INTRODUCTION

The regulation of lease agreements in India is governed by the Transfer of Property Act, 1882 (“TP Act”). Similarly, the Indian Easement Act, 1882, governs any agreement which is concerned with leave and license. Multiple states have also implemented their own rent laws to govern tenancy disputes, providing exclusive jurisdiction to small cause courts to preside over them for certain specific circumstances covered under it. This creates an ambiguity regarding the governing law, jurisdiction, and specifically, the applicability of alternative dispute resolution mechanisms (“ADR mechanisms”), like arbitration, provided under these agreements.

To that end, this note explores the position in Indian jurisprudence regarding the implementation of arbitration clauses in tenancy disputes by examining various case laws that have been developed recently.

PRIOR POSITION OF THE LAW

The Supreme Court’s ruling in Natraj Studios Ltd. v. Navrang Studios & Ors.[1] established the precedent that tenancy disputes that are solely under the purview of small cause courts cannot be referred to arbitration. This was the first case which dealt with the position on the applicability of arbitration clauses in tenancy disputes.

The Supreme Court subsequently upheld this judgment in the case of Booze Allen and Hamilton Inc. v. SBI Home Finance Ltd. and Ors.[2] where it was held that special laws regulate certain matters like eviction which flows from rent control acts and jurisdiction of any such dispute flows from the aforementioned act. Such disputes were classified as non-arbitrable disputes as per the Arbitration and Conciliation Act, 1996 (“A&C Act”). The rationale of the decision provided by the Supreme Court was that special laws specifically govern such relationships and hence should have precedence over resolving any dispute related to it. To that end, the Supreme Court created a distinction between disputes which arose from right in rem and right in personam. It ruled that disputes which are concerned with right in personam may be ruled by private forums like arbitral tribunals, however, disputes concerning right in rem must be ruled by public courts.

Relying on these judgments, the Supreme Court, in the case of Himangini Enterprises v. Kamaljeet Singh Ahluwalia[3] (“Himangini Enterprises”) held that lease agreements are governed by the TP Act and the jurisdiction of any dispute arising from such agreements will be determined by the said Act. Moreover, it was held that the non-application of the rent control legislation does not automatically transfer the jurisdiction to A&C Act. Hence, all disputes concerning tenancy were concluded as being non-arbitrable.

Overall, based on these judgements, it can be concluded that the following kinds of disputes cannot be subject to arbitration:

• disputes that are regulated by a special act which provides jurisdiction to a special court/forum; and
• disputes that can be addressed in a public forum, such as those based out of a right in rem.

THE RULING OF THE VIDYA DROLIA JUDGMENT

In 2021, the Supreme Court overruled the judgment of Himangini Enterprises in the case of Vidya Drolia v. Durga Trading Corporation (“Vidya Drolia”)[4] where it was held that disputes on a tenancy which are regulated by the TP Act could be referred to arbitration as these rights are subordinate rights in personam which is based out of a right in rem. 

The Supreme Court provided further clarity by observing that the provisions mentioned under the TP Act do not expressly bar arbitration, and an arbitrator appointed for any such dispute will be bound by such provisions. While doing so, the court addressed the doubts on the credibility of an arbitration proceeding and held that they are in parlance with any other dispute resolution mechanism and conducted by experts who provide adequate consideration to the facts, the relevant information, and the judicial precedents related to the dispute.

However, the Supreme Court cautioned that such treatment will not extend to cases where such rights and obligations are exclusively governed by specific courts or forums. It proposed a four-fold test to determine the classification of disputes as non-arbitrable and stated as follows:

• “when the 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 the cause of action and subject matter of the dispute affects third party rights, has erga omnes effect; requires centralised adjudication, and mutual adjudication would not be appropriate and enforceable;
• when the 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; or
• when the subject matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statutes.”

The Supreme Court also observed that the test is not exclusive in nature, but a holistic and pragmatic application of the test helps determine the non-arbitrability of a dispute.

The Apex Court also provided clarifications regarding the argument of non-arbitrability and held that it can be raised at three stages:

• “before the court on an application for reference under Section 11 of the A&C Act or for a stay of pending judicial proceedings and reference under Section 8 of the A&C Act; or
• before the arbitral tribunal during the course of the arbitration proceedings; or
• before the court at the stage of the challenge to the award or its enforcement.”

Additionally, the Supreme Court concluded that the arbitral tribunal is the first preferred authority to decide on questions of non-arbitrability. Section 34 of the A&C Act only allows courts to adjudicate on questions of non-arbitrability after the award is granted. However, the courts have the power to interfere in a case where the arbitration agreement is prima facie invalid, non-arbitrable, and non-existent. The prima facie validity of an arbitration agreement can be determined by the courts based on the following questions:

• “Whether the arbitration agreement was in writing?; or
• Whether the arbitration agreement was contained in the exchange of letters, telecommunication etc?; or
• Whether the essential elements of a contract been fulfilled by the arbitration agreement?; or
• Whether the subject matter of the dispute is arbitrable?”

Moreover, the Supreme Court held that resorting to arbitration as the dispute settlement mechanism does not allow consumers to waive their rights to approach statutory judicial forums. The Supreme Court recently reaffirmed the position in Brij Raj Oberoi v. The Secretary, Tourism and Civil Aviation Department & Anr.[5] by clarifying that disputes involving lease matters can be referred to arbitration.

CONCLUSION

The Vidya Drolia judgment is a welcome step in the Indian jurisprudence on arbitration as it expands the scope of this ADR mechanism by carving out exceptions in cases where they are excluded by necessary implication. Moreover, the judgment provides a test to measure the compatibility of statutes with such alternate redressal mechanisms.

Tenancy disputes are largely based on the commercial relationship between the parties and providing an avenue via arbitration allows parties to conserve on cost, time, and the relationship. Additionally, the insurmountable number of cases currently pending with the judiciary are a testament to the need for the adoption of mechanisms like arbitration to strengthen the judicial proceedings in India.

Please reach out to Praveen Raju and Renuka Abraham for queries.

[1] (1981) 1 SCC 583.

[2] (2011) 5 SCC 532.

[3] (2017) 10 SCC 706.

[4] Civil Appeal No. 2402 of 2019.

[5] Special Leave Petition No. 19520-19521 of 2021.