BRIJ RAJ OBEROI versus THE SECRETARY, TOURISM AND CIVIL AVIATION DEPARTMENT & ANR.

[2022] 7 S.C.R.

BRIJ RAJ OBEROI

THE SECRETARY, TOURISM AND CIVIL AVIATIONDEPARTMENT & ANR.

(Civil Appeal Nos. 5509-5510 of 2022)

AUGUST 18, 2022

[INDIRA BANERJEE AND C. T. RAVIKUMAR, JJ.]

Arbitration and Conciliation Act, 1996: s. 11(6) – Appointmentof an arbitrator – On facts, issue as regards reference of disputeCpertaining to lease deed between the parties, to the arbitrator –Held: Clauses in lease deed cannot be read and construed inisolation – Lease deed is to be construed as whole – All disputesbetween the parties to the lease with regard to renewal and/or non-renewal, the period of renewal and the quantum of rent would haveDbe decided by the Arbitrator – Issue of arbitrability of the dipsuteover non-renewal of the lease is within the realm of the arbitraltribunal/arbitrator – Thus, the Division Bench erred in rejectingthe application of the appellant u/s. 11(6) for appointment of anarbitrator – Arbitration clause cannot be rendered otiose by refusalof the respondent State to renew the lease – Thus, the impugnedEjudgment and order is set aside – Appointment of an arbitrator toadjudicate the disputes between the parties.

Allowing the appeals, the Court

HELD: 1.1 The Division Bench erred in arriving at theFfinding that the arbitration clause could only be invoked if theproposal for renewal was accepted by the lessor, but there wasdispute with regard to the period of renewal or there was disputewith regard to the quantum of rent proposed to be paid by thelessee to the lessor. [Para 14][87-D-E]

G1.2 Clauses in lease deed cannot be read and construedin isolation. The lease deed is to be construed as whole. Clause4(xiii) has to be read with Clause 3 which clearly provides thatthe initial term of the lease under the deed shall be period of 24years from 1st June 1997 to 31st May 2021 and shall be renewablefor such acceptance of the lessee’s offer in terms of Clause 4(xiii).H

Prima facie, the parties to the lease deed have used theexpression “shall” which connotes command. If the lesseeoffered its terms for renewal or extension of the lease within thetime stipulated in the lease, prima facie the same would have tobe accepted. However, if the quantum of rent or the period oflease could not be mutually agreed upon, the same wouldnecessarily have to be referred to arbitration by an Arbitrator tobe appointed by the Chief Justice of the Sikkim High Court.[Paras 15, 16][87-C-F, G-H]1.3 The Division Bench erred in rejecting the applicationof the appellant under Section 11(6) of the Arbitration andConciliation Act, 1996 for appointment of an Arbitrator. Thedispute arising out of non-renewal of the lease is clearly arbitrable.The deed of lease provided “that the initial terms of the leaseunder this deed shall be period of twenty four years from01.06.1997 to 31.05.2021 and shall be renewable for suchacceptance of the lessee’s offer in terms of clause 4(xiii)hereinafter”. Clause 4(xiii) provides that the appellant-lesseeshall, in the last year of the lease tenure and not later than sixmonths prior to the expiry of the present lease, communicate inwriting to the lessor, his terms and conditions for the renewal ofthe present lease and if the same is accepted by the lessor, thenthe present lease may be renewed for such further period and onsuch rent as may be mutually agreed. The arbitration clausecannot be rendered otiose by refusal of the respondent State torenew the lease. The respondent State may have formulated apolicy for encouraging self-employment of local youth who areduly qualified and competent to run the hotel. Such policy decisioncannot impact an existing agreement with renewal clause. Alldisputes between the parties to the lease with regard to renewaland/or non-renewal, the period of renewal and the quantum ofrent would have be decided by the Arbitrator. The issue ofarbitrability of the dipsute over non-renewal of the lease is withinthe realm of the Arbitral Tribunal/Arbitrator. [Paras 18, 19][89-H; 90-A-E]

1.4 The impugned judgment and order is set aside. Anarbitrator is appointed to adjudicate the disputes between theparties. The Arbitrator is requested to complete the proceedings

Aas early as possible preferably within the stipulated period. [Para20][90-F-G]

Vidya Drolia & Ors. v. Durga Trading Corporation(2021) 2 SCC 1 - referred to.

Case Law Reference

(2021) 2 SCC 1referred toPara 17

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 5509-5510 of 2022.

From the Judgment and Order dated 18.11.2021 of the High CourtCof Sikkim at Gangtok in Arb. A. No.02 of 2021 and Arb. P. No. 02 of2021.

Mukul Rohatgi, Sr. Adv., Saurav Agrawal, Debarshi Dutta, SahilTagotra, Aayush Kevlani, Abhishek Pandey, Ms. Kavya Pahwa, Advs.for the Appellant.D

Dr. M. S. Domat Bhutia, AAG, K. V. Vishwanathan, Sr Adv.,Raghvendra Kumar, Shashank Singh, Varun Singh, Advs. for theRespondents.

The Judgment of the Court was delivered by

EINDIRA BANERJEE, J.

1. Leave granted.

2. These appeals are against common judgment and final orderdated 18[th] November 2021 passed by the High Court of Sikkim at Gangtokallowing Arbitration Appeal No.02 of 2021 filed by the Respondents,Fsetting aside the impugned order dated 31[st] May 2021 passed by theCommercial Court on an application of the Appellant under Section 9 ofthe Arbitration and Conciliation Act, 1996, hereinafter referred to as“the 1996 Act”, and also dismissing Arbitration Petition No. 02 of 2021filed by the Appellant under Section 11 of the 1996 Act for appointmentof an Arbitrator.G

3. The State of Sikkim, impleaded as Respondent No.2 in thisappeal, is the absolute owner of the property bearing Plot No.309, PaljorStadium Road, Gangtok, East Sikkim, known as Norkhill Hotel,hereinafter referred to as the ‘said property’ along with its land, buildings,annexe, servants quarters and garages.H

4. By registered deed of lease dated 9[th] December 1997, theRespondent State leased out the said property to the Appellant on termsand conditions stipulated in the said deed of lease. Some of the termsand conditions of the Deed of Lease are set out hereinbelow forconvenience:-

2. The consideration of the lease of the premises fullydescribed in the schedule I below, the lessee undertakes topay to the lessor the sum of Rs. 30.00 lakhs (Rupees Thirtylakhs) only per annum with 10% (ten percent) increasecompounded every three years in quarterly installments ofRs. 7,50,000/- (Rupees Seven Lakhs Fifty Thousand only)payable by the 7[th] April, 7[th] July, 7[th] October and7[th] December of each year and the first installment shall bepayable on the date of the execution of this deed.

3. That the initial terms of the lease under this deed shall be aperiod of twenty four years from 01.06.1997 to 31.05.2021(First day of June one thousand nine hundred and ninetyseven to the thirty first day of May two thousand and twentyone) and shall be renewable for such acceptance of thelessee’s offer in terms of clause 4(xiii) hereinafter.

4. The lessee covenants with the Lessor as follows:

i) The lessee shall pay the lease amounts on the dates aforesaidin clause 2 hereinabove.

ii) The lessee shall pay the increased lease amounts at therate of 10% (ten percentage) to be compounded every threeyears as follows:

a) from 01.06.2000 to 31.05.2003 Rs. 33,30,000.00 perannum.

b) from 01.06.2003 to 31.05.2006 Rs. 36,30,000.00 perannum.

c) from 01.06.2006 to 31.05.2009 Rs. 39,93,000.00 perannum.

d) from 01.06.2009 to 31.05.2012 Rs. 43,92,300.00 perannum.

[2022] 7 S.C.R.

e) from 01.06.2012 to 31.05.2015 Rs. 48,31,530.00 perannum.

f) from 01.06.2015 to 31.05.2018 Rs. 53,14,683.00 perannum.

g) from 01.06.2018 to 31.05.2021 Rs. 58,46,151.30 perannum.

v) The lessee shall keep the leased premises in good orderand condition and in the same condition in which it washanded over the lessee with reasonable wear and tear forwhich he shall not be entitled to make any claim subsequently.

vi) The lessee shall comply with all the provisions of therelevant enactments and regulations thereunder and with anyother obligations imposed by the local laws in regard to thelease premises.

x) The lessee shall upon termination and/or expiry of the leasequit and vacate the leased premises.

xi) The lessee shall give three months notice in writing of hisintention to terminate this agreement if he wants to vacate thepremises before the expiry of the lease period. If such noticeis given the lessee shall be entitled to vacate the leasedpremises on expiry of the term of notice.

xii) The lessee if he fails and neglects to pay two consecutivequarterly lease amounts within the period situated in clause2 the lessee shall become defaulter in payment of the leaseamount and on and from the eight day of such second andconsecutive defaulting month, the lessee shall be deemed tobe trespasser in the demised premises.

xiii) The lessee shall in the last year of the lease tenure andnot later than six months prior to the expiry of the presentlease, communicate in writing to the lessor his terms andconditions for the renewal of the present lease and if the sameis accepted by the lessor, then the present lease may be renewedfor such further period and on such rent as may be mutually

agreed upon between the parties thereto, failing which thematter shall be referred to arbitration by an arbitrator to beappointed by the Chief Justice of the Sikkim High Court.

xvii) The lessee shall after the expiry of the tenure of thislease or sooner determination thereof, shall peacefully andquietly surrender to the lessor, the possession of the demisedpremises in the condition in which the same has been deliveredto the lessee.

5. The lessor covenants with the lessee as follows:

ii) The lessee upon paying the lease amount and observingand performing the other covenants and conditions andagreements to be observed and performed, shall peaceablyhold and enjoy the leased premises during the tenure of thislease without any interruption or disturbance.

6. In the event of any breach of the terms and conditions ofthe agreement by the lessee, the agreement/terminated by thelessor, at his option, after giving one months notice in writingof its intention to do so and the lessor shall be entitled toexercise its right of reentry, into the leased premises withoutprejudice to its right to recover all arrears of rent and otherclaims for damages caused by such breach of the terms andconditions hereinbefore covenanted.”

5. The lease was due to expire by efflux of time on 31[st] May2021. By letter dated 12[th] November 2020 addressed to the RespondentState, through the Secretary, Tourism Department, the Appellant offeredits terms and conditions for renewal of the lease of the said property, fora further period of 30 years, at an annual rent of Rs.64,30,766.43 peryear, that is, 10% more than annual rent being paid then, with escalationof 10% every three years.

6. By letter dated 17[th] May 2021 written in response to theAppellant’s letter dated 12[th] November 2020, Dr. K. Jayakumar, IAS,Additional Chief Secretary, Department of Tourism and Civil Aviation,Gangtok rejected the offer of the Appellant for renewal of lease of the

Aproperty in question. The said letter is extracted hereinbelow forconvenience:-

“...This has reference to your request for renewal of leaseownership of Norkhill hotel period for further period of30 years vide your letter dated 12 Nov. 2020.

2. In the context of the above, this is to inform you that theState Government has approved policy as part of executingthe vision for bringing about transformative changes in thetourism sector, which interalia envisages professional methodsof managing tourism infrastructure, assets and facilities inthe State.

3. Efforts are being made for mobilization of revenues for thegovernment with effective mechanisms, with effectivemechanisms, with associated enforcement of policies for theirprofessional regulation, processes for deciding on leaseownership, and for monitoring and enforcement of regulations.Assessment and revenue collections are to be realistic, withfocus on quality assurance and standards, in keeping withthe image and branding efforts, to make Sikkim preferreddestination for tourism.

E4. The State Government has considered the fact that Norkhillproperty being heritage hotel located at most commandingplace near the Palzor Stadium has considerable significanceand would need to be treated as premium property with apotential to generate better revenues for the State exchequer,in order that much needed funds to operate and manage theFstate machinery< especially in the context of the currentpandemic is ensured.

5. Furthermore, in the present context, energetic enthusiasticqualified younger generation hoteliers having the experienceof having served in the hotel industry in Sikkim and outsidethe State are available. It would only be fair for the State toprovide an opportunity for them to also make their offers forlease ownership, in terms of providing augmented quality ofvalue added services and spelling out their capability togenerate and offer more revenues for the state.

6. Hence, the State has decided that it would be in publicinterest to adopt process with stringent qualifications andbid participating criteria, and determine appropriate leaseowner through selection process. This approach wouldensure that capacities of emerging, capable, professionalhoteliers who provide more value added services and revenuescan be given the opportunity to participate for lease ownershipselection.

7. Hence, the Government has after crateful considerationand application of mind, has decided in public interest that,your request for consideration of renewal of lease ownershipand extension of tenure of lease in respect of Nikhill hotelwould not be accepted. The decision is also in keeping withthe principles laid down by the Hon’ble Supreme Court forletting out Government properties, in number of cases,which lays down that Public property partakes the characterof trust and that, public purpose would be served only bygetting the best price for government property, so that largerrevenue coming into the coffers of the State administrationcan be utilized for beneficent activities to subserve publicpurpose namely, the welfare State...”

7. By letter dated 21[st] May 2021, the Appellant requested theRespondents to refrain from taking steps to hand over the hotel to thirdparty until the disputes and differences were decided through arbitration.

8. The Appellant filed an application under Section 9 of the 1996Act, being Arbitration Suit No.05 of 2021 in the Commercial Court, beingthe Court of the District Judge, East Sikkim at Gangtok.

9. On or about 28[th] May 2021, the Respondent State filed itsResponse to the application under Section 9 of the 1996 Act, contendingthat the Appellant had misconstrued Clause 4(xiii) of the LeaseAgreement. It was contended that as the Respondent State had notaccepted the offer made by the Appellant, there was no case forarbitration. Read properly, clause 4(xiii) would permit reference ofdisputes with regard to the quantum of rent and the period of renewal,to arbitration. Furthermore, under clause 4(xvii), upon termination and/or expiry of the lease, the Appellant was required to quit and vacate thesaid property.

A10. By an order dated 31[st] May 2021, the learned Judge,Commercial Court restrained the Respondent State from disturbing theAppellant’s possession of the property in question, until thecommencement of the arbitral proceedings.

11. The Respondent State filed an appeal from the said orderBdated 31[st] May 2021 under Section 37 of the 1996 Act read with Section13 of the Commercial Courts Act, 2015 and Article 227 of the Constitutionof India being Arbitration Appeal No. 02 of 2021. The Appellant, on theother hand, filed an application under Section 11 of the 1996 Act, readwith Section 10 of the Commercial Courts Act, 2015 being ArbitrationPetition No.02 of 2021 for appointment of an Arbitrator.C

12. By the impugned judgment and order, the Division Bench ofthe High Court allowed Arbitration Appeal No. 02 of 2021, set aside theorder dated 31[st] May 2021 passed by the Commercial Court and alsodismissed Arbitration Petition No.02 of 2021 filed by the Appellant underSection 11 of the 1996 Act, for appointment of an Arbitrator.D

13. The Division Bench, inter alia, held:-

“9. As stated hereinbefore, the arbitration clause is set outunder clause 4 (xiii). plain reading of this clause revealsthat it can be invoked only if the following two situationsEarise, once the proposal for renewal of the present lease -communicated in writing by the lessee to the lessor within thestipulated time frame is accepted by the lessor:-

i. If there is dispute with regard to the further period ofrenewal of the present lease, as proposed; and

ii. If there is dispute with regard to the quantum of rentproposed to be paid by the lessee to the lessor for theextended period of lease.

10. In the instant case, the State expressed its inability to renewthe lease through its letter dated 17[th] May, 2021. It may havebeen written belatedly, however, it was before expiry of thelease period. As consequence, the result of this letter dated17[th] May, 2021, tantamount to final decision on the part ofthe State not to renew the present lease in favour of Brij RajOberoi.

11. In such circumstances, none of the disputes - which canbe termed as arbitrable dispute - as specified hereinbefore,are present in the facts of the instant case. In absence of anyarbitrable dispute, an order could not have been passed bythe Learned Commercial Court under section 9 of theArbitration Act.

12. Consequently, Arbitration Appeal No. 02 of 2021, isallowed and the impugned judgment and order dated31.05.2021, passed by the learned Commercial Court on theapplication filed by Brij Raj Oberoi under section 9 of theArbitration and Conciliation Act, 1996 is set aside. TheArbitration Petition No. 02 of 2021 seeking appointment ofArbitrator under section 11 of the Arbitration and ConciliationAct, 1996 read with section 10 of the Commercial Courts Act,2015 is also dismissed. The parties to bear their own costs.”

14. In our considered opinion, the Division Bench fell in error inarriving at the finding that the arbitration clause could only be invoked ifthe proposal for renewal was accepted by the lessor, but there wasdispute with regard to the period of renewal or there was dispute withregard to the quantum of rent proposed to be paid by the lessee to thelessor.

15. It is well settled that clauses in lease deed cannot be readand construed in isolation. The lease deed is to be construed as whole.Clause 4(xiii) has to be read with Clause 3 which clearly provides thatthe initial term of the lease under the deed shall be period of 24 yearsfrom 1[st] June 1997 to 31[st] May 2021 and shall be renewable for suchacceptance of the lessee’s offer in terms of Clause 4(xiii). Clause 4(xiii)has wrongly been printed as Clause 4(xii). It is not in dispute that it is tobe read as Clause 4(xiii) and all concerned have proceeded on the basisthat the offer is to be in terms of Clause 4(xiii).

16. Prima facie, the parties to the lease deed have used theexpression “shall” which connotes command. If the lessee offered itsterms for renewal or extension of the lease within the time stipulated inthe lease, prima facie the same would have to be accepted. However, ifthe quantum of rent or the period of lease could not be mutually agreedupon, the same would necessarily have to be referred to arbitration byan Arbitrator to be appointed by the Chief Justice of the Sikkim HighCourt.

A17. In Vidya Drolia & Ors. v. Durga Trading Corporation[1], athree-Judge Bench of this Court held :-

“151.....Broad or narrow interpretations of an arbitrationagreement can, to great extent, effect coverage of aretroactive arbitration agreement. Pro-arbitration broadBinterpretation, normally applied to international instruments,and commercial transactions is based upon the approach thatthe arbitration clause should be considered as per the truecontractual language and what it says, but in case of doubtas to whether related or close disputes in the course of parties’business relationship is covered by the clause, the assumptionCis that such disputes are encompassed by the agreement. Therestrictive interpretation approach on the other hand statesthat in case of doubt the disputes shall not be treated ascovered by the clause. Narrow approach is based on thereason that the arbitration should be viewed as an exceptionDto the court or judicial system. The third approach is to avoideither broad or restrictive interpretation and instead theintention of the parties as to scope of the clause is understoodby considering the strict language and circumstance of thecase in hand. Terms like “all”, “any”, “in respect of”, “arisingout of”, etc. can expand the scope and ambit of the arbitrationEclause. Connected and incidental matters, unless thearbitration clause suggests to the contrary, would normallybe covered.

152. Which approach as to interpretation of an arbitrationagreement should be adopted in particular case wouldFdepend upon various factors including the language, theparties, nature of relationship, the factual background inwhich the arbitration agreement was entered, etc. In case ofpure commercial disputes, more appropriate principle ofinterpretation would be the one of liberal construction as thereGis presumption in favour of one-stop adjudication.

153. Accordingly, we hold that the expression “existence ofan arbitration agreement” in Section 11 of the ArbitrationAct, would include aspect of validity of an arbitrationagreement, albeit the court at the referral stage would apply

the prima facie test on the basis of principles set out in thisjudgment. In cases of debatable and disputable facts, andgood reasonable arguable case, etc., the court would forcethe parties to abide by the arbitration agreement as the ArbitralTribunal has primary jurisdiction and authority to decide thedisputes including the question of jurisdiction and non-arbitrability.

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154.3. The general rule and principle, in view of the legislativemandate clear from Act 3 of 2016 and Act 33 of 2019, andthe principle of severability and competence-competence, isthat the Arbitral Tribunal is the preferred first authority todetermine and decide all questions of non-arbitrability. Thecourt has been conferred power of “second look” on aspectsof non-arbitrability post the award in terms of sub-clauses(i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section34(2)(b) of the Arbitration Act.154.4. Rarely as demurrer the court may interfere at Section8 or 11 stage when it is manifestly and ex facie certain thatthe arbitration agreement is non-existent, invalid or thedisputes are non-arbitrable, though the nature and facet ofnon-arbitrability would, to some extent, determine the leveland nature of judicial scrutiny. The restricted and limitedreview is to check and protect parties from being forced toarbitrate when the matter is demonstrably “non-arbitrable”and to cut off the deadwood. The court by default would referthe matter when contentions relating to non-arbitrability areplainly arguable; when consideration in summaryproceedings would be insufficient and inconclusive; whenfacts are contested; when the party opposing arbitrationadopts delaying tactics or impairs conduct of arbitrationproceedings. This is not the stage for the court to enter into amini trial or elaborate review so as to usurp the jurisdictionof the Arbitral Tribunal but to affirm and uphold integrityand efficacy of arbitration as an alternative dispute resolutionmechanism.”

18. In the considered opinion of this Court, the Division Bench fellin error in rejecting the application of the Appellant under Section 11(6)

Aof the 1996 Act for appointment of an Arbitrator. The dispute arising outof non-renewal of the lease is clearly arbitrable. As observed above, thedeed of lease provided “That the initial terms of the lease under thisdeed shall be period of twenty four years from 01.06.1997 to31.05.2021 (First day of June one thousand nine hundred andninety seven to thirty first day of May two thousand and twentyBone) and shall be renewable for such acceptance of the lessee’soffer in terms of clause 4(xiii) hereinafter”.

19. Clause 4(xiii) provides that the Appellant-lessee shall, in thelast year of the lease tenure and not later than six months prior to theexpiry of the present lease, communicate in writing to the lessor, hisCterms and conditions for the renewal of the present lease and if thesame is accepted by the lessor, then the present lease may be renewedfor such further period and on such rent as may be mutually agreed.The arbitration clause cannot be rendered otiose by refusal of theRespondent State to renew the lease. The Respondent State may haveDformulated policy for encouraging self-employment of local youth whoare duly qualified and competent to run the hotel. Such policy decisioncannot impact an existing agreement with renewal clause. All disputesbetween the parties to the lease with regard to renewal and/or non-renewal, the period of renewal and the quantum of rent would have bedecided by the Arbitrator, as observed above. The issue of arbitrabilityEof the dipsute over non-renewal of the lease is within the realm of theArbitral Tribunal/Arbitrator.

20. The appeals are allowed. The impugned judgment and orderis set aside. Justice Bhaskar Bhattacharya, Former Chief Justice of GujratHigh Court and Former Chairman of the Sikkim Law Commission isFappointed Arbitrator to adjudicate the disputes between the parties. TheArbitrator is requested to complete the proceedings as early as possiblepreferably within three months from the date of communication of thisorder. Needless to mention that the learned Arbitrator will not be influencedby any observations made in this order on the merits and/or arbitrabilityGof the disputes.

21. The order of status quo passed by this Court shall continue fora period of three months from today or until further orders of the ArbitralTribunal, whichever is earlier.

HNidhi Jain