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Mercantile Law
Vidya Drolia v. Durga Trading Company (2021)
«09-Jun-2025
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.
- The court laid down four conditions where disputes are non-arbitrable:
- 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.