The Arbitrability Paradox: Arbitrability in Eviction/ Tenancy Matters in India

It is well-known that since 2012, the world is seeing India as a pro-arbitration jurisdiction. Courts have been rendering several pro-arbitration decisions since then. Even the legislature has attempted to improve the overall arbitration experience in India by bringing about amendments in 2015. Despite these developments, it is paradoxical that the scope of disputes that are not arbitrable has increased, and that too, not for the right reasons. One such species of disputes is the arbitrability of tenancy matters, as exemplified by a recent judgement of the Supreme Court in Himangni Enterprises v. KS Ahluwalia (SCI. 2017). We had provided a descriptive comment of the judgement in this blog a few days back in the form of a presentation, where we had raised certain issues with the judgement. In this post, we critically evaluate the law on this subject using the points raised in the presentation.

Rent Control Laws in India

A slew of legislation were passed in independent India under the rubric Rent Control Act where the interests of the tenants were sought to be protected. These laws were enacted when there was scarcity of available accommodations [see, Santosh Mehta vs Om Prakash AIR 1980 SC 1664. These laws provided that no court or tribunal could, irrespective of any contract or otherwise, order eviction in a proceeding by a landlord against a tenant, subject to limited exceptions.

These rent control laws conferred exclusive jurisdiction on select courts, such as the Court of Small Causes to deal with eviction matters. Natraj Studios (P) Ltd. v. Navrang Studios, AIR 1981 SC 537 is a typical example. Two commercial entities, studios, fought for possession of two studios. Navrang Studios (Navrang), the owner entered into a leave and licence agreement. The concerned law was the Bombay Rent, Hotel and Lodging House Rates Control Act, 1947. Under the said law, the licensor and the licensee were deemed to be governed under the said law and  the Small Causes court had the exclusive jurisdiction to decide the disputes between the parties. Since the Rent Control law was a social welfare legislation, the court held that only the Small Causes court had the jurisdiction to decide the issues under the said law and that an arbitral tribunal could not. The court observed:

"The Bombay Rent Act is a welfare legislation aimed at the definite social objective of protection of tenants against harassment by landlords in various ways. It is a matter of public policy. The scheme of the Act shows that the conferment of exclusive jurisdiction on certain Courts is pursuant to the social objective at which the legislation aims. Public policy requires that contracts to the contrary which nullify the rights conferred on tenants by the Act cannot be permitted. Therefore, public policy requires that parties cannot also be permitted to contract out of the legislative mandate which requires certain kind of disputes to be settled by special courts constituted by the Act. It follows that arbitration agreements between parties whose rights are regulated by the Bombay Rent Act cannot be recognised by a Court of law."

Curiously both the parties were commercial entities and yet the court chose to view the case as relating to social welfare and public policy.

Critique of the Rent Control Laws

These rent control laws were criticised for being heavily in favour of the tenants even at the cost of landlords. The Supreme Court recognised this in various decisions. In Prabhakaran Nair & Ors. Vs. State of Tamil Nadu & Ors. [(1987) 4 SCC 238, the court held: "Tenants are in all cases not the weaker sections. There are those who are weak both among the landlords as well as the tenants." [Also see, Ganpat Ram v Gayatri Devi AIR 1987 SC 2016].

[For a discussion on the evolution of the the law, see, for instance, Aditya Alok & Pankti Vora, Rent Control in India- Obstacles for Urban Reform, 4 NUJS Law Review 81 (2011)].

The law in many states moved forward in enacting a legislation that balanced the interests of both the landlord and the tenant and repealed the old rent control laws. Karnataka is a typical example. The Karnataka repealed the old rent control law and enacted the Karnataka Rent Act, 1999. The Statement of Objects and Reasons to the Karnataka Rent Bill, (which eventually became Karnataka Rent Act, 1999) stated:

"Economic Administration Reforms Commission and the National Commission on Urbanisation have recommended reform of the Rent Legislation in a way that balances the interests of both landlord and the tenant and also stimulates future construction. The Government of India have formulated a model rent control law and recommended to the State Governments to undertake amendments to existing rent control laws or enact new laws on the basis of the model law. It is considered necessary and expedient to bring about a new legislation to provide for regulation of rent and eviction in the spirit of modern economy in a manner more suited to our State, by adopting some provisions of the model rent control law and some of the existing law of Rent Control in the state."

Why such Disputes should be Non-Arbitrable?

The question is given that the new set of laws are concerned with balancing the interests of the landlords and the tenants. There are two connected issues here: the law and the policy underlying it has considerably changed. Considering this, there seems to be no basis for holding that such disputes are not arbitrable. Secondly, despite the pro-arbitration developments in the past five years in India, there seems to be a deep mistrust in the ability of arbitration to deliver justice. This distrust may be justified in certain cases and this might have led the Supreme Court in Himangni Enterprises to decide in favour of non-arbitrability. Such a conclusion needs re-visiting for the following reasons:

• As has been discussed above, the law has undergone changes owing to the change in economic policies of the country. Given this, is there a need to make such disputes non-arbitrable? Disputes under rent control laws were not arbitrable since the rent control laws were considered social welfare legislations. Given that the rent laws repealing the rent control regime balance the rights of the landlords and the tenants, the reasons for making disputes under such laws do not survive. Therefore, the bar should consequently not lie: cessante ratione legis cessat ipsa lex.
• This is true especially in the context of putting a property to commercial use. When a property is put to commercial use, the parties generally enjoy equal bargaining power. The decision of the Supreme Court in 1981 in Natraj Studios pertained to two commercial entities fighting over possession of two studios. Where is the question of applying the social welfare test in such cases? 
• Although in Booz Allen, tenancy disputes were recognised as well-known non-arbitrable disputes, the test of in rem-in personam distinction to decide arbitrability as laid down in Booz Allen allows arbitrability of tenancy disputes as tenancy creates rights in personam. This is all the more reason why such disputes should be arbitrable.

Does Himangni go Much Further?

When the counsel for the appellant argued that the Delhi Rent Act 1995 [Note: The Supreme Court in Himangni Enterprises wrongly refers to the Delhi Rent Act of 1955; it is 1995 and not 1955.] would not apply to certain premises as listed out in Section 3 thereof, the Supreme Court went much further and held that tenancy disputes under the Transfer of Property Act, 1882 were also not arbitrable:

"26. 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 (Section 3) 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."

It is submitted that the Supreme Court has got this part of the decision completely wrong and the same deserves reversal or statutory abrogation. This reasoning is even contrary to Booz Allen. Note that Booz Allen talks about "eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes" and does not talk about cases where eviction or tenancy matters are not governed by special statutes. In the instant case, the Supreme Court held that even if the Delhi Rent Act did not apply by virtue of Section 3 thereof and the general law, that is, the Transfer of Property Act, 1882 applied, the dispute under the latter law would remain non-arbitrable. The court supplied a convoluted reasoning that if the exemption is withdrawn or if it ceases to have application to such premises the Act would become applicable. Obviously, if a premises ceases to fall within the exemption in Section 3, the Delhi Rent Act would apply. But so long as it falls within the exemption, the law would not apply. Thus, the Supreme Court's reasoning as regards non-arbitrability of tenancy disputes even under the general law is neither supported by the Supreme Court in Booz Allen nor is it supported by convincing reasoning.

The Way Forward

The way forward is for the Supreme Court to constitute a larger Bench and decide on all the issues that are noted above. At the least, the court has to exempt tenancy under the general law (not governed by special statutes) and commercial leases/ licences from the bar on arbitrability. Letting Himangni Enterprises to hold the field will do immense damage to Indian arbitration, which is otherwise on the right path.