Supreme Court Rules Transfer of Property Act Does Not Exclude Arbitration in Landlord-Tenant Disputes, Refers Matter for Larger Bench

Bench clarifies that Transfer of Property Act is silent on arbitrability and does not negate arbitration, overruling parts of Himangni Enterprises judgment; arbitral proceedings to continue with award subject to Supreme Court’s final approval

In a significant judgment delivered on February 28, 2019, the Supreme Court of India, in the case of Vidya Drolia & Ors. v. Durga Trading Corporation, has clarified the scope of arbitration in disputes arising under the Transfer of Property Act, 1882 between landlords and tenants. The Court held that the provisions of the Transfer of Property Act, including Sections 111, 114, and 114A, do not expressly or by necessary implication exclude the arbitrability of disputes relating to lease determination. This ruling overrules the earlier Supreme Court decision in Himangni Enterprises v. Kamaljeet Singh Ahluwalia (2017), which had held that landlord-tenant disputes under the Transfer of Property Act were non-arbitrable.

The dispute arose from a tenancy agreement executed in 2006 between the appellants (tenants) and the predecessor landlord, which contained an arbitration clause providing for resolution of disputes through arbitration. After the tenancy was assigned to the respondent, Durga Trading Corporation, a dispute regarding the delivery of vacant possession upon expiry of the lease term led the respondent to invoke arbitration. The tenants challenged the arbitrability of the dispute, relying on the Himangni Enterprises judgment.

The Supreme Court, however, noted that the Transfer of Property Act is silent on the issue of arbitrability and does not negate arbitration. The Court emphasized that while certain tenancy matters governed by special statutes with exclusive jurisdictional provisions may be non-arbitrable, the Transfer of Property Act does not fall within this category. The Court also distinguished the Himangni Enterprises case on facts and legal principles, observing that the earlier judgment did not consider the relevant provisions of the Transfer of Property Act in detail.

Importantly, the Court explained that Section 11(6A) of the Arbitration and Conciliation Act, 1996 mandates judicial authorities to confine their scrutiny to the existence of an arbitration agreement at the stage of appointing an arbitrator, leaving questions of jurisdiction and arbitrability to the arbitral tribunal. The Court further held that rights in rem (rights enforceable against the world) may be non-arbitrable, but rights in personam (rights against specific persons) arising from such rights are arbitrable.

The Court observed that the statutory provisions allowing relief against forfeiture of lease (Sections 114 and 114A) balance the interests of landlords and tenants and do not constitute a public policy bar to arbitration. It also differentiated the present case from others involving special tenancy laws like the Bombay Rent Act, which expressly exclude arbitration.

Given the complexity and importance of the issues, the Court referred the matter to a larger Bench of three judges for authoritative determination. Meanwhile, the Court lifted an earlier stay on arbitration proceedings, directing that the arbitration continue and that any award made shall be subject to the Court’s approval before execution.

This judgment is a landmark in clarifying the arbitrability of landlord-tenant disputes under the Transfer of Property Act and strengthens the scope of arbitration as a dispute resolution mechanism in property-related matters.

Statutory provisions

Transfer of Property Act, 1882 Sections 111, 114, 114A; Arbitration and Conciliation Act, 1996 Section 11(6A)

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Detailed Analysis and Step-by-Step Guide to the Judgment:

1. Background and Facts:

 The appellants and the predecessor landlord entered into a tenancy agreement in 2006 for a period of ten years, with a clause providing for arbitration of disputes. The tenancy was later assigned to the respondent. Upon expiry of the lease term, the respondent demanded possession of the premises, which the appellants refused. The respondent invoked the arbitration clause, leading to the appointment of an arbitrator by the Calcutta High Court.

2. Contention on Arbitrability:

 The appellants contended that disputes between landlords and tenants under the Transfer of Property Act are not arbitrable, relying heavily on the Supreme Court’s judgment in Himangni Enterprises, which held that such disputes are to be adjudicated only by courts. They argued that statutory provisions under the Transfer of Property Act indicated a public policy bar to arbitration.

3. Respondent’s Counter-Argument:

 The respondent argued that the arbitration clause is binding, and the appellants’ participation in arbitration estops them from challenging arbitrability. Further, they contended that Himangni Enterprises was distinguishable and possibly erroneous, particularly regarding lease expiry by efflux of time.

4. Legal Provisions Examined:

 - Transfer of Property Act Sections 111, 114, 114A:

  Section 111 defines various grounds for determination of lease, including expiry by efflux of time and forfeiture. Sections 114 and 114A provide discretionary relief against forfeiture, balancing landlord and tenant rights.

 - Arbitration and Conciliation Act Section 11(6A):

  Limits judicial scrutiny at the stage of appointing arbitrators to the prima facie existence of an arbitration agreement, leaving issues of arbitrability for the tribunal.

5. Key Legal Principles:

 - Arbitrability:

  The Court reiterated the principle from Booz Allen and Hamilton v. SBI Home Finance that disputes are arbitrable unless expressly or by necessary implication excluded.

 - Right in Rem vs. Right in Personam:

  Rights in rem (absolute rights against the world) are generally non-arbitrable, but disputes arising from rights in personam (contractual rights between parties) are arbitrable.

6. Examination of Himangni Enterprises Judgment:

 The Court found that Himangni Enterprises did not address the provisions of the Transfer of Property Act adequately and wrongly concluded non-arbitrability. It also disagreed with the reasoning that exemption from rent control statutes renders disputes non-arbitrable.

7. Comparison with Indian Trusts Act Case Law:

 The Court contrasted the Transfer of Property Act with the Indian Trusts Act, where arbitration is excluded by necessary implication due to the statutory scheme. No such express or implied exclusion exists under the Transfer of Property Act.

8. Conclusion and Reference to Larger Bench:

 Due to the conflicting precedents and importance of the issue, the Court referred the question of arbitrability of landlord-tenant disputes under the Transfer of Property Act to a three-judge Bench for authoritative resolution.

9. Interim Directions:

 The stay on arbitral proceedings was lifted, allowing the arbitration to proceed. However, enforcement of any arbitral award will require the Supreme Court’s sanction, ensuring judicial oversight pending final determination.

Implications:

This judgment broadens the ambit of arbitration in landlord-tenant disputes governed by the Transfer of Property Act, encouraging dispute resolution through arbitration and reducing court burden. It also clarifies the limited scope of judicial intervention at the stage of appointing arbitrators under Section 11(6A).

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This comprehensive report captures the essence of the Supreme Court’s judgment, its reasoning, and its impact on the law relating to arbitration in landlord-tenant disputes under the Transfer of Property Act.

Vidya Drolia v. Durga Trading Corporation (SC) : Law Finder Doc Id # 1388552