The development of Arbitration Law in India is not attributable to the success in arbitrations, but rather to the failures of Courts. The Hon’ble Supreme Court recently in ‘Vidya Drolia and Ors. v. Durga Trading Corporation’ has laid down that landlord-tenant disputes governed by the Transfer of Property Act, 1882 can now be adjudicated by an Arbitral Tribunal, thereby, refusing to accept the rationale enunciated in the judgment of ‘Himangni Enterprises v. Kamaljeet Singh Ahluwalia’ to the effect that landlord-tenant disputes governed by the Transfer of Property Act, 1882, were not arbitrable as the same would be contrary to public policy and were solely triable by  civil courts and thus, overruling Himangi Enterprises (supra).

The Hon’ble Supreme Court, in order to adjudicate the correctness of the law laid down in Himangi Enterprises (supra), broadly framed two issues, namely:

• When the subject matter of the dispute is not capable of being resolved through arbitration; the meaning of non-arbitrability (“Non-Arbitrability”); and
• Which court would decide the question of non-arbitrability, vis-à-vis, the court at the reference stage or the arbitral tribunal in question (“The Conundrum”).

• Non-Arbitrability:

 The law bestows upon the parties, the right to fix the boundaries, to confer or limit the jurisdiction and legal authority of the Arbitrator. The will of the parties is a subjective act and is gathered from the Arbitration Agreement, which enumerates ‘arbitrable’ disputes or “excepted matters”. The Arbitration and Conciliation Act, 1996 contains no provision for bifurcation and dividing the cause of action, meaning thereby, that parties cannot be referred to an Arbitral Tribunal for part cause and to a Court for the remaining part, which approach clearly is impressible in law.

The right of the parties to initiate adjudication of the dispute is sub-categorized, as follows:

• Right in Rem: A right exercisable against the world at large, meaning thereby that the action will determine the title to property and the rights of the parties, not merely among themselves but against all persons claiming an interest in the property and thus, binds all persons claiming an interest even though pronounced in their absence.

• Right in Personam: A right exercisable against a specific individual, meaning thereby that the action will determine the rights and interests of the parties themselves in the subject matter of the case and thus, will bind only the parties involved in the matter.

It is trite law that unless the jurisdiction of the Arbitral Tribunal is expressly barred or is barred by necessary implication, the Arbitral Tribunal is within its rights to adjudicate civil or commercial disputes (contractual or non-contractual). A mere conferment of jurisdiction on a specific court or creation of public forum is not the test to adjudicate “non-arbitrability”.

The Dovetail Test of “Non-Arbitrability”:

• When a cause of action and subject matter of a dispute relates to actions in rem, that does not pertain to subordinate rights in personam that arise from rights in rem;
• When a cause of action and subject matter of a dispute affects third party rights; erga omnes is hit; requires centralized adjudication and mutual adjudication would not be appropriate and enforceable;
• When a cause of action and subject matter of a dispute relates to inalienable sovereign and public interest functions of the State and hence, mutual adjudication would be unenforceable;
• When the subject matter of a dispute is expressly or by necessary implication non-arbitrable as per mandatory statues.

 Finding on “Arbitrability” of disputes inter-se Landlord-Tenant:

The Court held that landlord-tenant disputes governed by the Transfer of Property Act are arbitrable, as the actions are subordinate rights in personam that arise from rights in rem and thus, it does not affect the rights of a third party. It also held that an Award passed, deciding such disputes, can be executed and enforced as a decree of a Civil Court. The Transfer of Property Act, in no manner denudes or forbids the adjudicatory forum of arbitration. The Hon’ble Court, however, clarified that disputes covered and governed by rent control legislation are not arbitrable on the premise that the legislation has conferred exclusive jurisdiction to a specific court to adjudicate the rights and liabilities of the parties. 

• The Conundrum

The issue of non-arbitrability can be raised at three stages:

• Before the Court on an Application under Section 11 of the Arbitration and Conciliation Act and for reference under Section 8 of the Arbitration and Conciliation Act;
• Before the Arbitral Tribunal during the course of arbitration proceedings; and
• Before the Court during the challenge to the award or its enforcement thereto.

The Courts, in order to arrive at a finding on the aspect of “non-arbitrability”, are required to test on the principles enunciated hereinbelow.

Principle of separability and competence-competence:

The principle of separation of the Arbitration Agreement from the main contract is embedded in Clause (a) and (b) to sub-section (1) to Section 16 of the Arbitration and Conciliation Act. A reading of the clauses, ensues, that the Arbitration Agreement is severable from the main contract and thus, notwithstanding, any challenge to the main contract, the Arbitration Agreement survives for determining the disputes. The principle of competence-competence postulates that Arbitral Tribunals are declared competent and authorized to have a ‘first look’ and adjudicate on their own jurisdiction and refrains the Courts at the referral stage to give a finding on the same, save otherwise, when permitted by legislation either expressly or by necessary implication. The principle of competence-competence is enshrined under Section 16(1) of the Arbitration and Conciliation Act, which empowers the Arbitral Tribunal to give a finding on its own jurisdiction including the aspect of “non-arbitrability”. The principle, also empowers, the Courts, at the stage of challenge of such finding of the Arbitral Tribunal, to have a ‘second look’, subject to the limited grounds of Section 34 of the Arbitration and Conciliation Act. 

Prima facie case vis-à-vis when in doubt, do refer:  

The principles of prima facie merely require the Court to arrive at a finding that a case agitated by the party can be established, if evidence led in support of the case, were to be believed. In the context of Section 8 of Arbitration and Conciliation Act, a prima facie case does not necessitate the party to substantiate the merits of the case; it merely requires the party to establish a prima facie arbitrable case. In case, a prima facie review is not inconclusive or on consideration, inadequate, as it requires detailed examination, the matter should be left for final determination by the Arbitral Tribunal. In the context of Section 11 of the Arbitration and Conciliation Act, the Courts are required to apply the prima facie principle and in cases of debatable and disputable facts and good reasonable arguable case, the Court would force the parties to abide by the Arbitration Agreement as the Arbitral Tribunal has the primary jurisdiction and authority to decide the dispute of “non-arbitrability”. In furtherance, it was held that “existence of an arbitration agreement” in Section 11 of the Arbitration Act would include the aspect of validity of an Arbitration Agreement, albeit, the Court at the referral stage would apply the test of prima facie case. The Courts can restrain themselves from referring the matter to the Arbitral Tribunal, in case, a prima facie case of non-existence of valid Arbitration Agreement is established by a party. The Courts are to refer the matter to Arbitral Tribunal on the test of ‘when in doubt, do refer’, unless the Courts arrive at a prima facie view that there is no valid Arbitration Agreement.

Finding on the Conundrum:

• Scope of judicial review and jurisdiction of the Court under Sections 8 and 11 of the Arbitration and Conciliation Act is similar, albeit, extremely limited and restricted;
• The Arbitral Tribunal is the preferred authority to determine the issue of “arbitrability”;
• The Courts have been conferred jurisdiction and power of ‘second look’ on the aspect of ‘arbitrability’ post the Award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration and Conciliation and Conciliation Act;
• The Courts are to act rarely at the stage of Section 8 or Section 11 of the Arbitration and Conciliation Act, save and except, when there is manifest and ex facie certainty that the Arbitration Agreement is non-existent, invalid or the disputes are non-arbitrable; and
• The Courts are to refer the matter to arbitration, when the aspect of “non-arbitrability” is plainly arguable, when facts are contested, when party contesting is approaching dilatory tactics and when consideration in summary proceedings would be insufficient and inconclusive.

Conclusion:

The Hon’ble Supreme Court has held that the disputes inter-se landlord and tenant, which are governed by the Transfer of Property Act, are arbitrable in nature. The Arbitral Tribunal is conferred with the priority over the Courts to rule on its own jurisdiction including the issue of “non-arbitrability”; with a ‘second look’ bestowed on the Courts, whilst exercising jurisdiction under Section 34 of the Arbitration and Conciliation Act and extremely rarely, under Sections 8 and 11 of the Arbitration and Conciliation Act. Whilst, deliberating on the aspect of ‘right in rem’ vis-à-vis ‘right in personam’, the Hon’ble Supreme Court overruled the dictum laid down in ‘HDFC Bank Ltd. v. Satpal Singh Bakshi’ passed by the Hon’ble Delhi High Court to the extent that the matters covered by Debt Recovery Tribunal (“DRT”) are arbitral. The raison d’etre, in overruling HDFC Bank (supra) was that the legislature has overwritten the contractual right to arbitration by conferring specific jurisdiction on DRT through necessary implication.  

The Judgment passed by the Court will boost the alternative adjudicatory mechanism of arbitration and simultaneously, reduce the ever-lasting burden on the Courts. It shall also be beneficial for the tenant and landlord in getting their disputes adjudicated in a time bound manner and getting an Award, passed by the Arbitral Tribunal, executed at the earliest. It is apposite to mention that the Hon’ble Supreme Court has yet again boosted for a pro-arbitration adjudicatory process, which will go a longway for a fast and effective adjudication of disputes.      

(The Author is a practicing advocate before the Hon’ble Supreme Court)