The Arbitrability Conundrum: An Assessment of Non-Arbitrability of Lease Disputes in India



[This article is authored by Mayank Jain, a final year law student at RGNUL, Patiala.]


Keywords: Arbitrability, Lease Disputes.


Introduction

India is considered to be a pro-arbitration center by the world and is shaping its Arbitration and Conciliation Act, 1996 (“the Act”) in order to become a hub for arbitration worldwide. Many improvements have been made to the Act in order to achieve its goal, but it is paradoxical that the horizon of disputes which are non-arbitrable has increased, and one among them is lease disputes.


The Issue of Arbitrability

The Act does not specify which disputes are arbitrable or which are not. This issue has been left for the Courts to deliberate upon. In Natraj Studios (P) Ltd. v. Navrang Studios, the landlord filed a suit for eviction in the Small Causes Court, Bombay and the tenant had filed an application under Section 8 of the Act on the basis of the arbitration clause in the Leave and License Agreement between the parties. The 3-judge bench of the Court ruled that the Court of Small Causes alone had the jurisdiction to settle the question of whether the licensor-landlord is entitled to take possession of the studios.


Another pertinent case to be referred to here is the case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., where the Division Bench of the Supreme Court ruled that eviction or tenancy matters which have been governed by special statutes, where the tenants generally enjoy statutory protection against eviction and only some courts have jurisdiction to settle the disputes, are non-arbitrable. The Court also recognized a distinction between rights in rem and rights in personam. The disputes concerning rights in personam can be decided by a private party (such as arbitrators), while disputes concerning rights in rem can be decided by a public forum such as Courts.


Furthermore, in the case of A. Ayyasamy v. A. Paramasivam, it was held that those cases where the subject matter falls exclusively within the domain of a public forum such as Courts, would be non-arbitrable and cannot be decided by the arbitral tribunal, but by the Courts alone.


Moreover, in Smt. Penumalli Sulochana v. Harish Rawtani, the Andhra Pradesh High Court relied upon the case of Booz Allen and held that disputes governed by a lease deed are non-arbitrable. It reasoned that the eviction of tenants is governed by special statutes, and therefore, is not a subject matter of arbitration.


The Decisive Case – Himangni Enterprises

The issue was settled by the Division Bench of the Supreme Court in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, where it reaffirmed the non-arbitrability of disputes related to tenancy and eviction matters. The Court applied the law laid down in Navrang Studios and Booz Allen to this case and held that the lower courts were right in dismissing the Appellant-Tenant’s application filed under Section 8 of the Act and in holding that the civil suit filed by the Respondent-Landlord was maintainable, despite parties agreeing to get the dispute settled by arbitration. Therefore, the Court held that the disputes under the Transfer of Property Act have to be tried by a public court and not by an arbitrator.


Comment

The question of the arbitrability of lease disputes was not discussed either in Booz Allen or Navrang Studios and hence, basing the judgment of Himangni Enterprises on these cases seems to be misplaced. Booz Allen dealt with the arbitrability of a mortgage deed while Navrang Studios dealt with a lease and license agreement covered by special statutes. Instead, the Court in Himangni Enterprises should have based its judgment on the concepts of rights in rem and rights in personam. Moreover, this case is in consonance with the decision of A. Ayyasamy.


It is clear that the disputes concerning lease are either governed by Transfer of Property Act or special statutes. This involves a transfer of an interest in the property which creates rights qua third-parties, as far as the enjoyment of property is concerned. In a dispute of such a nature where the determination of rights of third parties is relevant, the matter must be decided by a public forum. This would give a chance of hearing to the parties whose rights may be affected. An arbitral tribunal settling disputes between two parties cannot decide on a dispute where a third party is also interested. Moreover, the decision of the tribunal would not be binding on the third party who is also concerned with the proceedings.


Therefore, only the Courts, being a public forum, should be allowed to decide on lease disputes and not the arbitral tribunal, as it would be determining rights in rem.