Whether disputes between Licensor and Licensee concerning recovery of security deposit can be referred to arbitration?




The Bombay High Court in Bafna Motors Private Limited versus Amanulla Khan vide order dated 05th May 2022 passed in Arbitration Petition No. 340 of 2019 held that where the parties to a leave and license agreement are governed by Arbitration Agreement, disputes between licensor and licensee concerning recovery of the security deposit can be referred to arbitration.

Brief Facts

Leave & License Agreement dated 02nd July 2012 (“the Agreement”) came to be executed between Bafna Motors Private Limited (“BMPL”) and the Amanulla Khan (“AK”) (collectively referred to as “parties”) for a workshop land (“the premises”). The term of the Agreement was for a period of five years starting 01st July 2012 to 30th June 2017. There was lock in period for the first two years of the Agreement. Pursuant to expiry of the lock in period, either party was entitled to revoke/terminate/ determine the Agreement by giving three (3) months’ notice.

BMPL had paid INR 12 lakhs towards security deposit. It was to be returned by AK to BMPL against handover of vacant possession of the premises, after deductions, if any. The Agreement provided for a dispute resolution mechanism. BMPL and AK had agreed under the Agreement to refer any dispute to arbitration. It was agreed that the Arbitral Tribunal shall consist of sole Arbitrator to be appointed with mutual consent between the parties. BMPL in May 2017 issued notice thereby, intimating that it would be vacating the licensed premises. Resultantly, demanded for refund of security deposit. AK did not agree to the termination of the Agreement and claimed an amount of INR 14,57,000/- from BMPL towards damage to the premises. Due to the above, dispute had arisen between the parties. Accordingly, BMPL filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”) before the Bombay High Court seeking appointment of sole arbitrator.

Contentions of BMPL

BMPL contended that since the dispute between the parties relates to refund of security deposit under the Agreement, such dispute would not fall within the exclusive jurisdiction of the Court of Small Causes under Section 41 of the Presidency Small Cause Courts Act, 1882 (“1882 Act”). In other words, the Court of Small Causes under section 41 of the 1882 Act will have exclusive jurisdiction over disputes concerning to recovery of possession of the licensed premises, rent or licensee fee. It does not have jurisdiction to decide the present dispute which is for refund of security deposit. On the said ground, BMPL sought appointment of sole arbitrator.

Contentions of AK

On the contrary AK contended that disputes arising out of the Agreement exclusively vests within the jurisdiction of Court of Small Causes under Section 41 of the 1882 Act. AK further contended that the arbitration clause in the agreement was invalid and against the public policy.

In relation to the claim of AK against BMPL, it was submitted that BMPL had unilaterally vacated the premises and had either taken away the valuable equipments from the premises or damaged them. Resultantly, AK had incurred expenses towards repairing the damaged equipments and was in the process of instituting a suit for the recovery of the amount in the Court of Small Causes, Mumbai.

Decision of the Court

The Bombay High Court held that Section 41(1) of the 1882 Act provides that the Court of Small Causes shall have jurisdiction to try suits between the licensor and licensee, or between a landlord and tenant, relating to the recovery of possession of any immovable property situated in Greater Bombay, or for recovery of the licence fee, charges or rent. It held that suit for recovery of security deposit does not constitute a suit for recovery of “licence fee or charges or rent” as provided under Section 41(1) of the 1882 Act referring to the full bench judgement of Bombay High Court in Brainvisa Technologies Private Limited v. Subhash Gaikwad (HUF).

The Bombay High Court noted Section 2(3) of the Act provides that Part I of the Act shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration. It also held that where the parties to a leave and license agreement were governed by an arbitration agreement, determination of the dispute relating to recovery of the security deposit under the said Agreement through arbitration is legally permissible.

The Bombay High Court observed that AK did not claim any amount was due to it towards license fee or other charges. It essentially claimed the cost of items which were allegedly lost or damaged by BMPL. It held that the claims raised by AK were primarily in the nature of damages, and the expression “charges” as provided under Section 41 of the 1882 Act cannot subsume in its fold a claim for damages.

The application of BMPL was allowed and a sole arbitrator was appointed to adjudicate upon claims and counter claims, if any between the parties.


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