The Bombay High Court in the matter of Bafna Motors Private Limited v. Amanulla Khan [Arbitration Petition No. 340 of 2019 dated May 5, 2022], has held that disputes between licensor and licensee over the licensor refusing to refund the security deposit to the licensee alleging damage caused to the licensed premises can be referred to arbitration.

Facts:

Bafna Motors Private Limited (“Applicant”) and the Amanulla Khan (“Respondent”) executed a Leave and License Agreement dated July 2, 2012 (“Agreement”). The term of license was five years from July 1, 2012 to June 30, 2017 and there was to be lock-in period for two years. Thereafter either party was entitled to revoke/ terminate/ determine the Agreement by giving three months’ notice in writing to the other party. A sum of Rs. 12 lakh was to be deposited by the Applicant as a security deposit to enforce due compliance of the Agreement and the said deposit of Rs. 12 lakhs were be returned to the Applicant against peaceful and vacant possession of the premises, after deductions, if any, on account of the arrears of license fee charges or expenses of repair or damages caused by Applicant to the premises. The Agreement also provided for a dispute resolution mechanism whereunder parties agreed to refer any dispute in connection with the Agreement to an arbitrator to be appointed by mutual consent. The Applicant issued a notice to the Respondent, intimating that it would be vacating the licensed premises and also made a demand for refund of security deposit. The Respondent did not agree to the termination of the Agreement. Additionally, it was contended by Respondent that on a visual inspection of the subject premises, it was noticed that a number of equipments, tools, gadgets and furnitures were either missing or severely damaged. A claim of Rs. 14,57,000/- was made towards the damages on the aforesaid count. After a dispute arose between the parties under the Agreement, the Applicant filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”) before the Bombay High Court seeking appointment of an arbitrator to arbitrate all the disputes.

Submissions:

Applicant:

The Applicant submitted that since it claimed refund of the security deposit under the terms of the Agreement, the dispute would not fall within the exclusive jurisdiction of the Court of Small Causes under Section 41 of the Presidency Small Cause Courts Act, 1882 (“1882 Act”).

The Applicant averred that the bar under Section 41 of the 1882 Act applied only when the dispute is relating to recovery of possession of the licensed premises, rent or license fee. Thus, the applicant contended that claim for refund of the security deposit does not fall within the ambit of exclusive jurisdiction of the Court of Small Causes and sought an appointment of arbitrator under the arbitration agreement contained in the Agreement.

Respondent:

The Respondent submitted before that the disputes arising out of the Agreement were exclusively amenable to the jurisdiction of Court of Small Causes, Mumbai under Section 41 of the 1882 Act. The Respondent further contended that reference to arbitration would be against the public policy and, therefore, the arbitration agreement contained in the Agreement was invalid and inoperative.

The Respondent also submitted that the Applicant had unilaterally vacated the subject premises and had either taken away the valuable equipments from the licensed premises or damaged them. The Respondent therefore submitted that he had incurred huge expenses towards repairing the damaged equipments and was in the process of instituting a suit for the recovery of the amount in the Court of Small Causes, Mumbai.

Decision of the Court:

The Court noted Section 2(3) of the Act which provides that Part I of the Act shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration.

The Court observed that Section 41(1) of the 1882 Act provides that the Court of Small Causes shall have jurisdiction to entertain and try all suits and proceedings between a licensor and licensee, or between a landlord and tenant, relating to the recovery of possession of any immovable property situated in Greater Bombay, or relating to the recovery of the licence fee, charges or rent.

The Court thus ruled that in view of the conjoint reading of Section 2(3) of the Act and Section 41 of the 1882 Act, if a special law provides for resolution of the disputes exclusively through a machinery created thereunder and implies that such disputes are not amenable to arbitration, Part I of the Act will not be attracted.

The High Court observed that a Full Bench of the Bombay High Court in the case of Central Warehousing Corporation v. Messrs. Fortpoint Automotive Private Limited [2010 (1) All MR 497], had ruled Section 41 of the 1882 Act falls within the ambit of Section 2(3) of the Act and, therefore, even if the Agreement contains an arbitration agreement, the exclusive jurisdiction of the Courts of Small Causes under Section 41 of 1882 Act is not affected in any manner. The Court had held that the arbitration agreement incorporated in the Agreement, in such cases, would be invalid and inoperative since it would be against public policy to allow the parties to contract out of the exclusive jurisdiction of the Small Causes Courts.

However, the Court observed that the Bombay High Court in the case of Brainvisa Technologies Private Limited v. Subhash Gaikwad (HUF), [Arbitration Application NO. 195 of 2010, dated September 14, 2012] had ruled that a suit for recovery of security deposit does not constitute a suit for recovery of "licence fee or charges or rent" as provided under Section 41(1) of the 1882 Act. The Court had held that though licence fees, charges and rent are periodical payments made for use and occupation, a security deposit is a form of security obtained from the licensee. Thus, the Court had ruled that a claim for recovery of security deposit and damages/ compensation would not fall within the exclusive jurisdiction of the Court of Small Causes.

The Court reiterated that a dispute over the refund of security deposit, as per the terms of a License Agreement, does not fall within the ambit of the exclusive jurisdiction of the Court of Small Causes under Section 41 of the 1882 Act.

The Court held that, where the parties to a leave and license agreement were governed by an arbitration agreement, determination of the dispute relating to recovery of the security deposit under the said Agreement through arbitration is legally permissible.

The Court observed that the Respondent did not claim that any amount was due to it towards license fee or other charges. The Court noted that the Respondent essentially claimed the cost of items which were allegedly lost or damaged by the Applicant. The Court therefore held that the claims raised by the Respondent were primarily in the nature of damages, and the expression "charges" as provided under Section 41 of the 1882 Act cannot subsume in its fold a claim for damages.

The Court accordingly held that the claim raised by the Respondent, with respect to withholding of security deposit on the ground that the Applicant was liable to pay damages to the respondent, did not fall within the exclusive jurisdiction of the Court of Small Causes. Thus, the Court ruled that the said dispute was amenable to arbitration.

The application was thus, allowed and a sole arbitrator was appointed to adjudicate upon claims and counter claims, if any between the parties.

Please find attached a copy of the judgment.

This update has been contributed by Luckyraj Indorkar (Counsel).

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