ARBITRABILITY OF DISPUTES UNDER THE TRANSFER OF PROPERTY ACT, 1882
– Akash Laad
“It is clear that the Transfer of Property Act is silent on arbitrability; however, it does not
negate the same”
Arbitration has emerged as a very profound and popular method of dispute resolution in the recent years; however, whenever an issue is associated with the public and not per se private parties, then the question of arbitrability of a particular subject comes into the picture.
The issue regarding the jurisdiction of any dispute resolution mechanism finds itself in the vanguard of any dispute, as it determines the fact that whether the particular dispute will be adjudicated by the body in question or not. With the emergence of ADR mechanisms like Arbitration and Mediation, there has been an upsurge in the matters where the arbitrability of any dispute has been challenged in the Courts. Since the parties to an agreement can only invoke arbitration, laws having public outlook and involving the interests of the people at large, have been contented to be out of the ambit of arbitration. The Apex Court has previously made a distinction between the disputes that are arbitrable and inarbitrable and held that the disputes accruing rights in rem are incapable of arbitration per se.
The disputes under the Transfer of Property Act, 1882 are mostly related to the tenancy disputes between the landlords and tenants, and considering the fact that a tenancy is a result of an agreement between the concerned parties, it prima facie gives an impression that such disputes may be arbitrated. However, the situation has not been that clear through the history, because the Apex Court in Booz Allen specifically provided, “eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection” are inarbitrable. Now, along with creating confusion as to whether the disputes under TP Act would fall under this category or not, the Court also extended its ratio regarding arbitrability from rights of rem ideology to the special statutes dogma.
The Apex Court in Himangni Enterprises settled this confusion summarily as holding the disputes inarbitrable completely. Till this case, the situation was clear, though not pro-arbitration. But recently the Apex Court in February 2019, in Vidya Drolia, cast serious doubts over the validity of Himangni Enterprises and held that Section 11 requirements under the Arbitration Act, 1996 must be looked upon and checked and there should not be any extraneous or extra-statutory requirements apart from the checking the validity of the arbitration agreement. It held the dispute to be arbitrable, as it said that the TP Act does not by express or necessary implication deems inarbitrability of disputes under the Act. It has given the question to a larger bench for consideration and therefore, this issue remains a res integra, as Vidya Drolia did not overrule the Himangni Enterprises but still substantially caused doubts over its jurisprudential outlook.
This paper will analyse the parameters of arbitrability of disputes, in general, and under the TP Act, in particular, while looking into the contiguous issues of rights in rem and special statutes, Section 11 requirements and the role of Courts thereof.
Keywords– Rights in rem, Special Legislation, Tenancy, Role of Courts u/s 11, Arbitrability of property disputes.
“Quo Vadis Arbitration”
– Prof. Peter Sanders
The term ‘quo vadis arbitration’ means, ‘where do you go arbitration?’ This maxim holds a stark relevance when it comes to the Indian context and the Indian legal regime governing the arbitration. The authors hold this view in the backdrop of the oscillatory framework of the domestic seated arbitrations in India. One of the most inconsistent matters has been the issue of arbitrability of a particular dispute and the role of courts in often undermining the competence of an arbitral tribunal to rule out its jurisdiction and thus, encumbering the already-overloaded judiciary.
The question of arbitrability remains at the heart of any dispute that goes for litigation despite the presence of an arbitration agreement between the parties to the dispute. It is imperative for an arbitral tribunal to have the competence to adjudicate any matter that comes before it; however, that should be the task of the tribunal itself as per the Kompetenz-Kompetenz principle, wherein, a tribunal or a court may have jurisdiction themselves to decide upon the jurisdiction of any matter before them and that they are the master of their own court. In India though, the Courts have overlooked the principle and largely decided upon it, before coming to a conclusive test of arbitrability of a dispute in Booz Allen v. SBI Home Finance . In this landmark judgment, the Court analysed that whether the courts can decide upon the arbitrability of a dispute at the pre-arbitration level or during the time of referring parties to arbitration on checking only validity of the agreement of arbitration. The Court, while deciding on the arbitrability, held, “Generally and traditionally 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.” This has been a conclusive test and the courts in India have followed this test in holding the dispute as arbitrable or not. The issue is discussed in detail in the following part.
PARAMETERS OF ARBITRABILITY IN INDIA
Since the enactment of Arbitration and Conciliation Act, 1996, India has been striving to make changes in its Arbitration regime with an intention to show itself globally as an arbitration-friendly country. For example, recently in the year 2018, the Central Government passed the Arbitration and Conciliation (Amendment) Act, 2018 and the New Delhi International Arbitration Centre Bill, 2018. However, most of the attempts taken to refurbish the Arbitration Act, 1996 have not dealt with the inconsistent nature of jurisprudence of arbitrability of disputes.
In common parlance, a dispute is said to be arbitrable if, “it is capable of settlement by arbitration”. Therefore, it is of immense importance to understand that what the term ‘arbitrability’ means. The term ‘arbitrability’ can have different meanings attached to it based on validity, scope and existence, such as, “(i) whether there is an arbitration agreement, (ii) whether the dispute is beyond the scope of the arbitration agreement, and, (iii) whether the subject matter of the dispute is arbitrable.”
The Indian Arbitration Law deals with the arbitrability only in Section 2(3) of the Act, which provides, “certain disputes may not be submitted to arbitration” and does not elaborate on such disputes. Furthermore, the Act provides the courts, the power to set aside an award if the dispute is inarbitrable or if the award is in contravention to the norms of public policy . Therefore, in India, the jurisprudence on arbitrability of the dispute is governed by case laws rather by statute.
The jurisprudence on arbitrability for the first time was discussed by the Hon’ble Supreme Court of India in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd . In Booz Allen, the Apex court considered the question of arbitrability based on two broad tests: “(a) whether the subject matter is capable of adjudication by a private forum; or (b) whether the relief claimed can only be granted by a special court or tribunal.” The court opined that arbitration is a private platform chosen by the parties and the disputes are capable for settlement by arbitration unless barred either expressly or by necessary implication. The Apex Court also listed out certain well-recognized matters such as, “criminal offences; matrimonial disputes; guardianship; insolvency and winding up; tenancy governed by a special statute” , which are rendered inarbitrable due to the nature of right attached with such disputes. Consequently, the Court “while upholding public policy in the face of arbitration clauses, propounded the test of ‘in rem and in personam’ i.e. rights against particular persons (in personam) are arbitrable but those against the world at large (in rem) are not”.
Since the test to determine the arbitrability of any dispute in India was for the very first time given by the Court in Booz Allen, the test of in rem and in personam could not be ignored whenever the question of arbitrability was raised. However, the Court failed to set the domain of what would comprise public policy and due to legal uncertainty on the public policy exception, the test was held to be inadequate and misinterpreted by various courts.
One of the prominent examples of misinterpretation of the jurisprudence of Booz Allen is the case of Vimal Kishor Shah v. Jayesh Dinesh Shah, wherein, the dispute arose between the trustees and the beneficiaries in regards to the functioning of a trust. The Supreme Court after examining the Indian Trusts Act, 1882 held that since the Act expressly provides for the jurisdiction of civil courts, the parties cannot be directed to arbitration for resolving the disputes. The Court erred by applying the obiter dicta of Dhulabhai v. State of M.P and Premier Automobiles Ltd. v. Kamlekar Shantaram Wadke and opined that since the Trusts Act does not provide for express exclusion, the jurisdiction of the arbitral tribunal is barred impliedly and the only recourse under the statute is of civil courts.
Subsequently, the Court relied on the reasoning that if any statute provides for a right and a specific remedy for its enforcement, then such remedy is exclusive in nature and ignored the latter part of the ruling that “the scope and purpose of a statute and in particular for whose benefit it is intended has got to be considered”. Because of it, the Court though intended to examine the arbitrability of dispute based on Booz Allen, but it failed to apply the test propounded in Booz Allen.
An anomaly to the misinterpretation of the dictum of Booz Allen was highlighted by the Bombay High Court in Eros Media Ltd. v. Telemax Links India Pvt. Ltd. , where the question of arbitrability arose in a dispute of copyright licensing and the single judge bench of the Court examined the position former to Booz Allen case and held that arbitrable or inarbitrable nature of any dispute cannot be determined merely by the language of the statute but must be ascertained on the lines of the claims made by the parties.
Therefore, the court held the dispute to be arbitrable in the present case. It also came to the conclusion that if the test laid down in the Booz Allen would have been applied in the present case then all IPR disputes would have become inarbitrable per se and every time in cases of transfer of intellect property between two parties, the clause governing the arbitration agreement would become void prima facie. Similarly, the Bombay High Court in another case diverted from the Booz Allen test and held that the question of arbitrability should not be based on the nature of rights attached rather based on claims sought by the parties.
Therefore, the test propounded in the Booz Allen case can be said to be flawed because of the following reasons: firstly, there might arise certain situations where the relief sought by the parties should be arbitrable and secondly, the test is too broad in its outset as it does not take certain issues, which can be arbitrable such as “rights in rem over moveable goods or lien over cargo.” Therefore, looking at such inefficient nature of the test there arises the need to formulate a new test to determine the arbitrability of disputes which should be based upon the following questions: “Whether the dispute relates to a claim involving economic value; Whether the claim is one which falls within the domain of sovereign functions or state monopoly i.e. inalienable functions of the State, or is it inter parties; Whether the relief claimed is one which has an erga omnes effect; Whether there is a special legislation with a social objective covering such a dispute.”
SCOPE OF ARBITRATION UNDER THE TRANSFER OF PROPERTY ACT, 1882
In India, as discussed above, the Arbitration Act, 1996, governs the arbitration and specifically, does not define what arbitrability is and how to adjudicate upon the arbitrability of a particular dispute, nor does it prohibit any dispute explicitly to be inarbitrable. In such circumstances, if a dispute at a pre-arbitration stage comes to the court, it is up to the court to look into the legislation concerned with the dispute and infer arbitrability or non-arbitrability from that legislation. For instance, if a dispute is arising out of the tenancy agreement, the concerned legislation is the TP Act and the court would look if the Act provides for its arbitration or explicitly proscribe the same and then will hold the dispute’s arbitrability.
Under the TP Act, the scope of arbitration is not much and the dispute usually arises out of the tenancy agreement between the tenant and the property owner. Further, the eviction of tenancy is one of the disputes that may arise from the agreement. As mentioned above, the TP Act does not put a bar upon arbitration. However, under the Civil Procedure Code, certain matters are saved for the jurisdiction of the Civil Court, just like, “matters relating to eviction and of rent and charges between landlord and tenant, licensor and licensee in Maharashtra are dealt under the Maharashtra Rent Control Act, 1999 (MRCA), which confers exclusive jurisdiction on the Small Causes Court and Competent Authority, with respect to certain “premises” as defined in section 7(9).”
Now, the issue is not only restricted to whether the disputes under the TP Act are arbitrable or not but extends to the question that should the matters under the TP Act be referred to arbitration. The answer to this could be, “disputes that do not fall under the specific jurisdiction of the Small Causes Court and the MRCA and affect the rights between two parties only and do not contravene the purposes of the MRCA and TP Act, should be allowed to be resolved by parties privately through arbitration as, this will be in line with the spirit of arbitration, where party autonomy is paramount.” This, precisely, surmises that the disputes which are not falling within the exclusive jurisdiction of any court and is not against the objective of the concerned legislation, then the question of arbitrability should be decided in the affirmative, therefore, encouraging the practice of arbitration to induce party autonomy and informal process to make the whole process of dispute resolution simple for parties.
“Further, one specific category of disputes that Booz Allen regarded as inarbitrable were those that concerned, “eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes”. This line of reasoning was endorsed subsequently in A. Ayyasamy v. A. Paramasivam , wherein it was further clarified that disputes falling under the exclusive purview of a special adjudication forum under a special statute are to be deemed inarbitrable.”
ARBITRATING TENANCY DISPUTES- IS THE DUST SETTLED YET?
The arbitrability of any dispute, as stated above, is a contested matter and more often than not has been left upon the courts to decide on a case-to-case basis. Courts, generally, look for the strong precedents on the matter rather adjudicating issues subjectively. The same could be inferred from the aforementioned cases, wherein, the ratio of Booz Allen was followed religiously.
The matter of arbitrating the tenancy disputes under the TP Act, 1882 came before the Court, as a standalone issue, in the case of Himangni Enterprises v. Kamaljeet Singh Ahluwalia. In this matter, the arbitrability of a matter concerned with lease deed was in question and the TP Act govern the matters related to leasing deeds in India. In this case, there was an arbitration agreement in a lease deed; however, the landlord filed a civil suit in the Court demanding the eviction of the tenant. The tenant, on the other hand, had revoked the arbitration clause and had asked the Court to refer parties to arbitration using its power under Section 8 of the Arbitration Act, 1996. The Court did not entertain the tenant’s contention and further, even the Delhi High Court and the Apex Court rejected his contention that stated, “Since special rent legislation was not applicable to the premises, the dispute had to be referred to arbitration.” The Apex Court, while relying on its two major precedents , held that though there is no special legislation governing the lease deed in question still that does not make the issue amenable to arbitration and it upheld the lower courts view in not referring parties to the arbitration.
This judgment of the Court was not praised among the legal scholars and practitioners, as it ruled against the popular method of dispute resolution and undermined the ability of arbitrators, which has been an issue with the courts for a long time now. It took into consideration two major cases of Booz Allen and Natraj Studios ; however, none of these cases dealt with the issue of lease deeds. In the former, the question was about a mortgage deed and the latter included a dispute of license governed by special rent legislation. Therefore, placing reliance on cases having different factual matrix was criticised by the legal academia and due to such overlooking of important factors, the recent case of Vidya Drolia has cast doubts over the correctness of the judgment in Himangni Enterprises.
The judgment in Himangni Enterprises could not distinguish between the mandate in the Indian Trusts Act and Transfer of Property Act as well. In the former, the exclusion of arbitration is necessarily implied , which is not there in the latter and therefore, reading exclusion of arbitration by necessary implication in the TP Act, 1882 akin to the Trusts Act, is not commensurate with the principles of arbitration in particular and with the rule of interpretation in general.
Now, in Vidya Drolia , the tenant and the landlord entered into a tenancy agreement for 10 years and it was also agreed that the tenancy would end in case a lease is terminated before the specified time of 10 years and on the determination of the lease, the tenant must return the possession to the landlord without any hindrance. Since the lease was terminated and it also contained an arbitration clause, the landlord, on not getting the vacant and peaceful possession of the property back from the tenant, invoked the clause and sought the appointment of an arbitrator by filing an application u/s 11 of the Arbitration Act, 1996 in the Calcutta High Court. The tenant (respondent) filed an objection in the Court against the Section-11 application of the landlord and filed a review petition in light of the judgment of Supreme Court in Himangni Enterprises.
The High Court rejected the tenant’s contentions and therefore, the tenant appealed to Supreme Court by contending, “The Transfer of Property Act creates rights in rem insofar as the landlord and tenant are concerned. 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 are provisions related to Public Policy of the country as they protect the interest of a class of society i.e. tenant, and are, therefore, non arbitrable.”
While examining these contentions raised by the tenant and subsequently, rejecting the same, the Apex Court opined, “the relevant provisions related to the mode of determination of lease and relief in case of forfeiture and did not concern public policy, it reasoned that there was nothing to suggest that the Arbitration Act stood excluded.”
After negating the ‘public policy’ contentions, the Supreme Court embarked upon scrutinising the ratio of Himangni Enterprises , which was reached upon by the Supreme Court majorly by depending upon Booz Allen and Natraj Studios. The Court in Vidya Drolia observed that why these two aforementioned judgments were misplaced by the Court in Himangni Enterprises. Talking about the Natraj Studios Case, the Court observed, “The landlord-tenant dispute in Natraj Studios was held inarbitrable because it was subject to the Bombay Rent Act, 1947, special welfare legislation which confers exclusive jurisdiction on the Small Causes Court.” Therefore, this case does not bear any relevance to the issues involved in the Himangni Enterprises Case. Further, the Court discussed that why Booz Allen case did not have any relevance on the Himangni Enterprises case and opined, “only those tenancy matters that are (i) governed by special statutes (ii) where the tenant enjoys statutory protection against eviction and (iii) where only specified courts are conferred jurisdiction to grant eviction or decide disputes, are cases where the dispute between landlord and tenant can be said to be non arbitrable.” So, in Himangni Enterprises Case, none of the three conditions, as mentioned above, was relevant.
“Accordingly, the Apex Court observed that the question of arbitrability of disputes under the TP Act “cannot possibly be said to have been answered by Booz Allen or Natraj Studios.” Concluding that the TP Act is silent on and does not negate arbitrability , the Supreme Court felt that the judgment in Himangni Enterprises requires a relook by a bench of three judges of the Supreme Court.”
Apart from holding that these judgments are inapplicable upon the matter that was in dispute in Vidya Drolia and Himangni Enterprises, the Court additionally discussed the report of the 246th Law Commission to mention the ambit of Section 11(6-A) of the Arbitration Act, 1996. “Section 11(6-A) only talks about the examination of the “existence” of the arbitration agreement and not of it being “null and void”.” Further, to substantiate the holding, the Court relied on Duro Felguera, S.A. v. Gangavaram Port Ltd. , which stated, “all that the courts need to see is whether an arbitration agreement exists— nothing more, nothing less. The legislative policy and purpose are essential to minimize the Court’s intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11(6-A) ought to be respected.”
“The issue is now ripe for consideration before the three-judge bench of the Supreme Court, in the case of Vidya Drolia, where one of the main issues is whether matters under TP Act are inarbitrable and can be decided in public forums only.” Another subsidiary issue is of determining the scope of Section 11 of the Arbitration Act, 1996 vis-à-vis the role of national courts to make an arbitration-friendly regime for the parties to experience a less formal, more conducive dispute resolution process. Until these issues are decided, the dusty clouds over the arbitrability of disputes under the TP Act, in particular, remain afloat.