Vidya Drolia v. Durga Trading Company (2021)

Introduction 

• This is a landmark judgment where the Supreme Court laid down the tests for arbitrability of disputes. 
• The Judgment was delivered by a 3- judge Bench consisting of Justice NV Ramana, Justice Sanjiv Khanna and Justice Krishna Murari.   

Facts   

• The Supreme Court in this judgment resolved a reference regarding whether landlord-tenant disputes under the Transfer of Property Act, 1882 (TPA) are arbitrable. 
• The judgment reconsiders the earlier ruling in Himangni Enterprises v. Kamaljeet Singh Ahluwalia (2017), which had held that such disputes are non-arbitrable due to public policy concerns. 
• Himangni Enterprises had relied on Natraj Studios and Booz Allen, stating that even in cases governed by the Transfer of Property Act, the dispute must be decided by civil courts. 
• Vidya Drolia disagreed, noting that Section 11(6-A) of the Arbitration Act limits the court’s role at the referral stage to checking only the existence of the arbitration agreement. 
• It held that landlord-tenant disputes under the Transfer of Property Act involve rights in personam and are therefore arbitrable, unlike disputes under special statutes offering exclusive jurisdiction to certain courts. 
• The judgment clarified that statutory protections (like rent control laws) or exclusive jurisdiction clauses render disputes non-arbitrable—but such limitations do not exist in the Transfer of Property Act. 
• The Court emphasized that judicial intervention at the appointment stage should be minimal, aligning with legislative intent. 
• Precedents like Olympus Superstructures and Vimal Kishor Shah were distinguished, reinforcing that the absence of statutory bar permits arbitration in lease disputes not covered by special rent laws. 
• The Court concluded that tenancy disputes under the Transfer of Property Act are arbitrable, unless excluded by special statutes granting exclusive jurisdiction to certain courts. 

Issues Involved  

• The Court addressed two main issues:  
  • The meaning of non-arbitrability. 
  • Whether the court or arbitral tribunal decides non-arbitrability at the reference stage under Sections 8 and 11 of the Arbitration Act. 

Observations 

• Respect for Arbitration Agreements: 
  • The court reaffirmed the importance of honoring arbitration agreements, citing the TELUS Communications case from Canada. 
• Tenancy Issues Are Arbitrable: 
  • The court held that tenancy matters are arbitrable, diverging from the earlier Himangini Enterprise judgment. 
• Actions in Rem vs. Actions in Personam: 
  • Relying on the Booz Allen & Hamilton v. SBI Home Finance Ltd (2011) case, the court drew a distinction between disputes affecting rights in rem (not arbitrable) and those affecting rights in personam (arbitrable). 
• Existence vs. Validity of Arbitration Agreement: 
  • The court clarified that at the referral stage, only the existence of an arbitration agreement needs to be examined, not its validity. 
• Test for Non-Arbitrability: 
  • The court laid down four conditions where disputes are non-arbitrable: 
    • When the dispute is in rem with no subordinate in personam action. 
    • When the dispute affects the public at large (erga omnes). 
    • When it involves inalienable state functions. 
    • When the law expressly or impliedly prohibits arbitration. 
• Judicial Intervention under Sections 8, 11, 16, and 34: 
  • The court clarified the stages at which non-arbitrability can be examined — reference to arbitration, appointment of arbitrator, commencement of arbitration, and challenge to an award. 
• Kompetenz-Kompetenz and Separability: 
  • These principles were upheld to prevent courts from examining merits at the referral stage unless legislation clearly permits. 
• Equal Scope of Sections 8 and 11: 
  • The court held that both sections allow for similar levels of judicial scrutiny regarding the arbitration agreement. 
• Liberal Interpretation in Commercial Disputes: 
  • Courts must adopt a liberal interpretation to promote arbitration in commercial disputes. 
• Debt Recovery Tribunal Act and Non-Arbitrability: 
  • Disputes under the DRT Act are non-arbitrable because the Act provides exclusive remedies and rights, which cannot be waived by arbitration. 

Conclusion 

• Despite answering many previously unsettled questions, the judgment faced criticism, particularly concerning the appealability of orders under Sections 8 and 11, and fears of mala fide applications under Section 11. 
• Nevertheless, the Vidya Drolia judgment is a landmark ruling that clarified the arbitrability of disputes and strengthened the legal framework surrounding arbitration agreements in India.