“An ounce of mediation is worth a pound of arbitration and a ton of litigation”
— Joseph Grynbaum
Arbitration has traditionally been a key component in myriads of legal contracts, including agreements for sale of real estate and has been perceived as time efficient and cost-effective alternative to litigation. In the context of an agreement for sale under the Real Estate Regulatory Authority (“RERA”) and recent approach of the Hon’ble Bombay High Court, a paradigm shift is noticed in weighing the efficacy and relevance of an arbitration clause in agreements between the promoter and homebuyer.
Shift in the dispute resolution landscape:
In the past decade, the Real Estate (Regulation and Development) Act 2016 was introduced with an object to enhance transparency, accountability, and efficiency in the real estate sector. Before the advent of RERA, homebuyers often found themselves in a vulnerable position.
RERA attempted to introduce expeditious resolution of disputes between developers and homebuyers. The Act mandates that homebuyers can approach the Authority or the Appellate Tribunal in case of grievances, bypassing pre-existing mechanisms under Consumer Protection Act as well as Arbitration. RERA specifically includes provisions which address issues such as delayed possession, non-compliance of project specifications and other contractual breaches. As a result, homebuyers have a direct and statutory mechanism for redressal.
Are RERA disputes ‘non-arbitrable’?
RERA exercises it jurisdiction upon such projects which are registered under its realm. It also has the jurisdiction to decide which real estate projects must be registered and which ones do not require registration. It mandates that disputes related to the performance of the contract (e.g., delays in possession, defective construction, non-payment, etc.) must be brought before the RERA or the Real Estate Appellate Tribunal (REAT). These authorities are empowered to resolve matters concerning real estate transactions, and thus, disputes covered under RERA fall under their jurisdiction. Including an arbitration clause in a RERA agreement for sale may conflict with the mandatory provisions of RERA, which require disputes to be first addressed by the RERA authority and, if necessary, appealed to the Appellate Tribunal. This may override the agreement to arbitrate because, for matters under RERA jurisdiction, the statutory process takes precedence. Consequently, the reliance on arbitration clauses in RERA Agreements for Sale is diminishing as the law itself provides an alternative dispute resolution mechanism that better serves the interests of homebuyers.
Recently, in Rashmi Realty Builders Pvt. Ltd. vs. Rahul Rajendrakumar Pagariya & Ors.[1], the Hon’ble Bombay High Court framed and answered in the negative a question of law in the Second Appeal being;
“Whether the jurisdiction of Real Estate Regulatory Authority established under Section 20 of the Real Estate Regulation and Development Act, 2016 is ousted, if the agreement between the promoter and the allottee contains arbitration clause?“
While passing the Order, the Hon’ble Court made certain crucial observations. It pondered over non-arbitrable disputes in light of the guidelines set by the Apex Court in Booz Allen and Hamilton INC vs. SBI Home Finance Limited & Ors.[2] as well as Vidya Drolia & Ors. vs. Durga Trading Corporation[3]. The Apex Court, in Vidya Drolia (supra) had held that in rem disputes, or those involving public interest, such as tenancy rights, land laws, or disputes under public law, are generally not arbitrable. Similarly, as per Booz Allen (supra); the well-recognised examples of non-arbitrable disputes are:
- Disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
- Matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
- Guardianship matters;
- Insolvency and winding-up matters;
- Testamentary matters (grant of probate, letters of administration and succession certificate); and
- Eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.
The Hon’ble Bombay High Court, in Rashmi Realty (supra) observed that, “In the peculiar nature of disputes under RERA, although a dispute may be filed by an individual allottee against promoter, however the decision will affect the plot and building i.e. rights of other allottees and rights of association of allottees may also be affected. Thus, the dispute covered by RERA cannot be termed as “a right in personam“. It further went on to observe that the parameters for determining whether a dispute is non-arbitrable highlight that disputes under RERA have an “Erga Omnes effect” i.e. they impact not only the individual allottee and promoter but also other allottees and the Association of Allottees. Since such disputes affect a wider group, including third parties, it was concluded that disputes between an individual allottee and promoter under RERA are non-arbitrable, as they involve broader public interests beyond just the two parties involved.
Interplay between the frameworks of Arbitration and RERA:
So, when it comes to RERA agreement for sale between promoters and homebuyers, the question to ponder about is the need of an Arbitration Clause when the disputes with respect to interpretation of the agreement is rendered non-arbitrable. It is a settled position under the law that an Arbitration clause shall not oust the jurisdiction of RERA and also that the provisions of the Act were to be in addition to, and not in derogation of, the provisions of any other laws.[4]. It is also a settled position that Arbitrators shall not have the authority to address matters that fall squarely within the scope of RERA to adjudicate, such as issues related to project registration or violations of statutory obligations by the promoters.
Also, as per Section 16 of the Arbitration and Conciliation Act, 1996; the Arbitrator has the authority to determine whether it has jurisdiction to hear a dispute and to rule on objections raised by any party concerning its jurisdiction. When a dispute arises between the promoter and the homebuyer and there is an arbitration clause in the agreement, Section 16 becomes relevant in determining whether the Arbitral Tribunal has the jurisdiction to hear the matter. If one of the parties challenges the jurisdiction of the Tribunal (e.g., claiming that the dispute is not arbitrable under the agreement or is governed by RERA provisions) and if the tribunal rules on its jurisdiction under Section 16, then it is unlikely that such ruling will sustain. Such ambiguity in scope to choose the forum in the event of a dispute will only create challenges for home buyers.
Conclusion:
It is opined that RERA’s exclusive jurisdiction over real estate disputes shall render futile, any attempts to govern the contracts between promoter and homebuyer through Arbitration. An Arbitration clause could still be utilized for certain disputes related to such breach of contract which do not directly impacting consumer protection. However, the requirement of carving out a dispute resolution mechanism mutually agreed between promoter and allottee in an agreement for sale has diminished to a large extent. It can only be hoped that we do not end up with tons of litigation which could have been resolved in an ounce of alternate dispute resolution mechanism.
– Authored by Sana Khan, Associate Partner
References
[1] BHC Second Appeal No.434 Of 2023
[2] (2011) 5 SCC 532
[3] (2021) 2 SCC 1
[4] Section 88 and 89 of the Real Estate (Regulation and Development) Act 2016
