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2020 Supreme(SC) 727
SUPREME COURT OF INDIA
N.V. RAMANA, SANJIV KHANNA, KRISHNA MURARI, JJ.
Vidya Drolia And Others – Appellants
Versus
Durga Trading Corporation – Respondent
CIVIL APPEAL NO. 2402 OF 2019 With SPECIAL LEAVE PETITION (CIVIL) NOS. 5605-5606 OF 2019 AND SPECIAL LEAVE PETITION NO. 11877 OF 2020
Decided On : 14-12-2020
For the Appellant(s) : Mr. Manoj Swarup, Sr.Adv. Mr. Ajay Kumar, Adv. Mr. Sunit Shah, Adv. Mr. Pinakin M. Raval, Adv. Mr. Neel, Adv. Ms. Vidisha Swarup, Adv. Mr. Debajyoti Basu, Adv. Ms. Soumya Dutta, AOR Mr. Pankaj Jain, Adv. Mr. Ashok Kumar Jain, Adv. Mr. Bijoy Kumar Jain, AOR
For the Respondent(s): Mr. Nakul Dewan, Sr.Adv. Mr. Pradhuman Gohil, Adv. Ms. Taruna Singh Gohil, AOR Ms. Ranu Purohit, Adv. Ms. Tanya Srivastava, Adv. Ms. Jasleen Bindra, Adv. Mr. Sambit Nanda, Adv. Mr. Rohan Naik, Adv. Mr. Maninder Singh, Sr.Adv. Mr. Bijal H. Chhatrapati, Adv. Mr. Anjali Anchayil, Adv. Ms. Avni Sharma, Adv. Mr. Prabhas Bajaj, Adv. Mr. Dheeraj Nair, AOR Mr. T. R. B. Sivakumar, AOR
IMPORTANT POINTS
(1) Landlord-tenant disputes are arbitrable.
(2) Will of parties as to scope of arbitration is a subjective act and personal to parties.
(3) Sections 8 and 11 of Arbitration Act are complementary provisions.
(4) Arbitration – Bifurcation of subject matter or causes of action in suit is not permissible and contemplated.
Headnote:
Per Sanjiv Khanna, J. (With Krishna Murari, J. Concurring)(Majority View)
(A) Arbitration and Conciliation Act, 1996 – Sections 8 and 11 – Transfer of Property Act, 1882 – Section 106 – Landlord-tenant disputes – Scope of arbitration – Landlord-tenant disputes are arbitrable as Transfer of Property Act does not forbid or foreclose arbitration – However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations – Such rights and obligations can only be adjudicated and enforced by specified court/forum, and not through arbitration – An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of civil court. (Paras 48 and 49)
(B) Arbitration and Conciliation Act, 1996 – Section 8 – Indian Contract Act, 1872 – Section 10 – Arbitration – Arbitration being a matter of contract, parties are entitled to fix boundaries as to confer and limit jurisdiction and legal authority of Arbitrator – Will of parties as to scope of arbitration is a subjective act and personal to parties – An arbitration agreement can be comprehensive and broad to include any dispute or could be confined to specific disputes – Non-arbitrability is basic for arbitration as it relates to very jurisdiction of Arbitral Tribunal – An arbitral tribunal may lack jurisdiction for several reasons – Arbitration agreement should satisfy mandate of Section 10 of Contract Act, in addition to satisfying other requirements stipulated in Section 7 of Arbitration Act – Non-contractual disputes would require a separate or submission arbitration agreement based on cause of action arising in tort, restitution, breach of statutory duty or some other non-contractual cause of action – Issue of scope of Arbitrator’s jurisdiction invariably arises when disputes that are arbitrable are enumerated or arbitration agreement provides for exclusions as in case of ‘excepted matters’ – Arbitration agreement may be valid, but arbitral tribunal in view of will of parties expressed in arbitration agreement, may not have jurisdiction to adjudicate dispute (Paras 8, 11, 12 and 15)
© Arbitration and Conciliation Act, 1996 – Section 8 – Arbitration – Bifurcation of subject matter or causes of action in suit is not permissible and contemplated – Bifurcation in such cases would result in a suit being divided into two parts, one being decided by arbitral tribunal, and the other by court or judicial authorities – This would defeat entire purpose and inevitably delay proceedings and increase cost of litigation, cause harassment and on occasions give rise to conflicting judgments and orders by two different For a. (Para 16)
(D) Arbitration and Conciliation Act, 1996 – Sections 8 and 11 – Arbitration – Scope and ambit of court’s jurisdiction under Section 8 or 11 of Arbitration Act is similar – There is a difference between a non-arbitrable claim and non-arbitrable subject matter – Certain disputes or subjects are not capable of being resolved by arbitration – Exclusion from arbitrability is predominantly a matter of case law – Exclusion or non-arbitrability when clearly expressed would pose no difficulty and should be respected – However, exclusion or non-arbitrability of subjects or disputes from purview of a private forum like arbitration by necessary implication requires setting out principles that should be applied – Rights in personam are considered to be amenable to arbitration and disputes regarding rights in rem are required to be adjudicated by courts and public tribunals – Latter actions are unsuitable for private arbitration – Disputes relating to subordinate rights in personam arising from rights in rem are considered to be arbitrable.(Paras 17, 18, 20 and 21)
(E) Indian Evidence Act, 1872 – Section 41 – Relevancy of Judgments – Distinction between judgments in rem and judgments in personam turns on their power as res judicata – A Judgment in rem determines status of a person or thing as distinct from particular interest in it of a party to litigation and such a judgment is conclusive evidence for and against all persons whether parties, privies or strangers of matter actually decided – Such a judgment “settles destiny of res itself” and binds all persons claiming an interest in property inconsistent with judgment even though pronounced in their absence – By contrast, a judgment in personam, although it may concern a res, merely determines rights of litigants inter se to res – Judgment in rem would operate as res judicata against world, and judgment in personam would operate as res judicata only against parties in dispute – Use of expressions “rights in rem” and “rights in personam” may not be correct for determining non-arbitrability because of the inter-play between rights in rem and rights in personam – Many a times, a right in rem results in an enforceable right in personam. (Paras 30 and 31)
(F) Arbitration and Conciliation Act, 1996 – Sections 8 and 11 – Existence of arbitration agreement – Expression ‘existence of an arbitration agreement’ in Section 11 of Arbitration Act, would include aspect of validity of an arbitration agreement – Existence of an arbitration agreement presupposes a valid agreement which would be enforced by court by relegating parties to arbitration – Scope of judicial review and jurisdiction of court under Sections 8 and 11 of Arbitration Act is identical but extremely limited and restricted – A party cannot sue and claim rights based on an unenforceable document – Existence and validity are intertwined, and arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal requirements – Invalid agreement is no agreement – Sections 8 and 11 of Arbitration Act are complementary provisions – Object and purpose behind two provisions is identical to compel and force parties to abide by their contractual understanding – These two provisions should be read as laying down similar standard and not as laying down different and separate parameters. (Paras 92, 95 and 96)
Per N.V. Ramana, J. (Separate Opinion)
(A) Arbitration and Conciliation Act, 1996 – Sections 34 and 37 – To what extent does Court decide question of non-arbitrability under Section 11 of Act? II. Whether tenancy disputes are capable of being resolved through arbitration? – Arbitration is a creature of consensus – It is completely dependent on party autonomy and intention expressed in agreement – If parties have contemplated an arbitration agreement, then they can approach a tribunal for getting matter resolved – Once they choose the non-judicial method, a party aggrieved by award, has a chance to approach judicial institutions under Section 34 and 37 (appeal jurisdiction), if award is violative of the grounds provided thereunder. (Paras 14 and 28)
(B) Arbitration and Conciliation Act, 1996 – Sections 8 and 11 – Sections 8 and 11 of Act have same ambit with respect to judicial interference – Usually, subject matter arbitrability cannot be decided at stage of Sections 8 or 11 of Act, unless it’s a clear case of deadwood – Court, under Sections 8 and 11, has to refer a matter to arbitration or to appoint an arbitrator, as the case may be, unless a party has established a prima facie (summary findings) case of non-existence of valid arbitration agreement, by summarily portraying a strong case that he is entitled to such a finding – Court should refer a matter if validity of arbitration agreement cannot be determined on a prima facie basis – Scope of Court to examine prima facie validity of an arbitration agreement includes only: a. Whether arbitration agreement was in writing? Or b. Whether arbitration agreement was contained in exchange of letters, telecommunication etc? c. Whether core contractual ingredients qua arbitration agreement were fulfilled? D. On rare occasions, whether subject-matter of dispute is arbitrable?. (Para 75)
Facts of the case:
Present judgment decides the reference to three Judges made vide order dated 28th February, 2019 in Civil Appeal No. 2402 of 2019 titled Vidya Drolia and Others v. Durga Trading Corporation, 2019 SCC OnLine SC 358, as it doubts the legal ratio expressed in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706, that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882, are not arbitrable as this would be contrary to public policy.
Findings of Court:
What is true and applicable for men of commerce and business may not be equally true and apply in case of laymen and to those who are not fully aware of the effect of an arbitration clause or had little option but to sign on the standard form contract. Broad or narrow interpretations of an arbitration agreement can, to a great extent, effect coverage of a retroactive arbitration agreement. Pro-arbitration broad interpretation, normally applied to international instruments, and commercial transactions is based upon the approach that the arbitration clause should be considered as per the true contractual language and what it says, but in case of doubt as to whether related or close disputes in the course of parties’ business relationship is covered by the clause, assumption is that such disputes are encompassed by the agreement. The restrictive interpretation approach on the other hand states that in case of doubt the disputes shall not be treated as covered by the clause. Narrow approach is based on the reason that the arbitration should be viewed as an exception to the court or judicial system. The third approach is to avoid either broad or restrictive interpretation and instead the intention of the parties as to scope of the clause is understood by considering the strict language and circumstance of the case in hand. Terms like ‘all’, ‘any’, ‘in respect of’, ‘arising out of’ etc. can expand the scope and ambit of the arbitration clause. Connected and incidental matters, unless the arbitration clause suggests to the contrary, would normally be covered.
Result : Reference answered.
Suggested Argument: Fraud Allegations Do Not Automatically Exclude Arbitration
Your Honor, mere allegations of fraud raised by the opposing party do not render the dispute non-arbitrable or invalidate the arbitration agreement. (!) A simple plea of fraud is insufficient; it must rise to the level of a virtual criminal offense, involve complex issues requiring voluminous evidence in a civil court, include serious forgery or fabrication of documents, target the arbitration provision itself, or permeate the entire contract such that the arbitration agreement is void. (!) Absent such exceptional circumstances, the dispute remains arbitrable, and the tribunal is competent to adjudicate. [1000735580046]
Even serious fraud claims must be tested against specific criteria: whether the plea undermines the entire contract and arbitration agreement, rendering it void ab initio, or merely concerns internal disputes between parties without broader public implications. (!) (!) Distinguish between fraud inducing the contract (potentially void under contract law principles) and post-formation fraud, which does not vitiate the agreement. (!)
The tribunal, like a court, is bound by public policy and mandatory law, ensuring robust resolution without preempting arbitration. [1000735580040] At this prima facie stage, absent clear evidence vitiating the arbitration clause itself, refer the matter to arbitration to uphold party autonomy and efficiency. (!) [1000735580046]
JUDGMENT :
SANJIV KHANNA, J.
This judgment decides the reference to three Judges made vide order dated 28th February, 2019 in Civil Appeal No. 2402 of 2019 titled Vidya Drolia and Others v. Durga Trading Corporation, 2019 SCC OnLine SC 358, as it doubts the legal ratio expressed in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706 that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882, are not arbitrable as this would be contrary to public policy.
2. A deeper consideration of the order of reference reveals that the issues required to be answered relate to two aspects that are distinct and yet interconnected, namely:
(i) meaning of non-arbitrability and when the subject matter of the dispute is not capable of being resolved through arbitration; and
(ii) the conundrum – “who decides” – whether the court at the reference stage or the arbitral tribunal in the arbitration proceedings would decide the question of non-arbitrability.
The second aspect also relates to the scope and ambit of jurisdiction of the court at the referral stage when an objection of non-arbitrability is raised to an application under Section 8 or 11 of the Arbitration and Conciliation Act, 1996 (for short, the ‘Arbitration Act’).
3. We are not reproducing and examining the factual matrix, as we are only answering the legal issues raised. However, we would refer, in brief, to the legal reasoning and the ratio in Himangni Enterprises and the counter view expressed in the order of reference in Vidya Drolia.
4. Himangni Enterprises upheld the decision of the High Court and the District Court rejecting the application filed by the defendant-tenant under Section 8 of the Arbitration Act in a civil suit seeking its eviction from a shop in a commercial complex in New Delhi. The suit was also for the recovery of arrears of rent and permanent injunction. The tenancy in question was not protected under the rent control legislation and the rights and obligations were governed by the Transfer of Property Act. Two Judges of this Court held that the issue of non-arbitrability is no longer res integra as it stood answered by decisions in Natraj Studios (P) Ltd. v. Navrang Studios, (1981) 1 SCC 523 and Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532: (2011) 2 SCC (Civ) 781In Natraj Studios (P) Ltd., wherein an application under Section 8 of the Arbitration Act, 1940 was dismissed as the tenancy was protected under the Bombay Rents, Hotel and Lodging Houses Rates Control Act, 1947, it was observed that on broader consideration of public policy, the arbitrator lacked jurisdiction to decide the question whether the licensee-landlord was entitled to seek possession. The dispute could be exclusively decided by the Court of Small Causes, which alone had jurisdiction. In Booz Allen & Hamilton Inc., it was held that in eviction or tenancy matters governed by special statutes and where the tenant enjoys statutory protection, only the specified court has been conferred jurisdiction. Himangni Enterprises relying on the said ratios holds that though the Delhi Rent Act is not applicable, it does not follow that the Arbitration Act would be applicable so as to confer jurisdiction on the arbitrator. Even in cases of tenancies governed by the Transfer of Property Act, the dispute would be triable by the civil court and not by the arbitrator. The exemption from the applicability of the Rent Act could be withdrawn and thereupon the rights would be governed by the rent control legislation.
5. In Vidya Drolia, another division bench referring to Section 11(6-A) has observed that the referral stage requirement is to only examine ‘existence of an arbitration agreement’ and not validity of the arbitration agreement. 246th Report of the Law Commission of India had suggested twin examination whether the agreement ‘exists’
