Vijay Drolia and ors. v Durga Trading Corporation
Before the Hon’ble Supreme Court of India
|
NAME
OF CASE |
Vijay Drolia and ors. v Durga Trading
Corporation |
|
CITATION |
2020
SC |
|
DATE
OF JUDGEMENT |
14 December, 2020 |
|
APPELLANT |
Vijay Drolia and ors. |
|
RESPONDENT |
Durga Trading Corporation |
|
BENCH/
JUDGE |
N.V. Ramana, Sanjiv Khanna, Krishna Murari |
|
STATUTES
INVOLVED |
Arbitration
and Conciliation Act, 1996 |
Introduction
Subject
matter arbitrability of disputes is one of the most contentious and
controversial matters in the field of arbitration. In the landmark case of Vijay
Drolia and ors. v Durga Trading Corporation, the supreme court decided upon
the arbitrability of various subjects as per the provisions of Indian Law and
laid down a four-fold test to determine the arbitrabilityof various subjects.
The Apex court further delved into defining the scope and power of S.8[1]&
S.11[2]
of the Arbitration and Conciliation Act, 1996.[3]
Facts of the case
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,1 as it doubts the legal ratio expressed in
Himangni Enterprises v. Kamaljeet Singh Ahluwalia, 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.
Factual
Matrix of Himangni- The Delhi Rent Act, which deals with the cases relating to
rent and eviction of the premises, is a special Act. Though it contains a
provision (Section3) by virtue of it, the provisions of the Act do not apply to
certain premises but that does not mean that the Arbitration Act,
ipso facto, would be applicable to such premises conferring jurisdiction on the
arbitrator to decide the eviction/rent disputes. In such a situation, the
rights of the parties and the demised premises would be governed by
the Transfer of Property Act and the civil suit would be triable by
the Civil Court and not by the arbitrator. In other words, though by virtue
of Section 3 of the Act, the provisions of the Act are not applicable
to certain premises but no sooner the exemption is withdrawn or ceased to have
its application to a particular premises, the Act becomes applicable to such
premises. In this view of the matter, it cannot be contended that the
provisions of the Arbitration Act would, therefore, apply to such
premises.
Landlord-tenant
disputes governed by rent control legislation are not actions in rem, yet they
are non-arbitrable. In Booz Allen & Hamilton Inc. reference was made to
Russell on Arbitration (22nd Edition) in Para 2.007 at Page 28 wherein the
author has observed that certain matters in English Law are reserved for the
court alone and if an arbitral tribunal purports to deal with them the
resulting award would be unenforceable. These matters would include where
the type of remedy required is not one which the arbitral tribunal is empowered
to give. Reference was made to Law and Practice of Commercial Arbitration in
England (2nd Ed. 1989) by Mustill and Boyd which states that certain types of
remedies which the arbitrator can award are limited by consideration of public
policy and as arbitrator is appointed by the parties and not by the State.
Arbitrator cannot impose fine, give imprisonment, commit a person for contempt
or issue a writ of subpoena nor can he make an award binding on third parties
and affect public at large, such as a judgment in rem. Mustill and Boyd in
their 2001 Companion Volume have observed that axiomatically rights that are
valid as against the whole world, cannot be a subject of private arbitration,
although subordinate rights in personam derived from such rights may be ruled
upon by the arbitrators. Therefore, rights under a patent license may be
arbitrated but the validity of the underlying patent may not be arbitrable.
Similarly, an arbitrator who derives its power from a private agreement between
A and B, plainly has no jurisdiction to bind a third person by a decision on
whether the patent is valid or not, for no one else has mandated him to
make the decision and the decision which attempts to do so would be
useless.
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’ or is ‘null and
void’, albeit the Section 11(6-A), as enacted, requires ‘existence of an
arbitration agreement’, and the prerequisite that the arbitration
agreement should not be ‘null and void’ was deliberately omitted. The wording
of Section 11(6-A) was contrasted with Section 16(1) to draw
distinction between ‘validity of an arbitration agreement’ and ‘existence of an
arbitration agreement’. Reference was made to observations of Kurian Joseph, J.
in Duro Felguera, S.A v. Gangavaram Port Limited,5 to the effect that the
scope of Section 11(6-A) is limited, only to see whether an arbitration
agreement exists – nothing more, nothing less. The legislative policy and
purpose are to essentially minimize judicial intervention at the appointment
stage. Referring to Sections 111, 114 and 114A of the
Transfer of Property Act, it is observed that there is nothing in this Act and
law to show that a dispute relating to the determination of lease, arrears of
rent etc. cannot be decided by an arbitrator. The grounds predicated on public
policy could be raised before the arbitrator as they could be raised before the
court. The arbitrator could well abide by the provisions of Sections
114 and 114A, and apply the public policy considerations for
the protection of tenants as a class. Referring to Booz Allen & Hamilton
Inc., it was observed that the right in rem is a right exercisable against the
world at large and is not amenable to 5 (2017) 9 SCC 729 arbitration,
whereas in case of rights in personam an interest is protected against a
specific individual, and is referable to arbitration. Further, subordinate
rights in personam arising from rights in rem have always been considered to be
arbitrable.
Issues
of the case
(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’).
Arguments From Appellant
· Exclusion of actions in rem from arbitration, exposits the intrinsic
limits of arbitration as a private dispute resolution mechanism, which is only
binding on ‘the parties’ to the arbitration agreement. The courts established
by law on the other hand enjoy jurisdiction by default and do not require
mutual agreement for conferring jurisdiction. The arbitral tribunals not being
courts of law or established under the auspices of the State cannot act
judicially so as to affect those who are not bound by the arbitration clause.
Arbitration is unsuitable when it has erga omnes effect, that is, it affects
the rights and liabilities of persons who are not bound by the arbitration
agreement. Equally arbitration as a decentralized mode of dispute resolution is
unsuitable when the subject matter or a dispute in the factual background,
requires collective adjudication before one court or forum. Certain disputes as
a class, orsometimes the dispute in the given facts, can be efficiently
resolved only through collective litigation proceedings.
· Contractual and consensual nature of arbitration underpins its ambit and
scope. Authority and power being derived from an agreement cannot bind and is
non-effective against non-signatories. An arbitration agreement between two or
more parties would be limpid and inexpedient in situations when the subject
matter or dispute affects the rights and interests of third parties or without
presence of others, an effective and enforceable award is not possible. Prime
objective of arbitration to secure just, fair and effective resolution of
disputes, without unnecessary delay and with least expense, is crippled and
mutilated when the rights and liabilities of persons who have not consented to
arbitration are affected or the collective resolution of the disputes by
including non-parties is required. Arbitration agreement as an alternative to
public fora should not be enforced when it is futile, ineffective, and would be
a no result exercise.
Arguments
of Respondent
·
Where there is no express exclusion the
examination of the remedies and the scheme of the particular Act to find out
the intendment becomes necessary and the result of the inquiry may be decisive.
In the latter case, it is necessary to see if the statute creates a special
right or a liability and provides for the determination of the right or
liability and further lays down that all questions about the said right and
liability shall be determined by the tribunals so constituted, and whether
remedies normally associated with actions in civil courts are prescribed by the
said statute or not.
·
Once an application in due compliance with Section 8 of the Arbitration Act is filed, the approach of the civil court
should be not to see whether the court has jurisdiction. It should be to see
whether its jurisdiction has been ousted. There is a lot of difference between
the two approaches. Once it is brought to the notice of the court that its
jurisdiction has been taken away in terms of the procedure prescribed under a
special statute, the civil court should first see whether there is ouster of
jurisdiction in terms or compliance with the procedure under the special
statute. The general law should yield to the special law — generaliaspecialibus
non derogant. In such a situation, the approach shall not be to see whether
there is still jurisdiction in the civil court under the general law. Such approaches
would only delay the resolution of disputes and complicate the redressal of
grievance and of course unnecessarily increase the pendency in the court.
Judgement
Ratio: The Supreme court put forth a four-fold 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).
Conclusion
Therefore, insolvency or intracompany disputes have to be addressed by a
centralized forum, be the court or a special forum, which would be more
efficient and has complete jurisdiction to efficaciously and fully dispose of
the entire matter. They are also actions in rem. Similarly, grant and issue of
patents and registration of trademarks are exclusive matters falling within the
sovereign or government functions and have erga omnes effect. Criminal cases
again are not arbitrable as they relate to sovereign functions of the State.
Further, violations of criminal law are offenses against the State and not just
against the victim. Matrimonial disputes relating to the dissolution of
marriage, restitution of conjugal rights etc. are not arbitrable as they fall
within the ambit of sovereign functions and do not have any commercial and
economic value. The decisions have erga omnes effect. Matters relating to
probate, testamentary matter etc. are actions in rem and are a declaration to
the world at large and hence are non-arbitrable. disputes which are to be
adjudicated by the DRT under the DRT Act are non-arbitrable.
Landlord-tenant disputes governed by the Transfer of Property Act are
arbitrable as they 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 inalienable and sovereign functions of the State. The provisions of
the Transfer of Property Act do not expressly or by necessary implication bar
arbitration. Transfer of Property Act, like all other Acts, has a public
purpose, that is, to regulate landlord- tenant relationships and the arbitrator
would be bound by the provisions, including provisions which enure and protect
the tenants.
The supreme court further stated, ‘we overrule the
ratio laid down in Himangni Enterprises and hold that landlord-tenant disputes
are arbitrable as the 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 the specified court/forum, and not through arbitration.’
Relevant Provisions
S. 7 Arbitration agreement. — (1) In this Part, “arbitration agreement”
means an agreement by the parties to submit to arbitration all or certain
disputes which have arisen or which may arise between them in respect of a defined
legal relationship, whether contractual or not.
(2) An arbitration agreement may be in the form of an arbitration clause
in a contract or in the form of a separate agreement.
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is contained in—
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or
other means of telecommunication which provide a record of the agreement; or
(c) an exchange of statements of claim and defense
in which the existence of the agreement is alleged by one party and not denied
by the other.
(5) The reference in a contract to a document
containing an arbitration clause constitutes an arbitration agreement if the
contract is in writing and the reference is such as to make that arbitration
clause part of the contract.”
S. 8- Power to refer parties to
arbitration where there is an arbitration agreement.—
(1) A judicial authority before which an action is
brought in a matter which is the subject of an arbitration agreement shall, if
a party so applies not later than when submitting his first statement on the
substance of the dispute, refer the parties to arbitration.
(2) The application referred to in sub-section
(1) shall not be entertained unless it is accompanied by the original
arbitration agreement or a duly certified copy thereof.
(3) Notwithstanding that an application has been
made under sub-section (1) and that the issue is pending before the judicial
authority, an arbitration may be commenced or continued and an arbitral award
made.
S. 11 Power to Court to remove
arbitrators or umpire in certain circumstances.
(1) The Court may, on the application of any
party to a reference, remove an arbitrator or umpire who fails to use all
reasonable dispatch in entering on and proceeding with the reference and making
an award.
(2) The Court may remove an arbitrator or umpire
who has mis- conducted himself or the proceedings.
(3) Where an arbitrator or umpire is removed
under this section, he shall not be entitled to receive any remuneration in
respect of his services.
(4) For the purposes of this section the
expression" proceeding with the reference" includes, in a case where
reference to the umpire becomes necessary, giving notice of that fact to the
parties and to the umpire.
S. 34 Power to stay legal
proceedings where there is an arbitration agreement. Where any party to an
arbitration agreement or any person claiming under him commences any legal
proceedings against any other patty to the agreement or any person claiming
under him in respect of any matter agreed to be referred, any party to such
legal proceedings may, at any time before filing a written statement or taking
any other steps in' the proceedings, apply to the judicial authority before
which the proceedings are pending to stay the pro- ceedings; and if satisfied
that there is no sufficient reason why the matter should not be referred in
accordance with the arbitration agreement and that the applicant was, at the
time when the proceedings were commenced. and still remains, ready and willing
to do all things necessary to the proper conduct of the arbitration, such
authority may make an order staying the proceedings.
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