Applicability of Arbitration Clauses in disputes arising out of Leave and License Agreements

Dispute Resolution | Jun 2020 | Rahul P. Jain

Authored by Rahul P Jain, Khushboo Rupani and Mahafrin Mehta

Arbitration is an alternate dispute resolution mechanism voluntarily chosen by the parties to get their civil/commercial disputes adjudicated upon. It is a well-settled law that an Award passed by an arbitral tribunal can be enforced in the same manner as a Decree passed by an Indian Court. It is pertinent to note that the Arbitration and Conciliation Act, 1996 (A&C Act) does not prima facie exclude a category of disputes which are to be treated as non-arbitrable. However, in case of certain categories of disputes, the Courts refuse to refer the parties to arbitration under Section 8 of the A&C Act.

A license is a personal right granted to a person to do something upon immovable property of the grantor i.e. the Licensor and does not amount to the creation of interest in the property itself. It is purely a permissive right to use and occupy the immovable property and is personal to the grantee i. e the Licensee. It creates no duties and obligations upon the persons making the grant and is, therefore, revocable except in certain circumstances expressly provided.

Section 52 of the Indian Easement Act, 1882 (Act) defines License as:

“Where one person grants to another, or to a definite number of other persons, a right to do or continue to do, in or upon immovable property of the grantor, something which would, in the absence of such rights, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a license.”

The essential features of a license are a license is not connected with the ownership of land/property but creates only a personal right or obligation; A license cannot be transferred or assigned; License is purely permissive right, express or implied, and not by adverse exercise or in any other way; It only legalizes a certain act which would otherwise be unlawful and does not confer any interest in the property itself in or upon or over which such an act is allowed to be done.

As per the amended Section 41 of the Presidency Small Causes Court Act, 1882 (PSCC Act), the small causes court shall have exclusive jurisdiction to try all suits/proceedings between a licensor and licensee, or a landlord and tenants, relating to the recovery of possession of any immovable property and/or to the recovery of the license fee or charges or rent. However, the same will not be applicable to suits/proceedings arising out of certain Acts i.e Bombay Rents, Hotel and Lodging House Rates Control Act, 1947, the Bombay Government Premises (Eviction) Act, 1955, the Bombay Municipal Corporation Act, the Bombay Housing Board Act, 1948.

The Courts have recognized a distinction between disputes involving rights in rem and those involving rights in personam. It ruled that disputes concerning rights in personam may be decided by a private forum such as an arbitral tribunal but those concerned with rights in rem should be decided by a public court.

The case of A. Ayyasamy v. A. Paramasivam carved out the following two categories of disputes which may not be subject to arbitral proceedings: (i) Disputes falling within the exclusive jurisdiction of a special court under a special statute; and, (ii) Disputes which are generally considered by the courts as appropriate for decision by public fora, for instance, disputes pertaining to rights in rem.

Typically, disputes between Licensor and Licensee under L&L Agreement are in the following areas:

  • Damage caused to the premises, fittings or misuse thereof & Delay in payment of rent & Unpaid dues and utility bills:

In the matter of Himangni Enterprises v Kamaljeet Singh Ahluwalia, the Hon’ble Supreme Court dismissed the argument that the Delhi Rent Act, 1995, was not applicable to the dispute by virtue of Section 3(1) (c) of the A&C Act and hence it could be referred to arbitration. The Court ruled that the mere preclusion of the application of the Delhi Rent Act did not mean that the A&C Act would automatically apply to the dispute. In such a situation, the rights of the parties would be governed by the Transfer of Property Act, 1882. Further, in the event the exemption in Section 3(1) (c) ceased to apply, the Act would become applicable to the premises. The Court placed its reliance on Natraj Studios (P) Ltd. (supra) and Booz Allen (supra) and ruled that it has already been established that tenant-landlord disputes are non-arbitrable.

However, recently in the matter of Vidya Drolia v. Durga Trading Corp, the Hon’ble Supreme Court has referred the question of arbitrability under the Transfer of Property Act to the Larger Bench, holding that judgment in Himangni Enterprises is required to relook. It observed that there is nothing in the TP Act that shows that a dispute as to the determination of lease cannot be decided by arbitration. It was noted that grounds u/s.111 whether r/w s.114 or 114A can be raised before an arbitrator.

  • Eviction Proceedings and recovery of possession:

While the law is clear on disputes arising above are governed by special statutes such as the Rent Control Act e.g. In Maharashtra, Section 24 of the Maharashtra Rent Control Act 1999 governs such dispute and as such the jurisdiction to entertain such disputes lie before the Competent Authority. As per Section 44 of the Maharashtra Rent Control Act 1999, the order passed by the Competent Authority is non-appealable and only a revision is allowed before State Government.

In the matter of Natraj Studios (P) Limited Vs. Navrang Studios, a landlord had filed a suit for eviction in the Small Causes Court, Bombay, and the tenant had filed an application under Section 8 of the A&C Act based on the arbitration clause contained in the L&L Agreement between the parties. The Hon’ble Supreme Court rejected the said application filed by the tenant and held, that the suit filed by the landlord for an eviction, was maintainable. It was further held that the disputes of such nature cannot be referred to the arbitrator. The relationship between the parties is that of licensor-landlord and licensee-tenant and the dispute between them relating to the possession of the licensed premises, therefore, the Small Causes Court alone has the jurisdiction and the arbitrator has none to adjudicate upon the dispute between the parties.

In Booz Allen & Hamilton Inc v SBI Home Finance Limited a Division Bench of the Hon’ble Supreme Court laid down a range of disputes to be non-arbitrable including ‘eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction’.

In Central Warehousing Corporation v Fortpoint Automotive Pvt. Ltd, it was held by the Hon’ble Bombay High Court that Section 5 of the A&C Act cannot affect the laws for the time being in force by virtue of which certain disputes may not be submitted to arbitration, as stipulated in Section 2(3) of the said Act12  and that Section 41 of the Act of 1882 falls within the ambit of Section 2(3). Thus, even if the Licence Agreement contains the Arbitration Agreement, the exclusive jurisdiction of the Small Causes Court under Section 41 of the PSCC Act is not affected. An Arbitration Agreement in such cases would be invalid and inoperative on the principle that it would be against public policy to allow the parties to contract out of the exclusive jurisdiction of the Small Causes Courts.

  • Premature termination of rent agreement or mutual termination of the agreement:

In the matter of Ashok Thapar v. Tarang Exports (P) Ltd, Hon’ble Bombay High Court has held that an Arbitration Clause survives even when the Leave and Licence Agreement was mutually terminated. After analyzing SMS Tea Estate (P) Ltd. v. Chandmari Tea Co. (P) Ltd.  and Magma Leasing and Finance Ltd. v. Potluri Madhavilata, It was held that once parties have intended to refer their dispute to the Arbitrator, then any dispute relating to such agreement must necessarily go to Arbitrator, even if agreement containing such a clause gets terminated by mutual consent.

  • Return or forfeiture of security deposit:

A dispute arising on account of the above and if the L & L Agreement contains an Arbitration clause then the same can be invoked and the recovery of a security deposit under a Leave and License Agreement can be procced with. In absence of an Arbitration clause in the L & L Agreement, then a Summary Suit under Civil Procedure Code, 1908 is a step available to the Licensee.

In A.S Patel Trust & Ors. Vs. Wall Street Finance Ltd, the Bombay High Court was of the view that any proceedings filed for recovery of the security deposit is not an action in rem but is action in personam and thus Section 41 of the PSCC Act will not be applicable and an Arbitrator will have the jurisdiction to adjudicate upon the subject dispute.

In the matter of RMC Readymix (I) Pvt. Ltd. Vs. Kanayo Motwani, the Hon’ble Bombay High Court has held that a claim for refund of the security deposit as stipulated under an L&L Agreement will not be covered under the provisions of Section 41(1) of the PSCC Act and a summary suit can be filed for the same.

Resolving disputes through alternate dispute mechanisms, such as arbitration are preferred options over litigation in India, especially property-related disputes which have a reputation to continue for years, even decades. Although arbitration agreements are held to be binding over the parties to such agreements, they are held to be void when a statute gives exclusive jurisdiction to a forum to try certain disputes. However, resolving disputes in courts continues to be a prolonged process, and parties in dispute will have to wait for many years for the outcome. Thus, these judgments put to rest the much-debated issue of the validity of arbitration clauses in the L&L Agreement.