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. --------------
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