Law Maker

Vidya Drolia v. Durga Trading Corporation

Supreme Court of India · 14 December 2020 · 3 judges

Overruled in whole or in part by SBI General Insurance Co. Ltd. v. Krish Spinning (2024), which says: “we find it difficult to hold that the observations made in Vidya Drolia (supra) and adopted in NTPC v. SPML (supra) that the jurisdiction of the referral court when dealing with the issue of “accord and satisfaction” under Section 11 extends to weeding out ex-facie non-arbitrable and frivolous disputes would continue to apply”

The Court laid down a four-fold test for non-arbitrability, overruled Himangni Enterprises to hold landlord-tenant disputes under the Transfer of Property Act arbitrable, and confined courts under Sections 8 and 11 to a prima facie review.

Facts

In Civil Appeal No. 2402 of 2019, tenants had entered into a tenancy agreement in 2006 containing a dispute resolution clause; the tenancy was later attorned to the respondent landlord. When the tenants did not vacate on expiry of the lease, the landlord invoked arbitration and filed a Section 11 petition in the Calcutta High Court, which appointed an arbitrator in 2016 after rejecting the tenants' objection that the dispute was not arbitrable. Meanwhile this Court in Himangni Enterprises held landlord-tenant disputes governed by the Transfer of Property Act not arbitrable. A two-Judge Bench, by order of 28 February 2019, doubted that view and referred the matter to three Judges, also asking whether the court at the Section 11 stage can decide validity and arbitrability.

Questions before the Court

  1. When is the subject matter of a dispute not capable of settlement by arbitration?
  2. Are landlord-tenant disputes governed by the Transfer of Property Act arbitrable, and was Himangni Enterprises correctly decided?
  3. Who decides non-arbitrability, the court at the referral stage under Sections 8 and 11 or the arbitral tribunal, and what is the scope of the court's review?

What the Court held

  • A dispute is non-arbitrable when it relates to actions in rem, not subordinate rights in personam arising from them; affects third party rights, has erga omnes effect or needs centralised adjudication; relates to inalienable sovereign and public interest functions of the State; or is expressly or by necessary implication non-arbitrable under a mandatory statute.
  • Landlord-tenant disputes governed by the Transfer of Property Act are arbitrable, and Himangni Enterprises is overruled. Disputes covered by rent control laws that give a specific court or forum exclusive jurisdiction are not arbitrable.
  • N. Radhakrishnan is overruled: allegations of fraud can be arbitrated when they relate to a civil dispute, though fraud that vitiates the arbitration clause itself goes to non-arbitrability. Claims covered by the DRT Act are not arbitrable, and the Delhi High Court Full Bench decision in HDFC Bank Ltd. v. Satpal Singh Bakshi is overruled.
  • 'Existence of an arbitration agreement' in Section 11 includes its validity, but the court applies only a prima facie test. Review under Sections 8 and 11 is identical and very limited; the ratio of Patel Engineering on the scope of review no longer applies after the 2016 and 2019 amendments.
  • The arbitral tribunal is the preferred first authority to decide non-arbitrability, with the court having a second look under Section 34. The court interferes at the referral stage only when non-existence, invalidity or non-arbitrability is manifest and ex facie certain; otherwise it refers the parties to arbitration.

Why it matters

The judgment lays down a four-fold test to decide whether a subject matter is arbitrable, overrules Himangni Enterprises and N. Radhakrishnan, and sets the limited prima facie standard of review for courts at the Section 8 and Section 11 stage, treating the arbitral tribunal as the first forum to decide arbitrability.

In the Court's words

Copied from the official judgment; each passage links to its page.

“In view of the above discussion, we would like to propound a four-fold test for determining when the subject matter of a dispute in an arbitration agreement is not arbitrable: (1) 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. (2) 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;”
Sanjiv Khanna, J.Page 60 of the judgment
“In view of the aforesaid, we overrule the ratio laid down in Himangni Enterprises and hold that landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration. However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations.”
Sanjiv Khanna, J.Page 63 of the judgment
“Accordingly, we hold that the expression ‘existence of an arbitration agreement’ in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment.”
Sanjiv Khanna, J.Page 148 of the judgment
“The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings.”
Sanjiv Khanna, J.Page 150 of the judgment

Provisions interpreted

Related judgments

Case and bench

Parties
Vidya Drolia v. Durga Trading Corporation
Case
Civil Appeal No. 2402 of 2019 with Special Leave Petition (Civil) Nos. 5605-5606 of 2019 and Special Leave Petition No. 11877 of 2020
Decided
14 December 2020
Bench
N.V. Ramana, J., Sanjiv Khanna, J., Krishna Murari, J.
Opinions
Unanimous. The main judgment by Sanjiv Khanna, J. is signed by all three Judges; N.V. Ramana, J. also wrote a separate concurring opinion on the scope of review at the referral stage and agreed with the conclusions on non-arbitrability.