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Dispute Resolution Mechanism Under Lease

The Dispute Resolution mechanism is an integral part of every contract. It provides a way to solve the issue which may arise in the future. Some of the famous mechanisms are Arbitration, Mediation, Conciliation, etc.

A lease contract may also contain these Dispute Resolution Mechanisms, which are now enforceable, and if no mechanism is mentioned in the contract, then the dispute can be resolved through arbitration.

Lease is governed by the Transfer of Property Act (TPA), 1882, and it is mentioned in chapter V from section 105 to section 117 of the Act. [1]

Meaning of technical words used in the article:
What is Lease?
Section 105 of the Transfer of Property Act (TPA) says when a right to enjoy any property is transferred in exchange for money or any other valuable thing for a certain period, impliedly or expressly by the transferor to the transferee, is called a lease. [2]

What is Right in Rem?

It means that the right is available against the whole world, no one in the world can interfere in your right. For example, A has a house of which he has complete ownership. He has a Right in Rem concerning the house, no one can interfere in his right of ownership.

What is Right in Personam?
It means the right which is available against the person in this duty is imposed against the said single individual only. The Indian Contract Act grants Rights in Personam to the parties of a contract. So, the parties of a contract have these contractual rights only against each other. For example, A loaned money to C. The right to recover the money belongs only to B, not the world in general.

What is Competence-Competence Doctrine?
The doctrine of competence-competence states that the Arbitral Tribunal has the jurisdiction to determine the scope and ambit of its powers.

What is Arbitration?
Arbitration is a legal mechanism encouraging settlement of disputes between two or more parties mutually by the appointment of a third party whose decision is binding on the parties referring to the said dispute.

History of Tenancy-landlord dispute
In 1981, in the case of Natraj Studios (P) Ltd. v. Navrang Studios & Ors. [3], the Supreme Court has observed that the issue between landlord and tenant is the issue of Right in Rem, and it affects the public at large, hence the tenancy issues are not arbitrable.

In 2011, in the case of Booz Allen and Hamilton Inc. vs. SBI Home Finance Ltd. and Ors. [4], the Court held that a suit to enforce a mortgage must be decided by courts of law and not by arbitral tribunals. The Court held that a suit to enforce a mortgage involved enforcement of a right in rem.

In 2017, in the case of Himangni Enterprises v. Kamaljeet Singh Ahluwalia [5], the Delhi High Court observed that the matter in issue was of lease and lease is not covered by the Delhi Rent Act, 1995, hence it came under the TOFA. Therefore, this matter must be decided by the civil court and cannot be sent to arbitration.

Dispute Resolution Mechanism for lease:
Supreme Court recently in the case of Vidya Drolia & Ors. v. Durga Trading Corporation cleared the fog from the four-decade-old issue, i.e. Dispute of Tenancy, are arbitrable or not. Supreme Court in his decision making a very key observation, those are:

Landlord-Tenant disputes are Right in Personam rather than Right in Rem, and hence Arbitrable.

But if the dispute relates to Right in Rem, or the dispute affects the third party and requires centralized adjudication, or the dispute related to the sovereign or the public interest, or the dispute specifically made non-arbitrable as per the statute, then it should be heard in the court.

SC follows the Competence-Competence doctrine and ruled that Arbitral Tribunal is the preferred first authority to determine and decide that the dispute is arbitrable or not.

Dispute of fraud is also arbitrable when they relate to the civil dispute. The court overturns his own decision in the case of N. Radhakrishnan v Maestro Engineers [6], where a court ruled that a dispute of fraud cannot be referred for arbitration.

The only exception will be the dispute, which is governed by special rent control legislation, like the Delhi Rent Act, etc.

Disputes which are to be adjudicated by the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 are non-arbitrable and thus setting aside from the Full Bench decision in the case of HDFC Bank Ltd v Satpal Singh Bakshi [7], which had held that such disputes were arbitrable.

Banks and financial institutions covered under the DRT Act have specific rights, including the modes of recovery specified in the DRT Act. Therefore, it has held that the claims covered by the DRT Act are non-arbitrable.

For inter-company disputes, the Judgement states that they are rights in rem. By this direction, SC tried to make the entire category of Intra-company dispute non-arbitrable. [8]

Disputes in a lease contract are quite common, and they always end in a long, exhaustible and frustrating legal battle, which cost tons of money and waste of valuable time of both courts and yours.

Supreme Court judgment in the case of Vidya Drolia & Ors. v. Durga Trading Corporation sighs relief to many tenants and landlords who are indulged in long legal fights. Now they can go through the arbitration process and come to a reasonable conclusion fast.

But this judgment needs to be read with caution because it is not applied in every aspect of tenancy dispute, it covered specific provisions of TPA. This judgment doesn't make every dispute arbitrable. Disputes have an element of Right in Rem or other conditions mentioned above are still non-arbitrable.

I hope this article gives you a clear picture of the dispute resolution of the lease and answered all your legal questions. So please leave comments and give your feedback.

  1. Transfer of Property Act, 1882, No. 04, Act of Parliament, 1882 (India).
  2. Transfer of Property Act, 1882, No. 04, Act of Parliament, 1882 (India).
  3. Natraj Studios (P) Ltd v. Navrang Studios & Anr., 1981 AIR 537, 1981 SCR (2) 466 (India).
  4. Booz-Allen & Hamilton Inc v. SBI Home Finance Ltd & Others. Civil Appeal No.5440 of 2002 (India).
  5. Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706 (India).
  6. N. Radhakrishnan v Maestro Engineers, CIVIL APPEAL NO.7019 OF 2009, (India).
  7. HDFC Bank Ltd v Satpal Singh Bakshi, WP(C) NO. 3238/2011, (India).
  8. Vidya Drolia & Ors v. Durga Trading Corporation, Civil Appeal No. 2402 of 2019 (India).
Written By: Abhishek Sahu

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