Landlord- Tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration: SC

Vidya Drolia and Ors v. Durga Trading Corporation

Civil Appeal No. 2402 of 2019

Decided on 14.12.2020

BENCH: Sanjiv Khanna, N V Ramana, Krishna Murari, JJ.

FACTS:  

A reference was made by a division bench of Supreme Court in 2019 which was considering an appeal against the order of Calcutta High Court wherein the High Court appointed an arbitrator in dispute between landlord and tenant.

The appeal was referred to the larger bench to determine the correctness of the judgement in Himangini Enterprises v. Kamaljeet Singh Ahluwalia, wherein it was held that where the Transfer of Property Act, 1882 applies between the landlord and tenant, the disputes between the said parties would not be arbitrable.

The three judge bench in this case overruled its judgement in Himangi Enterprises and held that landlord- tenant disputes under the Transfer of Property Act are arbitrable.

ISSUES:

Whether tenancy disputes are capable of being resolved through arbitration?

The Court over ruled the ratio laid down in Himangini Enterprises case and held that landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration. The court however clarified that the 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.

The court held that the landlord-tenant disputes are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. It was observed that the award passed in deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court. Landlord-tenant disputes do not related 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. TPA has a public purpose, that is, to regulate landlord-tenant relationships and the arbitrator would be bound by the provisions, including provisions which ensure and protect the tenants.

The judgement laid down a four-fold test to determine arbitrability:

1.      When cause of action and subject matter of dispute relates to action in rem, that do not pertain to subordinate rights in personam that arise from right in rem.

2.      When cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; required centralized adjudication and mutual adjudication would not be appropriate and enforceable.

3.      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.

4.      When the subject matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute.

These tests are not watertight compartments but they will help and assist in determining with certainty whether a dispute is arbitrable or not.

Can allegation of fraud be made a subject matter of arbitration?

The court overruled the ratio in N. Radhakrishnan v. Maestro Engineers and ors. (2010) and observed that the allegations of fraud can be made a subject matter of arbitration when they relate 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.

When can the issue of Non-arbitrability be raised?

The issue of non-arbitrability can be raised at three stages:

1.      Before the court on an application for reference under Section 11 or for stay of pending judicial proceedings and reference under Section 8 of the Arbitration Act.

2.      Before the arbitral tribunal during the course of the arbitration proceedings.

3.      Before the court at the stage of the challenge to the award or its enforcement.

Who decides non-arbitrability?

The court applied the principle of severability and competence-competence with the Arbitration Act and concluded that arbitral tribunal is the “preferred first authority” to determine and decide all questions of non-arbitrability and the court has the power of “second look” on aspects of non-arbitrability under the relevant clauses of Section 34.