Samyak Jain and Reha Mohan[i]
On 14th December 2020, a three-judge bench of the Supreme Court of India, in the case of Vidya Drolia v. Durga Trading Corporation (‘Vidya Drolia’), held that landlord-tenant disputes governed by the Transfer of Property Act, 1882 (‘TPA’) are arbitrable in nature and that arbitral tribunals have the jurisdiction to decide upon the issue of arbitrability.
The Court in Vidya Drolia has overruled the dictum of Himangni Enterprises v. Kamaljeet Singh Ahluwalia (‘Himangni Enterprises’), wherein it was held that landlord-tenant disputes under the TPA are actions in rem and thus cannot be arbitrable as that would be against public policy. In Himangni Enterprises, the Court relied upon the proposition laid down in Booz Allen Hamilton v. State Bank of India, wherein it stated that landlord-tenant disputes are non-arbitrable only: (i) when they are governed by special statues; (ii) if tenant enjoys statutory protection; and (iii) when specific courts have jurisdiction to decide that dispute. However, the Court in Vidya Drolia arrived at the conclusion that there is no provision in TPA, which conclusively states that landlord-tenant disputes cannot be adjudicated by an arbitral tribunal. The Court’s decision stems from the reasoning that landlord-tenant disputes are arbitrable as they are subordinate rights in personam which arise from rights in rem.
The other pertinent issue discussed by the Court in Vidya Drolia was with respect to the power of the arbitral tribunal to decide arbitrability of disputes at the reference stage, in view of Sections 8, 11 and 16 of the Arbitration Act, 1996 (‘Act’). The decision of the Court in Vidya Drolia reflects a paradigm shift in the jurisdictional issue - from a cautionary approach to a pro arbitration approach that facilitates fair and speedy remedy in the traditional approach of dispute resolution. This article discusses the shift in approach of the Court with respect to this arbitrability issue in the context of the Arbitration and Conciliation (Amendment) Act, 2015 (‘2015 Amendment’).
Position Prior to the 2015 Amendment
Over the years, the Supreme Court has extensively deliberated upon the power of judicial authorities to examine the existence and validity of arbitration agreement under Section 8 and 11 of the Act at the reference stage. In the case of SBP & Co. v. Patel Engineering Ltd. (‘Patel Engineering’), a seven-judge bench of the Supreme Court concluded that judicial authorities have the power to examine the validity of an arbitration agreement. It further held that this power of the Court is of judicial nature and has to be mandatorily exercised when a jurisdictional issue comes before it.
The case of Patel Engineering was re-affirmed by a two-judge bench of the Supreme Court in the case of the National Insurance Company Ltd. v. Boghara Polyfab Pvt. Ltd. (‘Boghara’). In Boghara, the Court identified and segregated three categories of issues that arose for consideration under Section 11 applications. The first category pertains to the mandatory issues that the Chief Justice/Designate is bound to decide such as, whether the party making the application has approached the appropriate High Court and whether there exists a valid arbitration agreement between the parties. In a more lucid manner, it can be inferred that it is the duty of the Chief Justice/Designate to decide arbitrability of the dispute at the reference stage itself and the issues based on merit or other claims shall be left to the exclusivity of the arbitral tribunal. The second category pertains to the issues that can be decided either by the Chief Justice/Designate or by arbitral tribunal such as the issue of claim being time barred. The third category pertains to the issues reserved only to be decided by the arbitral tribunal, like issues related to merits of the claim and scope of the arbitration clause.
Therefore, prior to the 2015 Amendment, Courts had the jurisdiction to decide arbitrability at the reference stage thus undermining commercial wisdom of the parties. This also ousted the jurisdiction of the arbitral tribunal.
Position After 2015 Amendment
On the recommendations of the 246th Law Commission Report, Sections 8 and 11 of the Act were amended to ensure the synchronization of the Indian Arbitration Law with the international standards. In lieu of this, Parliament added the phrase “refer parties to arbitration, unless prima facie no valid arbitration agreement exists” in Section 8. This led to a departure from the previous position and the Courts could only interfere when there was no existence of a valid arbitration agreement. Further, with the addition of Section 11(6-A), power of the Court was limited to examining whether an arbitration agreement is null and void, inoperative, and incapable of being performed.
Further, Justice B.N. Srikrishna in the case of Shin-Etsu Chemical Co. Ltd. v. AkshOptifibre, iterated that the Court’s review at the reference stage should be limited to prima facie verification of existence and validity of the arbitration agreement without analyzing in detail whether the arbitral tribunal is empowered to decide the subject matter or not.
It shall thus be given due consideration that after the 2015 Amendment the Court at reference stage cannot take away the jurisdiction of the arbitral tribunal and adjudicate by itself. Court can do so after summary examination if the arbitration agreement is found to be null and void, inoperative, and incapable of being performed. This raises the question whether the examination of existence would also extend to examining the validity of the arbitration agreement.
Does ‘Existence’ include ‘Validity’?
The Court in Vidya Drolia also came across the issue of whether the word ‘existence’ inserted after the 2015 Amendment includes weeding out arbitration clauses, i.e. whether the tribunal is capable of determining arbitrability. For this, the Court relied upon Duro Felguera SA v. Gangavaram Port Ltd. (‘Duro Felguera’), which held that prior to the 2015 Amendment, Section 11 (6) of Act was wide in nature as it gave enormous powers to the Court to decide arbitrability of disputes. This position changed after the 2015 Amendment. Thereafter, the Courts are only required to see whether there is an arbitration agreement between the parties – nothing more, nothing less. The reasoning laid down in Duro Felguera is in line with the purpose of the amendment and is essential to minimize the Court’s intervention at the reference stage. The ratio laid down in Duro Felguera was affirmed by the three-judge bench in Mayavati Trading Pvt. Ltd. v. Pradyut Deb Burman, wherein Court held that Patel Engineering is legislatively overruled by the 2015 Amendment.
This leads us to examining the aspects of the tribunal’s power to decide its own jurisdiction.
Negative Aspect of Competence – Competence: Boon or Bane?
Section 16 empowers the arbitral tribunal to rule upon its own jurisdiction, including rules with respect to the existence and validity of the arbitration agreement. Clause (b) of Section 16 (1) stipulates that a decision by the tribunal rendering the main contact void will not automatically make the arbitration clause void. The severability doctrine is of significant importance here. It treats arbitration as a distinct agreement that cannot be declared void or voidable only because the main contract is invalid. By voluntarily entering in an arbitration agreement, it can be assumed that the parties have an obligation to resort to a private forum for dispute resolution. Their intention is expressly mentioned in that particular agreement, and it is the Court’s duty to respect their commercial understanding reflected by the terms of the arbitration agreement.
Further, the Competence – Competence doctrine reflects the positive and the negative implications of the power of the tribunal. The positive implication is that the arbitral tribunals are solely competent to declare jurisdiction and arbitrability of disputes and there shall be no judicial interference. The negative implication on the power of the tribunal is that the decision of arbitrability can be challenged in Court at a later stage. A joint reading of Section 8, 11, 16 and 34 of the Act, suggests that arbitral tribunals are empowered to decide issues relating to jurisdiction and arbitrability of the subject matter at the reference stage. However, the decision of the arbitral tribunal is subject to challenge under Section 34 of the Act.
The jurisprudence on the arbitrability of disputes at the reference stage has been settled for the time being. The Court in Vidya Drolia considered the amended Sections 8 and 11, which prescribes only prima facie review by the Court at the reference stage and subject to adjudication by the Court only when the agreement is null and void, inoperative, and not capable of adjudication by the tribunal. It also limits the Court’s interference to situation when the agreement is incapable of being adjudicated upon. It can be inferred that after the 2015 Amendment, the Legislature aimed at preventing bootstrapping by equipping the arbitral tribunal to decide issues of arbitrability instead of the judicial authorities at the reference stage. This case will hopefully settle this long-standing issue and prove to be a crucial step towards arbitration friendly dispute resolution mechanism in India.
[] The authors, Ms. Reha Mohan and Mr. Samyak Jain are 4th year B.A.LL.B (Hons.) students at Institute of Law, Nirma University. Their interests lie in Arbitration Law, Competition Law and Constitutional Law. They can be contacted at firstname.lastname@example.org and email@example.com respectively.
Preferred Citation – Ms. Reha Mohan and Mr. Samyak Jain, “Vidya Drolia v. Durga Trading Corporation: Arbitrability to be decided by the Arbitral Tribunal at the Reference Stage”, Arbitration & Corporate Law Review, Published on 28th January 2021.