This issue of LexCognito, which in Latin means 'awareness about law', seeks to provide you an insight into significant legal and regulatory developments that have taken place very recently in India.
Date: 31 December 2020
Arbitrability of Landlord-tenant and other disputes: Landmark Judgment of Supreme Court
On 14 December 2020, a three-judge bench of the Supreme Court of India gave a landmark decision on the arbitrability of landlord-tenancy disputes in the case of Vidya Drolia & Ors v. Durga Trading Corporationand held that landlord-tenant disputes are arbitrable except when they are covered by specific forum created by rent control laws. The Apex Court not only considered arbitrability of disputes but also the competency of courts and arbitrators or arbitral tribunals to adjudicate on such arbitrability. This landmark judgment ends the uncertainty caused by the Apex court itself three (3) years ago in the ruling of Himangni Enterprises v. Kamaljeet Singh Ahluwalia (2017) 10 SCC 706 (Himangni Enterprises case), wherein it has held that landlord-tenant disputes governed by the Transfer of Property Act, 1882 (TOPA) are not arbitrable and can only be resolved in civil courts.
As per the Tenancy Agreement entered into between the Appellant (Tenant) and the Respondent (Landlord), the disputes between the parties were agreed to be settled through arbitration by a three (3) member Arbitral Tribunal. When the Landlord referred the matter for arbitration upon a dispute between the parties, it was objected by the Tenant by arguing that disputes arising out of TOPA are non-arbitrable. However, the Hon’ble Calcutta High Court had rejected the plea, thereafter an appeal was filed before the Apex Court based on the ruling of Himangni Enterprises case wherein it was held that where TOPA applied between landlord and tenant, disputes between the said parties would not be arbitrable.
The Supreme Court overruled its own ruling in the Himangni Enterprises case to hold that Landlord-tenant disputes governed by TOPA 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 a
omnes effect or require centralized adjudication.
The Apex Court has made it clear that arbitration is permitted in case of landlord-tenant disputes governed by TOPA if there is an arbitration clause present in the agreement and an award passed in such matter can be enforced like a Decree of the Civil Court. However, the Apex Court clarified that the dispute between landlord and tenant covered and governed under the rent control laws would not be arbitrable when a specific court or forum has been given exclusive jurisdiction over the subject matter. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration.
The Court further held that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred the power of “second look” on aspects of the non-arbitrability post the award.
Other decisions on arbitrability by Apex Court in the same judgment:
Disputes which are to be adjudicated by the Debt Recovery Tribunal are not arbitrable
While examining the issue of arbitrability in the same judgment, the Apex Court overruled a 2013 Full Bench decision of Delhi High Court in the matter of HDFC Bank Ltd. v. Satpal Singh Bakshi,wherein the Delhi High Court had held that the disputes which are to be adjudicated by the DRT under the DRT Act, are arbitrable. The Court held that the claims covered by the DRT Act are non-arbitrable as there is a prohibition against waiver of the jurisdiction of the DRT by necessary implication. The legislation has overwritten the contractual right to arbitration.
The Apex Court gave observation that the Delhi High Court decision holds that only actions in rem are non-arbitrable, which is the correct legal position. However, non-arbitrability may arise in case the implicit prohibition in the statute, conferring and creating special rights to be adjudicated by the courts/public fora, which right including enforcement of order/provisions cannot be enforced and applied in case of arbitration. To hold that the claims of banks and financial institutions covered under the DRT Act are arbitrable would deprive and deny these institutions of the specific rights including the modes of recovery specified in the DRT Act.
Allegations of fraud are arbitrable when they related to a civil dispute
While examining the issue of arbitrability in the same judgment, the Apex Court overruled the 2010 decision in N. Radhakrishnan v. Maestro Engineers and Others while observing that the allegations of fraud can be made a subject matter of arbitration when they related to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non-arbitrability.
With this path-breaking judgment, it is now clear that the landlord-tenant dispute covered under TOPA is arbitrable as the TOPA doesn't forbid or foreclose arbitration. Further, the allegations of fraud are arbitrable when they related to civil dispute. This clarity will be beneficial for the corporates to resolve their disputes as arbitration is a preferred mode of dispute resolution since it proves to be faster, cost-effective, and convenient in many cases. Such an alternative dispute resolution mechanism has become more relevant in the present scenario when the Indian judicial system has been completely disrupted due to ongoing COVID-induced pandemic.
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