The Arbitrability of Lease Agreements

-Radhika Shukla*

The Arbitration and Conciliation (Amendment) Act, 2019 is another one of India’s step towards developing a pro arbitration regime along with an attempt to promote institutional arbitration in India. However, much before this comes the gap that exists in the domestic arbitration regime with regard to arbitrability of lease disputes and the problems posed by conflicting decision in this matter.

ARBITRABLITY OF LEASES

The determination of arbitrability of disputes was clarified in the case of Booz Allen & Hamilton v. SBI Home Finance Ltd, , wherein the court laid down the types of disputes that may not be covered under arbitration, one of them being “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“. This judgement highlights that while the court opened the doors of arbitration to many fields, it attempted to balance and protect the rights of many vulnerable groups, including but not limited to tenants that are given special protection under the law.

It is this approach of the court which was then followed when the matter came up before for discussion in the case of Himangni Enterprises v Kamaljeet Singh Ahulwalia , wherein the court outrightly held that lease disputes are questions of public policy and no arbitration agreement can allow for resolution of such matters. These matters impact third party rights (rights in rem) and since tenants tend to enjoy statutory protection against eviction and other benefits under law, the dispute is beyond the scope of arbitration. The court relied on the case of Natraj Studios Pvt. Ltd. v. Navrang Studios and Anr. , to opine on the matter of public policy involved in arbitration and how a tenancy regulation is meant to further the social welfare approach of the government and must therefore be protected against such abuse.

It was found that tenants cannot be left at the whim of a private forum which is incapable of understanding and resolving the issues faced by tenants. Additionally, the court refused to allow a special statute to incorporate arbitration as a dispute resolution mechanism solely cause it was silent on it.

However, the aforementioned two judge bench case was questioned in the case of Vidya Drolia v. Durga Trading Corporation , wherein the court held that the court in Himagni had misinterpreted the ratio of Booz Allen. Only those tenancy matters which are governed by special statutes stand excluded by the Arbitration Act while all others can be covered under the scheme of arbitration. The court extensively relied on the 246th Law Commission Report and the insertion of Section 11(6A), which expressly stated that judicial intervention in the case of arbitration agreements must be limited to only determining the validity of an arbitration agreement and if the same exists, the matter must be referred to arbitration.[1] It is this approach which still remains the reason behind pro-arbitration amendments and decisions, thereby not just promoting it as a mechanism of dispute resolution but also ensuring that parties that have initially agreed to it do not try to squeeze their way out of the same.

The court elaborated on the aforementioned positions in law and the fact that no specific exclusion of arbitration exists in the Transfer of Property Act, 1882 and that adequate protection is provided under Section 114 and 114A of the Transfer of Property Act, 1882.[2] To sum it up briefly, the court stated that rights under section 114 and 114A  are sufficiently balanced to protect the interests of both the tenant and the landlord, wherein there is a mechanism for prevention of forfeiture, collection of costs of a dispute etc., to ensure they are not protecting tenants at the costs of the lessor and this section provides for remedies which may be provided for by an arbitrator as well. This protection plays an important role as it determines the scope of relief which an arbitrator can award. A statute providing equal protection to the parties in question will not be seen or read as favouring or benefitting one over another. Having explained the two contrary positions of law that exist in the judicial perspective today, we go on to examine the possible implications of the arbitrating lease disputes and why it is not solely a matter of public policy

PUBLIC POLICY

Public policy as a maxim has been elaborated  upon in the case of BCCI v. Cricket Association of Bihar & Ors,, . The court stated that although the phrase has a place in legal parlance, it has not been explained exhaustively on account of its dynamic nature and its need to be ever evolving. The court relied on the case of Murlidhar Agarwal v. State of Uttar Pradesh, wherein it was held that judges are vested with this duty to understand and interpret public policy in accordance with what is for the welfare of the people at that specific point, rather than remaining within the narrow view of precedents. It was held that principles governing public policy are and must remain capable of modification and expansion as new concepts come in and replace old, obnoxious, and oppressive notions of public policy.

Even while considering the meaning of the term public policy under S.34 of the Arbitration Act, the court has relied on giving it a liberal meaning so that resolution of disputes through arbitration is not rendered useless and redundant on account of such rigid notions of policy.[3] These meanings, while for the welfare of the public, must be allowed to vary from time to time to keep up with the times and needs of justice. The court summarized the basic principles of fairness, justice, transparency that must reflect in arbitral process and as long as a judicial enquiry is made into the matter, by ensuring fair opportunity to each side, a liberal view must be taken when arbitration matters are being considered.[4]

The conclusion that can be drawn from the above cited cases and the judicial interpretation given to the phrase public policy states that there is no exhaustive or rigid definition of the phrase and the judges are vested with the power to recognize and apply such principles. Any private arrangement that violate the basic principles of this stands to be struck down. Public policy, as a concept needs to be fluid and as per the present circumstances and must not derive its meaning from archaic concepts and notions of society and dispute resolution.

RIGHT IN PERSONAM

In the case of Booz Allen, the court distinguished between rights in rem and rights in personam. These rights were discussed and elaborated upon in the case of R. Viswanathan v. Rukn-ul-Mulk Syed Abdul Wajid, wherein the court explained that rights in rem implies rights imposed upon all and enforceable against all whereas rights in personam implies a duty against an identifiable person or class of persons.

This distinction plays an important role in arbitration as only when a party is claiming for rights in personam can arbitration be preferred. Arbitration, in essence, is a private forum agreed to by the parties for dispute resolution and this forum cannot be granted jurisdiction to decide on matters that extend to any third parties. Protection of rights in personam is of utmost importance and is one of the primary limitation of any alternate dispute resolution mechanisms. It is imperative for any regime to limit the powers of these mechanisms so that vulnerable parties are not victims on account of abuse or misuse of power.

SPECIFIC FORUM

The question of excluding those matters from arbitration that have designated forums came up in the case of HDFC Bank Ltd. v. Satpal Singh Bakshi,  wherein the court held that merely cause debt recovery tribunals exist for specific matters, it cannot be assumed that arbitration stands excluded. Rather, it is the question and scope of relief which has often been the determining factor for whether arbitration stands excluded or not.

For instance, in the case of Kingfisher Airlines Ltd. v. Prithvi Malhotra Instructor,  the court held that since rights of workmen in an industry stand to be affected, these matters can be subjected only to the tribunal created under the act.

The author acknowledges that the creation of specific forums and the rationale behind the same ought to be respected and utilised, however, for situations wherein parties do not have one specific forum, complete ouster of arbitration must not be blindly pursued. The relief that can be awarded by an arbitrator is limited to the contract and allowing it to extend beyond the two parties would harm the intent of arbitration.

WAY FORWARD

The author suggests that disputes under the Specific Relief Act, 1963 which seal the contractual rights between two parties can be considered as capable for arbitration as they do not stand limited by the reasons mentioned above. However, in case where the rights of a third party stand to be impacted, civil ligation will be the appropriate mechanism. This determination will lie on the court which allows arbitration in case an objection is received and even at the time of enforcement of the awards, in case it is found that the matter was not capable of being arbitrated upon or is against the public policy of the country.

Arbitration in lease disputes will not only aid India’s pro arbitration approach but also lead to quicker resolution of such disputes and clear much of the back log in the civil courts. At the same time, in case any arbitration is made in any matter which is found to be beyond the scope of the tribunal, the court retains its power to prevention enforcement of the award.

Therefore, while it is important for courts to adapt and align themselves to the pro-arbitration approach of India, it is equally essential for them to carefully delineate these issues, whilst the legislature does not comment on it. Misuse of arbitration will not only lead to additional costs for the economy but also set India back in its attempt to become a hub for arbitration.

As has been mentioned above, judicial intervention in such matters must be on limited grounds and they must not readily invalidate agreements. If the initial stage allows for the matter to be referred to arbitration, it must be adopted in matters wherein the dispute and the relief falls squarely between the two parties involved or does not impact any third party.

CONCLUSION

Having studied in detail the manner in which lease arbitrability is dealt with in India, the author believes that the anomaly created by these two judgements must be resolved. Two judgments passed by two benches of similar strengths have added to the confusion of arbitrability of lease disputes, more so at a time when India aims to be an arbitration hub.

The approach and rationale adopted by the both the courts is sound in reason but either they completely closes down the reach of arbitration in the field or opens it up in a way which shall harm certain stakeholders. The court needs to strike  a balance between protection of rights and promotion of arbitration to ensure no stakeholders lose out in the process and no party misuses this option of civil litigation as well, having agreed to the contrary previously.

The Supreme Court is yet to rule on the arbitration of lease disputes, when not governed by specific statutes other than the Specific Relief Act, 1963 and the Transfer of Property Act, 1882 and perhaps that will resolve this conundrum and pave a way to a more pro-arbitration India.


* The Author is a Fifth Year student at National Law University, Jodhpur. She can be reached via email at radhikashukla3012@gmail.com or via LinkedIn.

[1] Law Commission of India, Report No. 246, at pg. 16, available at https://lawcommissionofindia.nic.in/reports/Report246.pdf

[2] Vidya Drolia v. Durga Trading Corporation, AIR 2019 SC 3492, para 12, available at https://main.sci.gov.in/supremecourt/2018/26779/26779_2018_Judgement_28-Feb-2019.pdf

[3]ONGC v. Saw Pipes Ltd., 2003 5 SCC 705, para 92.

[4] ONGC v. Weetsern Geco International Ltd.,2014 9 SCC 263.



Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.