In a landmark judgment passed by a Full Bench of the Bombay High Court (“Court”), the Court has laid down the law regarding operation of an arbitration clause in agreements giving a license to use property executed in Greater Mumbai. The Court has thereby confirmed its earlier judgments which held that arbitration clauses in Leave and License Agreements pertaining to properties situated in Greater Mumbai are void and the jurisdiction to try all disputes in such arrangements vests with the Small Causes Court in Mumbai as per the provisions of the Presidency Small Causes Court Act, 1882 (“Presidency Act”).

While the earlier judgments were based on the provisions of the Arbitration Act of 1940, the present judgment has validated the same position in reference to the Arbitration and Conciliation Act of 1996. 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 particular forum to try certain disputes. The polemic regarding the binding effect of arbitration clauses was examined in the present case when the Learned Single Judge of the Court referred the issue to a Larger Bench in a Writ Petition filed by Central Warehousing Corporation against M/s Fortpoint Automative Pvt. Ltd.¹. The Court held that arbitration clauses would not oust the jurisdiction of the Small Causes Court in resolving disputes arising out of Leave and License Agreements pertaining to properties situated in Greater Mumbai.

Central Ware Housing Corporation (“Petitioners”) had entered into a Lease Deed in respect of the premises owned by the Mumbai Port Trust. Fortpoint Automotive Pvt. Ltd. (“Respondents”) later had entered into a Memorandum of Agreement (“Agreement”) with the Petitioners by virtue of which, storage facility space in the premises was provided to the Respondents. It was the case of the Petitioners that the Respondents encroached upon an area outside the godown premises and started using the same for washing their vehicles. Consequently, the lessors/owners Mumbai Port Trust issued a show cause notice to the Petitioners asking them why the Lease Deed executed between them and the Petitioners should not be terminated and threatened to initiate eviction proceedings. Later, the owners also enhanced the rent and also made a demand of Rs. 70,94,21,581.51 for increase in the rate with retrospective effect on the basis of unauthorized encroachment of the premises.

The Petitioners, in turn, sought to have the Respondents pay for damages for their unauthorized occupation and the revision of rent by Mumbai Port Trust. The Petitioners also terminated the storage warehousing facilities of the Respondents and asked them to vacate the premises.

The Respondents invoked the arbitration agreement as per Clause 14 of the Agreement and called upon the Petitioners to refer the disputes to arbitration. Simultaneously, the Respondents also proceed to file a suit before the Small Causes Court at Mumbai by invoking section 41² of the Presidency Act for declaration that that the Agreement between the Petitioners and Respondents was valid and subsisting and the termination notices issued by the Petitioners were illegal and bad in law.

The Petitioners contended that they had already appointed a sole arbitrator to adjudicate the dispute and the Respondents failed to appear before the arbitrator. Accordingly, the Petitioners raised a preliminary objection regarding jurisdiction of the Small Causes Court to try the suit under section 41 of Presidency Act on the ground that the same was barred in view of the provisions of section 8 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). Section 8 of the Arbitration Act provides that a court is obliged to refer to arbitration a matter bought before it if there exists an arbitration agreement between the parties and the defendant applies for reference of the dispute to arbitration.

The Small Causes Court framed a preliminary issue regarding jurisdiction and granted ad interim relief to the Respondents³. The preliminary issue was eventually decided against the Petitioners and aggrieved by the decision, the Petitioners appealed in the Bombay High Court.

The Petitioners contended before the learned Single Judge that the earlier decisions of the Bombay High Court which had taken the view that the provisions of section 41 of the Presidency Act would prevail over Arbitration Act did not have occasion to consider the efficacy of section 5 of the Arbitration Act. Section 5 of the Arbitration Act provides as under:

“ Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in Part-I of the Act of 1996”.

According to the Petitioners, this was a non -obstante clause that would prevail over section 41 of the Presidency Act. The Single Judge also noted that section 2(3) of the Arbitration Act, which is also contained in Part- I stipulates that this part did not affect any other law for the time being in force, by virtue of which, certain disputes may not be submitted for arbitration. The Single Judge thus found it appropriate to refer the following question to Larger Bench for an authoritative pronouncement:

“Whether in view of the provision of section 5 of the Arbitration and Conciliation Act, 1996, If any Agreement between the Licensor and Licensee contains a clause for arbitration, the jurisdiction of the Small Causes Court under the Presidency Small Cause Courts Act, 1882 would be ousted?”

The Court observed that the State Legislature had amended Section 41 of the Presidency Act to its present form to address the issue of multiplicity of proceedings. The Larger Bench examined the Statement of Objects and Reasons⁴ while introducing the amendment and took the view that section 41 (1) is a special law containing a non-obstante clause, by virtue of which, exclusive jurisdiction is vested on Small Causes Court for adjudication of disputes specified therein between the licensor or licensee or a landlord and tenant. The Larger Bench also noted that the Arbitration Act is not within the excepted enactments referred to in section 41 (2) of the Arbitration Act.

The Larger Bench also looked into the question of whether section 41 of the Presidency Act was a law by virtue of which certain disputes may not be submitted to arbitration as stipulated in section 2 (3) of the Arbitration Act . The Court noted that though Section 41 of the Presidency Act did not expressly provide for exclusion of arbitration, since it has a non – obstante provision providing for exclusive jurisdiction to Small Causes Court, by necessary implication, it is a provision by virtue of which, disputes referred to therein, cannot be submitted to arbitration. In doing so, the Larger Bench relied on the decision of the Supreme Court in Natraj Studio Pvt. Ltd. vs. Navrang Studio⁵, wherein in context of the section 28 of the Bombay Rent Act, 1947, it was held that the provision was a law by virtue of which disputes contemplated therein could not be submitted to arbitration. The Larger Bench also relied on the decision of the Supreme Court in Mansukhlal Dhanraj Jain v. Eknath Vithal Ogale⁶ case wherein it was held that the provisions of Section 28 of the Bombay Rent Act are pari materia (relating to the same subject matter) to section 41 (1) of the Presidency Act.

The Court observed that Section 41 (2) of the Presidency Act is a special law which in turn has constituted special courts for adjudication of disputes specified therein between the licensor and licensee or a landlord and tenant. Thus the Court held that Section 5 of the Arbitration Act in a sense was not an absolute non-obstante clause and cannot affect the laws that have been in force and thus Section 41 of the Presidency Act falls within the ambit of Section 2 (3) of the Arbitration Act. As a result, even if the License Agreement contains an Arbitration clause, the exclusive jurisdiction of the Courts of Small Causes under Section 41 of the Presidency Act, is not affected in any manner.

Accordingly, the Larger Bench held 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 Presidency Act.

The judgment upholds earlier judgments and clearly lays down that an arbitration clause in a Leave and License Agreement or Lease Deed pertaining to property situated in Greater Mumbai would not be enforceable. Though in the instant case it was the licensee that benefited, the judgment is likely to prove advantageous for licensors and landlords, since the recent trend of judgments indicates a pro- landlord approach in settling disputes between landlords and tenants. However, resolving disputes in courts still continues to be a prolonged process and parties in dispute will have to wait for many years for the final outcome. Thus, while the judgment puts to rest the much debated issue of the validity of arbitration clauses in Leave and License or Lease Agreements executed in Greater Mumbai, it also exposes these ubiquitous arrangements to litigation. The already burdened litigation system will now see a surge in cases being filed under Leave and License and Lease Agreements, giving rise to a danger of abuse of the legal system, where often cases are filed to take benefit of systemic delay.

-   Gautam Dembla & Shafaq Uraizee-Sapre