Advani & Co.Experts Corner

 

Introduction

 

The seminal judgment of the 3-Judge Bench of the Supreme Court of India in Vidya Drolia v. Durga Trading Corpn.[1] (Vidya Drolia) has been instrumental in settling many controversies that have existed in Indian arbitral jurisprudence since the commencement of the Arbitration and Conciliation Act, 1996 (the Act). The judgment of the Supreme Court has addressed multiple issues concerning the interpretation of the various facets of the arbitration agreement that have time and time again been obscured by obsolete and conflicting jurisprudence. The Court found it appropriate to recalibrate the Indian position of arbitrability and therefore has holistically articulated the fourfold test to determine subject-matter arbitrability supplementing the rights test laid down in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd.[2](Booz Allen). The Court has also held the ratio in Booz Allen as per incuriam with regard to the arbitrability of the tenancy disputes governed by the Transfer of Property Act, 1882. The judgment has also laid emphasis on the scope of judicial interference when the courts are seized of an application made under Sections 8 and 11 of the Act. The Court while delivering its opinion in this regard has conclusively outlined the scope of judicial inquiry that is to be conducted to determine the existence and validity of the arbitration agreement. The Court in its reasoning has extensively relied on the 246th Report of the Law Commission of India and has noted the importance of giving effect to the intention of the legislature that is evident from the series of amendments made to the Act in recent years. The opinion of the Supreme Court pertaining to the scope of judicial inquiry at the time of deciding an application under Sections 8 and 11 and the appealability of the orders under the provisions of the Act is within the purview of the present article.

 

The Prima Facie Test

 

The Supreme Court laid extensive reliance on its earlier decisions while simultaneously noting the lack of their precedential value in the light of the legislative amendments made to the Act in recent years. The Court has propounded a prima facie test in order to determine the existence of an arbitration agreement by holding that the courts must refer parties to arbitration unless they find that prima facie no valid arbitration agreement exists. The Court has reiterated that this prima facie examination is only to weed out ex facie non-existent arbitration agreements, invalid arbitration agreements and that on rare occasions the courts could consider non-arbitrability contentions. It must also be kept in the mind that the Court’s findings must be based on and limited to a summary presentation of documents rather an extensive appreciation of evidence.

 

The Court has also reiterated the importance of strictly adhering to the words in the erstwhile Section 11(6-A) of the Act and has also stated that its omission in 2019 has not changed the restrictive examination of the courts at the referral stage. Augmenting its ratio, the Court also placed reliance by elucidating the rationales of the sacrosanct doctrines of separability and kompetenz-kompetenz that give primacy to the Arbitral Tribunal to determine all questions pertaining to the validity and existence of the arbitration agreement. The Court also departed from its earlier position and has held that arbitrability is for the arbitrator to decide in accordance with the power enshrined in Section 16 of the Act. The Court has held while the principle of kompetenz-kompetenz gives the Arbitral Tribunal primacy to decide issues of non-arbitrability, they still have the final word as the courts can take a second look when deciding an application for setting aside under Section 34 of the Act. Finally, the Court in Vidya Drolia[3] has held that the scope of judicial inquiry at the time of deciding applications under Sections 8 and 11 is identical and the said sections are complementary in nature.

 

It is interesting to note, that although the Supreme Court has confined its inquiry to ascertain prima facie whether a valid arbitration agreement exists to compel parties to arbitrate, it has distinguished validity and existence as two separate corollaries to assess the enforceability of an agreement in law. It is true that many jurisdictions recognise the dichotomy between the formal and substantive validity of the arbitration agreements, it is in my opinion that the assessment of the substantive validity in terms of the requirements under the Contract Act, 1872 would not be feasible on a summary perusal of documents and would in fact require an extensive appreciation of evidentiary proceedings. The Court has pre-empted such a situation and has therefore held that when the Court cannot come to a conclusion on the validity of the arbitration agreement applying the prima facie test, it must stop any further inquiry and must refer the parties to arbitration. The judgment of the Court in Vidya Drolia[4] has summed up this approach as “when in doubt, do refer”.

 

It is also pertinent to note that this opinion of the Court in Vidya Drolia[5] is based on the findings of the another decision of the Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd.[6] (Garware). However, a coordinate Bench of the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[7] has expressed dissent with the opinion of the Court in Garware[8] that was affirmed in Vidya Drolia[9] and has accordingly referred the question to a Constitution Bench. Therefore, until this question is settled by the Constitution Bench the opinion of the Court regarding the dichotomy of existence and validity of the arbitration agreement in Vidya Drolia[10] is of uncertain precedential value.

 

Appealability and Conclusion

 

After analysing the above proposition, it is clear that the Supreme Court in Vidya Drolia[11] has vehemently laid down that the scope of judicial inquiry under Sections 8 and 11 of the Act is identical and extremely restrictive. Although the Court has brought the ambit of inquiry under Sections 8 and 11 at par by reading the prima facie test into both provisions, it has erred by failing to take cognizance of an inconsistency between the said sections with regard to the appealability of orders passed under these sections. From a conjoint reading of Section 8(1) with Section 37(1)(a) and Sections 11(6) and (6-A) with Section 11(7) of the Act it appears that an anomaly has arisen. It will be seen that an order passed under Section 8 that refuses to refer parties to arbitration is appealable under Section 37(1)(a), whereas a similar order passed under Section 11(6) read with Section 11(6-A) whether referring the parties or refusing to refer parties to arbitration is barred from an appeal by virtue of the strict rule in Section 11(7).

 

It is needless to say that this outcome is undesirable and is contrary to the true spirit of the ratio laid down by the Court in Vidya Drolia[12]. The legislature has followed the recommendations of the Law Commission of India and has carried out amendments to the Act but has not brought about the desired consistency between Sections 11(7) and37 of the Act. It is my opinion that such a lacuna could be used by recalcitrant parties, as they are likely to resort to dilatory tactics by filing mala fide Section 11 applications. Through this medium, these parties would attack the existence and validity of the arbitration agreement and would therefore pray for an order refusing to refer the parties to arbitration. By virtue of Section 11(7) of the Act that order would not be appealable. Such an outcome defeats the legislature’s policy to promote arbitration as the preferred method for dispute resolution arising from commercial contracts and is evidently not in conformity with the due process of law.

 

However, the Supreme Court in a recent judgment in Pravin Electricals (P) Ltd. v. Galaxy Infra and Engg. (P) Ltd.[13] (Pravin Electricals) has noted this inconsistency and has expressed its concern in relation to what has been laid down in Vidya Drolia[14]. The Court in Pravin Electricals[15] has invited the attention of the legislature to this conundrum by making an observation stating that Parliament might need to have relook at Sections 11(7) and 37 in order to bring the orders passed under Sections 8 and 11 at par on appealability. Therefore, until the legislature steps in and fixes this loophole the uncertainty will prevail.

 


† Hiroo Advani, Senior Managing Partner at Advani & Co.

†† Manav Nagpal, Associate at Advani & Co.

 

[1] (2021) 2 SCC 1.

[2] (2011) 5 SCC 532.

[3] (2021) 2 SCC 1.

[4] Ibid.

[5] Ibid.

[6] (2019) 9 SCC 209.

[7] 2021 SCC OnLine SC 13.

[8] (2019) 9 SCC 209.

[9] (2021) 2 SCC 1.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] 2021 SCC OnLine SC 190.

[14] (2021) 2 SCC 1.

[15] 2021 SCC OnLine SC 190.

Case BriefsSupreme Court

Supreme Court: Three days after the Court 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, the 3-judge bench of SA Bobde, CJ and AS Bopanna* and V. Ramasubramanian, JJ referred to the law laid down in Vidya Drolia v. Durga Trading Corporation2020 SCC OnLine SC 1018 and explained what makes the lease disputes arising under the Transfer of Property Act, 1882 arbitrable and those under Rent Acts, non-arbitrable.

Here’s the explainer by the Court:

Disputes arising under Transfer of Property Act

Section 111, 114 and 114A of the TP Act indicate the manner in which the determination of lease would occur, which also includes determination by forfeiture due to the acts of the lessee/tenant in breaking the express condition   agreed between the parties or provided in law. The breach and the consequent forfeiture could also be with respect to nonpayment of rent.

In such circumstance where the lease is determined by forfeiture and the lessor sues to eject the lessee and, if, at the hearing of the suit, the lessee pays or tenders to the lessor the rent in arrear, Section 114 of TP Act provides that the Court instead of passing a decree for ejectment may pass an order relieving the lessee against the forfeiture due to which the lessee will be entitled to hold the property leased as if the forfeiture had not occurred.

Under Section 114A of the TP Act a condition for issue of notice prior to filing suit of ejectment is provided so as to enable the lessee to remedy the breach.

“No doubt the said provisions provide certain protection to the lessee/tenant before being ejected from the leased property. In our considered view, the same cannot be construed as a statutory protection nor as a hard and fast rule in all cases to waive the forfeiture. It is a provision enabling exercise of equitable jurisdiction in appropriate cases as a matter of discretion.”

Such equitable protection does not mean that the disputes relating to those aspects between the landlord and the tenant is not arbitrable and that only a Court is empowered to waive the forfeiture or not in the circumstance stated in the provision.

When the disputes arise between the landlord and tenant with regard to determination of lease under the TP Act, the landlord to secure possession of the leased property in a normal circumstance is required to institute a suit in the Court which has jurisdiction. However, if the parties in the contract of lease or in such other manner have agreed upon the alternate mode of dispute resolution through arbitration the landlord would be entitled to invoke the arbitration clause and make a claim before the Arbitrator.

Even in such proceedings, if the circumstances as contained in Section 114 and 114A of TP Act arise, it could be brought up before the Arbitrator who would take note of the same and act in accordance with the law qua passing the award.

“If in the arbitration proceedings the landlord has sought for an award of ejectment on the ground that the lease has been forfeited since the tenant has failed to pay the rent and breached the express condition for payment of rent or such other breach and in such proceedings the tenant pays or tenders the rent to the lessor or remedies such other breach, it would be open for the Arbitrator to take note of Section 114, 114A of TP Act and pass appropriate award in the nature as a Court would have considered that aspect while exercising the discretion.”

Disputes arising under Rent Acts

The disputes arising under the Rent Acts are not arbitrable as notwithstanding the terms and conditions entered into between the landlord and tenant to regulate the tenancy, if the eviction or tenancy is governed by a special statute, namely, the Rent Act the premises being amenable to the provisions of the Act would also provide statutory protection against eviction and the courts specified in the Act alone will be conferred jurisdiction to order eviction or to resolve such other disputes.

“In such proceedings under special statutes the issue to be considered by the jurisdictional court is not merely the terms and conditions entered into between the landlord and tenant but also other aspects such as the bonafide requirement, comparative hardship etc. even if the case for eviction is made out.”

In such circumstance, the Court having jurisdiction alone can advert into all these aspects as a statutory requirement and, therefore, such cases are not arbitrable. The same is not the position in matters relating to the lease/tenancy which are not governed under the special statutes but under the TP Act.

Conclusion

Insofar as eviction or tenancy relating to matters governed by special statutes where the tenant enjoys statutory protection against eviction whereunder the Court/Forum is specified and conferred jurisdiction under the statute alone can adjudicate such matters. Hence in such cases the dispute is non-arbitrable.

If the special statutes do not apply to the premises/property and the lease/tenancy created thereunder as on the date when the cause of action arises to seek for eviction or such other relief and in such transaction if the parties are governed by an Arbitration Clause; the dispute between the   parties is arbitrable and there shall be no impediment whatsoever to invoke the Arbitration Clause.

[Suresh Shah v. Hipad Technology Pvt. Ltd., 2020 SCC OnLine SC 1038, decided on 18.12.2020]


*Justice AS Bopanna has penned this judgment

For petitioner: Advocate Vikas Dhawan

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

Case BriefsSupreme Court

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