Arbitrability of Landlord-Tenant Disputes: Supreme Court Refers Issue to Larger Bench in Vidya Drolia vs. Durga Trading Corporation (28 February 2019)

Introduction

Date of the Judgment: 28 February 2019

Citation: 2019 INSC 182

Judges: R.F. Nariman, J. and Vineet Saran, J.

Can a landlord-tenant dispute, governed by the Transfer of Property Act, 1882, be resolved through arbitration, or is it a matter exclusively for the courts? The Supreme Court of India grappled with this question, specifically addressing whether an arbitrator has the jurisdiction to decide such matters. This case arose from a dispute where a landlord sought to evict a tenant after the lease period expired. The court, while hearing the matter, noted a conflict with a previous judgment and referred the matter to a larger bench.

The bench comprised Justices R.F. Nariman and Vineet Saran. The judgment was authored by Justice R.F. Nariman.

Case Background

The case involves a tenancy agreement between Shree Bajrang Land & Trading Company (predecessor-in-title of the landlord) and the appellants (tenants) on 02 February 2006. The agreement was for certain godowns and structures, with a maximum tenancy period of 10 years. The initial term was 5 years, with an option to renew for another 5 years with a 10% rent increase. The agreed rent was Rs. 12,985 per month. The agreement stipulated that upon expiry or earlier termination, the tenant would hand over vacant possession. A crucial clause (Clause 23) mandated arbitration for any disputes arising from the agreement, with the venue of arbitration within the jurisdiction of the High Court at Kolkata.

On 16 October 2012, the tenancy was transferred to the respondent, Durga Trading Corporation, and the appellants began paying rent to them. On 24 August 2015, the respondent sent a letter to the appellants, asking them to vacate the premises by 01 February 2016, which was the end of the 10-year lease period. A reminder was sent on 30 December 2015. When the appellants failed to vacate, the respondent initiated arbitration proceedings on 29 February 2016.

Subsequently, the respondent filed a petition under Section 11 of the Arbitration & Conciliation Act, 1996, before the Calcutta High Court on 28 April 2016, seeking the appointment of an arbitrator. The High Court, on 07 September 2016, appointed an arbitrator, rejecting the appellants’ objections regarding the arbitrability of the dispute. Following this, arbitration proceedings commenced, with 18 sittings held.

However, on 12 October 2017, the Supreme Court ruled in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706, that disputes between landlords and tenants under the Transfer of Property Act, 1882, are not arbitrable. Following this, the appellants filed a review/recall application before the Calcutta High Court on 04 June 2018, which was dismissed on 08 June 2018.

Timeline

Legal Framework

The core legal provisions in question are from the Transfer of Property Act, 1882, and the Arbitration & Conciliation Act, 1996.

Section 111 of the Transfer of Property Act, 1882, outlines how a lease is determined:

“111. Determination of lease.— A lease of immovable property determines— (a) by efflux of the time limited thereby; (b) where such time is limited conditionally on the happening of some event—by the happening of such event; (c) where the interest of the lessor in the property terminates on, or his power to dispose of the same extends only to, the happening of any event—by the happening of such event; (d) in case the interests of the lessee and the lessor in the whole of the property become vested at the same time in one person in the same right; (e) by express surrender; that is to say, in case the lessee yields up his interest under the lease to the lessor, by mutual agreement between them; (f) by implied surrender; (g) by forfeiture, that is to say, (1) in case the lessee breaks an express condition which provides that on breach thereof the lessor may re-enter; or (2) in case the lessee renounces his character as such by setting up a title in a third person or by claiming title in himself; or (3) the lessee is adjudicated an insolvent and the lease provides that the lessor may re-enter on the happening of such event; and in any of these cases the lessor or his transferee gives notice in writing to the lessee of his intention to determine the lease; (h) on the expiration of a notice to determine the lease, or to quit, or of intention to quit, the property leased, duly given by one party to the other.”

Section 114 of the Transfer of Property Act, 1882, provides relief against forfeiture for non-payment of rent:

“114. Relief against forfeiture for non-payment of rent.— Where a lease of immovable property has been determined by forfeiture for non-payment of rent, and the lessor sues to eject the lessee, if, at the hearing of the suit, the lessee pays or tenders to the lessor the rent in arrear, together with interest thereon and his full costs of the suit, or gives such security as the Court thinks sufficient for making such payment within fifteen days, the Court may, in lieu of making a decree for ejectment, pass an order relieving the lessee against the forfeiture; and thereupon the lessee shall hold the property leased as if the forfeiture had not occurred.”

Section 114A of the Transfer of Property Act, 1882, provides relief against forfeiture in certain other cases:

“114A. Relief against forfeiture in certain other cases.—Where a lease of immovable property has been determined by forfeiture for a breach of an express condition which provides that on breach thereof the lessor may re-enter, no suit for ejectment shall lie unless and until the lessor has served on the lessee a notice in writing— (a) specifying the particular breach complained of; and (b) if the breach is capable of remedy, requiring the lessee to remedy the breach; and the lessee fails, within a reasonable time from the date of the service of the notice, to remedy the breach, if it is capable of remedy. Nothing in this section shall apply to an express condition against assigning, under-letting, parting with the possession, or disposing, of the property leased, or to an express condition relating to forfeiture in case of non-payment of rent.”

Section 11(6A) of the Arbitration & Conciliation Act, 1996, limits the court’s examination to the existence of an arbitration agreement:

“11. Appointment of arbitrators. —
xxx xxx xxx
(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.
xxx xxx xxx”

Section 16(1) of the Arbitration & Conciliation Act, 1996, empowers the arbitral tribunal to rule on its own jurisdiction:

“16. Competence of arbitral tribunal to rule on its jurisdiction.—(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,— (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

Arguments

Appellants’ Arguments:

• The Transfer of Property Act, 1882, creates rights in rem (rights against the world), which are not arbitrable. The public policy enshrined in Sections 111(g), 114, and 114A of the Transfer of Property Act, 1882, implicitly excludes the application of the Arbitration & Conciliation Act, 1996. This is supported by Section 2(3) read with Section 5 of the Arbitration & Conciliation Act, 1996.
• The claim for mesne profits (profits from the property after the lease ends) falls outside the scope of the arbitration agreement, as mesne profits are damages determined after the agreement’s termination. Order XX Rule 12 of the Code of Civil Procedure (CPC) specifies that mesne profits are to be decided by a civil court, not an arbitrator.
• Even if some grounds for eviction under Section 111 of the Transfer of Property Act, 1882, are arbitrable, disputes involving arrears of rent and forfeiture are not. Since eviction petitions often include multiple grounds, it is difficult to bifurcate arbitrable and non-arbitrable issues.
• The matter is inherently without jurisdiction, and participation in arbitration does not confer jurisdiction. Consent or waiver cannot validate a lack of jurisdiction.
• The Supreme Court’s judgment in Himangni Enterprises (supra) directly applies to this case, rendering the arbitrator without jurisdiction.
• Section 11(6A) of the Arbitration & Conciliation Act, 1996, should be interpreted to include the non-arbitrability of disputes when considering the “existence” of an arbitration agreement.

Respondent’s Arguments:

• The appellants participated in the arbitration proceedings, and therefore, the Supreme Court should not exercise its discretionary jurisdiction under Article 136 of the Constitution of India against the appellants.
• Himangni Enterprises (supra) is distinguishable on facts, as it does not apply to a lease expiring by efflux of time. Several High Court judgments have distinguished the said judgment on this and other grounds.
• Alternatively, Himangni Enterprises (supra) requires reconsideration, as it does not correctly state the law.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the word “existence” in Section 11(6A) of the Arbitration & Conciliation Act, 1996, includes weeding-out arbitration clauses in agreements which indicate that the subject-matter is incapable of arbitration.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729: The Court referred to this case to highlight that the scope of Section 11(6A) of the Arbitration & Conciliation Act, 1996, is limited to examining the existence of an arbitration agreement.
• Praduman Kumar v. Virendra Goyal (Dead) by LRs., (1969) 3 SCR 950: The Court referred to this case to explain the purpose of Section 114 of the Transfer of Property Act, 1882, which is to secure payment of rent, and provide relief against forfeiture.
• Namdeo Lokman Lodhi v. Narmadabai & Ors., [1953] SCR 1109: The Court referred to this case to emphasize that each case under Section 114 of the Transfer of Property Act, 1882, must be judged on its own merits, considering the conduct of the parties.
• Booz Allen and Hamilton Inc. v. SBI Home Finance Limited and Others, (2011) 5 SCC 532: The Court relied on this case to define “arbitrability” and to explain that disputes relating to rights in rem are generally not arbitrable, while those relating to rights in personam are. It was also used to show that tenancy matters governed by special statutes are non-arbitrable.
• Natraj Studios (P) Ltd. vs. Navrang Studios, (1981) 1 SCC 523: The Court discussed this case to highlight that disputes under the Bombay Rent Act, which is a welfare legislation, are not arbitrable due to the exclusive jurisdiction of specific courts.
• Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706: The Court disagreed with this judgment, stating that the question involved in a Transfer of Property Act situation cannot be said to have been answered by the two decisions of this Court, as has been stated in paragraph 18 of the said judgment. The Court referred the matter to a larger bench for reconsideration of this judgment.
• Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan and Others, (1999) 5 SCC 651: The Court cited this case to show that there is no prohibition in the Specific Relief Act against referring specific performance issues to arbitration.
• Vimal Kishor Shah and Others v. Jayesh Dinesh Shah and Others, (2016) 8 SCC 788: The Court relied on this case to demonstrate that disputes under the Indian Trusts Act, 1882, are not arbitrable due to the specific remedies provided under the Act.
• Dhulabhai v. State of M.P., (1968) 3 SCR 662: The Court referred to this case to discuss the categories of cases where civil court jurisdiction is excluded by statute.
• Wolverhampton New Waterworks Co. v. Hawkesford, 141 ER 486: The Court referred to this case to explain the three categories of cases where a liability may be established based on a statute.
• Emaar MGF Land Limited v. Aftab Singh, 2018 SCC OnLine SC 2771: The Court cited this case to show that Vimal Kishor Shah (supra) has been followed in a Consumer Protection Act situation.

What weighed in the mind of the Court?

The Supreme Court’s decision to refer the matter to a larger bench was primarily influenced by its disagreement with the previous judgment in Himangni Enterprises (supra). The Court found that Himangni Enterprises (supra) incorrectly applied the principles of arbitrability to disputes arising under the Transfer of Property Act, 1882. The Court emphasized that the Transfer of Property Act, 1882, does not explicitly prohibit arbitration and that the statutory reliefs provided under Sections 114 and 114A are not exclusively reserved for courts.

The Court also noted that the scope of Section 11(6A) of the Arbitration & Conciliation Act, 1996, needed further clarification. Specifically, it questioned whether the word “existence” in Section 11(6A) should be interpreted to include weeding out arbitration clauses in agreements where the subject matter is not arbitrable.

Additionally, the Court observed that the Law Commission Report spoke not only of “existence” but also of an arbitration clause being null and void, but this has not translated itself into the language of Section 11(6A). The Court noted that the “validity” of an arbitration agreement is apart from its “existence”.

The Court’s analysis of the cited authorities also played a crucial role. It distinguished between cases involving rights in rem and in personam, and clarified that while disputes relating to rights in rem are generally not arbitrable, the same does not apply to all disputes under the Transfer of Property Act, 1882.

The Court’s reasoning indicates a desire to ensure that the law on arbitrability is clear and consistent, especially in the context of landlord-tenant disputes. By referring the matter to a larger bench, the Court sought to obtain a more authoritative and comprehensive ruling on the issue.

Final Order

The Supreme Court made the following order:

“In view of the above, we are of the view that the question involved in a Transfer of Property Act situation cannot possibly be said to have been answered by the two decisions of this Court, as has been stated in paragraph 18 of the said judgment. We, therefore, feel that this judgment will require a relook by a Bench of three Hon’ble Judges of this Court. The Registry is directed to place this matter before the Hon’ble the Chief Justice of India for appropriate orders.”

The Court referred the matter to a larger bench of three judges for a re-examination of the legal issues involved.

Flowchart of the Case

Key Takeaways

• The Supreme Court questioned the correctness of its previous judgment in Himangni Enterprises (supra), which had held that disputes between landlords and tenants under the Transfer of Property Act, 1882, are not arbitrable.
• The Court emphasized that the Transfer of Property Act, 1882, does not explicitly prohibit arbitration of disputes arising under it.
• The Court sought clarification on the scope of Section 11(6A) of the Arbitration & Conciliation Act, 1996, particularly whether the term “existence” includes the arbitrability of the subject matter.
• The matter was referred to a larger bench of three judges for a more authoritative and comprehensive ruling.
• The case highlights the ongoing debate and evolving jurisprudence on the arbitrability of disputes, particularly those involving property rights and statutory reliefs.