SC: Landlord-Tenant Disputes are Arbitrable except when covered by Rent Control Laws

Landlord-tenant disputes governed by the Transfer of Property Act are arbitrable except when specific Courts or forum have been given exclusive jurisdiction to apply and decide special rights and obligations pertaining to such matters.

Presently, arbitration is governed by the Arbitration and Conciliation Act of 1996, with subsequent amendments. A cursory reading of the legislative history points to the fact that the intention of the legislature was to make the regime ‘pro­arbitration’.
 
The Supreme Court in the case of Vidya Drolia v. Durga Trading Corporation overruled the legal ratio expressed in Himangni Enterprises v. Kamaljeet Singh Ahluwalia that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882, are not arbitrable as this would be contrary to public policy.

Facts and Procedural Background of the Case:
  • In 2006, the appellants entered into a tenancy agreement with the predecessor titleholder with   respect to certain buildings. This agreement contained a dispute resolution   clause.  
  • In the year 2012, the tenancy was attorned to the respondent, after   which the appellants   started paying monthly rent to the respondent.
  • In 2015,   the   respondent wrote   a   letter seeking vacant   possession   of   the property as the period of lease was expiring in 2016. The Appellants   did   not   vacate.  
  • Aggrieved,   the respondent   invoked   the   arbitration   under   the dispute resolution mechanism provided under the contract. The respondent then filed a Section 11 petition before the Calcutta High Court for appointment of an   arbitrator.  
  • On 7th September, 2016,   the   High   Court   passed   the impugned order appointing an arbitrator, after rejecting the appellants’ objections on the arbitrability of the dispute.
The Supreme Court discussed the ambit and scope of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. which discussed the arbitrability of tenancy disputes arising between parties.
As per this case, some well-established examples of non-arbitrable disputes were: 
  • Disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
  • Matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights,   child custody;
  • Guardianship matters;
  • Insolvency   and   winding-up matters;
  • Testamentary matters (grant of probate,   letters   of   administration   and succession   certificate);
  • Eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.
Himangni Enterprises v. Kamaljeet Singh Ahluwalia had also discussed The Delhi Rent Act, which deals with the cases relating to rent and eviction of the premises, as a special Act. Though it contains a provision (such as Section 3) by virtue of it, the provisions of the Act do not apply to certain premises but that does not mean that the Arbitration Act, ipso facto, would be applicable to such premises conferring jurisdiction on the arbitrator to decide   the eviction/rent disputes.

In such a situation, the rights of the parties and the demised   premises   would   be governed by the Transfer of Property Act and the civil suit would be triable by the Civil Court and not by the arbitrator.  In other words, though by virtue of Section 3 of the Act, the provisions of the Act are not applicable to certain premises but no sooner the exemption is withdrawn or   ceased to have its application to a particular   premises,   the   Act becomes applicable to such premises. In this view of the matter, it cannot be contended that the provisions of the Arbitration Act would, therefore, apply to such premises.

Issues discussed by the Supreme Court:

1. Whether the issue of ‘arbitrability’ can be analysed by the Courts under Section 8 or Section 11 of the Arbitration and Conciliation Act?

Arbitrability of disputes finds a close nexus with the validity of the arbitration agreement, yet   it is necessary to observe the unique nature of the arbitration agreement, which is a bundle of contractual and jurisdictional elements. Even if a Court or Tribunal comes to an understanding   that there exists a valid arbitration agreement, still it does not mean that certain subject matters are arbitrable per se. This distinction is required to be kept in mind.

Section 34 (2) (b) of the Act provides the statutory basis for objecting that an award which may not be capable of being settled by arbitration,   or   is   against   the   public   policy   of   India.   The legislative intention of not arbitrating issues of public policy are intertwined with the fact that monopolies of the State activities should not be subject matter of a private tribunal, as the concerns of the State cannot not be dealt effectively. Further, an award, which has an erga omnes effect on third parties, would not be in tune with the contractual nature of arbitration,   which   is   binding   on   the   consenting   parties alone.   However,   this   feature   alone,   does   not   explicitly mandate   that   the   tribunal   cannot   first   adjudicate   a   claim based on the public policy argument.

Finally, the Court noted that when deciding that whether a subject matter can or cannot be arbitrated should necessarily be dealt on a case to case basis, rather than a having a bold exposition that certain subject matters are incapable of arbitration, deferring from the Booz Allen case.

2. Arbitrability of Landlord-Tenant Disputes:

Landlord-tenant disputes are arbitrable except when they are covered by specific forum created by rent control laws. Landlord-tenant disputes governed by the Transfer of Property Act (TP Act) are arbitrable as they are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. Such actions normally would not affect third-party rights or have erga omnes affect or require centralized adjudication. An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court. Landlord-tenant disputes do not relate to inalienable and sovereign functions of the State. The provisions of the Transfer of Property Act do not expressly or by necessary implication bar arbitration. However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration.

While dealing with the issue of arbitrability in the present case, the Supreme Court held that the disputes under the TP Act are arbitrable as they are not actions in rem but pertains to subordinate rights in personam which arises from rights in rem.

In view of the above interpretation, the Supreme Court laid own a four-fold test for determining when the subject matter of dispute in an arbitration agreement is not arbitrable:

  • When cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.
  • When cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;
  • When cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and
  • When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).

The Court clarified that these tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will help and assist in determining and ascertaining with great degree of certainty when as per law in India, a dispute or subject matter is non-arbitrable. Only when the answer is affirmative that the subject matter of the dispute would be non-arbitrable.

Conclusion:

Courts, while analysing a case under Section 8, can choose to identify the issues which require adjudication pertaining to the validity of the   arbitration   agreement.   If the Court cannot rule on the invalidity of the arbitration agreement one prima facie basis, then the Court should stop any further analysis and simply refer all the issues to arbitration to be settled.

Sections 8 and 11 of the Act have the same ambit with respect to judicial interference. Usually, subject matter arbitrability cannot be decided at the stage of Sections 8 or 11 of the Act, unless it’s a clear case of deadwood. The Court, under Sections 8 and 11, has to refer a matter to arbitration or to appoint an arbitrator, as the case may be,   unless   a   party   has   established   a prima facie case of non­existence of valid arbitration agreement.