Facts
There
was a 5-year lease agreement between landlord and tenant in 2006 that could be
extended for the next 5 years with a 10% enhancement in rent if both parties
agree to. But, despite several notices given to the tenant, they did not vacate
the premises even after 2016. The landlord file application u/s 11 and started
the arbitration. After 18 rounds of arbitral proceedings, the Supreme Court of
India passes the Himangni Enterprises judgement in 2017. Which said that the
landlord-tenant disputes are non-arbitrable in nature and hence the appellant
approaches the Supreme Court as the High Court dismisses the review of the
matter.
Trivia
The
following case has 2 judgements, one that was passed in 2019 by a 2-judge bench
(Hon’ble Justice R F Nariman and Vineet Shah) and the other that was passed in
2020 by a 3-judge bench (Hon’ble Justice N V Ramana, Sanjiv Khanna and Krishna
Murari). This was because the same judge bench of the Supreme Court cannot overrule
its previous judgement, it is only up to a larger bench that can overrule its
previous judgements.
Background
The
Himangni judgement was delivered by a 2-judge bench by Hon’ble Justice R K
Agarwal and A M Saper in 2017. The SC took the reference of the Delhi Rent
Control Act for deciding the jurisdiction of the court because the Transfer of Property
Act does not talk about its jurisdiction. This act was specifically giving jurisdiction
to the Delhi Rent Tribunal. But as per section 3 of this Act, it wouldn’t be
applicable on the premises that have a monthly rent of 3,500 rupees or more. Hence
relying on the said ratios, the court holds that though the Delhi Rent Act is
not applicable. Even in cases of tenancies governed by the Transfer of Property
Act, the dispute would be triable only by the civil court and not by the
arbitrator. The exemption from the applicability of the Rent Act could be
withdrawn and thereupon the rights would be governed by the rent control
legislation.
Issues
1. Whether the matters of the tenancy as having
been laid down in Himangi Enterprises, are non-arbitrable?
2. Whether tenant-landlord dispute under
Transfer of Property Act is right in rem?
3. Whether validity of arbitration agreement
is a part of the word ‘existence’ u/s 11. Whether existence would include to
weed out matters which are incapable of arbitration?
4. At which stage, the court can decide on
the dispute concerning arbitrability?
Observations
In
Natraj Studios (P) Ltd., wherein an application under Section 8 of the
Arbitration Act, 1940 was dismissed as the tenancy was protected under the
Bombay Rents, Hotel and Lodging Houses Rates Control Act, 1947, it was observed
that on broader consideration of public policy, the arbitrator lacked
jurisdiction to decide the question whether the licensee-landlord was entitled
to seek possession. The dispute could be exclusively decided by the Court of
Small Causes, which alone had jurisdiction.
(But
in this case, the statute, which was governing the matter in dispute, was
specifically mentioned the jurisdiction of the Small Couse Court.)
In
Booz Allen & Hamilton Inc., it was held that eviction or tenancy
matters if are governed by special statutes and where the tenant enjoys
statutory protection, only the specified court has been conferred jurisdiction.
It was observed that the right in rem is a right exercisable against the world
at large and is not amenable to arbitration, whereas, in the case of rights in
personam, the interest is protected against a specific individual and is
referable to arbitration. Further, subordinate rights in personam arising from
rights in rem have always been considered to be arbitrable.
The
exception in the form of non-arbitrable landlord-tenant disputes was confined
only to those cases/matters governed by:
(i) special statues,
(ii) where the tenant enjoys statutory
protection and
(iii) where only specific courts are conferred
jurisdiction to decide disputes. Transfer of Property Act does not negate
arbitrability
The
well-recognised examples of non-arbitrable disputes are:
(i) disputes relating to rights and
liabilities which give rise to or arise out of criminal offences;
(ii) matrimonial disputes relating to divorce,
judicial separation, restitution of conjugal rights, child custody;
(iii) guardianship matters;
(iv) insolvency and winding-up matters;
(v) testamentary matters (grant of probate,
letters of administration and succession certificate); and
(vi) 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.”
In
Duro Felguera, S.A v. Gangavaram Port Limited, to the effect that the
scope of Section 11(6-A) is limited, only to see whether an arbitration
agreement exists – nothing more, nothing less. The legislative policy and
purpose are to essentially minimize judicial intervention at the appointment
stage. Referring to Sections 111, 114 and 114A of the Transfer of Property Act,
it is observed that there is nothing in this Act and law to show that a dispute
relating to the determination of the lease, arrears of rent etc. cannot be
decided by an arbitrator.
SBP &
Co. v. Patel
Engineering Ltd. The
majority opinion concluded that:-
(i) the subsection (7) of Section 11 makes
the adjudication by the Chief Justice, final.
Such final determination in the usual course would be a judicial
determination.
(ii) the reason for delegating the power to the
highest judicial authority in the State or the Country is to provide
credibility for the process.
(iii) the power of a persona designata cannot be delegated unless
such power is judicial power.
(iv) Section 8 and 11 are complimentary and the
ambit of power is the same.
(v) the principle of KompetenzKompetenz, as enshrined under
Section 16, will come to play only if the parties approach the Arbitral
Tribunal, without taking recourse to Section 8 or 11.
(vi) it is incongruous to permit the order of
the Chief Justice under Section 11(6) of the Act to be subjected to scrutiny
under Article 226 of the Constitution.
(vii) the Court on earlier instances did not
concentrate on the threshold satisfaction of the Chief Justice before the same
is referred to arbitration.
(viii) it
would be a wasteful exercise for parties to arbitrate on the jurisdiction, only
to find that tribunal did not have sufficient jurisdiction to entertain the
arbitration.
Bifurcation
of subject matter or causes of action in the suit is not
permissible and contemplated.
Bifurcation
in arbitration cases would result in a suit being divided into two parts, one
being decided by the arbitral tribunal, and the other by the court or judicial
authorities. This would defeat the entire purpose and inevitably delay the
proceedings and increase the cost of litigation, cause harassment and on
occasions give rise to conflicting judgments and orders by two different fora[1].
Difference
between right in rem and right in personam
A
judgment in rem determines the status of a person or thing as distinct from the
particular interest in it of a party to the litigation; and such a judgment is
conclusive evidence for and against all persons whether parties, privies or
strangers of the matter actually decided. Such a judgment “settles the destiny
of the res itself” and binds all persons claiming an interest in the property
inconsistent with the judgment even though pronounced in their absence. By
contrast, a judgment in personam, “although it may concern res, merely
determines the rights of the litigants inter se to the res”. The distinction
between judgments in rem and judgments in personam turns on their power as res
judicata, i.e., judgment in rem would operate as res judicata against the world,
and judgment in personam would operate as res judicata only against the parties
in dispute. The use of expressions “rights in rem” and “rights in personam” may
not be correct for determining non-arbitrability because of the interplay
between rights in rem and rights in personam.
Why right in rem is not arbitrable
Exclusion of actions
in rem from arbitration, exposits the intrinsic limits of arbitration as a
private dispute resolution mechanism, which is only binding on ‘the parties to
the arbitration agreement. The courts established by law on the other hand
enjoy jurisdiction by default and do not require a mutual agreement for
conferring jurisdiction. The arbitral tribunals not being courts of law or
established under the auspices of the State cannot act judicially so as to
affect those who are not bound by the arbitration clause. Arbitration is
unsuitable when it has an erga omnes effect, that is, it affects the rights and
liabilities of persons who are not bound by the arbitration agreement.
Contentions
(i) K.V. Vishwanathan: That the section 11(6A)
is a unique section that is untraceable in UNCITRAL model law and hence, in
spite of legislative provisions of other countries, the Courts have the power
to check the existence of arbitration agreement at the stage of appointment of the
arbitrator and not the mere existence of arbitration clause, as also held by SC
in Nobel Denton Middle East v Noble Denton International Ltd (2010).
(ii) Nakul Dewan: The 246th Law Commission Report stated that Section
11(6A) limits the scope of judicial enquiry to the determination of a prima facie existence.
(iii) Manoj Swarup: Leasehold rights under the
Transfer of Property Act, 1882 are rights in rem. A contractual tenant upon
determination of lease becomes a statutory tenant and is entitled to statutory
protection. Therefore, the arbitration, in that case, would be ousted. Section
11 is not the stage for the determination of the issue of arbitrability in
those cases where the test of Section 89, CPC is to be applied.
(iv) Sourav Agarwal: The Court under Section 8
and 11 of the Act, does not act as a mere post office. Himangni Enterprises
would require reconsideration as it did not state the law correctly.
Sections
5 of the Act emphasise a very important principle that the judicial
interference shall be minimum in arbitral proceedings should be limited to
instances where it is specifically provided for under the Act.
The
present structure of arbitration is such that courts are to assist and support
arbitration and leave the substantive part of adjudication to the arbitral
tribunal. But our understanding is that that the rule of law is less in tension
with arbitration than critics imagine because they both aim to serve the same
goal the pursuit of justice.
From
the study of the precedents, the following propositions, concerning Section
11 of the Act, are clear and binding:
1. Reference power under Section 11 of the
Act is judicial and not administrative.
2. There was a wide discretion for judicial
interference at the stage of reference under Section 11 of the Act, prior to
the Arbitration Amendment Act of 2015.
3. Amendment in 2015 was brought into force
to limit the power of judicial interference under Section 11 of the Act.
Why
Courts shall prima facie check whether arbitration agreements exist?
Under
Section 8 of the Act, the Court is obligated to refer a matter to
arbitration, on the satisfaction that a valid arbitration agreement exists
between the parties. The 2015 amendment clarified that the test to be utilized
by the Court is on a prima facie basis.
The
primary reason for the same is the negative effect of Kompetenz Kompetenz under
Section 16, which mandates that the arbitral tribunal is required to first look
into any objections as to the jurisdiction of the tribunal itself. It is due to
the fact that parties may abuse and protract the proceedings if there is no
gatekeeping mechanism, that the legislature has found a balance, wherein the Court is required to examine the
validity of an arbitration agreement on a prima facie basis.
No
doubt, arbitrability finds a close nexus with the validity of the arbitration
agreement, yet we need to observe the unique nature of the arbitration
agreement, which is a bundle of contractual and jurisdictional elements. Even
if a Tribunal comes to an understanding that there exists a valid arbitration
agreement, still it does not mean that certain subject matters are arbitrable
per se. This distinction is required to be kept in mind.
It
may be noted that the Act itself does not exclude any category of disputes as
being nonarbitrable. However, the Courts have used the ‘public policy’ reason to restrict arbitration with respect
to certain subject matters.
What
does prima facie mean and how to check it?
First,
it means a party is said to have established a prima facie case when he has
satisfied his burden of producing evidence. The second meaning postulates that
a party has established a prima facie case only when he has made such a strong
showing that he is entitled to a presumption in his favour.
The
scope of the Court to examine the prima facie validity of an arbitration
agreement includes only:
a. Whether the arbitration agreement was in
writing? or
b. Whether the arbitration agreement was
contained in an exchange of letters, telecommunication etc?
c. Whether the core contractual ingredients
qua the arbitration agreement were fulfilled?
d. On rare occasions, whether the
subjectmatter of dispute is arbitrable?
246th
Law Commission Report, 2014 (as referred by the court)
It
is in this context, the Commission has recommended amendments to Sections 8 and
11 of the Arbitration and Conciliation Act, 1996. The scope of the judicial
intervention is only restricted to situations where the court/judicial
authority finds that the arbitration agreement does not exist or is null and
void. Insofar as the nature of the intervention is concerned, it is recommended
that in the event the court/judicial authority is prima facie satisfied against
the argument challenging the arbitration agreement, it shall appoint the
arbitrator and/or refer the parties to arbitration, as the case may be. The
amendment envisages that the judicial authority shall not refer the parties to
arbitration only if it finds that there does not exist an arbitration agreement
or that it is null and void. If the judicial authority is of the opinion that
prima facie the arbitration agreement exists, then it shall refer the dispute
to arbitration, and leave the existence of the arbitration agreement to be
finally determined by the Arbitral Tribunal. However, if the judicial authority
concludes that the agreement does not exist, then the conclusion will be final
and not prima facie. The amendment also envisages that there shall be a
conclusive determination as to whether the arbitration agreement is null and
void. In the event that the judicial authority refers the dispute to
arbitration and/or appoints an arbitrator, under Sections 8 and 11
respectively, such a decision will be final and non-appealable. An appeal can
be maintained under Section 37 only in the event of refusal to refer
parties to arbitration, or refusal to appoint an arbitrator.”
Judgement
Landlord-tenant
disputes are under the Transfer of Property Act, 1882 are not action in rem but
pertain to subordinate rights in personam that arises that arise out from right
in rem. Hence such disputes are very much arbitrable by the arbitration
tribunal unless they are covered by a specific law.
Meaning
- (It basically means that in general, the transfer of property gives the right
to enjoy property to an owner against the whole world, but such rent agreement gives
right exercisable only against the contracting parties, that are arising from
this Act).
The
court held that arbitration agreement u/s 11 not only means mere existence but
also includes its validity and which the court finds that prima facie there
exists no arbitration agreement the application would be rejected as u/s 11. But
prima facie does not mean full review of merits of the case, but the only
primary first view to weed out manifestly and non-existent arbitration agreement.
And if it appears that prima facie review would be inconclusive and a detailed examination
would be required, then the determination shall be tribunal itself.
The
Court also provided a four-fold test for determining the non-arbitrability of
the subject-matter dispute i.e., “when the cause of action and subject
matter of the dispute-
1. Relates to action in rem, that do not
pertain to subordinate rights in personam that arises out of right in rem;
2. Impacts the rights of the third party,
have erga omnes effect, required centralized adjudication, and mutual
adjudication would not be appropriate and enforceable;
3. By expressly or through necessary
implication not arbitrable because of the mandatory statute;
4. Relates to the inalienable sovereign and
public interest functions of the state and therefore mutual adjudication would
be not enforceable.”
The
Court mentioned that these tests are not rigid and watertight; however, they
can help in ascertaining to the great extent the arbitrability of the
dispute.
Section
8 of the Act mandates that a matter should not be referred to arbitration by a
court of law unless it finds that prima facie there is no valid arbitration
agreement. Sections 8 and 11 of the Act have the same ambit with
respect to judicial interference. The Court interpreted the term
“existence of arbitration agreement” mentioned under Section 11(6A) to include
“validity of arbitration agreement” within its ambit. Court held that the first
authority as per section 16 of the Act to decide the matter of arbitrability is
the tribunal but at the stage of sections 8 and 11, the courts can determine when
the rare cases of prima-facie validity or non-existence of arbitration
agreement arise.
Himangni
Enterprises v. Kamaljeet Singh Ahluwalia (2017) and UIICL v. Antique Arts
Exports Pvt. Ltd. (2019) judgements got overruled.
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