Annual Arbitration Review- 2017,  Arbitration

Himangni Enterprises v. Kamaljeet Singh Ahluwalia: Arbitrability of Lease Disputes

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This case comment is a part of our Annual Arbitration Review of the year 2017.

Citation: (2017) 10 SCC

Court: Supreme Court of India

Coram: A.M Sapre J.

Date: 12th October, 2017

This case deals with the arbitrability of lease disputes in India. There are certain disputes which are considered non-arbitrable and have been listed in various judgments. The underlying principle for such a restriction is that such rights in rem come within the protection offered by a state as its duty towards its citizenry.[1] Therefore the sovereign duty of the state cannot be delegated to a private adjudicatory forum(supra). This case deals with the non-arbitrability of disputes pertaining to tenancy/eviction/rent matters, which in effect cements the list of non-arbitrable disputes laid down in the Booz-Allen case.[2] By applying the list laid down in Booz-Allen by a straight jacket formula, the court has taken a decision overlooking the intention of the parties. Party autonomy has yet again taken a back seat and an anti-arbitration approach has been taken by The Apex Court. This judgement becomes important in the context of parties intending to include an arbitration clause in their lease deed, which in effect would become redundant.

Issue

Whether disputes arising out of a lease deed with respect to the tenancy of a premise can be decided by arbitration, when parties have expressly agreed on a lease deed containing an arbitration clause for resolution of disputes? In other words are disputes pertaining to tenancy/eviction/rent disputes, i.e. disputes subject matter of a civil suit, arbitrable?

Facts

The appellant after being aggrieved with the orders of the trial court and High Court has filed an appeal at The Supreme Court. The issue arose when the appellant failed to vacate the shop leased to him after the expiry of the lease deed. The appellant after being served with notice of a civil suit, filed an application under Section 8 of the 1996 Act. The application was not entertained by the two subordinate courts on two grounds contended by the respondent. First, the fact that the lease deed had come to an end, such lease deed was not enforceable by the appellant. And second, that the disputes which are subject matter of a civil suit, are incapable of being referred to an arbitrator. Now the Supreme court has to decide the latter, i.e. whether the respondents have rightly field the civil suit in a civil court seeking plaintiff’s eviction from the premises notwithstanding an arbitration clause for resolution of disputes arising out of the lease deed.

Analysis

The court while reaching to its conclusion relied on two important cases. The first being Natraj Studios case[3] where the facts were same to the extent that the landlord had filed a civil suit of eviction against the tenant. Interestingly in this case the landlord was also the licensor as he had licensed machinery and equipment along with two studios to the license/tenant.   The tenants application under section 8 of the arbitration act was rejected by a three judge Supreme Court bench stating that exclusive jurisdiction to entertain and try such suits is given to small causes court. They coupled this argument with the broader consideration of public policy as it was stated that section 28 of the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 shows that the conferment of exclusive jurisdiction on certain courts is pursuant to social objective at which the legislative aims. Though the Natraj studio case had a very well written judgement but it is definitely distinguishable on important facts from the case in hand. The fact that there was no special forum for such a dispute and also there was no licensee-licensor agreement makes considerable difference in the applicability of the case. The applicability of this case without providing a detailed explanation is highly questionable.  Even in A. Ayyasamy case[4], The Supreme Court ruled that the disputes would not be capable of resolution by arbitration if the jurisdiction of an ordinary civil court is excluded by giving exclusive jurisdiction to specified court or tribunal under a special statute. The Transfer of Property Act, 1882 codifies the general law of transfer of property and is not a special statute.[5] The court has certainly missed out on some important differentiating factors in the case.

The second case relied by the court is the landmark judgment by The Supreme Court in Booz-Allen which laid down the list of non-arbitrable disputes. The list included, “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.” The impugned judgment fails to recognise the fact section 3 of The Delhi Rent Act, 1995 does not apply to the premises where the property under contention is situated. Therefore the protection under a special statute is absent. It just states that the premises would be governed by the Transfer of Property Act and a civil suit will be triable only by a civil court. In The Olympus Superstructures case[6] the court ruled that an arbitrator has the power and jurisdiction to grant specific performance of contracts relating to immovable property. In this case the arbitration tribunal could have decided in favour of the landlords by granting them an equitable relief of possession of property since the lease deed had come to an end. Though such an order would have created a right against the world, but it would have certainly been enforceable only against the tenant as the parties had intended to arbitrate.

To resolve such disputes it is very important to test the dispute involved upon the nature of relief sought rather than mechanically testing the subject using the Booz-Allen test and scrutinizing the subject as a whole in its widest ambit.[7] A very good example of such a case was given in the Eros case[8] by The Bombay High Court where it was held that the IP licensing cases are arbitrable as they are primarily in persona disputes. It was further reiterated that: The Arbitration Act is not one that we should constantly try to short-circuit in matter after matter. Unless specifically barred, what a Civil Court can do, an arbitrator can do.”  This is a great example of the court ensuring that the intent of the parties to arbitrate holds primacy.

A tenancy or a lease creates a right in rem to the benefit of the lessee. The right can be exercised against the rest of the world, but the crucial question is whether such right versus the rest of the world is the same as that of the lessor? The answer is no: their relationship is governed by the contract/lease between the parties. Thus, the scope of the right to enjoy the property versus the owner/lessor is exclusively as between the lessor and the lessee. Consequently, the same should be arbitrable. Moreover the reasoning of the court seems to be misplaced as there is no mention about the deciding on the rights of the third party which is in consequence bound by the agreement as possession of property creates right in rem.

Moving on to the international landscape on the question of non-arbitrable disputes. The French courts have evolved and become more arbitration friendly. The French court of appeal held in substance that in international arbitration, the arbitrators have jurisdiction to rule on the arbitrability of the dispute which touches upon issues of public policy.[9] In the United States reference regarding non-arbitrable disputes is included in The Federal Arbitration Act; Title 9 “Arbitration”, Chapter 1, Article 1, providing that arbitration rules are not applicable to disputes pertaining to employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. Article 2[10] of the act also states that any dispute submitted to arbitration is presumed to be valid and enforceable. In Moses V. Mercury case[11] the United States Supreme Court further stressed on the liberal pro-arbitration approach taken by the legislator stating that: “[Article] 2 is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies (…).The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration..”

Conclusion

The critical examination of this judgment certainly brings out the major flaws of the judgement. From the fact that a special act does not apply to this case to the point where the court shouldn’t have referred to the aforesaid judgements without properly differentiating them on factual grounds, makes the ruling of the court problematic. From a neutral point of view it can be said that the Hon’ble Supreme Court has been right to reach such a conclusion, as majority property disputes create right against the world and this case is no different.  But the fact that the court fails to mention the rights of a third party in such an agreement makes the impugned orders explanation unsatisfactory. Finally, what remains disappointing from a pro-arbitration perspective is the lack of freedom given to the parties to solve disputes by the informal, cost effective and easy methods of dispute resolution.

[This case comment has been contributed by Ashray Chopra, a third year student of Jindal Global Law School.]

References:

[1] Vivek Anandh, Arbitrability of Disputes And Alternative Standard of Tests, livelaw.in, (May 14, 2017 1:54 pm) http://www.livelaw.in/arbitrability-disputes-alternative-standard-tests/

[2] Booz-Allen & Hamilton Inc V. Sbi Home Finance Ltd. & Ors, (2011) 5 SCC 532 (India).

[3] Natraj Studios (P) Ltd V. Navrang Studios & Anr, (1981) 1981 AIR 537 (India).

[4] A. Ayyasamy vs A. Paramasivam & Ors, (2016) Civil Appeal Nos. 8245-8246 (India).

[5] Bharat Petroleum Corporation Ltd. V. P. Kesavan & Ors, (2004) Civil Appeal No. 1383 of 1999 (India).

[6] Olympus Superstructure Pvt. V. Meena Vijay Khetan & Ors, (1998) Arbitration Petition 283 of 1997 (India).

[7] Vivek Anandh, Arbitrability of Disputes And Alternative Standard of Tests, livelaw.in, (May 14, 2017 1:54 pm) http://www.livelaw.in/arbitrability-disputes-alternative-standard-tests/

[8] Eros International Media Limited V. Telemax Links India Pvt. Ltd. And Ors, (2016) MANU/MH/0536/2016 (India)

[9] Freimane, N. (2018). Arbitrability: Problematic Issues of the Legal Term. LL.M. Riga Graduate School of Law.

[10] The Federal Arbitration Act 1925, Title 9 “Arbitration”, Chapter 1, Article 2.

[11] Moses H. Cone Memorial Hospital V. Mercury Construction Corp, (1983) 460 U.S 1.

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