Arbitrability Of Lease Disputes in India: A Conundrum?

The past decade has seen a growth of dispute resolution through Arbitration in India making India a pro-arbitration center. The essence of the Arbitration and Conciliation Act (hereinafter ‘act’) is to provide an alternative redressal mechanism by reducing the intervention and burden on the courts in India. The act aims at minimizing the intervention of the judiciary. However, the act does not specify disputes which are arbitrable in India and it is the courts who decide this contested issue on a case to case basis.  The Supreme Court of India in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.(hereinafter ‘Booz Allen’) held in April 2011 a spectrum of disputes as non-arbitrable in India.

THE ISSUE OF ARBITRABILITY OF LEASE DISPUTES

The Supreme Court in Booz Allen determined that matters relating to eviction or tenancy issues governed by the special statutes would be non-arbitrable in nature. In India, these matters are ordinarily governed by the Transfer of Property Act, 1882 (hereinafter ‘TP Act’ ). The reasoning given by the court was that they were matters related to public policy and right exercisable against the world at large and therefore should be adjudicated by courts or public fora. The court further established a distinction between matters involving the right in rem and right in personam. It decided that disputes concerning right in personam could be decided by private forum whereas the disputes related to right in rem could only be taken up in a court of law.

A gamut of conflicting judgments by the High Courts in India exists on the issue of arbitrability of lease disputes. In July 2013 in the case of Sulochana v Harish Rawtani the Andhra Pradesh High Court held that disputes related to lease deed, governed by TP Act would be non-arbitrable as laid in Booz Allen. The court reasoned that just like how matters related to tenant eviction cannot be arbitrable similarly lease deed fall under the TP Act and therefore cannot be subjected to Arbitration. In April 2015, the Calcutta High Court in Ambuja Neotia Holdings Pvt. Ltd v. M/s Planet M Retail Ltd. held that lease deeds under TP Act were arbitrable as it is not a special statute. However, a case by case approach to determine the effect of the action is highly vulnerable as this makes the predictability in governance difficult and leads to dilution of the economic basis of law. Therefore, to lay rest these ambiguities the Supreme Court in October 2017 in the Himangi Enterprise v Kamaljeet Singh Alhuwalia case, ruled out that parties cannot enforce arbitration as disputes under the TP Act has to be tried by a public court as laid in the Booz Allen Judgement and the matter should be heard in a civil court.

However, in February 2019, the Supreme Court in the case of Vidya Drolia and Ors v Durga Trading Corporation considered an appeal to a tenancy agreement that had an arbitration clause. The court reasoned out that there was nothing in the act to show that a dispute concerning lease cannot be arbitrated in India. The court elucidated that it is imperative to look at a statute as a whole while considering the arbitrability of a certain matter. They carefully compared the Transfer of Property Act along with the Indian Trust Act and the Specific Relief Act. They further explained that The Indian Trust Act specifically mentions the courts as its only redressal forum. However, the Specific Relief Act is silent on this provision and therefore arbitration cannot be excluded. Similarly, TP Act runs parallel on this regard since it does not explicitly exclude arbitration.

The Supreme Court did not agree with the reasoning given in Himangi Enterprise and therefore the case and issue of arbitrability have been now referred to a larger three-judge bench of the Supreme Court of India.

COMMENTS

While the decision of Vidya Drolia is not binding per se, it has expanded the horizon of the Indian Arbitrability Jurisprudence by giving wholesome reasoning about the situation present in the country. Moreover, by dismantling the foundation in Himangi Enterprise, Vidya Drolia has affirmed its dictum for the future.

The court has excellently articulated instances where arbitration is excluded by necessary implication. It has further set a scheme to show how statutes can be wholly incompatible with arbitration as a redressal mechanism. Furthermore, lease agreements are based on the long-standing commercial relationship between the lessor and the lessee. Litigation as a recourse will have a cascading effect on the business, the relationship, time, and money. With the real estate market growing rampantly in the past two decades, it is necessary to not take futile measures to redress a dispute.

Over 3.7 million cases are pending before different High Courts and District and Taluka courts according to National Judicial Data Grid (NJDG). The mounting number of cases show that if an Alternate Dispute Resolution process like Arbitration is not accepted, the Judiciary will succumb under its own weight. It is essential for the Central and State Government to understand the dire consequences of the prolonged judicial process. Our country has no dearth of laws to protect the rights of its citizens, however, the problem has always been with the implementation and execution of these laws. The only solution to this is by a pro-efficient judicial system backed by Arbitration and other dispute resolution mechanisms. The need to have a holistic method to evaluate cases under the current law has increased manifold with the upward trajectory of cases being registered on a day to day basis.  Thus, for this, there is a need to re-evaluate the fundamentals laid in the preceding judgments or to reform the current laws so as to fill in the lacuna and strengthen the judicial proceedings in India.

Author: Souvik Ganguly

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