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 Dispute mechanism available under a lease

How it started:

It started with the case of Booz-Allen & Hamilton Inc v. SBI Home Finance Ltd & Others (“Booz-Allen”), wherein the Supreme Court, after hearing the matter, held that the disputes relating to eviction and tenancy were not arbitrable. Leases are governed under the Transfer of Property Act, 1882 (“TOPA”). The court discussed the nature and scope of issues arising for consideration in an application under Section 8 of the Arbitration and Conciliation Act (“Act”) wherein “even if there is an arbitration agreement between the parties, and even if the dispute is covered by the arbitration agreement, the court where the civil suit is pending, will refuse an application under Section 8 of the Act, to refer the parties to arbitration, if the subject matter of the suit is capable of adjudication only by a public forum or the relief claimed can only be granted by a special court or Tribunal”.

The Court categorised the well-recognised examples of non-arbitrable disputes such as : (i) rights and liability issues giving rise to or arising out of criminal offences; (ii) matrimonial wrangles relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters which are governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or resolve the disputes.[1]

The Court further discussed Right in rem and Right in personam:

A right in rem is a right exercisable against the world at large, whereas a right in personam is applied for protection of interest solely against specific individuals. Actions in personam refer to actions defining the rights and interests of the parties themselves in the subject matter of the case, whereas actions in rem refer to actions determining the title to property and the rights of the parties, not merely among themselves but also against all persons at any time claiming an interest in that property.

Explaining it further, the Court held that, “generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to sub-ordinate rights in personam arising from rights in rem have always been considered to be arbitrable.”

Discussions around non-arbitrability of leases basis the Booz Allen case:

In the case of Sulochana v. Harish Rawtani, one of the questions before the apex Court was whether the dispute, which is covered by the suit, can be subject matter of an arbitration. To put it simply, arbitration is a tool picked by the parties for resolution of disputes with reference to the terms of a contract entered between them. The Court described the essence of arbitration lies in such remedies wherein the parties outline their common rights and obligations under a contract or agreement that fall within the framework of law and in cases where the relationship is governed by any specific provision of law, the dispute in relation cannot constitute the subject matter of arbitration.

In view of the above, Courts held that once a situation attracting a specific provision of law exists, “it has to be dealt with in accordance with that provision and even a Court of law has no discretion except to apply the provision. If such matters are entrusted to arbitration, there is every likelihood of the arbitrator taking his own view, which, in a given case, may be contrary to the provisions of law. Once such matters are referred to arbitration, the mechanism to control his discretion is virtually non-existent, if one takes into account, the grounds on which, the award of an arbitrator can be set aside.”[2]

It was held with reference to the question asked above that “dispute covered by the suit cannot be subject matter of arbitration.” As viewed above, the court believed as matters related to tenant eviction cannot be arbitrable and since leases fall under TOPA, the same cannot be subject to arbitration (w.r.t. Booz-Allen).

The case of Himangni Enterprise v. Kamaljeet Singh Alhuwalia[3] (“Himangni”) came into light following the above case in 2019, wherein yet again the Court was of the view that the landlord and tenant disputes, which are governed under TOPA, are not arbitrable since they differ with public policy.

The entire fight of whether landlord-tenant disputes are arbitrable or not are based on the theory and analysis of right in rem and right in personam. Since the Act does not explicitly clarify what disputes are arbitrable and what are not, it has given birth to numerous interpretations and theories., The Act does not capture the categories of arbitrable disputes, even though its essence was to provide an alternate solution to the redressal structure, and hence, the landlord-tenant disputes have remained open ended.

Summarising the trail of case laws presented above, there would be no doubt as to what the judiciary deems fit for the disputes between a landlord and a tenant. Both the cases as described above (Booz-Allen and Sulochana v. Harish Rawtani) and Himangni Enterprises v. Kamaljeet Singh Ahluwalia leave us with just one decision saying that disputes between landlord-tenant are non-arbitrable.

Before proceeding further to how the final judgment trumps the trail of crowd followers, it is notable that the view formed in the Himangni case was based on Natraj Studios (P) Ltd. v. Navrang Studios [4]case and Booz-Allen.

As in the famous case of Natraj Studios, the appellant filed an application under Section 33 of the Act for a declaration that the arbitration clause in the ‘leave and license agreement’ was invalid and inoperative. The application was dismissed by a single judge on the ground that he had no jurisdiction to determine the rights, if any, of the appellant as a tenant. The Court evaluated the scheme of the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 (“1947 Act”) and observed why landlord-tenant disputes in their view are public policy and should be preserved. The Court reasoned by stating that, “the conferment of exclusive jurisdiction on certain Courts is pursuant to the social objective at which the legislation aims. Public policy requires that contracts to the contrary cannot be permitted. Therefore, public policy requires that the parties cannot be permitted to contract out of the legislative mandate which requires certain kinds of disputes to be settled by special courts constituted by the Act”.

They further concluded by stating, “Section 28(1) of the 1947 Act positively confers jurisdiction on the Court of Small Causes to entertain and try any suit between, among others, a licensor and a licensee relating to the recovery of licence fee and to decide any application made under the Act and negatively excludes the jurisdiction of any other Court from entertaining and such suit, proceeding or application or dealing with such claim or question.”

Keeping in mind the cases discussed hereinabove, the Court in Himangni stated that “the question involved in the appeal remains no longer res integra and stands answered by two decisions of this Court in Natraj Studios (P) Ltd. vs. Navrang Studios & Another, and Booz Allen & Hamilton Inc. vs. SBI Home Finance Ltd. & Ors. against the appellant and in favour of the respondent in that the civil suit filed by the respondents is maintainable despite the parties having an agreement to arbitrate.”

There was a lot of criticism pertaining to the approach of the Court in all the cases discussed above. The narrow interpretation of the Section/Acts and the mindset of the generation which has not evolved in time led to the matters being referred to a larger bench for reconsideration.

The final verdict:

The recent judgment of Vidya Drolia & Ors v. Durga Trading Corporation [5]made its final word play. Earlier judgments made the position under law clear that landlord-tenant disputes are not arbitrable. However, in the case of Vidya Drolia, after discussion at large and a deeper consideration of all sides, two issues considered, (i) meaning of non-arbitrability and when the subject matter of the dispute is not capable of being resolved through arbitration and (ii) the conundrum – “who decides.

The Court revisited all the cases basis which it was declared that landlord-tenant disputes are not arbitrable and observed that, “In essence, it is necessary to examine if the statute creates a special right or liability and provides for the determination of each right or liability by the specified court or the public forum so constituted, and whether the remedies beyond the ordinary domain of the civil courts are prescribed. When the answer is affirmative, arbitration in the absence of special reason is contraindicated. The dispute is non- arbitrable.”

The Court laid down four-fold test on deciphering when the subject matter of a dispute in an arbitration agreement is not arbitrable. After extensive analysis, the Court overruled the case of Himangni and held that, “landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration.” The Court noted that various courts have interfered with the subject matter arbitrability at the pre­-reference stage. The Courts have used the ‘public policy’ reason to restrict arbitration with respect to certain subject matters and cleared the path where landlord-dispute can be arbitrable. This judgment made a mark in the history and ended all ambiguity revolving around the issue.

[1] Booz-Allen & Hamilton Inc v. SBI Home Finance Ltd & Others. Civil Appeal No.5440 of 2002.

[2] Smt. Penumalli Sulochana v.Harish Rawtani. Civil Revision Petition No.4506 of 2012.

[3] Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706.

[4] Natraj Studios (P) Ltd v. Navrang Studios & Anr., 1981 AIR 537, 1981 SCR (2) 466.

[5] Vidya Drolia & Ors v. Durga Trading Corporation, Civil Appeal No. 2402 of 2019.