Arbitrability of Tenancy Disputes: A Conundrum

Contributed by: Khaitan & Co







Introduction


The question of arbitrability of landlord-tenant disputes has been a contentious one, with varying judicial findings surrounding the issue by the Supreme Court of India and various High Courts. The COVID-19 induced lockdown has led to a rise in disputes between landlords and tenants, with tenants citing closure/non-use of the leased premises as a ground to negotiate a suspension or a complete waiver of their obligation to pay rent, or even to terminate the lease altogether, perhaps succumbing to the financial pressures and hardships brought about by the pandemic. No points for guessing, majority of Landlords have been resisting such endeavours. In the circumstances, it becomes imperative to examine the legal position on arbitrability of landlord-tenant disputes as more and more lease agreements contain an arbitration agreement between the parties.


First and foremost, interestingly, the Arbitration and Conciliation Act, 1996 (“the Act”) itself does not define, include, or exclude any disputes as arbitrable or non-arbitrable. This article discusses the divergent views opted by various courts on the arbitrability of tenancy disputes.


The conundrum


Initially, the Supreme Court adjudicated this issue in 1981, in the matter of Natraj Studios v. Navrang Studio [(1981) AIR 537] (“Natraj Studios”). In this case, the landlord had filed a suit for eviction in the Small Causes Court, and the tenant had filed an Application under Section 8 of the Act seeking reference to arbitration owing to the arbitration clause in the Agreement between the parties. Upon examining the scheme and object of the Bombay Rent Act, 1947, the Supreme Court observed that the Small Causes Court can exclusively try such disputes between landlords and statutory tenants, inter-alia, on the ground that the Bombay Rent Act, 1947 being a welfare legislation enacted with the definite purpose of protecting tenants against harassment, vested these special courts with the exclusive jurisdiction to decide tenancy related disputes. The Supreme Court thus went on to hold that owing to the specific statutory intent, parties cannot be permitted to circumvent the legislative mandate through private contracts.


Thereafter, in the landmark case of Booz Allen and Hamilton Inc v. SBI Home Finance Limited, [(2011) 5 SCC 531] (“Booz Allen”) , a similar Application under Section 8 of the Act had been filed in a suit pertaining to redemption of mortgage. The issue raised before the Supreme Court was whether a dispute relating to enforcement of a mortgage is arbitrable, given the existence of an arbitration clause in the mortgage deed. While adjudicating the said issue and analysing the broader concept of ‘arbitrability of disputes’, the Supreme Court held that 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. It was further held that an exception to this principle arises when a statute either expressly or by necessary implication, bars the jurisdiction of an arbitral tribunal. In this case, the Supreme Court also observed that ‘eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes’ are ‘well recognized examples of non-arbitrable disputes"


Placing reliance on Booz Allen, the Andhra Pradesh High Court, in Penumalli Sulochana v. Harish Rawtani (2013 SCC OnLine AP 667), held that disputes arising under a lease deed, which are governed by the Transfer of Property Act, 1882 (“TP Act”) are non-arbitrable. The Andhra Pradesh High Court was further of the opinion that since the eviction of tenants which is governed by special statues, cannot be the subject-matter of arbitration, in the same manner, a case which comes under the ambit of the TP Act also cannot be a subject-matter of arbitration. However, the Calcutta High Court in Ambuja Neotia Holdings Private Limited v. M/s Plant M Retail Limited (2015 SCC OnLine Cal 7000), took a different view and held that disputes arising under lease agreements governed by the TP Act are indeed arbitrable because the TP Act is not at all a special statue as it codifies the general law of transfer of property. The Calcutta High Court was also of the opinion that Booz Allen does not render all tenancy matters non- arbitrable, but only those which are governed by special statues. This view of the Calcutta High Court, in the humble opinion of the authors, was perhaps the more sustainable and legally plausible interpretation of the observations of the Supreme Court in Booz Allen.


In Himangni Enterprises v. Kamaljeet Singh, [(2017) 10 SCC 706] (“Himangni Enterprises”), the Supreme Court once again reaffirmed the non-arbitrability of disputes relating to tenancy and eviction. The appeal before the Supreme Court arose out of an order of the Delhi High Court upholding the lower court's decision rejecting the Appellant’s Application under Section 8 of the Act in a civil suit filed by the Respondent/Plaintiff against the Appellant/Defendant. It was contended by the Appellant that since the dispute arose from a lease deed containing an arbitration agreement, the parties were bound by the same and hence, the dispute had to be referred to arbitration. The Respondent, on the other hand, contended that the lease deed had already expired and hence was no longer enforceable by the Appellant. The Respondent further contended that the subject matter of the civil suit filed by the Respondent was not arbitrable. In this case, the Supreme Court held that in view of the decisions in Natraj Studios and Booz Allen, it was already well settled that tenant-landlord disputes were non-arbitrable. Further, the Supreme Court rejected the Appellant's argument that since the “special statute” i.e., the Delhi Rent Act, 1995, was not applicable to the present case by virtue of Section 3(1)(c) of the said Act, the disputes could be referred to arbitration. The Court ruled that the mere preclusion of the Delhi Rent Act, 1995 from Application did not mean that the Act would automatically apply to the present dispute. In such a situation, the rights of the parties would be governed by the TP Act and the civil suit would be triable by the Civil Court and not by the arbitrator. The Supreme Court again placed a bar on the arbitrability of tenancy disputes on the grounds of involvement of rights in rem and public policy.


More recently, the correctness of the decision in Himangni Enterprises was questioned by another two-judge bench of the Supreme Court in Vidya Drolia & Ors. v. Durga Trading Corporation, (2019 SCC OnLine SC 358), (“Vidya Drolia”), which ruled that where landlord tenancy disputes are not governed by a special statute such as the Delhi Rent Control Act, 1958, which confers jurisdiction on courts, and where the TP Act applies instead, the disputes may be arbitrable, since nothing in the TP Act impliedly or expressly bars arbitration. In this case, the Appellant (tenant) did not deliver possession to the Respondent (landlord) even after the expiry of the tenancy agreement. Accordingly, the landlord applied before the Calcutta High Court seeking appointment of an arbitrator under Section 11 of the Act. The tenant opposed the Application on the ground that the dispute was not arbitrable. The Calcutta High Court, however, passed the impugned order appointing an arbitrator, rejecting the tenant’s objections on arbitrability of the dispute between the parties. After this, the arbitral proceedings began, and several sittings had taken place. Meanwhile, the decision in Himangni Enterprises came to be passed, wherein it was held that even where the TP Act is applied between landlord and tenant, disputes between the said parties would not be arbitrable.


In Vidya Drolia, the Supreme Court revisited Booz Allen and Natraj Studios, the two judgments on which reliance had been placed by another two-judge bench of the Supreme Court while passing the decision in Himangni Enterprises. It was clarified that in Booz Allen, only those tenancy matters were held to be non-arbitrable, which are (i) governed by special statutes (ii) where the tenant enjoys statutory protection against eviction and (iii) where only specified courts are conferred jurisdiction to grant eviction or decide disputes. Insofar as the decision in Natraj Studios was concerned, the Supreme Court observed that this was a judgment in which Section 28 of the Bombay Rent, 1947 Act, in the context of arbitrability, arose for consideration. This section expressly made it clear that disputes between landlords and statutory tenants would be referable only to the Small Causes Court in Bombay and “no other court has jurisdiction to entertain any such suit, proceeding or application or to deal with such claim or question”. Thus, the Supreme Court concluded the question of arbitrability of landlord-tenant disputes governed under the TP Act could not possibly be said to have been answered by the two decisions of the Supreme Court in Booz Allen and Himangni Enterprises.


However, Himangni Enterprises was not overruled since the bench rendering the decision in Vidya Drolia was of equal strength and hence, it could only be referred to a larger bench for reconsideration. There is also currently no stay on the decision in Himangni Enterprises, meaning thereby that Himangni Enterprises will still be considered applicable. The reference to the larger bench in Vidya Drolia is expected to finally settle the law on this issue, which remains pending.


Pertinently, in Vidya Drolia, given the facts of the case and the fact that several hearings had already been held in the arbitration, the Supreme Court permitted the proceedings to be continued and culminate in an award, the execution of which was barred without first applying to the Supreme Court.


Comment:


Though the law is clear on the non-arbitrability of tenancy disputes arising out of lease agreements governed by special statues, there is still a need for clarity on this issue in cases covered under the TP Act, given the conflicting judgments on the issue in Himangni Enterprises and Vidya Drolia. While the authors are in agreement with the sound findings of the Supreme Court in Vidya Drolia, a view can be taken that Himangni Enterprises does not bar arbitration. Interestingly, in Vijaylakshmi Verma v. HT Learning Centres Limited, (Arb. P. No. 331 of 2019), the Delhi High Court vide Order dated 22 January 2020 distinguished Himangni Enterprises and permitted appointment of an Arbitrator, on the ground that the parties were neither governed by any special statute nor did the tenant enjoy any statutory protection. Since the disputes between the parties related to the period during the validity of the lease deed and the lease was not a monthly lease as in Himangni Enterprises, the Delhi High Court held that there was no impediment in the appointment of an arbitrator.

However, in view of the pendency of this issue in the Supreme Court, it is not settled whether disputes between landlord and tenant can be arbitrated, and until this clarity is attained, any party wanting to delay the arbitration process, may take advantage of this conundrum and raise an objection with regard to the maintainability of the arbitration proceedings.


Contributed by Khaitan & Co


The above article is authored by Mr. Aseem Chaturvedi (Partner), Ms. Wamika Trehan (Principal Associate), and Ms. Maithili Moondra (Associate).



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