In a dispute arising from a Leave and License Agreement between Motilal Oswal Financial Services (the appellant/Licensee) and Santosh Cordeiro (the respondent/Licensor) for a property in Malad (West), Mumbai, the Supreme Court has ruled that when two or more persons agree to refer a matter to arbitration, Section 28 of the Contract Act, 1872, will not render that agreement invalid. Section 28, which speaks of agreements in restraint of legal proceedings being void, has two important exceptions.
The Court explained that Section 28 of the Contract Act shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.
A Two-Judge Bench of Justice J.B. Pardiwala and Justice K. V. Viswanathan observed that mere creation of a specific forum as a substitute for the civil court or specifying the civil court may not be enough to accept the inference of implicit non-arbitrability. Conferment of jurisdiction on a specific court or creation of a public forum, though eminently significant, may not be the decisive test to answer and decide whether arbitrability is impliedly barred.
The Bench reiterated that Section 41 of the Presidency Small Causes Court Act, 1882, falls within the ambit of Section 2(3) of the Arbitration and Conciliation Act, 1996. As a result of this, even if the Licence Agreement contains an Arbitration Agreement, the exclusive jurisdiction of the Courts of Small Causes under section 41 of the 1882 Act is not affected in any manner.
Whereas, the Bench explained that 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 by virtue of Section 41 of the 1882 Act.
The Bench then referred to the Full Bench decision of the Bombay High Court in Central Warehousing Corporation, Mumbai vs. Fortpoint Automotive Pvt Ltd. [2009 SCC OnLine Bom 2023], where it was found that the object of introducing Section 41 of the 1882 Act in the amended form was to avoid multiplicity of proceedings in different Courts and consequent waste of public time and money and to avoid unnecessary delay and hardship to the suitors.
The Bench reiterated that the objective was to have uniformity of the procedure so that all suits and proceedings between a landlord and tenant or a licensor and licensee for recovery of possession of premises or for recovery of rent or license fee, irrespective of the value of the subject matter, should go to and be disposed of by the Small Causes Court.
The Bench then observed that the Court’s jurisdiction under Section 11(6-A) of the 1996 Act is confined to the “examination of the existence of an arbitration agreement”, which is limited to a prima facie determination and does not involve a laborious or contested inquiry. The Bench also emphasised that under Section 16 of the 1996 Act, the arbitral tribunal is empowered to rule on its own jurisdiction, including objections regarding the existence or validity of the arbitration agreement.
Therefore, pointing out that the question of whether the claim pertains to a ‘debt’ or ‘license fee’ is a matter for the arbitrator to decide, not the Court in a Section 11 proceeding, the Bench held that an examination under Section 11(6-A) of the A&C Act indicates that an arbitration agreement exists between the parties. Consequently, the Bench directed the arbitrator to proceed with the adjudication and conclude the proceedings within six months.
Briefly, the appellant was granted an initial leave & license for a property in Mumbai for 60 months, from October 01, 2017, to October 30, 2022. Although the appellant terminated the agreement on December 31, 2019, the termination was reversed, and an Addendum was executed, which extended the license period from 60 to 96 months and established a lock-in period of 72 months. Later, citing the COVID-19 pandemic and the force majeure clause, the appellant handed over vacant possession of the premises to the respondent and sought a refund of the security deposit.
Thereafter, the respondent demanded Rs. 94.40 lacs with interest, representing alleged arrears of license fees for the balance lock-in period, and also invoked Clause 33 of the Leave and License Agreement, which provided for the settlement of disputes through arbitration. The appellant, however, objected to the appointment of an arbitrator, contending that Section 41 of the 1882 Act grants exclusive jurisdiction to the Small Causes Court for disputes between licensors and licensees, rendering the dispute non-arbitrable.
The High Court of Bombay allowed the application and appointed an arbitrator. The High Court’s decision was based on the finding that the property’s location (Malad) was outside the jurisdiction of the Small Causes Court. When the appellant filed a Section 16 application before the arbitrator, raising the ground of non-arbitrability, the arbitrator dismissed this application, holding that the amount sought was in the nature of a debt and not a claim for license fees.
Appearances:
AOR Sanjana Saddy and Advocate Chirag M. Shah, for the Appellant
Advocates Rishabh Shah, Dhaval Mehrotra, Shivani Bansal, and Aditi Desai, for the Respondent
