Lease and Arbitrability – End of Conundrum



The law of the land and its transactions thereof are governed by the central, ancient, yet valuable piece of legislation titled the Transfer of Property Act, 1882 (“TOPA”). ‘Transfer of property’ as defined in TOPA means an act by which a living person conveys property i.e., movable or immovable, to one or more living persons or himself. While the transfer of a property can be affected in various manners such as sale, mortgage, hypothecation, etc., the central subject for this article is the transfer of a property through the medium of ‘lease’ and resolution of disputes arising thereunder.

A lease is a transfer of an interest in immovable property for a prescribed period coupled with a transfer of possession. The person transferring the property is termed as the ‘Lessor/ landlord’ while the person enjoying the benefit thereof is termed as the ‘Lessee/ tenant’. The arrangement between the Lessor and the Lessee is recorded by way of a document titled “Indenture of Lease” or “Lease Deed” which records, inter alia, the agreed terms for the demise of lease, conditions, and obligations to be performed by the parties.

The issue of arbitrability of lease disputes has been tested before various High Courts of India, however, while some have held that disputes under TOPA are non-arbitrable, some have held to the contrary. The Apex Court in the case of Booz Allen observed that matters pertaining to eviction or tenancy are not arbitrable in nature as they were matters related to public policy and a right exercisable against the world at large. The law laid down in Booz Allen was upheld in the case of Himangni Enterprises v. Kamaljeet Singh Ahluwalia (“Himangni case). Recently, in December 2020, a 3-judge bench of the Hon’ble Supreme Court, comprising of Justice N.V. Ramana, Justice Sanjiv Khanna, and Justice Krishan Murari, on a reference made to it vide order dated 28th February 2019 in the case of Vidya Drolia and Others v. Durga Trading Corporation (“Vidya Drolia), have settled the law on arbitrability of lease disputes. Prior to the reference being made, when the matter was assailed before the Division Bench, the Court observed that both, Natraj Studios and Booz Allen did not consider a case of landlord-tenant relationship under TOPA.

Brief Facts
The parties (Vidya Drolia was a tenant as per the agreement) had entered into a tenancy agreement with respect to certain go downs and other structures for a maximum tenancy term of 10 (ten) years. The said agreement consisted of an arbitration clause in the dispute resolution mechanism. When a dispute arose between the parties, the landlord invoked the arbitration clause as recorded in the agreement; pursuant to which (after rejecting the tenant’s contention regard arbitrability of dispute), on 7th September 2016, the Hon’ble Calcutta High Court appointed an arbitrator to adjudicate the disputes. When the matter was initially assailed before the Apex Court, a 2-judge bench while disagreeing with the views laid down in the Himangni case, referred the matter to a bench of 3 judges which eventually paved way for a landmark judgment.

The issue involved, inter alia, was whether tenancy disputes are capable of being resolved through arbitration. While analysing the legal position, the Hon’ble Supreme Court laid down a four-fold test for determining whether the subject matter of a dispute in an arbitration agreement is not arbitrable.

(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).

The Court clarified that these tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will help and assist in determining and ascertaining with a great degree of certainty when as per law in India, a dispute or subject matter is non-arbitrable. Only when the answer is affirmative that the subject matter of the dispute would be non-arbitrable.

Applying the aforesaid test to the facts of the case of Vidya Drolia, the Court observed that landlord-tenant disputes governed by TOPA are arbitrable as they are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. Such actions normally would not affect third-party rights or have an erga omnes effect or require centralized adjudication. It further observed that an award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court. Landlord-tenant disputes do not relate to the inalienable and sovereign functions of the State. The provisions of the TOPA do not expressly or by necessary implication bar arbitration. The Court further observed that landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when a specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration.

While considering the aspect as to ‘who decides arbitrability’, the Supreme Court observed that the scope of judicial review and jurisdiction of the court under Section 8 and 11 of the Arbitration Act is identical but extremely limited and restricted. It observed that rarely as a demurrer, the court may interfere at Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. The restricted review is to check and protect parties from being forced to arbitrate when the matter is demonstrably ‘non-arbitrable’ and to cut off the deadwood. The court by default would refer to the matter when contentions relating to non-arbitrability are plainly arguable; when considered in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings. This is not the stage for the court to enter into a mini trial or elaborate review to usurp the jurisdiction of the arbitral tribunal but to affirm and uphold the integrity and efficacy of arbitration as an alternative dispute resolution mechanism.

It is pertinent to note that the judgment of Vidya Drolia was upheld by the Supreme Court in a subsequent case of Suresh Shah v. Hipad Technology India Pvt. Ltd. thereby dealing with the issue as to whether the dispute arising under the lease being governed under TOPA is arbitrable. The Apex Court was once again of the view that when disputes arise between the landlord and tenant concerning the determination of lease under TOPA, the landlord that has to secure possession of the leased property in a normal circumstance is required to institute a suit in the Court which has jurisdiction. However, if the parties in the contract of lease or in such other manner have agreed upon the alternate mode of dispute resolution through arbitration the landlord would be entitled to invoke the arbitration clause and make a claim before the learned Arbitrator.

The Supreme Court’s stance of arbitrability of landlord-tenant dispute is pro-arbitration and opens the doors for landlords and tenants for a speedy dispute resolution as opposed to the usual lengthy court proceedings.


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