Supreme Court on Arbitrability of Disputes

Background

A three-judge bench of the Supreme Court of India in a landmark decision in the case of Vidya Drolia v. Durga Trading Corporation (Vidya Drolia), answered the question on whether landlord-tenant disputes governed by the Transfer of Property Act, 1882 (TOPA) are arbitrable. This question was referred to the three-judge bench by an order of the Supreme Court’s division bench in Vidya Drolia and Others v. Durga Trading Corporation (Vidya Drolia I). The Supreme Court while delivering its judgement on the reference also laid down the law on arbitrability of disputes generally and the forum to decide upon the question of ‘non-arbitrability’ of a dispute. In Vidya Drolia I, the Supreme Court had questioned the reasoning rendered in Himangni Enterprises v. Kamaljeet Singh Ahluwalia (Himangni), which held that disputes governed by the TOPA were not arbitrable as a matter of public policy and referred the question to a larger bench of the Supreme Court.

Facts

Briefly, the timeline leading up to this reference is:

• In 1981, in Natraj Studios (P) Limited v. Navrang Studios (Natraj), the Supreme Court dismissed an application for appointing an arbitrator under Section 8 of the erstwhile Arbitration Act, 1940, on the ground that the tenancy was protected under the Rent Control Act and the relevant court stipulated under that statute alone had jurisdiction.
• In 2011, in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (Booz Allen), the Supreme Court agreed and held that for eviction or tenancy matters governed by special statutes, where the tenant enjoys statutory protection, only the specified court has jurisdiction. Booz Allen also laid down the principle that rights in rem are not arbitrable, but subordinate rights, which are in personam, are arbitrable. The Supreme Court explained that a right in rem was exercisable against the world at large (example, testamentary matters), as contrasted from a right in personam which is an interest protected solely against specific individuals. Example, rights under a patent licence may be arbitrated, but the validity of the underlying patent may not be arbitrated. This became the guiding principle on arbitrability of disputes.
• In 2017, while relying on Natraj and Booz Allen, the Supreme Court in the Himangni case, went a step further to hold that even in cases where the TOPA was applicable, it would be the civil court which would have jurisdiction to decide landlord-tenant disputes and not an arbitrator.
• In 2019, the reasoning in Himangni was questioned by the Supreme Court in Vidya Drolia I while hearing a petition filed for appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). The two issues considered by the Supreme Court were – first, that the court should examine only the ‘existence of an arbitration agreement’ while appointing an arbitrator and not delve into issues or arbitrability of the dispute. Second, that the TOPA does not preclude the arbitrability of landlord-tenant disputes, being rights in personam.

Court Ruling

The Supreme Court, while answering the reference, has held as follows:

• Landlord-Tenant Disputes are arbitrable: The Supreme Court overruled Himangni and found that landlord-tenant disputes are not actions in rem but pertain to subordinate rights in personam. The Supreme Court also noted that TOPA does not contain a bar against arbitration. Therefore, the court held that landlord tenant disputes are arbitrable. The Supreme Court also carved out an exception where landlord-tenant disputes are governed by rent control legislation where specific courts have been designated to exclusively hear disputes. In such cases, disputes would not be arbitrable.
• Meaning of non-arbitrability of a dispute: The Supreme Court examined the meaning of non-arbitrability of disputes. After a detailed examination of various decisions, the Supreme Court formulated a 4-pronged test to determine when a dispute is non-arbitrable as under:
  • when the cause of action and subject matter of the dispute are related to a right in rem. Example, a right in copyright.
  • when cause of action and subject matter of the dispute affect third party rights or where they operate against the world in general. Example, matters relating to probate, testamentary matter etc.
  • when cause of action and subject matter of the dispute relate to inalienable sovereign and public interest functions of the State. Example, monopoly rights granted by a State.
  • when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statutes since Section 2(3) (Scope) of the Arbitration Act itself recognises that certain disputes may not be referred to arbitration. Example, disputes between workmen and management under the Industrial Disputes Act, 1947 (ID Act) are required to be exclusively adjudicated by authorities constituted under the ID Act.

  While laying down the above test, the Supreme Court overruled its 2010 decision in N. Radhakrishnan v. Maestro Engineers and Others, which held that matters of fraud were not arbitrable. By doing so, the Supreme Court has cemented the judicial shift towards arbitrability of allegations of fraud in contractual disputes.

  The Supreme Court also overruled a 2013 decision of a full bench of the Delhi High Court in HDFC Bank Limited v. Satpal Singh Bakshi, which held that disputes between banks and lenders under the Recovery of Debts Due to Banks and Financial Institutions Act,1993 were arbitrable. Thus, the Supreme Court has now laid down that disputes to be adjudicated by the Debts Recovery Tribunal (DRT) are not arbitrable.

• Forum to decide upon non-arbitrability: The Supreme Court examined in detail as to which of the following forums can and should determine arbitrability:

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