On December 14, 2020, a three-judge bench of the Supreme Court pronounced its decision in the case of Vidya Drolia and Others vs Durga Trading Corporation2 (“Present Case”), making it the latest landmark precedent as to the arbitrability of landlord-tenant disputes in the Indian context. The Present Case was referred to it by a division bench of the apex court as it doubted the legal ratio expressed in the earlier judgment of Himangni Enterprises vs Kamaljeet Singh Ahluwalia3 (‘Himangni”).

To understand the need for the reference to the larger bench, it becomes important to juxtapose the decisions of the division benches of the Supreme Court in Himangni and the Present Case. The former, relying on the principles established in Natraj Studios (P) Ltd. vs Navrang Studios4 and Booz Allen & Hamilton Inc. vs SBI Home Finance Ltd.5 (“Booz Allen”), held that landlord-tenant disputes as governed by the provisions of the Transfer of Property Act, 1882 (“Transfer of Property Act”) are not arbitrable as they are contrary to public policy. Whereas, the latter, while referring to Sections 111 (Determination of lease), 114 (Relief against forfeiture for non-payment of rent) and 114A (Relief against forfeiture in certain other cases) of the Transfer of Property Act, observed that there is nothing in the said Act and under law to show that a dispute relating to the determination of lease, arrears of rent, etc. cannot be decided by an arbitrator. Moreover, it was highlighted that the exception in the form of non-arbitrable landlord-tenant disputes, as laid down in Booz Allen, was confined only to those matters (i) which are governed by special statutes; (ii) where the tenant enjoys statutory protection; and (iii) where only specific courts are conferred jurisdiction to decide disputes. Therefore, as per the division bench’s view in the Present Case, it could not be said that the Transfer of Property Act negates arbitrability of landlord-tenant disputes.

In light of the abovementioned dichotomous views, and with the intent to arrive at a definite conclusion in the Present Case, the three-judge bench of the apex court considered two distinct yet interconnect aspects of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) viz. (i) the meaning of non-arbitrability and when the subject matter of the dispute is not capable of being resolved through arbitration; and (ii) the conundrum of who decides the question of non-arbitrability – whether the court at the reference stage or the arbitral tribunal in the arbitration proceedings.

A. Non-arbitrability

In the Present Case, the three-judge bench of the Supreme Court, upon examining and analysing various judgments, coalesced and crystallised the legal principles for determining the non-arbitrability of disputes. Accordingly, it propounded the following four-fold test to determine whether the subject matter of a dispute in an arbitration agreement is not arbitrable:

  1. when the cause of action and subject matter of the dispute relates to actions in rem, that do no pertain to subordinate rights in personam that arise from rights in rem;
  2. when the cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralised adjudication, and mutual adjudication would not be appropriate and enforceable;
  3. when the cause of action and subject matter of the dispute relate to inalienable sovereign and public 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 statutes.

It has been clarified that while the abovementioned tests are not watertight compartments in so far as they overlap, if applied holistically and pragmatically, they will aid in determining and ascertaining, with a great degree of certainty, whether a particular dispute is non-arbitrable under Indian laws. Consequently, while reiterating that insolvency and intracompany disputes, grant and issue of patents and registration of trademarks, criminal cases, matrimonial disputes, and testamentary matters are all non-arbitrable, the court overruled the ratio in N. Radhakrishnan vs Maestro Engineers and Others6 inter alia observing that allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. Further, the decision of the full bench of the Delhi High Court in the case of HDFC Bank Ltd. vs Satpal Singh Bakshi7, which held that disputes to be adjudicated by the Debt Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 are arbitrable, was also set aside as these disputes are non-arbitrable.

So far as landlord-tenant disputes are concerned, the court also overruled the Himangni decision stating that landlord-tenant disputes are arbitrable since the Transfer of Property Act does not forbid or foreclose arbitration, whether expressly or by necessary implication. Accordingly, while deciding such disputes, the arbitrator would be bound by the provisions of the Transfer of Property Act, including provisions which enure and protect the tenants, and an award passed pursuant thereto can be executed and enforced like a decree of the civil court. However, if such disputes are covered and governed by rent control legislation, then they would not be arbitrable where a specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations.

B. Who decides non-arbitrability?

Pursuant to its detailed analysis on this aspect based on established jurisprudential principles, it was held that the scope of judicial review and jurisdiction of the court under Section 8 (Power to refer parties to arbitration where there is an arbitration agreement) and Section 11 (Appointment of arbitrators) of the Arbitration Act is identical but extremely limited and restricted. Rarely as a demurrer the court may interfere at these stages 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 the non-arbitrability would, to some extent, determine the nature of judicial scrutiny. The rationale behind this restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably non-arbitrable. It has also been notably highlighted that 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 the integrity and efficacy of arbitration as an alternative dispute resolution mechanism.

Further, in view of the clear legislative mandate of the 2016 and 2019 amendments to the Arbitration Act, and considering the principle of severability and competence-competence, it has been held 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 non-arbitrability post the award in terms of sub-clauses (i), (ii) or (iv) or Section 34(2)(a) or Section 34(2)(b)(i) of the Arbitration Act, which pertain to the limited power of the courts to set aside an arbitral award. As a result, in light of the foregoing deliberations, the Supreme Court left the issue of arbitrability in the Present Case to be decided by the arbitral tribunal.

Thus, the pro-arbitration view taken by the apex court in the Present Case has not only affirmed the arbitrability of landlord-tenant disputes but has also set the record straight as to all the factors that need to be assessed by stakeholders at the time of submitting disputes to arbitration. The much-needed clarifications provided by this judgment, as discussed above, will go a long way in furthering the Government’s intent to promote India as an arbitration hub and reduce the burden on the traditional court system in order achieve timely dispute resolution. Further, these principles will also prove to be a guiding light for courts, enabling them to effectively demarcate the extent of their intervention in cases where parties have agreed to resolve their disputes in accordance with Arbitration Act.