Recently, the Supreme Court of India, in its judgement dated 18.08.2022 in Brij Raj Oberoi v. The Secretary, Tourism and Civil Aviation Department & Anr. held that the disputes involving lease matters can be referred to arbitration. The dispute in the present case was with respect to the renewal of a lease deed where Mr. Oberoi sought recourse to the Commercial Court which was pleased to restrain the respondents from taking coercive actions which were against the interests of the appellants. Further, the High Court passed an order dismissing the application to appoint an arbitrator. Thus, the issue to dismantle the applicability of the arbitration clause over the present dispute of renewal of the deed of lease came before the Hon’ble Supreme Court. In the present article, the authors try to dissect and analyze this order of the Supreme Court.
Brief background
The State of Sikkim is the owner of the property bearing Plot No.309, Paljor Stadium Road, Gangtok, East Sikkim, known as Norkhill Hotel. Brij Raj Oberoi and the State of Sikkim entered into an agreement for the lease of the said property by a registered deed of lease dated 9th December 1997 which was supposed to expire on 31st May 2021. Therefore, Mr. Oberoi by a letter dated 12th November 2020 offered to renew the Terms and Conditions of the lease for further 30 years with 10% escalation in interest rate every three years. Thereafter, a dispute arose between the parties with respect to the renewal of the lease. However, on 17th May 2021, Dr. K. Jayakumar, IAS, Additional Chief Secretary, Department of Tourism and Civil Aviation refused to renew the lease over the said property. Mr. Oberoi by a letter dated 21st May 2021 requested the respondents to refrain from handing over the said property to any third party till disputes are resolved through arbitration.
Mr. Oberoi, then filed an application u/s 9 of the Arbitration and Conciliation Act, 1996 in the Commercial Court. After listening to the parties, the Commercial Court ordered by restraining the respondents from disturbing Mr. Oberoi’s possession until arbitral proceedings commence. An appeal was preferred against the said order by the Respondents u/s 37 of the Arbitration and Conciliation Act, 1996 read with Section 13 of the Commercial Courts Act, 2015 and Article 227 of the Constitution of India. While Mr. Oberoi, filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 read with Section 10 of the Commercial Courts Act, 2015 for the appointment of an arbitrator. The Division Bench of the High Court set aside the order of the Commercial Court and also dismissed the application of Mr. Oberoi for the appointment of arbitrator. Aggrieved by the order of the High Court, Mr. Oberoi filed a Special Leave Petition before the Hon’ble Supreme Court of India. The question for consideration before the Hon’ble Supreme Court was whether an arbitration clause could be invoked only when the proposal for renewal was accepted by the lessor?
Court’s analysis
The Court herein took the view that the present writ petition was maintainable. It asserted this view by placing reliance on a three-judge bench of the Supreme Court (“SC”) in Vidya Drolia and Others vs. Durga Trading Corporation, wherein the court has significantly elucidated the position on intricacies surrounding subject-matter arbitrability. In Vidya Case, the court overturned its verdict of Himangni Enterprises by holding that the findings were not supported by suitable reasoning and that the mere fact that the government could revoke the exemption for leased properties under the Delhi Rent Act, 1995, did not make tenancy disputes inadmissible to arbitration. Further, the court elucidated that tenancy disputes under the TP Act are related to inferior rights in personam that derive from superior rights in rem and therefore such rights fall under the realm of the arbitrator. For instance, rights under copyright assignment may be arbitrable, however the protection afforded by an assignment of copyright per se may not be adjudicated through arbitral proceedings.
The court while explaining the interpretation of arbitration agreement shed light on three rules of interpretation firstly, Pro Arbitration or Broad approach, it generally applied to international instruments, and commercial transactions is founded upon the principle that the arbitration clause should be construed as per the prescribed contractual language. Secondly, restrictive interpretation is based on the reason that the arbitration should be seen as an exception to the judicial or court system. Thirdly, to avoid either broad or narrow approach and instead go with intention of the parties as to scope of the clause is understood by considering the strict language and circumstance of the case in hand.
Accordingly, it observed 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. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the Arbitral Tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.
Following the aforementioned holdings in Vidya Case, the SC in the present case held that the arbitration clause was expressed in a way that if both the parties agree to the renewal of agreement, then the disputes regarding the tenure and the quantum of rent were arbitrable disputes. In the present case, both the parties have disagreement on the renewal due to the dispute on period and rent of the lease. It noted that merely because the respondent State refuses to renew the lease, the arbitration agreement cannot be rendered ineffectual. Furthermore, debunking the argument of the Respondent State who wants to formulate a policy for energetic qualified young generation and to encourage self-employment of local youth who are competent to run the hotel court held that such policy decision cannot influence an existing agreement with a renewal clause. All disagreement between the parties with respect to renewal and/or non-renewal of the lease, the amount of rent and the tenure of renewal will be within the realm of the Arbitrator, as noted above. In view of the above, the appeals were allowed, the issue of arbitrability of the dispute over non-renewal of the lease would be decided by the Arbitral Tribunal/Arbitrator.
Authors’ comment
The Supreme Court’s clarification that arbitration clause can be invoked even if there’s non-renewal of the lease is altogether necessary. It also finds support under Transfer of Property Act, upon careful analysis of right and liabilities of landlord and tenants which is provided under Sections 111, 114 and 114A of the Act. In Vidya Case though the court upheld that the Transfer of Property Act did not bar the adjudication of dispute related to tenancy by an arbitrator but it also has clarified the position that disputes governed by specific rent control legislation would be bestowed with specific courts and forums to adjudicate upon special rights and liabilities with an exclusive jurisdiction.
Further, the court placing reliance on the Vidya Case also clarified the fine line between the disputes that are arbitrable and which are not by reading the terms and conditions of the deed of lease as a whole.
While this judgement is an extension of what was held in Vidya case, it is undoubtedly significant not only with respect to the trend of Indian Judiciary in upholding pro arbitration approach – but it will increase the chances of reaching settlement which can then be recorded and even if they did not, there are recognised criteria for fixing rent and period having regard to “assumptions” and “disregards” which are internationally recognised for coming to a decision.