Vidya Drolia v. Durga Trading [Supreme Court, 14 December 2020]

VIDYA DROLIA V. DURGA TRADING

ISSUE:

Whether landlord-tenant issues covered by the Transfer of Property Act 1882, are arbitrable under Indian law, and how does the Supreme Court’s four-part test influence this determination?
Whether claims of fraud in a dispute constitute it non-arbitrable, and under what conditions do such allegations influence a disagreement’s arbitrability?

RULE:

In India, a four-part test is used to evaluate subject matter arbitrability. When the cause of action and/or subject of the dispute (1) relates to actions in rem that do not relate to inferior rights in personam arising from rights in rem, (2) has an erga omnes effect on third-party rights, necessitating centralised adjudication where mutual adjudication would be inappropriate, (3) involves unalienable sovereign and public interest functions of the State, or (4) is expressly or implicitly prohibited, the dispute is not considered arbitrable.

FACTS:

The case dealt with landlord-tenant issues governed by the 1882 Transfer of Property Act (TPA).
An appeal against a Division Bench’s decision in Himangni Enterprises v. Kamaljeet Singh Ahluwalia (2017), which concluded that TPA-based landlord-tenant conflicts are not arbitrable due to public policy.
Previously decided Supreme Court cases such as Natraj Studios, Booz Allen, and Himangni Enterprises influenced the arbitrability of tenancy issues.
The case also addressed the arbitrability of fraud, consistent with the Avitel decision.

HELD:

In accordance with Sections 8 and 11 of the Arbitration and Conciliation Act, 1996, the judgement addressed questions regarding the arbitrability of the subject matter and the extent of judicial intervention.
A four-part test that defined subject matter arbitrability made it clear which conflicts may be resolved by arbitration:
It is not arbitrable if a dispute involves in-rem activities and excludes rights in personam derived from in-rem rights.
Non-arbitrable disputes have an erga omnes effect, call for centralised adjudication, involve the rights of third parties, and are not appropriate for mutual arbitration.
Arbitration is not permitted in cases involving the State’s unassailable sovereign and public interest functions.
Conflicts that are explicitly or tacitly exempt from arbitration under certain statutes are not arbitrable.
The Court emphasised a prima facie test at the referral stage, highlighting the parameters of judicial interference under Sections 8 and 11. Courts must send cases to arbitration or select an arbitrator unless a side can establish prima facie that there is no valid arbitration agreement. The court’s investigation is limited to figuring out particular elements of the arbitration agreement.
The judgment overturned earlier rulings that fraud allegations and tenancy disputes may not be arbitrated, giving these sectors more clarity and leeway.
The Court emphasized the importance of following the prima facie test when establishing arbitrability and expressed increased confidence in arbitration as a conflict settlement method.
Concerns about the different appealability of orders issued under Sections 8 and 11 raised the possibility that legislative changes would be required to bring them into compliance.