Arbitrable Disputes: Supreme Court clears the air

Authored by Mr. Ateev Mathur, Partner & Mr. Amol Sharma, Principal Associate | SNG & Partners

In urban India most of the young population migrating to metros avail rented accommodation and even big corporates prefer to have leased commercial establishments. In general legal parlance, the tenancies are considered of two types such as ‘protected tenancies’ and ‘unprotected tenancies’. Protected tenancies or regulated by State Rent Control legislations, which protects such tenancies. Unprotected tenancies, on the other hand, are governed by contractual terms contained in the Lease Deeds and are dealt with in accordance with Transfer of Property Act, 1882 (TPA). Often it is seen that the parties incorporate an Arbitration clause in the lease deeds as a mechanism of Dispute Resolution. Needless to say that the benefits of such mechanism are numerous. However, the arbitrability of such disputes between landlords & tenants got a jolt in the year 2017, when a two Judge Bench of Supreme Court in the matter of Himangni Enterprises v. Kamaljeet Singh Ahluwalia(2017) 10 SCC 706  held that the landlord-tenant disputes governed by the provisions of the TPA are not arbitrable for it being contrary to Public Policy. The correctness of this Judgment was doubted in the legal corridors and ultimately in 2019 another two Judge bench referred the issue for re-consideration to the larger bench.

While dealing with the legal issue posed before it, the three Judge bench in a recent judgement of Vidya Drolia & Ors Vs. Durga Trading Corporation put to rest the aspect of arbitrability of such disputes and has cleared the air. Earlier, the  judgment of Booz Allen & Hamilton Inc. occupied the field on the issue of the nature of disputes and their arbitrability. The legal position was that tenancy matters governed by special statutes were held to be not arbitrable as only the specified courts were conferred with jurisdiction. Himangni (supra) on the other hand held that even in cases of tenancies governed by the TPA, the dispute would be triable by the Civil Court and not by the arbitrator.

Arbitration as is known is a private dispute resolution mechanism whereby two or more parties agree to resolve their disputes by an arbitral tribunal instead of courts established by law. Arbitration agreement gives contractual authority to the arbitral tribunal to adjudicate the disputes and bind the parties. It is settled law that all disputes relating to rights in personam are considered to be amenable to arbitration and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. A study of various case laws makes it clear that the disputes covered by the specific provisions of Code of Civil Procedure concerning Mortgage Suits, Consumer disputes and disputes related to Private Trusts, trustees and beneficiaries of trust are some of the examples which are not amenable to arbitrations. To clarify,  a Judgment in Rem would bind the public in general even though the Judgment was passed in their absence and would be a conclusive evidence of a person or property. Whereas in contrast to this, a Judgment in Personam would only decide the issue inter-parte and would be conclusive between the parties to the lis. With this understanding on the subject , the Supreme Court has now again explained that since the Arbitral Tribunals are the creation of contract between the parties, it cannot bind the non-signatories and strangers. Thus, where law of the land has conferred jurisdiction on special courts, the parties cannot by contract opt to by-pass the law and appoint an arbitral tribunal. It is settled concept in law that legislature on the basis of public policy may restrict the arbitrability of disputes by express provision of law or impliedly also. The Supreme Court over ruled the law laid down in Himangni (supra) and reiterated the principles for determination of a disputes’ arbitrability. This judgment is now the guiding force in order to ascertain if a dispute would be arbitrable or not. The principles are :-

“(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). “

On due application of these principles it has now been settled that Insolvency or intracompany disputes, issues of grant of patent, trademarks, trial of criminal offences, adjudication of matrimonial disputes are non-arbitrable. While deciding the aforesaid, the court also cleared the passage on the issue of arbitrability of disputes, which otherwise are statutorily amenable under the debt recovery laws. The court while delivering its judgment, also set aside the Full Bench decision of the Delhi High Court in case of HDFC Bank Ltd Vs. Satpal Singh Bakshi, which held that the matters covered under the DRT Act are arbitrable. The reason being that the claims covered by the DRT Act are non-arbitrable as there is a prohibition against waiver of jurisdiction of the DRT by necessary implication. The judgment has undoubtedly cleared the confusion on many vexed issues of law and has certainly provided a clear guidance on the subject.