Jurisdiction of Small Causes Court Under Section 41 Does Not Extinguish Arbitration Clause in Leave and License Agreements: Supreme Court

“Our jurisdiction is only to inspect or scrutinize the dealings between the parties for determination about the existence of an Arbitration Agreement. We are not to launch a laborious or a contested inquiry” – Supreme Court affirms narrow scope under Section 11(6A)

On January 5, 2026, the Supreme Court of India, in a significant judgment in Motilal Oswal Financial Services Ltd. v. Santosh Cordeiro & Anr., Civil Appeal No. 36 of 2026, upheld the High Court’s appointment of an arbitrator in a dispute arising under a Leave and License Agreement, despite objections that Section 41 of the Presidency Small Cause Courts Act, 1882 conferred exclusive jurisdiction on the Small Causes Court.

Rejecting the appellant's contention that such a statutory ouster rendered the arbitration clause invalid, the Court ruled that an arbitration clause cannot be treated as non-existent solely on the ground of Section 41 of the 1882 Act, especially at the stage of appointment under Section 11(6A) of the Arbitration and Conciliation Act, 1996.

 “Referral Court is not the appropriate forum to conduct a mini-trial… The Tribunal decides jurisdiction under Section 16”

The bench comprising Justice K.V. Viswanathan and Justice J.B. Pardiwala firmly reiterated the limited jurisdiction of the court under Section 11(6A) of the Arbitration and Conciliation Act:

“Our jurisdiction is only to inspect or scrutinize the dealings between the parties for determination about the existence of an Arbitration Agreement. We are not to launch a laborious or a contested inquiry.”

This approach, as the Court emphasized, reflects the legislative intent under Section 11(6A)—a provision that, though omitted by a 2019 amendment, remains in force as the omission has not been notified.

Relying on the authoritative 7-Judge Bench judgment in In Re Interplay Between Arbitration Agreements under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899, the Court clarified:

“The legislature confined the scope of reference under Section 11(6-A) to the examination of the existence of an arbitration agreement... The requirement of ‘existence’ draws effect from Section 7 of the Arbitration Act.”

Dispute Between Licensor and Licensee Over Monetary Claims, Not Possession

The case arose from a Leave and License Agreement dated 06.10.2017, entered into between Motilal Oswal Financial Services Ltd. (Appellant) and Santosh Cordeiro (Respondent) for commercial premises in Malad, Mumbai. The agreement, originally for 60 months, was extended to 96 months through an Addendum dated 13.03.2020, with a lock-in period of 72 months.

In 2020, the appellant invoked the force majeure clause due to the COVID-19 pandemic, surrendered possession, and demanded a refund of the security deposit. The respondent countered with a claim of over Rs. 94 lakhs towards unpaid license fees for the remainder of the lock-in period, invoking Clause 33, the arbitration clause.

The High Court of Bombay appointed an arbitrator under Section 11. The appellant challenged this before the Supreme Court, contending that under Section 41 of the Presidency Small Cause Courts Act, only the Small Causes Court had jurisdiction over such disputes and that the arbitration clause was invalid and inoperative.

Section 41 Doesn’t Extinguish Arbitration Clause: Arbitration Clause Not Inoperative or Against Public Policy

The appellant relied on the Full Bench decision of the Bombay High Court in Central Warehousing Corporation v. Fortpoint Automotive Pvt. Ltd., which held that arbitration clauses in license agreements concerning immovable property in Greater Bombay would be inoperative due to the exclusive jurisdiction of the Small Causes Court under Section 41.

However, the Supreme Court held that the reliance was misplaced. It distinguished the facts, noting that in Central Warehousing, the licensee was in possession of the premises, and the proceedings related to recovery of possession—whereas in the present case, possession had already been handed over in 2020, and the dispute was purely monetary.

Crucially, the Court held:

“Section 41 is a provision conferring jurisdiction on the Small Causes Court for certain types of disputes and cannot be interpreted to mean that ex proprio vigore, it neutralizes arbitration clauses in agreements.”

The Court also noted that the High Court judgment in Central Warehousing did not consider Section 28 of the Indian Contract Act, 1872, which expressly protects arbitration agreements as a valid exception to contracts in restraint of legal proceedings.

Court Emphasizes Doctrine of Kompetenz-Kompetenz: Arbitrator to Rule on Jurisdiction Under Section 16

The Supreme Court clarified that questions about whether a particular claim is for license fees or debt, or whether it falls within the jurisdiction of the Small Causes Court under Section 41, are not for the court to decide at the Section 11 stage.

“In exercise of our jurisdiction under Section 11, we are not concerned with the said dispute. That will be for the arbitrator to decide.”

Citing Section 16 of the Arbitration Act and reaffirming the doctrine of kompetenz-kompetenz, the Court explained that the arbitral tribunal is competent to rule on its own jurisdiction, including the existence and validity of the arbitration agreement.

Vidya Drolia-II Revisited: Mere Creation of a Specific Forum Doesn’t Impliedly Bar Arbitration

The Court also relied on Vidya Drolia v. Durga Trading Corporation [(2021) 2 SCC 1], particularly the para that stated:

“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.”

Thus, the Court held that Section 41 does not bar arbitration of monetary claims arising out of a Leave and License Agreement, especially when the issue is not possession or rent recovery per se, but contractual claims based on breach or premature termination.

Arbitration Clause Exists – Arbitrator to Continue Proceedings

Ultimately, the Supreme Court dismissed the appeal, upholding the High Court’s appointment of an arbitrator, holding that:

“An examination under Section 11(6-A) indicates that there exists an arbitration agreement between the parties.”

The Court also directed the arbitrator to conclude the proceedings within six months, leaving all other questions of arbitrability, jurisdiction, and substantive claims open for determination by the arbitral tribunal or appropriate remedies under law.

Date of Decision: 05 January, 2026