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Application of Arbitration in the Realm of Tenancy Disputes: Vidya Drolia and Ors v. Durga Trading


Kumar Kartik*

 

Introduction

The judiciary of India handles different types of cases in a manner that is both pragmatic and desirable, to deal with the vice of overburdened judicial bodies. In the course of this case note, the author seeks to explore how the Indian judiciary has evolved its modus operandi with time, to fix the popular notion that the institution is inefficient. One such example is seen in the domain of Arbitration Law in India. Arbitration is a relatively new branch of dispute resolution method in India but has been ever-expanding in terms of its wide range of applicability. The Supreme Court of India, unfettered by the difficulties created by the COVID-19 virus, has brought several changes in the realm of laws of arbitration, by laying down numerous landmark judgments in the year 2020. The Apex Court, in the case of Vidya Drolia & Ors v Durga Trading Corporation,[1] dealt with the long-standing issue of whether the Law of Arbitration applies to the landlord-tenant disputes arising out of Section 111,[2] Section 114,[3] and Sec 114A[4] of the Transfer of Property Act, 1882.


Facts

In Vidya Drolia vs Durga Trading Corporation, the factual matrix is as follows; the appellant had entered into a tenancy contract with the respondent on 02.02.2006. As per the terms of the contract, the appellant was to get tenancy over certain warehouses and a few other buildings for a stipulated period of 10 years, after which the appellant would be obligated to hand over the possession of the property to the rightful owner in a peaceful manner. The dispute arose when the stipulated time was over, and the appellant refused to vacate the property as promised. The respondent cited Clause 23 of the agreement which stated that, if in case a dispute arises, it is to be heard by a 3-member arbitration bench. Therefore, the respondent, in the following SC appeal, filed for the appointment of an arbitrator before the High Court of Calcutta, as per Section 11[5] of the Arbitration and Conciliation Act, 1996. The Calcutta High Court accepted the respondent’s plea and rejected the appellant’s contention that the matter is not arbitrable. An arbitrator was then appointed.

During the arbitration proceedings between the parties in the present suit, the Supreme Court held in the case of Himangni Enterprises v Kawaljeet Ahluwalia[6], that, where a premise is beyond the jurisdiction of the Special Rents Acts, the Transfer of Property Act, 1882 is to be followed for deciding disputes. This essentially means that such cases are to be heard by the civil court; the application of the Arbitration and Conciliation Act, 1996 is not possible. Based on the same premise, the appellant filed a review petition before the Calcutta High Court, which was rejected. The appellant then filed a case before the Supreme Court.

The appellant before the Supreme Court relied on two judgments. In the first, Booz Allen Hamilton Inc. vs SBI Home Finance Limited and Other[7], the appellant relied on paragraph 34, which extensively dealt with the meaning of arbitrability, and paragraph 35. The two paragraphs demonstrated how the dispute that arose, in this case, is not arbitrable. In light of this, the Apex Court held that cases involving the tenant-landlord disputes, which are regulated by special rent laws, are not arbitrable; such matters must be heard by the Civil Courts.

The second case that explicates the invalidity of arbitration is Natraj Studios Private limited v Navrang Studios[8]. Here, the appellant relied on paragraphs 17 & 18 of the judgment, where it was held that the dispute between a tenant and a landlord is regulated by the Bombay Rent Act, 1947. This is a special statute that transfers jurisdiction to the Small Causes Court. Therefore, the matter is not arbitrable. So, what did these two judgements mean for the appellant standing before the Supreme Court in Vidya Drolia & Ors v Durga Trading Corporation?


Issue

• If the subject matter of a conflict cannot be settled by arbitration, what does it mean to be non-arbitrable, and who determines if a conflict is non-arbitrable?


Findings

• In terms of the relationship between Section 8 (power to refer to arbitration) and Section 11 ACA (appointment of an arbitrator), both clauses can be interpreted as laying similar requirements and both are at the ‘referral' or ‘first-look level.

• Validity and arbitrability, as well as "valid arbitration agreement" as used in Section 8 ACA, are included in the definition of "life of an arbitration agreement" in Section 11 ACA. A valid arbitration agreement meets the provisions of Section 7 of the ACA, Section 10 of the Indian Contract Act of 1872, and other contract law requirements, as well as including an arbitrable matter.

• Because of the principle of separability and the competence doctrine in Section 16 ACA, the arbitral tribunal may rule on its jurisdiction. It is the chosen first authority for determining and deciding all non-arbitrability issues. Under Section 34 of the ACA, the court has the right to take a “second look” at the set-aside point. However, domestic courts maintain certain power to check the existence and fairness of the arbitration arrangement prima facie at the ‘referral' or ‘first-look level in legitimate cases (which includes some types of arbitrability). As a result, the court can only intervene at Section 8 or 11 levels if it is manifestly and unequivocally certain that the arbitration arrangement is non-existent, void, or the conflicts are unarbitrable. In both proceedings, the court's power is similar, but it is exceedingly limited and constrained. To cut the deadwood, the court should apply the prima facie test; unless a party makes a prima facie case of the absence of a binding arbitration arrangement, the matter should be referred.

• When the cause of action and subject matter relates to acts in rem when the cause of action and subject matter of the conflict affect third party rights, have erga omnes effect, and require collective or centralised adjudication before one court or forum, subject matter arbitrability is decided when the cause of action and subject matter are related to the State's inalienable sovereign and public-interest duties, and when there is tacit non-arbitrability, that is when the parties are prohibited by mandatory statute from contracting out and waiving adjudication by a specific public forum.

• Section 8 requires that a case be referred to arbitration unless the court prima facie determines that there is no valid arbitration arrangement in place (rather than a finding prima facie that a valid arbitration agreement exists). A prima facie case of non-existence must be established by the "respondent/defendant." The legislative drafting in Section 8 is poor. There would be no reference if there was a conclusion that there was no arbitration arrangement. This is a definitive decision that can only be overturned on appeal. To draw a definitive conclusion, a prima facie standard is given.


Judgement

In the Vidya Drolia judgement, the Court laid down a four-fold test that would hopefully determine whether a dispute could be arbitrable or not. If a dispute concerns rights in rem, affects third-party rights, affects state sovereignty, or falls under statutes that explicitly state in-arbitrability, then that dispute cannot be arbitrable. When applying this test to the facts of the present case, the SC concluded that there was nothing to indicate that the matter could not be arbitrated[9].

The Supreme Court, after hearing the arguments of both parties exhaustively, overruled the decision laid down in the case of Himangni Enterprises v Kawaljeet Ahluwalia[10], which held that since the Transfer of Property Act, 1882 is not special legislation, such disputes which are regulated by the Transfer of Property Act, 1882 can be arbitrable. The Supreme Court also stated that there is no provision in the Transfer of Property Act, 1882, which explicitly bars the applicability of the Arbitration and Conciliation Act, 1996. By overruling the aforementioned decision, the Supreme Court significantly increased the scope of arbitrability, which will hopefully reduce the number of disputes locked in the doldrums of the over-burdened system. Additionally, this decision would likely increase the legitimacy of arbitration as a valid method to resolve property-related disputes, encouraging more individuals to look into the process as a faster, more efficient way to obtain a solution.


Analysis

While it is easy to condemn any judgement, it is commendable that the Supreme Court has put to rest the debate about the arbitrability of conflicts governed by TPA provisions as well as those governed by special tenancy statutes. However, one has to wonder whether the Supreme Court produced astringent appetisers in the process of preparing this main course. For example, “it is obvious that insolvency or intracompany disputes must be resolved by a centralised tribunal, be it the court or a special forum, which would be more effective and have complete jurisdiction to completely dispose of the entire scenario,” as stated in the report. Has the Supreme Court ruled that such conflicts cannot be arbitrated? It's worth noting that there is a variety of intracompany conflicts that could be resolved by arbitration without the need for a rem suit. Besides, the Supreme Court has ruled against the arbitrability of disputes that can be decided by the DRT. Setting aside for the time being the caseload that had crippled the DRT, which would now grow by leaps and bounds, it was clear that arbitration was being deliberately chosen over the DRT's broader range of reliefs. Furthermore, transactions that are below the DRT's monetary threshold may appear to be arbitrable, which seems contradictory.

Despite the Supreme Court's consistent emphasis on the preliminary existence of an investigation at the referral level, a variety of factors seems to have broadened the reach of inquiry. To begin, the validity of the arbitration agreement may be investigated. Second, there seems to be agreement about what matters must be investigated by the court, what matters can be investigated by the court, and what matters may not be investigated by the court at the referral level. Limitations, excepted matters, accord fulfilment, novation, and other issues can be determined at the threshold as a result of this. The above perplexes me, considering that the Supreme Court itself acknowledges that the law has changed since the 2015 Amendment Act. Third, despite the numerous caution of a prima facie examination, there was a deliberate discussion of the term examination and the observation that "the court can, for legitimate reasons, to prevent wastage of public and private resources, should exercise judicial discretion to conduct an intense but summary prima facie review while remaining conscious that it is to assist the arbitration proponent.”

It seems the 2015 Amendment Act's implementation of section 11 (6-A) (now repealed by the 2019 Amendment Act) resulted in significant change, as courts were only allowed to "examine the existence of an arbitration arrangement" at the section 11 level. The current decision may have unwittingly set back the reach of the inquiry at the referral stage to the pre-2015 stages. Perhaps the haiku, "When in doubt, do refer," captures the spirit of this decision better than the ballad.


Conclusion

There has been a paradigm shift in the modes of dispute settlement in the modern era. People are now willing to settle their disputes through out-of-court settlement mechanisms as well since there exists an immense burden on existing judicial institutions. Such a situation suggests that the judiciary is now inclined to expand the horizons of the Alternative Dispute Mechanisms i.e., Arbitration, Mediation, and Conciliation. The Apex Court, in the case of Vidya Drolia & Ors v Durga Trading Corporation, laid down a landmark judgment of the disputes arising out of the Transfer of Property Act, 1882. It expounded that disputes arising out of the Act are arbitrable if the dispute is not regulated by special legislation. This judgment has essentially broadened the scope of disputes that can be decided through the course of the arbitration. This results in a reduction of landlord and tenant disputes that arise out of the Transfer of Property Act, 1882 that is presented before the overburdened judicial bodies in the country.

[1] Vidya Drolia & Ors v Durga Trading Corporation, (2019) 20 SCC 406. [2] Transfer of Property Act, 1882, § 111, No 4, Acts of Parliament, 1882 (India). [3] Transfer of Property Act, 1882, § 114, No 4, Acts of Parliament, 1882 (India). [4] Transfer of Property Act, 1882, § 114 A, No 4, Acts of Parliament, 1882 (India). [5] Arbitration and Conciliation Act, 1996, § 11, No 26, Acts of Parliament, 1996 (India). [6] Himangni Enterprises v Kawaljeet Ahluwalia, (2017) 10 SCC 706. [7] Booz Allen Hamilton Inc. vs SBI Home Finance Limited and Other, (2011) 5 SCC 532. [8] Natraj Studios Private limited v Navrang Studios, (1981) 1 SCC 523. [9] supra note 1. [10] (2017) 10 SCC 706


 

[*] Kumar Kartik is a fourth-year undergraduate student from National Law University, Odisha. For any discussion related to the article, he can be contacted via mail:17ba050@nluo.ac.in


Preferred Citation – Kumar Kartik, “Application of Arbitration in the Realm of Tenancy Disputes: Vidya Drolia and Ors v. Durga Trading Corporation", Syin & Sern Law Review, Published on 8th April 2021.

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