Monday, April 24, 2023

AARBITRATION & ARBITRABILITY

 


ARBITRATION & ARBITRABILITY

The issue of landlord-tenant dispute and that of fraud determined in the light of Vidya Drollia case

In Vidya Drolia and Ors. v.  Durga Trading Corporation and Others[i] the Supreme Court has dealt with comprehensively as regards the ambit and amplitude and have settled various issues that remained within the realm of probabilities. The aforesaid judgment of Supreme Court has therefore settled the ambiguity that persisted before. To begin with, doubts persisted as r4egards arbitrability of landlord tenancy disputes. This is no more in doubt. 

In Booz Allen and Hamilton Inc v. SBI Home Finance Ltd and Others[ii]  the Supreme Court has emphasised the expression of arbitrability and held that disputes concerning special statutes are non-arbitrable.

The Supreme Court has overruled its decision in Himangni Enterprises The Supreme Court has overruled its decision in Himangni Enterprises Vs Kamaljeet Singh Ahluwalia[iii]  wherein it was ruled that landlord-tenant disputes covered and governed by special statutes would not be arbitrable if a specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations.”

It is observed in Vidya Drollia (Supra) that :

“landlord-tenant disputes 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 erga omnes affect or require centralized adjudication. 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 Transfer of Property Act do not expressly or by necessary implication bar arbitration.”

The Supreme Court in Vidya Drolia (Supra) case has held that in  Booz Allen Hamilton (Supra),  Transfer of Property Act was not considered, whereas, while stating that Soundness of Hemangini enterprises (Supra) was not that reasonable and must be reviewed by a three-judge bench, it stated that Transfer of Property Act is not a special statute so the dispute arising under this act are arbitrable. Further, it is stated that Transfer of Property Act does not contain any such provision which nullifies the arbitrability of disputes. In Vidya Drollia (Supra) the Supreme Court has disagreed with Himangni Enterprises (Supra) and has held that disputes arising out of lease deeds shall be governed by the Transfer of Property Act, 1882, hence, were arbitrable, if they meet certain criteria. Apart from settling the conundrum around arbitrability of tenancy disputes under lease deeds, Vidya Drolia (Supra) touched upon other legal positions in connection with the Arbitration and Conciliation Act, 1996 ("Act").

In fact, Vidya Drolia (Supra) puts forward a fourfold test to determine the arbitrability of subject matters of a dispute. The Supreme Court has made it clear that the test is not a straight jacket formula and exists for the purpose of gaining certainty to confirm whether the subject matter of the dispute would be non-arbitrable. A subject matter is non-arbitrable if:

1.   it is an action in rem and no subordinate action in personam arises out of it.

2.   it has the erga omnes effect, i.e., adjudication on the subject matter would affect individuals who are not parties to arbitration.

3.   it involves inalienable functions of the state.

4.   it is expressly or impliedly non-arbitrable by virtue of law.

By applying the above test, it was held that lease deeds are arbitrable if they are not covered under special statues.



Issue of Fraud

Further, in Vidya Drolia (Supra), the Supreme Court has also reaffirmed the law laid down in Avitel Post Studioz Ltd & Ors Vs HSBC PI Holdings (Mauritius) Ltd [iv] Civil Appeal No. 5145 of 2016 as regards the issue of fraud and its arbitrability.  It overruled its decision in N. Radhakrishnan Vs Maestro Engineers & Ors[v]  and held that fraud renders a dispute non-arbitrability only if: 

1.   In a clear case where the arbitration clause or agreement itself cannot be said to exist; or 

2.   If allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct which requires a public enquiry.

The Court further observed that “it would be grossly irrational and completely wrong to mistrust and treat arbitration as flawed and inferior adjudication procedure” thus marking a clear shift in judicial perception and its increasing faith in the process of arbitration.

In Avitel Post (Supra)  it is held as under:

 

“it is clear that serious allegations of fraud arise only if either of the two tests laid down are satisfied and not otherwise. The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus, necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof but questions arising in the public law domain.”

 

The judgment in Avitel Post Studioz Limited interprets Section 17 of the Contract Act to hold that Section 17 would apply if the contract itself is obtained by fraud or cheating. Thereby, a distinction is made between a contract obtained by fraud, and post contract fraud and cheating. The latter would fall outside Section 17 of the Contract Act and, therefore, the remedy for damages would be available and not the remedy for treating the contract itself as void.



Who decides 'non-arbitrability'?

To arrive at the answer, the Supreme Court has examined the following circumstances:

(i)          when a request for reference to arbitration is sought before a civil court (section 8),

(ii)         when an application for appointment of an arbitrator is made (section 11),

(iii)        when arbitration has commenced but statement of defense is yet to be filed (section 16), and

(iv)        when an arbitral award is sought to be set aside (section 34).

Since the 2016 amendment of the Act, a court, under section 8, is statutorily required to examine the validity of the arbitration agreement. Under section 16, an arbitrator is empowered to decide on arbitrability. Should the question of arbitrability be decided in favour of the claimant, the defense may appeal under section 34 and challenge arbitrability only after publication of award.

As for section 11, the judicial view has evolved in four phases since the enforcement of the Act. Until 2005, the SC was of view that appointment of an arbitrator under section 11(6) was merely an administrative order. In 2005, a constitutional bench of the Supreme Court constituting Seven (7) judges in a matter reported as SBP & Co. Vs Patel Engineering Ltd & Anr[vi]  overruled this ratio. Thus, the scope of the courts under 11(6) was interpreted11 as follows:

“the court must look into its own jurisdiction, existence of arbitration agreement and arraying of appropriate parties. The court may examine if the claim is time barred and whether the contracted is concluded. However, the court shall not consider the arbitrability and merits of the claim. It was also held that should an objection as to the arbitrability be raised on the ground that agreement was obtained by fraud, etc., the court would then be required to consider its validity”.

With the amendment of the Act in 2016, the scope of courts under section 11(6) was curtailed with the introduction of Section 11 (6A) which required that a court must confine its findings only to the extent of existence of an arbitration agreement. Section 11(6A) later came to be omitted by way an amendment in August 2019.

With the above history in mind, Vidya Drolia, examines the principles of separability and competence-competence in the context of section 16 and held that 'the courts at the referral stage do not perform ministerial functions.' Section 16 gives the arbitration clause a life of its own. Therefore, for the purposes of both sections 8 and 11, 'the courts at the referral stage are not to decide on merits, except when permitted by the legislation either expressly or by necessary implication, such questions of non-arbitrability.'

While distinguishing between validity and arbitrability, the Supreme Court held that:

'only when the court is certain that no valid arbitration agreement exists or the disputes/subject matter are not arbitrable, the application under section 8 would be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary and not a mini trial.'

The Supreme Court steered clear from commenting on whether an on-going arbitration under section 8(3) must be stayed or deferred during the pendency of application under section 8(1).

With respect to section 11The Supreme Court in Vidya Drollia( Supra) has held that mandate for a court is to satisfy itself as to the existence of an arbitration agreement. However, with abundant caution, the Supreme Court  further states that 'The court is not powerless and would not act beyond jurisdiction, if it rejects an application for reference, when the arbitration clause is admittedly or without doubt is with a minor, lunatic or the only claim seeks a probate of a will.'

In effect, it is the arbitrator who has the authority under section 16 to consider arbitrability of a dispute. Once held to be arbitrable, the baton then gets passed on to the court under section 34 only for a 'second-look' on the question of arbitrability. While entertaining applications under sections 8 and 11, courts must restrict their examination to the existence of an arbitration agreement and not embark on determining arbitrability of the dispute. The judicial precedents on section 11 set prior to the 2016 amendment are no longer applicable despite the 2019 amendment.

Lastly, while considering the principles applicable in interpretation of arbitration clauses, the SC held that in purely commercial disputes, the principle of liberal interpretation must be adopted.

The Supreme Court has thus propound a fourfold test for determining when 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).

 

According to Supreme Court, 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 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.                       

CONCLUSION

Therefore what is clear as on today is that in Vidya Drolia (Supra), the Supreme Court has taken a pro-arbitration stance by laying a catena of precedents. Lease deeds are arbitrable if they are not covered by special statutes. The applicability of Transfer of Property Act 1882 shall not bar arbitrability as the same was not construed as special statute, unlike Rent Control Acts. Similarly, it is categorically held that the allegations of fraud can be made subject matters of arbitration, only, when they are in connection with a civil dispute, and do not have the seriousness of circumstances better described under criminal laws. It is the Arbitral Tribunal that has the first authority to determine arbitrability. The 'second-look' over arbitrability is conferred to the courts under section 34 of the Act. F course, the courts are not precluded , albeit as rare exercise of power to protect parties to a dispute and in such apt cases , the courts may, under sections 8 and 1 of the Act may examine arbitrability, when the very validity of arbitration agreement is put to question.                                  --------------

                                                    Anil K Khaware
                                                    Founder & Senior Associate
                                                    societylawandjustice.com

[i]AIR (2019) SC 3498

[ii](2011) 5 SCC 532

[iii](2017) 10 SCC 706

[iv]Civil Appeal No. 5145 of 2016(Supreme Court)

[v](2010) 1 SCC 72

[vi](2005) 8 SCC 618  

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