Arbitrability of any issue is concerned with the question of whether a dispute can form part of the subject matter of arbitration. In India, the scope and extent of ‘arbitrability’ of various subject matters have been in constant doubt and debate. This uncertainty has arisen due to the lack of any express provision under the Arbitration and Conciliation Act 1996 ('A&C Act') restricting the arbitrability of disputes arising out of specific legal relationships. One of the victims of this uncertainty is the landlord-tenant relationship which is governed by the Transfer of Property Act 1882 ('ToPA').
It is inarguable that arbitral proceedings are fairly private. The private and confidential nature of arbitration has led to the debate as to whether public law issues can be resolved through arbitration. Disputes arising out of the relationships governed by the ToPA have often fallen into the debate. For instance, the question of arbitrability of tenancy matters is pending before a three-judge bench of the Supreme Court of India (SC) in the Vidya Drolia and Others v. Durga Trading Corporation. The SC has completed its hearings in Vidya Drolia, and the judgment is pending. In this post, the author seeks to analyze the current position of arbitrability of tenancy disputes in India.
Section 2(3) of the A&C Act lays down that the statute will not affect any other law which specifies that certain disputes cannot be subject to arbitration proceedings. Further, Section 34(2)(b) and 48(2) of the A&C Act also conform to the non-arbitrability of certain disputes by allowing the courts to set aside awards if 'the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force'. Since there is no express statutory clarification on this point, the law has been developed by the courts.
The SC in its seminal decision in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Limited held that all disputes arising out of violations of rights in personam are arbitrable, and those disputes arising out of rights in rem are not arbitrable and should be adjudicated by the courts and public tribunals only. The Bombay High Court in its decision in Kingfisher Airlines Limited v. Prithvi Malhotra Instructor narrowed down this principle by holding that rights in personam would not be arbitrable as a matter of public policy if a statute vests exclusive jurisdiction upon a particular court or tribunal. Later, these two positions were recognised and upheld by the SC in its 2016 decision in A. Ayyasamy v. A. Paramasivam and Others.
The dual filter test
In Vidya Drolia, one of the questions of law which arose was whether Section 11(6A) of the A&C Act requires the courts to determine only the existence of an arbitration agreement or whether it extends to assessing the validity of the subject matter as well (dual filter test).
Section 11(6A) of the A&C Act restricts the examination by the courts of an application under Section 11(4), for the appointment of an arbitrator, to the ‘existence of an arbitration agreement’. The SC in its decisions in M/s Duro Felguera S.A. v. M/s Gangavaram Port Limited and M/s Mayavati Trading Private Limited v. Pradyuat Deb Burman interpreted these terms to mean that the courts are restricted to determining only the existence of an arbitration agreement. However, in later decisions, the High Courts have widened the scope of the court’s interpretation, requiring the courts to examine existence as well as the validity of the arbitration agreement. This extension relates to the power of the court to scrutinise the arbitrability of the subject matter at this stage.
The recent decision of the SC in Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India Private Limited and Others supports the position that the courts should delve into only the existence of an arbitration agreement rather than validity. However, the observation of R. Nariman J. in the case of Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited cannot be side-lined. Nariman J., in that case, read the arbitration clause as a contract. As an agreement becomes a contract only if it is enforceable by law, the arbitration agreement would not be binding if it is not enforceable by law. This enforceability by law would be decided on the basis of contract law which does not allow enforcement merely based on the existence of an agreement. Instead, contract law allows the courts to delve into the validity of an agreement. Thus, the decision in this case indicates that the examination of the validity of the arbitration agreement is also covered under the scope of Section 11(6A).
Apart from the arbitrability of tenancy disputes, the three-judge bench in Vidya Drolia is also set to rule on the scope of Section 11(6A) to settle this position of law. Further, with the omission of this provision by the 2019 Amendment Act, it is all the more essential for this clarification in cases where Section 11(6A) would still be applicable.
Arbitrability of tenancy disputes
In Vidya Drolia, the landlord required the tenant to peacefully give back the possession of a property which was subject to a lease deed. The said lease deed included an arbitration clause in case of any dispute between the parties. Upon some disagreements, the landlord brought a petition under Section 11 of the A&C Act before the Calcutta High Court for the appointment of an arbitrator. The Calcutta High Court rejected the application against which the landlord brought an appeal before the SC. As already mentioned, the SC has referred the matter to a larger bench to settle the issue of arbitrability on this point conclusively. Herein-below, the author analyses the grounds on which tenancy disputes have been rendered non-arbitrable.
The right in rem and the right in personam conundrum
ToPA includes subject matters like sale, mortgage, lease, license etc. which provide interest holders rights qua third parties and thus form a part of rights in rem. As per the Booz Allen test, disputes arising out of it would therefore not be arbitrable. However, an agreement between a landlord and a tenant gives rise to subordinate rights in personam, which can form the subject matter of arbitration. For instance, Section 108 of ToPA dealing with rights and liabilities of the lessor and the lessee, are exercisable against each other only and not the world at large and thus forms a part of rights in personam. Additionally, the division bench decision in Vidya Drolia has already rejected the argument that tenants form a ‘class’ under ToPA due to the nature of remedies provided to them under Sections 111, 114 and 114A. Therefore, though ToPA includes certain rights in rem, the landlord-tenant relationship is a subordinate right in personam and thus is capable of being resolved through arbitration.
The welfare legislation ground
The SC in Natraj Studios Private Limited v. Navrang Studios and Another held that statutes governing rent and tenancy are special statutes and are public welfare legislations. Therefore, the disputes forming the subject matter of these legislations cannot be arbitrable. It is argued that merely because a legislation serves a welfare purpose, does not mean that all disputes falling within its domain are non-arbitrable. The SC in the case of Emaar MGF Land Limited v. Aftab Singh dealing with a dispute arising out of the Consumer Protection Act 1986 (COPRA) which is also a public welfare legislation, opined that the parties may opt-in for arbitration, without prejudice to the rights of the consumer to approach the consumer forum.
Like COPRA, ToPA and rent control legislations are also welfare legislations. These rent control legislations serve a two-fold purpose of protecting the tenants from eviction and protecting them from payment of unfair rent. In light of the Emaar MGF case, the author argues that like consumers, the tenants who are protected by several rent control legislations should have an option to opt for arbitration. Though the rent control legislations provide special remedies to tenants to promote their welfare, it should not be a ground to deter them from opting-in for arbitration. To conclude, the option to arbitrate the tenancy dispute should be without any prejudice to the remedy provided to them before the civil courts by these legislations.
The special court stance
Relying on the decision in Natraj Studios, the SC in Himangni Enterprises v. Kamaljeet Singh Ahluwalia considered tenancy disputes to be non-arbitrable. The court reasoned that various provisions of the ToPA confer jurisdiction upon the civil courts and thus the intention of ToPA could not be to allow arbitration. In essence, the decisions in both Natraj Studios and Himangni have been based on the principle as evolved by the Kingfisher Airlines case, which restricted arbitrability of a matter if jurisdiction is conferred explicitly to special tribunals by the statute. However, in HDFC Bank Limited v. Satpal Singh Bakshi, the Delhi High Court held that disputes forming the subject-matter of the jurisdiction of the debt recovery tribunals could be arbitrable. The court concluded that the mere creation of a special forum for adjudication of disputes could not render these disputes non-arbitrable. The determining factor is whether these special courts have powers that arbitral tribunals or civil courts cannot exercise. Therefore, arbitrability of tenancy disputes cannot be denied solely based on the argument that jurisdiction is conferred to civil courts by specific provisions of the ToPA.
The landlord-tenant relationship gives rise to rights in personam, which the parties can exercise only against each other. The mere existence of a special forum for adjudication should not bar the jurisdiction of arbitral tribunals. Additionally, parties should have the right to opt into arbitration despite being protected by public welfare legislations. In light of these factors, the author argues that tenancy disputes should be arbitrable in India.