The Supreme Court has clarified that, unless it is specifically determined by a court of law that a landlord-tenant dispute cannot be referred to arbitration, an arbitration clause in an agreement shall be valid and fully enforceable.

Here is an analysis of the practical implications arising from the recent judgment of the Supreme Court whereby it upheld the arbitrability of landlord-tenant disputes. Previously, in 2017 the court had held that such landlord-tenant disputes were not subject to arbitration and would be decided under existing property laws.

THE JUDGMENT

The three-judge bench, in the reference arising from order dated February 28, 2019, in Civil Appeal No. 2402 of 2019 titled “Vidya Drolia and Others v. Durga Trading Corporation”, has held that landlord-tenant disputes are arbitrable, and has overturned the previous position laid down in Himangni Enterprises v. Kamaljeet Singh Ahluwalia (wherein it was held that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882, are not arbitrable being contrary to public policy).

While analysing the Arbitration and Conciliation Act, 1996 (and amendments thereof) (collectively referred to as “Arbitration Act”), as well as a plethora of judgments which have dealt with validity of arbitration clauses, the Supreme Court observed that the primary aspect to be determined is that the plea of public policy is required to be specifically identified, pleaded and determined on merits. This would require a complete examination of all the issues in relation to the dispute.

The Supreme Court analysed the scope, interpretation, and evolution of Section 8 (power to refer parties to arbitration) under the Arbitration Act and stated that where an action is brought before a judicial authority, the parties shall be referred by it to arbitration. The only exception to this case is where the authority finds, prima facie, that there is no valid arbitration agreement.

The Supreme Court analysed the scope, interpretation and evolution of Section 11 (appointment of arbitrators) of the Arbitration Act and observed that the reference power under Section 11 of the Arbitration Act is judicial - and not administrative, that there existed a discretion for judicial interference at the stage of reference prior to the Arbitration Amendment Act of 2015 and that, the amendment in 2015 was brought into force to limit the power of such judicial interference.

The Court reiterated that when a matter is brought by one of the parties to a dispute before the Court, and the opposing party brings to the notice of the Court, the existence of such arbitration agreement, the Court is obligated to refer a matter to arbitration, on satisfaction that a valid arbitration agreement exists between the parties. The 2015 amendment has already clarified that the test to be utilized for determining arbitrability of a dispute is on a ‘prima facie basis’.

However, the court clarified that arbitrability shares a close nexus with the validity of the arbitration agreement. In the event that a Tribunal comes to an understanding that there exists a valid arbitration agreement, it does not definitively mean that the subject matter of the dispute is arbitrable.

The Supreme Court clarified as follows:

“There is a difference between a non-arbitrable claim and non-arbitrable subject matter. Former may arise on account of scope of the arbitration agreement and also when the claim is not capable of being resolved through arbitration. Generally non-arbitrability of the subject matter would relate to non-arbitrability in law.”

Therefore, the court extended a word of caution for arbitrators stating that since they are given the jurisdiction to decide on the arbitrability of a dispute, by way of abundant caution, they must specifically identify contravention of public policy in order to finally determine the subject matter of arbitrability.

The court impressed on the point that a dispute should not be referred to arbitration by a court of law, unless it finds that, prima facie, that there is a valid arbitration agreement. The Court should refer a matter if the validity of the arbitration agreement cannot be determined. The Court reiterated its position to use ‘when in doubt, do refer’ – as a thumb rule.

The court clarified that arbitration shall not extend to disputes governed by rent control laws:

“In view of the aforesaid, we overrule the ratio laid down in Himangni Enterprises and hold that landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or 63 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.”

The three-judge bench of the Supreme Court finally observed as follows:

Sections 8 and 11 of the Arbitration Act have the same scope with respect to judicial interference and that the subject matter of arbitrability cannot be decided at the stage of Sections 8 or 11 of the Act, unless it is clear ab-initio.

The Court, under Sections 8 and 11, has to refer a matter to arbitration or to appoint an arbitrator, as the case may be, unless it has been established that prima-facie there is a case of nonexistence of valid arbitration agreement.

The Court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis, following the principle of ‘when in doubt, do refer’.

The scope of the Court to examine the prima facie validity of an arbitration agreement includes only:

Whether the arbitration agreement was in writing?Or

Whether the arbitration agreement was contained in exchange of letters, telecommunication etc?

Whether the core contractual ingredients qua the arbitration agreement were fulfilled?

On rare occasions, whether the subject matter of dispute is arbitrable?

PRACTICAL IMPLICATIONS

This judgment has clarified that, unless it is specifically determined by a court of law that a dispute cannot be referred to arbitration, an arbitration clause in an agreement shall be valid and fully enforceable.

However, it is important to note that this judgment does not undermine or preclude the Transfer of Property Act, 1882 (and related legislations) from having jurisdiction to determine landlord-tenant disputes in the absence of a valid arbitration clause in the agreement.

Therefore, the ultimate decision to include an arbitration clause in a landlord-tenancy agreement lies finally with the parties, at the time of finalisation of the agreement. In the event that they opt for a well-drafted arbitration clause, this shall be legally enforceable in the event of a dispute.