‘Landlord-tenant disputes under Transfer of Property Act are arbitrable’. SC lays down test for determining non-arbitrability of disputes

Supreme Court: The 3-judge bench of NV Ramana*, Sanjiv Khanna** and Krishna Murari, JJ has overruled the ratio in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706 wherein it was held that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882, are not arbitrable as this would be contrary to public policy.

Are Landlord-tenant disputes arbitrable?

“Landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration. However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration.”

  • Landlord-tenant disputes are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. Such actions normally would not affect third-party rights or have erga omnes affect or require centralized adjudication.
  • An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court.
  • Landlord-tenant disputes do not relate to inalienable and sovereign functions of the State. The provisions of the Transfer of Property Act do not expressly or by necessary implication bar arbitration.
  • Transfer of Property Act, like all other Acts, has a public purpose, that is, to regulate landlord-tenant relationships and the arbitrator would be bound by the provisions, including provisions which enure and protect the tenants.

A fourfold test for determining non-arbitrability of a dispute

(1) when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.

(2) when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;

(3) when cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and

(4) when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).

However, these tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will help and assist in determining and ascertaining with great degree of certainty when as per law in India, a dispute or subject matter is non-arbitrable. Only when the answer is affirmative that the subject matter of the dispute would be non-arbitrable.

Instances of Non-arbitrable disputes

  • Insolvency or intracompany disputes
  • Grant and issue of patents and registration of trademarks
  • Criminal cases
  • Matrimonial disputes relating to the dissolution of marriage, restitution of conjugal rights etc.
  • Probate, testamentary matter etc.
  • Allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non-arbitrability.
  • Disputes which are to be adjudicated by the DRT under the DRT Act.

When can the issue of non-arbitrability be raised?

  1. Before the court on an application for reference under Section 11 or for stay of pending judicial proceedings and reference under Section 8 of the Arbitration Act;
  2. Before the arbitral tribunal during the course of the arbitration proceedings; or
  3. Before the court at the stage of the challenge to the award or its enforcement.

‘Existence of an arbitration agreement’ – Meaning

“An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law.”

Hence, the phrase ‘existence of an arbitration agreement’ in Section 11 of the of the Arbitration and Conciliation Act, 1996, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the arbitral tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.

Who decides arbitrability?

The general rule and principle, in view of the legislative mandate clear from the amendments to the of the Arbitration and Conciliation Act, 1996 by Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of nonarbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.

Judicial Review- Scope

Scope of judicial review and jurisdiction of the court under Section 8 and 11 of the Arbitration Act is identical but extremely limited and restricted in order to check and protect parties from being forced to arbitrate when the matter is demonstrably ‘non-arbitrable’ and to cut off the deadwood.

Rarely as a demurrer the court may interfere at the Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny.

The court by default would refer the matter when

  • contentions relating to non-arbitrability are plainly arguable;
  • consideration in summary proceedings would be insufficient and inconclusive;
  • facts are contested;
  • the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings.

“This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the arbitral tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism.”

Justice NV Ramana, writing a separate but concurring opinion said

“Courts, while analyzing a case under Section 8, may choose to identify the issues which require adjudication pertaining to the validity of the arbitration agreement. If the Court cannot rule on the invalidity of the arbitration agreement on a prima facie basis, then the Court should stop any further analysis and simply refer all the issues to arbitration to be settled.”

He further states that the scope of the Court to examine the prima facie validity of an arbitration agreement includes only:

  1. Whether the arbitration agreement was in writing?
  2. Whether the arbitration agreement was contained in exchange of letters, telecommunication etc?
  3. Whether the core contractual ingredients qua the arbitration agreement were fulfilled?
  4. On rare occasions, whether the subject-matter of dispute is arbitrable?

[Vidya Drolia v. Durga Trading Corporation, 2020 SCC OnLine SC 1018, decided on 14.12.2020]


*Justice NV Ramana penned a concurring opinion.

**Justice Sanjiv Khanna penned the judgment. 

For petitioners: Senior Counsels K. V. Vishwanathan, Manoj Swarup, Gopal Shankarnarayan

For Respondents: Senior Counsel Nakul Dewan and counsel Sourav Agarwal

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