A brief note on Vidya Drolia & Ors. v. Durga Trading Corporation, 14.12.2020, (2021) 2 SCC 1

-Adarsh Mohandas, Advocate, Chennai

The Reference to a larger bench of the Hon’ble Supreme Court of India (three judges) vide Reference Order in Civil Appeal №2402 of 2019 dated 28.02.2019, was made doubting the ratio in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706, which held that the landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882, were not arbitrable as this would be contrary to public policy.

In the reference matter in Vidya Drolia, the division bench of SC after referring to section 11(6A) had observed that the referral stage requirement was to only examine ‘existence of an arbitration agreement’ and not the validity of the arbitration agreement. Besides on the issue of arbitrability, Drolia observed that there was nothing in the Arbitration and Conciliation Act, 1996 (1996 Act) and law to show that a dispute relating to the determination of lease, arrears of rent etc. could not be decided by an arbitrator after referring to Sections 111, 114 and 114A of the Transfer of Property Act as well. The reasoning that the exemption from rent control legislation could be withdrawn and thereupon 1996 Act would not apply, as observed, was not a valid justification and ground to hold that the subject matter was not arbitrable. The referral order in Drolia thus, doubted the ratio laid down in Himangni Enterprises and referred the same for conclusive determination.

The following issues were referred for determination:

· meaning of non-arbitrability and when the subject matter of the dispute was capable of being resolved through arbitration; and

· 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 Judgment was delivered by Justice Sanjiv Khanna on behalf of Justice Krishna Murari and himself along with a concurring opinion rendered by Justice NV Ramana. The majority opinion set out at the outset that it would not apply to Part II of the 1996 Act.

Meaning of non-arbitrability

The court first dealt with the contours of an arbitration agreement (to posit what was arbitrable). The definition of arbitration agreement u/s 7 of the 1996 Act was construed in conjunction with what is an agreement u/s 10 of the Indian Contract Act, 1872 r/w sections 12–28 of the 1872 Act in order to hold that the rigours of section 10 of the 1872 Act was to be satisfied first for it to be an arbitration agreement. The concurring opinion in this context observed that the term “arbitrability” had a reasonably precise and limited meaning, relating to whether specific classes of disputes were barred from arbitration because of national legislation or judicial authority.

Next, the court dealt with the terms ‘judgments in rem’ and ‘judgments in personam’ in order to delineate what kinds of claims could be arbitrated through arbitration. This was considered necessary as arbitration was essentially a private dispute resolution mechanism binding only on the parties to the arbitration agreement as opposed to courts established by law that enjoyed jurisdiction by default, not requiring any mutual agreement for conferment of jurisdiction. It was opined that the distinction between judgments in rem and judgments in personam turned on their power as res judicata, i.e. a judgment in rem would operate as res judicata against the world, and a judgment in personam would operate as res judicata only against the parties in dispute. However, this distinction was held to be not conclusive since non-arbitrability of claims as a right in rem could result in an enforceable right in personam which could be the subject matter of arbitration. In this context, it was held that a claim for infringement of copyright against a particular person was arbitrable, though in some manner the arbitrator would examine the right to copyright, a right in rem.

The court then set out certain obvious areas of law that would be non-arbitrable:

· claims that have an erga omnes effect as it would affect the rights and liabilities of persons who are not bound by the arbitration agreement;

· claims that require collective adjudication before a single court/forum as the subject matter of such claims could affect the rights and interests of third parties or without presence of others, an effective and enforceable award is not possible;

· claims that are attributable to the Sovereign functions of the State as the same being inalienable and non-delegable would be performable only by the State;

· claims that have public interest element like the legitimacy of marriage, citizenship, winding up of companies, grant of patents, etc. unless the statute in relation to a regulatory or adjudicatory mechanism either expressly or by clear implication permits arbitration.

The next principle of non-arbitrability was that of implicit non-arbitrability which, it was held, could be established when by mandatory law, the parties were quintessentially barred from contracting out and waiving the adjudication by the designated court or the specified public forum. Thus, it was necessary to examine if the statute created a special right or liability and provided for the determination of each right or liability by the specified court or the public forum so constituted, and whether the remedies beyond the ordinary domain of the civil courts were prescribed (by the statute). When the answer is affirmative, the dispute would be non-arbitrable. In this context, the Decision in HDFC Bank Ltd. v. Satpal Singh Bakshi, 2013 (134) DRJ 566 (FB) holding that only actions in rem were non-arbitrable (though correct) was overruled, as non-arbitrability could arise in case, the implicit prohibition in the statute, conferring and creating special rights to be adjudicated by the courts/public fora, could be inferred.

The last form of non-arbitrability examined was that of fraud for which the decision in Avitel Post Studioz Limited and Ors. v. HSBC PI Holdings (Mauritius) Limited, (2020) 6 MLJ 544 was affirmed on the principle that serious allegations of fraud could arise only if either of the two tests laid down in Rashid Raza v. Sadaf Akhthar (2019) 8 SCC 710 stood satisfied and not otherwise. Thus, N. Radhakrishnan v. Maestro Engineers and Ors. (2010) 1 SCC 72 was overruled.

Finally, a fourfold test was laid down for determining non arbitrability:

o 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.

o 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;

o 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

o when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s)

Applying the above tests to the facts in the case, it was held that landlord-tenant disputes governed by the Transfer of Property Act were arbitrable as they were not actions in rem but pertained to subordinate rights in personam that arose from rights in rem. Thereby, Himangni Enterprises was overruled.

Who decides non-arbitrability?

The second question posed to the court, it was held, could be raised at three stages of proceedings in an arbitration. Firstly, before the court (as it is prior to commencement of arbitration) on an application for reference under Section 11 or for stay of pending judicial proceedings and reference u/s 8 of 1996 Act; secondly, before the arbitral tribunal during the course of the arbitration proceedings; or thirdly, before the court (post completion of arbitration) at the stage of the challenge to the award or its enforcement. In the current case, matter pertained to issue of non-arbitrability at the referral stage/first stage.

In the first stage dealing with applications u/s 8 & 11, it was held that they were complimentary in nature and the Court, while exercising powers under both Sections, enjoyed equal powers. Otherwise, it would lead to an anomalous situation wherein a judicial authority would have wider power under Section 8 but narrower power of examination under Section 11. Section 8 to this end allowed for reference to arbitration unless prima facie no valid arbitration agreement existed. This prima facie examination was held to not be a full review but a primary first review to weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes. Thus, referral proceedings were preliminary and summary but not a mini trial. When it appeared that prima facie review would be inconclusive, or on consideration inadequate as it would require detailed examination, the matter, it was held, should be left for final determination by the arbitral tribunal selected by the parties by consent.

Drawing from the above point on complimentary nature of powers to be exercised u/s 8 & 11, ‘existence of an arbitration agreement’ u/s 11(6A) was construed to mean an arbitration agreement that met and satisfied the statutory requirements of both the 1996 Act and the 1872 Act and that which was enforceable in law. Consequently, prima facie standard equally applied when the power of judicial review was exercised by the court u/s 11 of the 1996 Act. Thus, one had to read the mandate of valid arbitration agreement in Section 8 into the mandate of Section 11 as well. In this context, the ratio in SBP & Co v. Patel Engineering and anr, (2005) 8 SCC 618, was held to be inapplicable even post omission of Section 11(6A) in the 2019 Amendment Act and Mayavati Trading Pvt Ltd v. Pradyuat Deb Burman, (2019) 8 SCC 714, thereby, had rightly held that Patel Engineering had been legislatively overruled.

This exercise of limited prima facie review, it was held, would not in any way interfere with the principle of competence-competence and separation (both principles allow party autonomy) as to obstruct arbitration proceedings but ensured that vexatious and frivolous matters would get over at the initial stage.

In re, the issue of limitation u/s 43 r/w section 21 at the referral stage, it was held that the Court could interfere only when it was manifest that the claims were ex facie time barred and dead, or there was no subsisting dispute. All other cases were to be referred to the arbitral tribunal for decision on merits. Identical standard was to be applied even in cases of disputed ‘no claim certificate’ or defence on the plea of novation and ‘accord and satisfaction’.

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