Supreme Court Clarifies Arbitrability of Landlord-Tenant Disputes and Scope of Judicial Review: Vidya Drolia vs. Durga Trading Corporation (2020) INSC 804 (14 December 2020)

Case Background

The case arose from a dispute between Vidya Drolia and others (appellants/tenants) and Durga Trading Corporation (respondent/landlord). The appellants had entered into a tenancy agreement in 2006 with the predecessor of the respondent. This tenancy was later attorned to the respondent in 2012, after which the appellants began paying rent to the respondent. In 2015, the respondent sought vacant possession of the property, citing the expiry of the lease period. When the appellants failed to vacate, the respondent invoked the arbitration clause in the agreement and filed a Section 11 petition before the Calcutta High Court for the appointment of an arbitrator. The High Court appointed an arbitrator, rejecting the appellants’ objection that the dispute was not arbitrable.

Timeline

Legal Framework

The judgment primarily revolves around the interpretation of the Arbitration and Conciliation Act, 1996, and the Transfer of Property Act, 1882. Key provisions discussed include:

• ✓ Section 7 of the Arbitration and Conciliation Act, 1996: Defines an “arbitration agreement” as an agreement to submit disputes to arbitration, which can be part of a contract or a separate agreement. It also specifies that such agreements must be in writing.
• ✓ Section 8 of the Arbitration and Conciliation Act, 1996: Mandates that a judicial authority must refer parties to arbitration if there is an arbitration agreement, unless it finds that prima facie no valid agreement exists.
• ✓ Section 11 of the Arbitration and Conciliation Act, 1996: Outlines the procedure for the appointment of arbitrators. The 2015 amendment introduced sub-section (6A), which restricted the court’s role to examining the existence of an arbitration agreement. This sub-section was omitted by Act 33 of 2019.
• ✓ Section 16 of the Arbitration and Conciliation Act, 1996: Empowers the arbitral tribunal to rule on its own jurisdiction, including objections to the existence or validity of the arbitration agreement.
• ✓ Section 34 of the Arbitration and Conciliation Act, 1996: Specifies the grounds on which an arbitral award can be set aside, including when the subject matter is not capable of settlement by arbitration or when the award conflicts with the public policy of India.
• ✓ Sections 111, 114 and 114A of the Transfer of Property Act, 1882: These sections deal with the determination of lease, arrears of rent, etc.

The Court also discussed the interplay between the Arbitration Act and the Indian Contract Act, 1872, emphasizing that an arbitration agreement must satisfy the requirements of a valid contract.

Arguments

Appellants’ Arguments (Tenants):

• ✓ Landlord-tenant disputes governed by the Transfer of Property Act, 1882, are not arbitrable.
• ✓ The word “existence” in Section 11(6A) should include the weeding out of arbitration clauses where the subject matter is not arbitrable.
• ✓ The scope of judicial review at the referral stage should not be limited to the mere presence of an arbitration clause.
• ✓ The test of ‘good arguable case’ should be applied by the courts to examine the existence of a valid arbitration agreement.

Respondent’s Arguments (Landlord):

• ✓ Section 11(6A) was a conscious departure from earlier judicial interpretations that had widened the scope of judicial inquiry.
• ✓ The 246th Law Commission Report suggests that Section 11(6A) limits the scope of judicial inquiry to determining a prima facie existence of an arbitration agreement.
• ✓ “Existence” under Section 11(6A) means legally enforceable existence, not just a mere presence in the contract.
• ✓ The Court, under Section 11, is merely functioning as an appointing authority.
• ✓ Landlord-tenant disputes under the Transfer of Property Act are arbitrable.

The arguments also touched upon the interpretation of Section 16 of the Arbitration Act, with the appellants arguing that the section implies the arbitration agreement has an independent existence, and the respondent countering it by saying that the arbitration clause would not exist in law until the contract is duly stamped.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether the word “existence” would include weeding out arbitration clauses in agreements that indicate the subject matter is incapable of arbitration?
2. To what extent does the Court decide the question of non-arbitrability under Section 11 of the Act?
3. Whether tenancy disputes are capable of being resolved through arbitration?

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Judgment

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

How each authority was viewed by the Court?

• ✓ Natraj Studios (P) Ltd. v. Navrang Studios: Distinguished as the rent control legislation was applicable.
• ✓ Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.: Relied upon to define non-arbitrable disputes and the distinction between actions in rem and in personam.
• ✓ Himangni Enterprises v. Kamaljeet Singh Ahluwalia: Overruled, holding that landlord-tenant disputes under the Transfer of Property Act are arbitrable.
• ✓ Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan: Cited to support the view that there is no prohibition in the Specific Relief Act, 1963, for referring disputes relating to specific performance of contracts to arbitration.
• ✓ Vimal Kishor Shah v. Jayesh Dinesh Shah: Referred to demonstrate that disputes under the Trust Act were non-arbitrable by necessary implication.
• ✓ Emaar MGF Land Limited v. Aftab Singh: Referred to highlight that Consumer Protection Act cases are not arbitrable.
• ✓ A. Ayyasamy v. A. Paramasivam: Referred to discuss the arbitrability of disputes involving fraud and to emphasize the limited scope of judicial review.
• ✓ HDFC Bank Ltd. v. Satpal Singh Bakshi: Overruled, holding that claims under the DRT Act are not arbitrable.
• ✓ N. Radhakrishnan v. Maestro Engineers: Overruled, holding that allegations of fraud can be subject to arbitration when they relate to a civil dispute.
• ✓ Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited: Cited to hold that N. Radhakrishnan has no legs to stand on.
• ✓ Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited: Referred to discuss the relationship between the existence and validity of an arbitration agreement.
• ✓ Mayavati Trading Private Limited v. Pradyuat Deb Burman: Relied upon to hold that Section 11(6A) is confined to examining the existence of an arbitration agreement.
• ✓ Duro Felguera, S.A v. Gangavaram Port Limited: Referred to emphasize that the scope of Section 11(6A) is limited to examining the existence of an arbitration agreement.
• ✓ Transcore v. Union of India: Cited to explain the doctrine of election in the context of arbitration.
• ✓ M.D. Frozen Foods Exports Private Limited v. Hero Fincorp Limited: Referred to highlight that prior arbitration proceedings are not a bar to proceedings under the NPA Act.
• ✓ Indiabulls Housing Finance Limited v. Deccan Chronicle Holdings Limited: Referred to highlight that prior arbitration proceedings are not a bar to proceedings under the NPA Act.
• ✓ V.H. Patel & Company v. Hirubhai Himabhai Patel: Cited to demonstrate that an arbitrator is not barred from deciding whether the dissolution of a partnership is just and equitable.
• ✓ Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties: Cited to hold that cancellation of documents under Section 31 of the Specific Relief Act, 1963, are actions in personam and not actions in rem.

Key Principles Established

The Supreme Court laid down the following key principles:

• ✓ Arbitrability of Landlord-Tenant Disputes: Landlord-tenant disputes are generally arbitrable under the Transfer of Property Act, 1882, unless they are covered by specific rent control legislation.
• ✓ Scope of Judicial Review under Section 11: The judicial review under Section 11 of the Arbitration Act is limited to a prima facie examination of the existence and validity of the arbitration agreement. The court should not delve into detailed factual or legal analysis at this stage.
• ✓ Prima Facie Test: The court should apply a prima facie test to determine the existence and validity of the arbitration agreement. If there is doubt, the matter should be referred to arbitration.
• ✓ Competence-Competence Principle: The arbitral tribunal has the first authority to rule on its own jurisdiction, including objections to the existence or validity of the arbitration agreement.
• ✓ Limited Interference: Courts should exercise restraint and refrain from interfering with the arbitration process unless there is a clear case of non-arbitrability.

Conclusion

The Supreme Court’s judgment in Vidya Drolia vs. Durga Trading Corporation provides much-needed clarity on the arbitrability of landlord-tenant disputes and the scope of judicial review at the referral stage. By overruling the earlier judgment in Himangni Enterprises, the Court has expanded the ambit of arbitrable disputes, aligning with the pro-arbitration stance of Indian law. The judgment emphasizes the importance of the competence-competence principle and the limited role of courts at the referral stage, promoting a more efficient and less interventionist arbitration process. This decision will have significant implications for landlords and tenants, encouraging them to resolve their disputes through arbitration, provided that their disputes are not covered under rent control legislation. The judgment also clarifies that the power under Section 11 is a judicial power and not an administrative function.