Summary

• Leased properties exempted under rent control legislations would be governed by Transfer of Property Act;

• Landlord-tenancy disputes governed by Transfer of Property Act are arbitrable;

• Arbitrators can grant reliefs provided under landlord-tenancy provisions of the Transfer of Property Act;

• Landlord-tenancy disputes governed by special rent control legislations continue to be non-arbitrable;

Are disputes between landlords and tenants arbitrable under Indian law? If yes, are all types of disputes arbitrable? Can arbitration clauses in lease agreements be enforced? After significant confusion and long-standing disputes around the arbitrability of tenancy matters, it may now be possible to answer some of these questions. In two judgments passed within a month, Suresh Shah v. Hipad Technology India Private Limited¹ (“Suresh Shah”) and Vidya Drolia & Ors. v. Durga Trading Corporation² (“Vidya Drolia II”), the Supreme Court has settled the dust on whether landlord-tenancy disputes under the Transfer of Property Act, 1882 (“TP Act”) are arbitrable under the Arbitration & Conciliation Act, 1996 (“Arbitration Act”).

Overruling many of its own as well as other High Courts’ judgments, the Court in Vidya Drolia II has set out the broad principles on which arbitrability of disputes may be decided. Applying the principles, the Court held that landlord-tenant disputes under TP Act, and not any special statute (such as state-specific rent legislations, etc.), would be arbitrable.

Additionally, the Vidya Drolia II judgment also demarcates the scope of inquiry by courts in determining questions of arbitrability at the pre-arbitration / reference stage under Section 8³ and 11⁴ of the Arbitration Act, along-with issues relating to the arbitrability of disputes involving fraud and debt recovery, among others. In this piece, however, we analyse the critical judgments that have brought arbitrability of landlord-tenancy disputes to the fore and steered the analysis till date.

History of Controversy on Landlord Tenancy Disputes

Natraj Studios (P) Ltd. v. Navrang Studios & Ors. - 1981

One of the early cases involving arbitrability of landlord-tenant disputes arose in 1981 in the judgment of the Court in Natraj Studios (P) Ltd. v. Navrang Studios & Ors.⁵ (“Natraj Studios”). In Natraj Studios, the Court held that disputes between landlord and tenant under Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 (“Bombay Rent Act”) cannot be referred to an arbitrator. This was because:

1. the dispute was governed by the Bombay Rent Act;

2. Bombay Rent Act is a welfare legislation aimed at the definite social objective of protecting tenants against harassment by landlords. Accordingly, parties cannot be permitted to contract out of the legislative mandate which is rooted in public policy; and

3. Bombay Rent Act conferred jurisdiction on the Court of small causes, under Section 28, to entertain and decide all matters arising thereunder.

Booz Allen and Hamilton Inc. vs. SBI Home Finance Ltd. and Ors. - 2011

In 2011 with Booz Allen and Hamilton Inc. vs. SBI Home Finance Ltd. and Ors.⁶ (“Booz Allen”), the Court held that a suit to enforce a mortgage must be decided by courts of law and not by arbitral tribunals. The Court held that a suit to enforce a mortgage involved enforcement of a right in rem. It explained that a right in rem is a right exercisable against the world and is not amenable to arbitration. In contrast, a right in personam, in which interest is protected against specific individuals, is arbitrable. It was also stated that disputes relating to subordinate rights in personam arising from rights in rem are arbitrable.

The Court further held that every civil or commercial dispute which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration, unless it is excluded expressly (as a matter of public policy) or by necessary implication.

In the judgment, the Court enumerated examples of non-arbitrable disputes. Regarding landlord-tenant disputes, the Court stated in obiter that tenancy disputes are not arbitrable when (i) the eviction or tenancy matters are governed by special statutes; (ii) the tenant enjoys statutory protection against eviction; and (iii) only specified courts are conferred jurisdiction to grant eviction or decide the disputes (“Booz Allen Criterion”).

Himangni Enterprises v. Kamaljeet Singh Ahluwalia - 2017

In 2017, in the case of Himangni Enterprises v. Kamaljeet Singh Ahluwalia (“Himangni”),⁷ the Court was again seized with the question of whether landlord-tenant disputes are arbitrable. Here, a landlord sued the tenant in a civil court. The property in question was leased under a lease agreement that contained an arbitration clause. The tenant applied under Section 8 of the Arbitration Act before the civil court, praying for reference of the dispute to arbitration. The landlord objected to the application on the ground that the subject matter of the suit was incapable of reference to arbitration. The civil court and the Delhi High Court (in appeal) accepted the landlord's plea and refused the application for reference to arbitration.

In the appeal before the Court, it was contended that under normal circumstances, landlord-tenant disputes in the jurisdiction would be governed by the Delhi Rent Act, 1995 (“Delhi Rent Act”). However, by virtue of Section 3⁸, the Delhi Rent Act did not apply to the leased premises. As the Delhi Rent Act did not apply to the leased premises, the matter was no longer governed by a special statute (i.e. Delhi Rent Act). Therefore, it did not meet the Booz Allen Criterion - leaving the dispute capable of reference to arbitration.

However, the Court was not impressed by the above contention. It held that, mere inapplicability of the Delhi Rent Act to the leased premises did not make the dispute arbitrable. The exemption from applicability of the Delhi Rent Act to the leased premises could be withdrawn by the government at anytime. In such a case, Delhi Rent Act (which is a special legislation) will start to apply again, thereby ousting the jurisdiction of the arbitrator (as per Booz Allen Criterion). As such, merely because the premises are exempted from the applicability of the Delhi Rent Act does not mean that the matter can be referred to arbitration. In such a case, the matter will be governed by the TP Act and must be decided by civil courts. Ignoring the exemption provided under the Delhi Rent Act, the Court held that the facts of this case were covered by the judgments of Natraj Studios and Booz Allen.

Vidya Drolia & Ors. v. Durga Trading Corporation – 2019 (Vidya Drolia I)

In Vidya Drolia & Ors. v. Durga Trading Corporation, a tenancy agreement was entered into between the landlord and the tenant regarding certain godowns and other structures. The maximum period of tenancy was ten years. The tenancy agreement provided an arbitration clause. After ten years, the landlord called upon the tenant to vacate the premises. Upon the tenant’s failure to vacate the premises, the landlord issued a notice of arbitration to the tenant. The landlord applied under Section 11 of the Arbitration Act for the appointment of an arbitrator. The High Court of Calcutta rejected the tenant’s objections relating to the non-arbitrability of the dispute and referred the matter to arbitration.

Meanwhile, the Court passed its judgment in the case of Himangni Enterprises (ruling that landlord and tenant disputes governed by the TP Act would not be arbitrable). Based on the judgment in Himangni Enterprises, a review / recall application was filed in the High Court of Calcutta against the order appointing the arbitrator. The High Court of Calcutta rejected this application, against which an appeal was preferred before the Court.

When a two-judge bench first heard the appeal in 2019 (“Vidya Drolia I”), the Court held that a dispute between landlord-tenant governed by TP Act was never covered under either Natraj Studios (as this was a case under Bombay Rent Act) or Booz Allen (as this was a case involving enforcement of mortgage which was a right in rem). The Court differed with its judgment in Himangni Enterprises and held that the decision was not based on sound reasoning. It held that merely because the government could withdraw the exemption (from the applicability of Delhi Rent Act) would not render the dispute inarbitrable.

The Court agreed that if the Delhi Rent Act becomes inapplicable, the dispute would be governed by TP Act. However, it was not convinced that an arbitrator could not decide landlord-tenancy matters governed under TP Act. Analysing the provisions of the TP Act (particularly Sections 111, 114 and 114A, which specifically cover landlord-tenants' rights and liabilities), the Court held that the disputes under TP Act can be decided by an arbitrator, and there is nothing in the TP Act that prohibits arbitrability.

Having thus found itself at odds with its judgment in Himangni Enterprises, the Court referred the matter to a larger bench of three judges, which culminated in the present Vidya Drolia II judgment.

Vidya Drolia & Ors. v. Durga Trading Corporation – 2020 (Vidya Drolia II)

In the Vidya Drolia II Judgment, the Court laid down a four-fold test to determine the arbitrability of disputes. It held that a dispute would be inarbitrable when:

1. it relates to actions in rem or actions that do not pertain to subordinate rights in personam that arise from rights in rem.

2. it affects third party rights; have erga omnes⁹ effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;

3. it relates to the inalienable sovereign and public interest functions of the state; and

4. it is expressly or by necessary implication non-arbitrable as per mandatory statute(s).

Applying the above principles to the present landlord-tenant dispute under TP Act, and referring to Sections 111, 114 and 114A of the Transfer of Property Act, the Court held that there is nothing in the TP Act that expressly or impliedly bars arbitration. Such disputes were not actions in rem, but actions in personam that arose from rights in rem. They did not affect third-party rights or have erga omnes effect. They also do not relate to any sovereign functions of the state.

As regards the grounds predicated on public policy, the Court held that the same could well be raised before the arbitrator as they could be raised before a civil court. As under other acts of legislature, the arbitrator would be bound by the TP Act, and would have to decide disputes in line with the benefits and protections provided to tenants. The Court further held that an award passed in a landlord-tenant dispute would be enforceable like a decree of civil Court. Accordingly, it held that landlord-tenant disputes covered under the TP Act would be arbitrable.

Suresh Shah v. Hipad Technology India Private Limited - 2020

In the more recent Suresh Shah case, the parties had entered into a sub-lease agreement containing an arbitration clause. Disputes arose under the sub-lease agreement. An application was filed in Court under Section 11 of the Arbitration Act for the appointment of an arbitrator. Before considering the appointment of an arbitrator, the Court elaborated on the arbitrability of disputes relating to lease/tenancy agreements/deeds.

The Court reiterated that insofar as the eviction or tenancy was governed by special statutes, where tenant enjoys statutory protection against eviction and whereunder a specific court is conferred jurisdiction (i.e. Booz Allen Criterion), the disputes would be non-arbitrable. In other words, holding that landlord-tenancy disputes under TP Act would be arbitrable.

Analysis & Conclusion

The Suresh Shah and Vidya Drolia II judgments now offer much needed clarity to landlords and tenants on the type of tenancy disputes that can be referred to arbitration. The four-pronged test laid down by the Court in Vidya Drolia II to determine arbitrability would also help to determine arbitrability of disputes in general. With clarity on the arbitrability of landlord-tenancy disputes governed by the TP Act, it is believed that the courts' burden will also reduce going forward.

It must be noted that the applicability of rent control legislation is typically exempted on certain types of premises. For example, under the Maharashtra Rent Control Act, 1999 (“MH Rent Act”), premises let or sub-let to banks, public sector undertakings or any corporation established by any state or central act, or foreign missions, multinational companies, international agencies, are exempted. The MH Rent Act also does not apply to premises let to private limited and public limited companies with a paid-up share capital of rupees one crore or more. Similarly, the Delhi Rent Act does not apply to any premises belonging to the government or to any tenancy created by a grant from the government. Thus, the present judgments have cleared the way for many disputes relating to such exempted premises to be referred to arbitration.

However, the judgments must be explicitly read in the context of landlord-tenancy disputes under specific provisions of the TP Act. Caution must be exercised in considering the nature of dispute under action. The judgment cannot be broadly applied to mean that all provisions under the TP Act are arbitrable. Disputes having any element of in rem action or erga omnes effect under the TP Act will continue to be non-arbitrable and will have to be assessed on a case by case basis.

¹ 2020 SCC OnLine SC 1038

² Civil Appeal No. 2402 of 2019

³ Section 8, Arbitration and Conciliation Act, 1996 – (1)- “A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”

⁴ Section 11, Arbitration and Conciliation Act, 1996 – “… (4) If the appointment procedure in sub-section (3) applies and—

(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or

(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, the appointment shall be made, upon request of a party, by the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court;

(c) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court…”

⁵ (1981) 1 SCC 523

⁶ (2011) 5 SCC 532

⁷ (2017) 10 SCC 706

⁸ The Delhi Rent Act, 1995, Section 3 – “(1) Nothing in this Act shall apply--

(a) to any premises belonging to the government or a local authority;

(b) to any tenancy or other like relationship created by a grant from the government in respect of the premises taken on lease, or requisitioned, by the government…”

⁹ Erga omnes meaning “towards all” or “towards everyone” are obligations owed to the community as a whole. In the context of arbitration, having erga omnes effect means “affecting rights and liabilities of persons who are not bound by the arbitration agreement.