Applicability of S 69(3) Partnership Act to Arbitration- Part IV

In the last three posts on this subject, we had dealt with the impact of S 69(3) of the Indian Partnership Act on arbitration. The purpose of dealing with this topic was to critically analyse the Madras High Court judgement of Texfield Engineers v. Texteema Engineering Industries. The said posts can be accessed from here, here and here. We had, in these three posts, dealt in slight detail with the said subject. In this post, we have two aims-One is to summarize, from the said three posts, our analysis of the law on the point. Secondly, we would see whether Texfield v Texteema was correctly decided. First, the summary:

1. As per S 69 Indian Partnership Act, no suit can be filed on behalf of an unregistered partnership firm for disputes in respect of a contract entered into with a third party. This bar in S 69 would equally apply to arbitration proceedings. 
2. The two judge bench (consisting of Mr. Justice D.Murugesan & Mr. Justice C.S.Karnan) of the Madras High Court in Indian Oil Corporation v. Devi Constructions held that when parties have mutually agreed to enter into a contract, one of the parties cannot later contend that it is not obligated to perform its obligations of the contract because of S 69 Indian Partnership Act. This decision is incorrect. 
3. The law is not very clear on the question as to whether it is the Chief Justice (hereinafter, a reference to Chief Justice also includes his designate) who decides the arbitrability question in respect of a contractual claim by an unregistered partnership firm (similar to the arbitrability issue is the issue of limitation. 
4. The third party would be saved from the unnecessary costs of arbitrating on an issue which the court can decide summarily, based simply on affidavits and documents. 
5. Going by the rationale of SBP & Co. v. Patel Engineering (right or wrong it might be), the question as to whether S 69 barred reference to arbitration ought to be decided by the court. 
6. Prior to SBP & Co. v. Patel Engineering, the law on this issue was occupied by the decision of the five judge bench of Supreme Court in Konkan Railway Corporation v. Rani Constructions (2002), which affirmed the three judge bench decision of the Supreme in Konkan Railway Corporation v. Mehul Constructions (2000). The role of the Chief Justice under S 11 was merely to act as a tribunal constituting authority in case of failure of the parties or the agreed institution to do so. Hence, all questions pertaining to arbitrability were to be taken before the arbitral tribunal. 
7. This meant that any argument that a party has waived its right to object to the jurisdiction of the arbitral tribunal on arbitrability grounds (if such waiver is permitted by the law) should be raised before the arbitral tribunal and not the court [S 16(2)]. However, after SBP & Co. v. Patel Engineering, the Chief Justice was bound to decide on certain questions, including questions pertaining to arbitrability. This meant that an objection to reference to arbitration/ appointment of arbitrator on the ground that arbitration is barred by S 69 Partnership Act had to be raised before the court. 

Now that we have summarized the analysis of law, we go to the reasoning of the judge in Texfield v. Texteema. But before that it would do well to recollect the prime issue in this case. The arbitrator had, in limine, dismissed the claim of Texfield on the ground that Texfield was an unregistered partnership firm and its claim was barred by S 69(3) of the Partnership Act. The decision of Mrs. Justice Chitra Venkatraman is summarised as follows:

1. The SC decision of Jagdish Chandra Gupta V. Kajaria Traders (India) Ltd. has recognised that S 69 would apply even to arbitration proceedings.
2. In Indian Oil Corporation v. Devi Constructions, the Division Bench of the Madras High Court has held that when parties have mutually agreed to enter into a contract, one of the parties cannot later contend that it is not obligated to perform its obligations of the contract because filing of a suit is barred by S 69 of the Indian Partnership Act.
3. If there is an arbitration clause and once the arbitrator has been appointed, all the arbitrator needs to do is see if the purported agreement satisfies the requirement of S 7 of the Arbitration and Conciliation Act, 1996 and if there is a dispute.
4. The question of applicability of substantive law at the time of "assumption of jurisdiction" does not arise at this juncture. The only question that arises is the content of the arbitration clause. 

The court held (we quote extensively so that readers could check if our reading of the judgement is in accord with what has actually been stated there):

"[A]pplicability of a substantive law at the stage of assumption of jurisdiction arises only as regards the content of agreement on arbitration as per Section 7 of the Arbitration and Conciliation Act, which means, the agreement satisfies all these requirements that need to be met as per the provisions of the Indian Contract Act. The application of substantive law arises only as regards the disputes raised under the agreement. Hence, the applicability of substantive law like Section 69 of the Indian Partnership Act as to whether there could be an agreement to go before an Arbitrator at all does not arise. What is applicable of a dispute going before the Court of law by way of a suit is not of any relevance when the parties decide on the choice of forum in terms of the agreement therein. The choice of forum for the resolution of a dispute, the ambit of the authority of a dispute resolution mechanism chosen by the party and the venue of the proceedings are all matters of agreement between the parties."

In effect the court has held that the arbitrator could not have dismissed the case of Texfield because the arbitrator was supposed to only see if there was a dispute and the arbitration clause covered the dispute. Applicability of S 69 is a matter of substantive law, which the arbitrator ought to have taken up at a later stage. 

This blawgger's opinion is that the said judgement, as well as the judgement of the Division Bench in the IOC case mentioned above, is faulty. The reasons are as follows:

1. The Arbitration and Conciliation Act, 1996 does not unnecessarily complicate the arbitration process by making rules for conducting the arbitration proceedings. Chapter V of the said Act contains the procedure for arbitration. In the said chapter, S 19(1) does not even make the Code of Civil Procedure, 1908.S 19(2) provides that the parties can agree on any procedure as they feel as appropriate. In case the parties do not agree upon any procedure, the Act leaves it to the discretion of the tribunal to adopt any procedure as it deems fit. In this regard, S 19(3) states:

"Failing any agreement referred to in sub-section (2), the arbitral tribunal may, subject to this Part, conduct the proceedings in the manner it considers appropriate."

To recollect, the judge had stated that the arbitrator was bound to decide on questions pertaining to substantive law only after the stage of "assumption of jurisdiction". It is difficult to understand how the judge in this case lays down a special procedure for the arbitrator to follow when S 19(3) (or for that matter the Act) leaves to the discretion of the tribunal to adopt the procedure as it deems fit! It may be noted that the complaint of the judge is not that the arbitrator had denied Texfield of an opportunity to be heard. Rather, it is of the fact that the arbitrator had erred in dismissing Texfield's claim in limine.

Imagine what would have happened if the arbitrator had not dismissed the case in limine but had done so only after only  parties complete their arguments. Even then,  the judge would have had a complaint against the said dismissal because she was bound by the  Indian Oil Corporation case mentioned above.

2. As the judge rightly said, the choice of forum, ambit of the authority of the dispute resolution mechanism, venue of arbitral proceedings are all a matter of choice of the parties. But the agreement of the parties cannot overrule a statutory provision which specifically applies (logically) irrespective of the agreement of the parties to the contrary.

3. Now the simple question is whether the S 69 bar is a jurisdictional question or not. To put it in arbitration lingo, whether the bar under S 69 bar is an arbitrability question or not. This blawgger is of the opinion that the S 69 bar question is an arbitrability question. Arbitrability, in simple, refers to the capability of reference of a particular dispute to arbitration¸ either because of a contract or because of a statutory bar. It may be noted that as regards non-arbtirability of a dispute due to statute, S 2(3) of the 1996 Act provides:

"This Part shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration."

Numerous judgements of the Supreme Court and the High Courts have stated that the bar under S 69 (being a statutory bar) would apply even to arbitration proceedings. If so, the bar is a bar to even refer any dispute to arbitration. We come to this conclusion by jointly reading S 69(3) and 69(2). We quote both these provisions for the sake of clarity:

“(3) The provisions of sub-sections (1), (2) and (2A) shall apply also to a claim of set-off or other proceedings to enforce a right arising from a contract…”

S 69(2) reads:

“(2) No suit to enforce a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.”

As is apparent from a combined reading of both provisions, the bar is to enforce a right arising from a contract irrespective of whether the forum is a court of an arbitral tribunal. That being so, the conclusion of the single judge  (and the Division Bench judgement of the Madras High Court in the Indian Oil Corporation case) does not seem to be correct. When there is a clear statutory bar, the dispute is not arbitrable. If it is not arbitrable, the arbitrator cannot have any jurisdiction over the matter. The arbitrator can, and should, decide such questions at the inception of arbitral proceedings because it is of no use to postpone the decision when it is the parties who have to bear, unnecessarily, the costs of arbitration. Hence, it was the proper move from the arbitrator to have dismissed the claim in limine having come to the conclusion that the claim of Texfield was barred by S 69.

On what amounts to jurisdictional questions, the judge indicated:

"A reading of Section 16 of the Arbitration and Conciliation Act, 1996 shows that the decision of the Tribunal as to its jurisdiction stems out of the agreement to refer the dispute on the matters arising out of the contract. Hence, going by Section 7 of the Arbitration and Conciliation Act, 1996 and read in the context of the Sections 16 and 28 of the Arbitration and Conciliation Act, 1996, one may find that the jurisdiction of the Arbitrator arises out of the agreement between the parties to refer disputes before the chosen forum, namely, arbitration; that the Arbitrator has to go by the terms of the reference and decide on disputes, which arise out of or in connection with and incidental to the working of the terms of the agreement; that in deciding the dispute arising between the parties the Arbitrator has to follow the substantive law. Thus with the provisions of the Act clearly laying down the matrix on which an Arbitrator has to proceed."

Thus, the court restricts jurisdictional questions to questions that pertain to the agreement. What are jurisdictional facts? We do no more but quote this statement made in SBP & Co. v. Patel Engg, where the Supreme Court held:

"Normally, any tribunal or authority conferred with a power to act under a statute, has the jurisdiction to satisfy itself that the conditions for the exercise of that power existed and that the case calls for the exercise of that power. Such an adjudication relating to its own jurisdiction which could be called a decision on jurisdictional facts."

Now, when the law of the land bars a court or an arbitral tribunal from allowing an unregistered partnership firm to raise a claim against a third party for the enforcement of a contractual right, obviously, the tribunal cannot have any power to adjudicate on such a claim. In other words, it would not have any jurisdiction to decide on such a claim.

The above quote from the judgement in issue is correct insofar as it states that the arbitrator derives his jurisdiction from the prior consensus to submit any dispute to arbitration. Nevertheless, it must be noted that it is the statute (the Arbitration and Conciliation Act, 1996) which accords such status to the consensus between the parties. It is the same law which states [in S 2(3)] that certain disputes which have been barred by law shall not be referred to arbitration. Hence, it cannot be said that a decision on S 69 Partnership Act is not a decision on  a jurisdictional question. What the 1996 Act does is to allow two parallel regimes- one regulated by law and the other by the parties. Hence, there may be questions of jurisdiction based on contract as well as on statute. For example, if the arbitration agreement provides that certain disputes shall not be referred to arbitration (Non-referable Dispute), the question as to whether a particular dispute is a Non-referable Dispute is a jurisdiction question. Similarly, when the law provides that a certain dispute shall not be referred to arbitration, whether a dispute is prohibited by such law from being referred to arbitration is, again, a jurisdictional question. On that, the decision in issue seems incorrect.

4. The arbitrator in this case was actually doing a favour to the parties. Rather than making the parties fight the case on merits and then dismiss the case on the S 69(3) ground (as the Single Judge wanted him to do), the judge saved considerable time and money of the parties by dismissing the claim of Texfield in limine.

Kishanganga Dispute between India and Pakistan

The Indian Express has reported that the hearings in the Kishanganga dispute arbitration between Pakistan and India would begin from January 2011. The Tribunal consists of the following members:

1. Justice Stephen M Schwebel (Presiding arbitrator) 
2. Justice Sir Franklin Beman 
3. Prof Howard S Wheater 
4. Justice Bruno Simma 
5. Jan Paulsson 
6. Justice Peter Tomka and 
7. Lucius Caflisch

The said newsreport also suggests that the international law expert R.K.P. Shankar Dass and the noted jurist Mr. Fali Nariman might represent India in the dispute.

For more insights into the dispute, one may access our earlier posts on the Kishanganga dispute from here and here.

Can there be a partially honest judiciary?

This is a reproduction of a statement issued by Mr. Bijo Francis on Indian Judiciary in the website of AHRC.

The simmering debate between three senior judges in India, involving the suspect in a criminal case and a former Union Minister from Tamilnadu state, Mr. A. Raja, and his alleged attempt to influence the court to obtain bail for the suspect with the assistance of the former Chairperson of the Tamilnadu and Pondicherry Bar Council, Mr. R. K. Chandramohan, has once again brought the lingering question of judicial independence and accountability in the country into the forefront of national debates. Of the three judges involved in the debate, one is a sitting judge of the Supreme Court, Justice H. L. Gokhale, the other is the former Chief Justice of India who is now the current Chairperson of the National Human Rights Commission and the third judge is a former judge of the Madras High Court, Justice Regupathi. Chandramohan, the lawyer involved in the case has been temporarily suspended from practice and from the powerful post he occupied at the Bar Council, as it's Chairperson.

Four central questions that should be addressed and clarified in this issue are:

(1) Why did the courts -- the Madras High Court, when one of its judges were approached in his chamber, by none other than the Chairperson of the State Bar Council intervening criminally in the judicial process, and the Supreme Court of India, when its Chief Justice was addressed by the Chief Justice of Madras High Court at the request of the judge who was approached by the lawyer -- fail to immediately take actions against the bail petitioner, the lawyer and the minister?

(2) What prevented Justice Regupathi from initiating criminal proceedings against the lawyer, the accused and the minister when they tried to interfere with the court proceedings? The judge was empowered to do so. The courts in India have done it on several occasions in the past. The Indian courts have even misused the contempt of court proceedings often when the judges faced public criticism. Most of these cases involved, in lay language, 'small fries'. But in this case, which involved a powerful lawyer and a minister in the Union Cabinet, the judge appeared to be seeking consensus from his senior colleagues. One cannot be blamed if it is said that in cases involving powerful persons the court hesitates to act.

(3) What prompted the minister or his lawyer to engage in this otherwise audacious attempt of illegally approaching a High Court Judge to decide a case in favour of a particular person? Is it a practice that in this instance got exposed? It is difficult to believe that any lawyer worthy of his salt will dare to do such a task, risking his career. In this case, the lawyer involved is not a novice. He is the Chairperson of the State Bar Council.

(4) Why did not the State Bar Council take action when the judge himself first exposed the case, by his remarks in open court? The Bar Council is a statutory body empowered to take disciplinary actions against lawyers for misconduct. How did such a person become the Chairperson of the Bar Council? Is this the standard of the Bar Council? Now that the case has been exposed, what action has been taken to find the truth behind the matter other than the suspension of the lawyer from the Bar? Why no enquiry is initiated into the case?

Indeed these are some of the many questions that anyone could ask, coming to know the details about the case. Unfortunately, it is a sad irony in India that none in the country would dare to ask such questions, since that could amount to contempt, the way this miserably misused law is practiced in India.

The case not only casts shadow upon a former Union Minister or a retired Chief Justice or other judges in the country. The incident is one more indicator to the fact that it is time to seriously consider looking into the state of affairs within the Indian justice system. The country's judges must know that accountability, transparency and honesty are virtues that they can afford to insist upon the rest of the world only if they practice it among themselves.

The judiciary, irrespective of the geopolitical and legislative environment in which it works, has an inherent problem. It is the very notion of justice. In that, there cannot be a 'partially honest' judiciary. The nature of the institution demands absoluteness. It can be only either completely open, transparent and honest or absolutely dishonest. Justice cannot be 80 percent honest.

Those judges in India, who claim that 20 percent of their colleagues are dishonest, also have the responsibility to disclose the names and details of those judges who are corrupt, so that the litigants and lawyers can avoid such judges. There can never be percentages of honesty and dishonesty awarded to justice. Sadly, in India, it is so. Even worse is the fact that many in the country feel contented about the so-called 80 percent honest judges and thus about the judiciary as an institution. Any comments against it, other than from judges of the Supreme Court, warrants immediate contempt of court action.

This leads to the following additional questions. Can India continue to afford to have a judiciary that house judges having their names tainted with corruption? How long can the Supreme Court afford to have judges who will be transferred to High Courts in Sikkim or Guwahati, whenever their names and credential starts appearing in every place where a judge or his name should not be mentioned? How long can the Indian judiciary expect the people in Assam, Sikkim and Manipur to face the burden of having some of the tainted names in the country's justice system?

What would have been the approach of the higher judiciary, had the judges involved are from the lower courts, like a Magistrate or a Munsiff? Would the Supreme Court or the High Court allow a retired lower court judge to make such remarks like those made by the senior judges in this case? If not, what additional rights do these senior judges have than their colleagues in the lower courts?

Last but not least, how long can India continue to have this mess, what Indians today call as their judiciary?

Once More the Court has Taken the Rein of Investigation

The SC has given a 7 point direction in the PIL filed on the 2G spectrum issue. (Centre for Public Interest Litigation v. The Union of India, Arising out of SLP (C) No. 24873 of 2010. Decided on 16/12/10)

SC though rejected the plea of instituting a Special Investigating Team, ordered the continuation investigation by CBI and Enforcement, monitored by the court. iI followed the Vineet Narain line and directed the investigation agencies to file periodic report on the investigation directly to the court.

The directions of the court is reproduced below

1. The CBI shall conduct thorough investigation into various issues highlighted in the report of the Central Vigilance Commission, which was forwarded to the Director, CBI vide letter dated 12.10.2009 and the report of the CAG, who have prima facie found serious irregularities in the grant of licenses to 122 applicants, majority of whom are said to be ineligible, the blatant violation of the terms and conditions of licences and huge loss to the public exchequer running into several thousand crores. The CBI should also probe how licences were granted to large number of ineligible applicants and who was responsible for the same and why the TRAI and the DoT did not take action against those licensees who sold their stakes/equities for many thousand crores and also against those who failed to fulfill rollout obligations and comply with other conditions of licence.
2. The CBI shall conduct the investigation without being influenced by any functionary, agency or instrumentality of the State and irrespective of the position, rank or status of the person to be investigated/probed.
3. The CBI shall, if it has already not registered first information report in the context of the alleged irregularities committed in the grant of licences from 2001 to 2006-2007, now register a case and conduct thorough investigation with particular emphasis on the loss caused to the public exchequer and corresponding gain to the licensees/service providers and also on the issue of allowing use of dual/alternate technology by some service providers even before the decision was made public vide press release dated 19.10.2007.
4. The CBI shall also make investigation into the allegation of grant of huge loans by the public sector and other banks to some of the companies which have succeeded in obtaining licences in 2008 and find out whether the officers of the DoT were signatories to the loan agreement executed by the private companies and if so, why and with whose permission they did so.
5. The Directorate of Enforcement / concerned agencies of the Income Tax Department shall continue their investigation without any hindrance or interference by any one.
6. Both the agencies, i.e., the CBI and the Directorate of Enforcement shall share information with each other and ensure that the investigation is not hampered in any manner whatsoever.
7. The Director General, Income Tax (Investigation) shall, after completion of analysis of the transcripts of the recording made pursuant to the approval accorded by the Home Secretary Government of India, hand over the same to CBI to facilitate further investigation into the FIR already registered or which may be registered hereinafter.

Fortnightly Roundup of SSRN Articles on Arbitration (December 1- 15)

Impact of Insolvency of a Party on Pending Arbitration Proceedings in Czech Republic, England and Switzerland and Other Countries
Alexander J. Belohlavek
Abstract:
The interference between insolvency law and the law applicable to arbitration is inevitable. Council Regulation (EC) No. 1346/2000 of 29 May 2000, on insolvency proceedings (Regulation), deals with proceedings being conducted in one EU Member State, while an insolvency proceedings involving one of the parties to the arbitration agreement was opened in another Member State. The present article describing impacts of opening an insolvency proceedings (within the scope of Regulation) and declaration of bankruptcy on pending arbitration in light of recent decisions of the Czech, English and Swiss arbitral tribunals and courts dealing with the insolvency of one of the parties in pending international arbitrations. Some case law of particular Austrian, Dutch, French and German courts will be reflected as well.

The formulation pending lawsuit within the meaning of Art 15 of the Regulations is broader than a lawsuit pending within the jurisdiction of the courts and it covers all proceedings, which might have the same or similar effect as a court judgment. The wording of Art 15 covers therefore pending arbitrations seating within the Member States applying the Regulation as well. Irrespective of the duty to apply all EC regulations within their territorial scope as a part of the law of all Member States (excl Danmark) the acceptance of the principle of suspension of ongoing proceedings, if being a part of the national law within the seat of any finding and contradictory dispute resolution mechanism, forms part of internal public policy.

Neither arbitration (arbitration clause) nor any other jurisdictional clause create a security of an contractual obligation. Trying to take out arbitration from the scope of the Insolvency Regulation or any law applicable on the effect(s) of insolvency proceedings within the seat of arbitration is a breach of the public policy principle prefering the equal and partial distribution of the bankruptcy assets to all (registered) creditors under a public supervisory. A reliance on the arbitration clause as a principle can not prevail the equality of all unsecured creditors of the debtor. The prevalance of the later principle over a reliance on the arbitral clause has furthermore to be understood as a part of international public policy (ordre public).

Court-Connected Arbitration in the Superior Court of Arizona: A Study of its Performance and Proposed Rule Changes
Roselle Wissler and Bob Dauber
Abstract:
This article reports the findings of an empirical study of arbitration in Arizona's general jurisdiction civil trial courts. The study found that the arbitration program's primary goals of providing faster and less expensive resolution of cases, reducing the court's workload, and maintaining or enhancing the satisfaction of users, were not entirely being met. Many cases did not meet arbitration deadlines and court case processing time standards. Most cases eligible for arbitration concluded before a hearing was held, and those cases that had a hearing seemed more likely to have been diverted from settlement than from trial. Consequently, the arbitration program was likely to affect the court's workload in a relatively small proportion of cases, was more likely to reduce the use of court pretrial rather than trial resources, and was unlikely to substantially reduce litigants' costs. But arbitration did increase access to a hearing on the merits. Lawyers who represented clients in arbitration had generally favorable assessments of the process and award, but expressed concerns about the adequacy of arbitrators’ knowledge of both substantive issues and arbitration procedures. A majority of lawyers favored retaining compulsory arbitration and some of its basic components but changing policies relating to arbitrator service and assignment. These findings, which were consistent with studies in other jurisdictions, suggest that court-connected arbitration does not have negative consequences, but also does not consistently or substantially improve the effectiveness and efficiency of dispute resolution.

Law Applicable to the Merits of International Arbitration and Current Developments in European Private International Law: Conflict-of-Laws Rules and the Applicability of the Rome Convention, Rome I Regulation and Other EU Law Standards in International Arbitration
Alexander J. Belohlavek
Abstract:
The determination of the applicable law may never exceed the limits of the contract entered into by the parties and their expectations and legal certainty. This criterion is to be understood as the main dogma. The global financial and economic crisis only confirmed that commercial practices became extremely brutal, and the current global situation confirms that any arbitral or choice-of-forum clause, i.e., an authorisation of the tribunal to choose any law or rules or even principles of law, does not indicate a greater willingness of the parties to settle potential disputes in a fair manner. The tribunals have to determine the applicable law as a legal system of a particular country using standard conflict-of-laws methods and conflict-of-laws rules as prescribed by applicable lex arbitri or (if authorised by lex arbitri and/or by the parties themselves) to first determine the relevant choice-of-law methods and rules. They have to reflect on the contract as well as potentially applicable lex arbitri if these contain binding instruction for conflict-of-laws resolution. In respect to the applicability of the Rome I Regulation in arbitration, the author‘s opinion is that the tribunals must apply it at once if they have to apply particular conflict-of- laws rules (as adapted by a number of national lex arbitri rules) and such conflict-of-laws rules are those of a country bound by the Regulation. The refusal to apply it would endanger certainty and foreseeability. Nevertheless, the arbitrators might do so, and they often have to find a more rational and commercially practical approach in interpreting the Regulation. In addition, they often determine the limits of the parties‘ autonomy, which in EC law are in fact (de iure) rather broad. And this occurs even though EU administrative structures usually attempt to subordinate arbitration conducted in EU countries under the ECJ (EU Tribunal) adjudicated standards, which are (in contrast to the Rome I Regulation itself) not binding for the arbitrators if determining substantial law issues.

Compulsory Arbitration Changes Proposed: Time to Comment
Roselle Wissler and Bob Dauber
Abstract:
This article summarizes the discussions and recommendations of the Committee on Compulsory Arbitration in the Superior Court of Arizona that form the basis of proposed changes to the Arbitration Rules and the authorizing statute. The proposed changes include increasing the maximum jurisdictional limit for arbitration, increasing arbitrator compensation and permitting CLE credit for arbitrator service, and altering some aspects of the process and associated deadlines to enhance efficiency. In addition, the committee proposed requiring wholly dispositive motions to be decided by the trial judge instead of the arbitrator and expanding the evidence admissible at arbitration hearings beyond that permitted by the Rules of Evidence. The article also explains the reasons behind the Committee's decision to retain other aspects of the arbitration system.

Lawyer Views on Mandatory Arbitration
Roselle Wissler and Bob Dauber
Abstract:
This article summarizes some of the key findings from a survey of Arizona lawyers regarding Arizona's court-connected arbitration system. Most lawyers who had represented clients in arbitration thought the process and award were fair. Their ratings of the arbitrators’ level of preparation and knowledge of the law and arbitration procedures, however, were less favorable. A majority of lawyers thought either that arbitration should remain mandatory for cases below the current jurisdictional limit or that a different ADR process should be made mandatory. A majority of lawyers favored retaining most of the basic components of the current arbitration system. But a majority favored changes in arbitrator service, assignment, and compensation. The lawyers appeared to be skeptical about court-connected arbitration's ability to provide a more efficient and effective dispute resolution process for smaller cases.

Mandatory Arbitration in Arizona: Structure and Performance
Roselle Wissler and Bob Dauber
Abstract:
This article summarizes some of the key findings regarding the structure and performance of Arizona's court-connected arbitration system. Most cases eligible for arbitration concluded before a hearing was held, and those cases that had a hearing seemed more likely to have been diverted from settlement than from trial. Consequently, the arbitration program was likely to affect the court's workload in a relatively small proportion of cases, was more likely to reduce the use of court pretrial rather than trial resources, and was unlikely to substantially reduce litigants' costs. Many cases did not meet arbitration deadlines and court case processing time standards. These findings, which were consistent with studies in other jurisdictions, suggest that court-connected arbitration does not have negative consequences, but also does not consistently or substantially improve the effectiveness and efficiency of dispute resolution.

Arbitration Agreement, MDR Clauses and Relation Thereof to Nature of Jurisdictional Decisions on the Break of Legal Cultures
Alexander J. Belohlavek
Abstract:
Arbitration is usually defined as a manner of dispute resolution. While in most legal systems the arbitration agreement is considered a type of procedural agreement, it is more closely connected with substantive law than procedural agreements stricto sensu, i.e. agreements entered into between parties related to particular pending or immediate proceedings with the intention of directing the course thereof. If one accepts the definition of procedural agreement as an agreement that induces its direct effect in the area of procedure, in relation to a certain formal procedure (whatever the kind), i.e. that these agreements are effective in relation to such procedure, such definition is evidently correct and relatively broad and is a definition of procedural agreement in the broad sense. The term procedural agreement so broadly defined can no doubt cover also arbitration and prorogation agreements, as arrangements on the manner of resolving potential disputes arising from substantive legal relations based either on a contract or otherwise (for example within extra-contractual obligations and on jurisdiction of a particular forum/tribunal or the manner of constituting tribunal to hear and to resolve such disputes, as well as other procedural terms relating to the particular procedure. It is an arrangement on a potential [future] procedure (approved and regulated at least in its basic principles by law) in its broadest sense, usually a procedure in the sense of an adversary fact-finding proceeding. Therefore there is no need for such an agreement to be made in respect of one specific proceeding. The basic typical feature of procedural agreement in the above-defined broad sense is its ability to induce effects approved by procedural law, including establishing the jurisdiction of particular forum (tribunal) before which a certain proceeding may be commenced and held. Besides, there is also another type of procedural agreement which I call procedural agreement in the narrow sense (or narrow procedural agreement) and which are entered into only in the course of a particular proceeding. The effects of these agreements are operative solely and exclusively within such particular proceeding or with respect to the subject of the proceeding, whether to the subject in its entirety or partially, when the subject matter scope delimited by the relevant procedural agreement is more narrow than the scope of the subject of the given proceeding. Thus the subject of such procedural agreement in the narrow sense cannot in any situation exceed the scope of the subject of the proceeding. If such situation occurs, it has to be considered according to the relevant applicable law whether such subject matter excess of the procedural agreement brings about some qualified effect (such as invalidity/nulity or simply ineffectiveness of the agreement) in respect of the procedural agreement in its entirety or to the part exceeding the subject of the procedure only. This category of procedural agreements includes for instance reconciliation agreements concluded in the course of proceedings, agreements on withdrawal of action, agreements on withdrawal of a remedy already filed, evidentiary agreements (on types of evidence and manner of taking evidence) etc. It is not only possible but in the author‘s opinion also necessary to apply substantive law to procedural agreements, at least as supportive instruments in questions not regulated by procedural law, the effect of procedural agreements (in any case at least of narrow procedural agreements and as a rare exception possibly also in broad procedural agreements in some countries according to their legal approach under the theory of extensive effect) is limited solely to the area of procedure. For a narrow procedural agreement to be valid and binding for parties, the parties must act within their respective procedural capacities, that is, within their respective procedural personalities. It is an agreement entered into by parties in civil proceedings in which they agree certain procedural legal effects. The subject-matter of the agreement is all relations that are subject to discretionary freedom of the parties in compliance with the law and rules applicable to a given specific proceeding and to the manner and course of the proceeding. In any case the procedural agreements in terms arbitration agreement (arbitration clause) will commonly be evaluated pursuant to substantial law and its institutes, at least in civil law, while in the common law the judges dispose of a broad range of possibilities to evaluate such agreements abstractedly from the substantive law. This close link between arbitration agreements and substantive law arises from the fact that arbitration clauses are entered by the parties before any particular proceedings are initiated, and in most cases, simultaneously with the establishment of a substantive legal relation itself, i.e. a particular contract or legal relation similar in nature, and they are intended to serve as a dispute resolution mechanism in order to settle disputes concerning the main agreement in cases concerning arbitration clauses, or a separate contract in cases of formally separate arbitration agreements. The purpose of the arbitration agreement is purely procedural, i.e. designating the method of dispute resolution for the main agreement.

The theoretical problem of distinguishing between the procedural and substantive nature of dispute resolution agreements becomes very real in practice when it comes to the question of determining the nature and legal effect of multi-step (called as combined or multi-tiered as well) agreements. The determination of the substantive or procedural nature of such agreements directly affects their enforcement in practice. The effect of the initial tiers of the MDR agreement is limited mean that MDR clauses are unsuitable as efficient means of dispute resolution? It has to be stated that by saying that the MDR clause is not suitable to prevent resorting to the arbitration or court proceedings, it does not mean that it is of no effect. The nature of the clause as a substantive agreement does indeed affect the position of the parties in the dispute. The question of the effectiveness and nature of MDR clauses has to be separated.

Civil law jurisdictions generally tend to provide a less rigorous approach to jurisdictional awards, which means that the judicial review of such awards is performed at the outset, i.e. the court is authorized to fully remit the arguments of the arbitral tribunal related to jurisdiction and in turn overturn the arbitral tribunal’s decision on grounds of improper justification of the award or inconsistency with applicable law. In other civil law jurisdictions the rigid nature of the jurisdictional ruling is softened by the possibility of the continuous review of the issue of jurisdiction, which can be addressed throughout the proceedings. In the Czech arbitration law and in other jurisdictions there is also an otherwise rarely recognized duty of arbitrators to address the issue of jurisdiction ex officio. On the other hand, common law jurisdictions only provide limited possibility for the review of jurisdictional decisions. This solution gives the arbitrators great autonomy to acquire jurisdiction over disputes, or more precisely, it enables parties to the arbitration agreement to transfer their fate fully into the hands of arbitrators. This situation is both criticized and praised at the same time. From the above, it seems obvious that a large number of civil law jurisdictions that have been examined do not consider the decision on jurisdiction to be a decision on the merits, or a substantive decision. This decision, in terms of the definitions presented, is of a purely procedural nature, and in turn does not constitute a res iudicata objection. One of the consequences is that for example the rendering of an award on jurisdiction as a kind of interim award does not limit the court to set-aside the final award in the same proceedings, even if any setting-aside has not been applied specifically regarding the [interim] award on jurisdiction, if rendered. The jurisdictional issue is, as a matter of principle, to be understood in the particular jurisdictions as a spine of the whole proceedings (arbitration).

Arbitration's Suspect Status
Hiro N. Aragaki
Abstract:
Concerned about abuses of power in the arbitration area, state legislatures have stepped up efforts to regulate arbitration agreements. But under the U.S. Supreme Court’s Federal Arbitration Act ("FAA") jurisprudence, such measures are uniformly preempted, resulting in what one scholar has described as "federal imperialism" in an area of law traditionally reserved for the states. This has led to numerous calls for reform, including the controversial "Arbitration Fairness Act" currently pending in Congress.

Under the Constitution’s Supremacy Clause, the FAA should preempt only state laws that stand as an "obstacle" to its purpose. The traditional understanding of that purpose is to enforce arbitration agreements as written. In this Article, I offer a different interpretation of that purpose as one of anti-discrimination: of reversing centuries of "judicial hostility," pursuant to which courts refused to honor pre-dispute arbitration agreements in quite the same way they did other contracts. If I am correct, the FAA should preempt only those state laws that can be said to discriminate improperly against arbitration. Many courts, scholars, and practitioners have lent credence to this theory, but this is the first article systematically to develop it.

This is the first of two works in which I use anti-discrimination law and theory as a lens to critique the Court’s FAA preemption jurisprudence and to develop a more sophisticated approach - one that is better at reconciling the states’ regulatory interests with the "national policy favoring arbitration."

Court Related Arbitration: Access, If Not Efficiency
Roselle Wissler and Bob Dauber
Abstract:
This article summarizes the findings of an empirical study of arbitration in Arizona's general jurisdiction civil trial courts. The study found that the arbitration program's primary goals of providing faster and less expensive resolution of cases, reducing the court's workload, and maintaining or enhancing the satisfaction of users, were not entirely being met. Arbitration cases often did not meet court case processing time standards. Cases that had an arbitration hearing appeared more likely to have been diverted from settlement than from trial. The findings, which were consistent with studies in other jurisdictions, suggest that court-connected arbitration does not have negative consequences, but also does not consistently or substantially improve the effectiveness and efficiency of dispute resolution.

Fee Shifting in Investor-State Arbitration: Doctrine and Policy Justifying Application of the English Rule
David P. Riesenberg
Abstract:
In investor-state arbitration, tribunals can and should apply the English rule on legal costs and abandon the two alternatives, the American rule and the pro-claimant rule. Under the English rule, the unsuccessful party in a dispute must indemnify the prevailing party for the costs of dispute resolution. Both doctrine and public policy support the application of the English rule, particularly in light of the much-publicized backlash against the investor-state arbitration system. Most importantly, the English rule would help to mitigate the two most commonly identified causes of the backlash — the system’s alleged proinvestor bias and its chilling effect on host states’ legitimate use of police power. Though a slowly growing number of tribunals have either followed or purported to follow the English rule, the doctrine and policies that justify applying it have so far been either poorly articulated or ignored. This Note presents those justifications in detail for the first time.

Harmonization of International Investment Law: Illustrations from the Case of Suez, Sociedad General de Aguas de Barcelona S.A., Vivendi Universal S.A. and AWG Group v Argentine Republic
James Harrison
Abstract:
Arbitral tribunals charged with deciding investment treaty disputes have sought to harmonize the interpretation of those treaties in such a way that one can begin to speak of an emerging jurisprudence constante on certain issues of international investment law. One recent case which clearly demonstrates this trend for harmonization is Suez, Sociedad General de Aguas de Barcelona S.A., Vivendi Universal S.A. and AWG Group v Argentine Republic. This note considers how the claims made by the investors were dealt with by the tribunal. In particular, it will pay attention to whether or not differences in the language of the three BITs at issue in this case had any impact on the decision of the tribunal. It will also consider how the tribunal used previous investment arbitral awards in its reasoning. It is argued that the most convincing way of harmonizing the substantive standards of the three BITs would be to consider them as incorporating customary international law standards, as was implicitly done with the expropriation standard in this case. In contrast, the reasons for following previous arbitral awards are less convincing when the substantive rules being applied are interpreted as an autonomous treaty standard. In these circumstances, interpretation is not an appropriate technique for harmonizing international investment law, given inherent differences in the language and context of investment treaties. It does not follow that harmonization cannot occur, however. The MFN clause could be used to that a better standard of treatment is applied to all investors, as was done in relation to the procedural prerequisites in this case.

Enjoining Employers Pending Arbitration: Some Misconceptions and Clarifications
William P. Kratzke
Abstract:
Labor organizations increasingly sue in federal courts to obtain an injunction enjoining an employer from pursuing a contemplated course of action pending arbitration. This Article will demonstrate that the Norris-LaGuardia Act is inapplicable in this context, which leads to the conclusion that a "Boys Markets" injunction against an employer simply is not possible. When a union seeks to have contemplated employer conduct enjoined pending arbitration, the action should not be governed by the principles of the Norris-LaGuardia Act, Boys Markets, or Buffalo Forge. Rather, an employer should be enjoined from pursuing a contemplated course of action when its conduct interferes with the preservation and advancement of a strong, underlying policy of labor relations law - namely, the maintenance of the central role played by the arbitration process. Injunctive relief should minimize the risk of erroneous, irreparable injury as well as provide the final judicial solution to the arbitrable dispute. This premise does not mean that the employer must always be thwarted in its efforts to make changes. It does mean, however, that the employer should bear the risk that arbitration as a process will be undermined. If the employer cannot bear this risk and its cost, it should be enjoined.

‘All are equal but some are more equal than others’: None believes it more firmly than Vilasrao Deshmukh

Rule of law in democracy have two strands; one for those in positions of power who bends and breaks it with impunity and the other for lesser mortals. The right of a farmer in Vidarbha to file a complaint against the Shylocks of the neighbourhood has to be at the behest of the Chief Minister of the state, so says the order dated 5.6.2006. The Chief Minister called the District Collector to his home and issued a diktat that translated into the above order of the District collector to the S.P of the District that henceforth any complaint against Mr. Dilipkumar Sananda (MLA of the region) and his family members related to money lending has to be screened through a non- statutory body “the District Anti-Money Lending Committee and said Committee should obtain legal opinion of District Government Pleader and then only take decision on the same and take appropriate legal action accordingly.”

The High Court on a writ petition challenging the order found it abhorrent and slashed it down against which an SLP was filed and on which the current appeal stands (Civil Appeal No. 10605 Of 2010. Decided on 14/12/10). The Supreme Court used strong language against Vilasrao Deshmukh, who is presently the Union Minister for heavy Industries. Court did not mince words when it said that the “Chief Minister’s instructions are so incongruous and anachronistic, being in defiance of all logic and reason, that our conscience is deeply disturbed. We condemn the same in no uncertain terms.” The court slammed a cost of ten lakhs to be paid by the appellant to the State Legal Services Authority

Tail End: Interestingly appellant herein is the State of Maharashtra. Ironic it would be that the state will pay ten lakh from the exchequer which has the tax contribution of the same farmer who is the complainant. Next issue, will Vilasrao Deshmukh resign from ministership due to this adverse finding by the court? It might be too much to expect from the thick skinned politicians of the day.

Applicability of S 69(3) of the Partnership Act to Arbitration- Part III

In the first post on this topic, we started off with the analysis of the case of Texfield Engineers v. Texteema Engineering Industries. After briefly stating the facts, we had started analyzing the law as would be applicable in the case. We had discussed two issues:

1. Whether S 69 of the Partnersip Act (PA)bars a suit filed by an unregistered partnership firm against third parties?
2. Whether the said bar is applicable if such firm refers the dispute to arbitration, instead of filing a suit?

In the last post on this topic, we had continued discussing the second issue and the third issue. The third issue was: Whether there was a waiver to the objection on the jurisdiction of the arbitrator based on S 69 PA?. Here, we had discussed the law on how a court should deal with a petition for appointment of an arbitrator if the dispute for which the arbitrator is to be appointed is regarding enforcement of a contractual right. We were analyzing the law on whether there was a waiver to the objection on the jurisdiction of the arbitrator based on S 69 Partnership Act.

Since the law is not very clear on the point, we cannot accurately answer, based on Supreme Court authorities, the question as to whether it is the Chief Justice (hereinafter, a reference to Chief Justice also includes his designate) who decides the arbitrability question in respect of a contractual claim by an unregistered partnership firm (similar to the arbitrability issue is the issue of limitation. If the Chief Justice is asked to refer a matter to arbitration but the Cheif Justice finds that the claim is barred by time, what does he do? See Rajesh Kumar Garg v. MCD where the Delhi High Court held: "The question of limitation normally is a mixed question of law and facts. In case the Chief Justice or his designate finds that the claims sought to be referred to the arbitrator are ex-facie time barred then reference of such dispute for arbitration would be exercise in futility."). Several judgements have been in favour of the Chief Justice deciding arbitrability questions (See, for example, Perma Container (UK) Line Ltd. v. Perma Container Line (India) Pvt. Ltd. (Bom.2009). I have to admit that as per National Insurance Co. Ltd vs M/S. Boghara Polyfab Pvt. Ltd., a non-arbitrability contention based on the contract  has to be raised before the arbitrator and not before the Chief Justice:

"The issues (third category) which the Chief Justice/his designate should leave exclusively to the arbitral tribunal are : (i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration)."

As stated above, there is no clear law laid down on this point. For example, see the decision of the Supreme Court in Vipin Kumar Gadhok v. Ravinder Nath Khanna which decides that the arbitrability question can be decided by the Chief Justice.Notwithstanding these contrary positions, this blawgger is in favour of the Chief Justice deciding the issue of whether  S 69 PA bars a claim from being arbitrated for the reasons stated in the previous post. This would mean that any objection to arbitrability of such claim should be necessarily brought before the Chef Justice.

Now, this legal position was always not so (Patel Engineering is prospective in its application). Prior to SBP & Co. v. Patel Engineering, the law on this issue was occupied by the decision of the five judge bench of Supreme Court in Konkan Railway Corporation v. Rani Constructions (2002), which affirmed the three judge bench decision of the Supreme in Konkan Railway Corporation v. Mehul Constructions (2000). In the 2002 decision, the Supreme Court held:

“Section 16 provides for this. It states that the arbitral tribunal may rule on its own jurisdiction. That the arbitral tribunal may rule "on any objections with respect to the existence or validity of the arbitration agreement" shows that the arbitral tribunal's authority under Section 16 is not confined to the width of its jurisdiction, as was submitted by learned counsel for the appellants, but goes to the very root of its jurisdiction.”

The role of the Chief Justice under S 11 was merely to act as a tribunal constituting authority in case of failure of the parties or the agreed institution to do so. Hence, all questions pertaining to arbitrability were to be taken before the arbitral tribunal. In the 2000 decision referred above, the three judge Bench held:

“It is clarified that the learned Chief Justice not having functioned as a Court or Tribunal and the order being administrative in nature, the observations and findings are not binding and will not be taken into consideration by the Arbitral Tribunal, if an objection to validity or existence of Arbitration Agreement is taken before it. Such objection, if taken, shall be decided on its own merits [by the arbitral tribunal].”

In the facts of the case that is subject to analysis- Texfield v. Texteema- the order for appointing the sole arbitrator was passed when the Konkan Railway cases occupied the field. The below chronology would make things clear:

August 2000: Konkan Railway Corporation v. Mehul Constructions
January 2002: Konkan Railway Corporation v. Rani Constructions
February 2005: Order by the Madras High Court appointing the sole arbitrator for resolving disputes between Texfield v. Texteema.
October 2005: SBP & Co. v. Patel Engineering

Since on the date of the order of the Madras High Court appointing the sole arbitrator was prior to SBP & Co. v. Patel Engineering and since as per the law prevailing then, the arbitrator was given the sole power to decide on his jurisdiction, the Madras High Court was not the proper forum for raising such an objection. Hence, there was no waiver on the part of Texteema of the right to object to the jurisdiction of the arbitral tribunal.

It may be noted that in view of Section 16(2) of the 1996 Act, this reasoning may prima facie appear unnecessary. The said provision reads:

“(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.”

However, this provision was enacted presumably when the arbitrator was supposed to decide on all questions pertaining to his jurisdiction. SBP & Co. v. Patel Engineering changed it all. This proviso is applicable only to those questions which the arbitrator, and not the Chief Justice, actually decides (See para 17 of National Insurance Co. Ltd vs M/S. Boghara Polyfab Pvt. Ltd.). This is because the decisions on questions which the Chief Justice decides (in his discretion) or has to decide is binding on the arbitrator. That being so, a party ought to bring an objection to the jurisdiction of the arbitrator when the Chief Justice decides “finally” on the issue.

In Texfield v. Texteema, the court appointed the sole arbitrator. Texfiled raised claims for around Rs. 41 lakhs before the arbitrator. Texteema raised a counter-claim for around Rs. 62 lakhs. Further, Texteema filed an application before the arbitrator bringing to the notice of the arbitrator that Texfield was an unregistered partnership and hence its claim was liable to be dismissed. This was objected by Texfield on the ground that the said objection to the arbitrator’s jurisdiction was not made in Texteema’s statement of defence. The arbitrator had dismissed in limine the case of Texfield accepting the contention of Texteema in its application filed post its statement of defence. Counsel for Texfield contended that there was waiver of the right to object to the lack of jurisdiction of the arbitrator as it got exhausted as soon as Texteema filed its statement of defence. Counsel for Texteema contended that the objection to jurisdiction can be made at any time and the same need not be raised only at the first instance.

Now, the issue is whether Section 16(2) precluded Texteema from contending that the dispute was not arbitrable. To put it differently, where there is a statutory bar on the tribunal to decide on a claim by an unregistered firm for enforcement of its contractual right, can objections to the arbitrator jurisdiction be made after filing of the statement of defence, as was done in this case? S 16(2) of the 1996 Act has already been quoted above. Ordinarily, a party is deemed to have waived an objection as to the jurisdiction of the tribunal if it does not raise it in its statement of defence. However, in case a party raises the objection belatedly, it is within the discretion of the arbitral tribunal (to be exercised in a proper manner) to condone the delay. In this regard S 16(4) provides:

“The arbitral tribunal may, in either of the cases referred it, in sub- section (2) or sub- section (3), admit a later plea if it considers the delay justified.”

Apparently, the arbitrator dismissed the claim of Texfield on the basis of S 69 PA. We move to the next issue:

Was the arbitrator right in his decision to dismiss the case in limine, without hearing the case on merits?
In arbitrations, the respondent generally raises preliminary issues that concern limitation, arbitrability etc (To clarify the meaning of arbitrability, arbitrability refers to the capability of reference of a particular dispute to arbitration¸ either because of a contract or because of a statutory bar). The 1996 Act does not prescribe procedures which the arbitral tribunal must follow in such a situation. The tribunal has two choices. Either the tribunal can decide to hear the preliminary questions first and then decide on merits subsequently, if necessary. The tribunal can also deal with the said questions alongwith the issues on merits of the claims. The choice of each procedure depends on the nature of the preliminary objections. Law practitioners typically raise such preliminary issues just for the sake of raising it. Another reason they do is because the law provides a negative incentive on the counsels. If they do not raise such contentions at the outset, there is a risk of not being able to raise them subsequently.

Hence, the arbitrators should peruse through the pleadings to decide prima facie if there is a chance of the claim being dismissed on preliminary grounds. It is the duty of the arbitrator to do this so that the parties need not waste their time and resources for litigating on merits when the claim itself cannot be raised for reasons such as limitation or because of non-arbitrability.

In the instant case, the arbitrator decided the effect of S 69(3) on the claim of Texfield as a preliminary issue and dismissed the claim. This seems to be the prudent approach.

Now that we have analysed the law, in the next post we’ll see what the Madras High Court had to say on it.

Applicability of S 69(3) of the Partnership Act to Arbitration- Part II

In yesterday’s post, we had started off with the analysis of the Madras High Court decision in Texfield Engineers v. Texteema Engineering Industries. While analyzing the law on the points raised in the case, we had taken note of the case of Jagdish Chandra Gupta v. Kajaria Traders (India) Ltd, where the Supreme Court interpreted the phrase “other proceeding” in S 69(3) elastically. Subsequent courts have held that the said provision disables an unregistered partnership firm from arbitrating to enforce a contractual claim. For example, in U.P. State Sugar Corporation Ltd v. Jain Construction, the Supreme Court held:

“The question as to whether the respondent no.1-firm is registered or not is essentially a question of fact. It is true that the arbitral proceedings would not be maintainable at the instance of an unregistered firm having regard to the mandatory provisions contained in Section 69 of the Indian Partnership Act, 1932. It has been so held in Jagdish Chandra Gupta vs. Kajaria Traders (India) Ltd. [AIR 1964 SC 1882].”

We had also analysed a two bench judgement of the Madras High Court in the case of Indian Oil Corporation v. Devi Constructions where the court did not set aside an award in which the arbitrator had validated a claim by an unregistered firm based on a contractual right despite the same being barred by S 69. We had concluded the said post by arguing that this judgement of the High Court was erroneous. In Himachal Pradesh Cooperative Group Housing Society vs Umesh Goel And Anr. where Justice Vikramjit Sen stated:

“3. The requirement of registration of a partnership is not an empty formality. It serves an extremely far reaching function. In the event of a dispute the aggrieved party should be able to easily ascertain the names and details of persons who would eventually be liable for recoveries against the firm. Unlike a company a partnership firm is not a distinct legal entity and its partners remain personally liable for all its debts subject to their inter se compact. Given the relative ease with which a firm can be registered, failure on the part of the partners to take requisite action cannot but be viewed with suspicion; namely that they intend to unethically and illegally defraud their creditors… Every interpretation of Section 69 of the Partnership Act must give effect to these objectives, unless the plain language makes it impossible to do so.”(emphasis mine)

Justice Vikramjit Sen also quoted the Special Committee’s Report providing reasons for introducing the chapter on Registration of Firms in the Indian Partnership Bill. Relevant paras of the Report are quoted below:

“[I]t is proposed that registration should lie entirely within the discretion of the firm or partner concerned; but, following the English precedent, any firm which is not registered will be unable to enforce its claims against third parties in the civil courts; and any partner who is not registered will be unable to enforce his claims either against third parties or against his fellow partners. One exception to this disability is made - any unregistered partner in any firm, registered or unregistered, may sue for dissolution of the firm. This exception is made on the principle that registration is designed primarily to protect third parties, and the absence of registration need not prevent the disappearance of an unregistered or imperfectly registered firm. Under this scheme a small firm, or a firm created for a single venture, not meeting with difficulty in getting payment, need never register; and even a firm with a large business need not register until it is faced with litigation. Registration may then be effected at any time before the suit is instituted. The rights of third parties to sue the firm or any partner are left intact.
18. Once registration has been effected the statements recorded in the register regarding the constitution of the firm will be conclusive proof of the facts therein contained against the partners making them, and no partner whose name is on the register will be permitted to deny that he is a partner, -- with certain natural and proper exceptions which will be indicated later. This should afford a strong protection to persons dealing with firms against false denials of partnership and the evasion of liability by the substantial members of a firm.”

Thus, it is a settled proposition that an unregistered firm cannot refer to arbitration a dispute pertaining to its right under a contract. In this post, we continue with the analysis of legal aspects raised in Texfield Engineers v. Texteema Engineering Industries.

Whether there was a waiver to the objection on the jurisdiction of the arbitrator based on S 69 PA?

In Texfield Engineers v. Texteema Engineering Industries, one of the contentions of the counsel for Texfield was that since Texteema never raised the issue that Texfield was an unregistered partnership in the course of hearing of the petition filed by Texteema for the appointment of arbitrators under S 11 of the Arbitration and Conciliation Act, 1996, there was a deemed waiver on the objection to the jurisdiction of the arbitrator based on S 69 PA. In Yoda-speak, sophisticated, this argument might sound, but faulty it is.

S 69 does not bar a third person from suing the unregistered partnership firm to enforce its right under a contract. It only bars the unregistered firm from enforcing its contractual right. When Texteema applied to the court for appointment of an arbitrator, it was well within its rights to do so without making a mention of S 69 simply for the reason that it was not necessary because Texteema had its own claims against Texfield (I am assuming that the application for appointment of arbitrators was for the claims of Texteema). Even if the application for the appointment of arbitrator for resolution of the claims raised by the unregistered firm, Texfield, was by Texteema, whether not raising the contention that enforcement of rights by Texfiled through arbitration “proceedings” is barred would constitute waiver depends on whether the appointing authority should be satisfied that the claim can be referred to arbitration as there is no statutory bar for doing so. If the issue has to be decided by the arbitrator, then the forum for raising that question is with the arbitrator. So the primary question is: who has to decide whether S 69 bars the claims raised by Texfield, the court or the arbitrator?

In SBP & Co. v. Patel Engineering, the Supreme Court held that the Chief Justice or his designate, under S 11 has to not only see if there is a valid arbitration agreement, but also whether “there was a live and subsisting dispute for being referred to arbitration”. Further, the court held:

“Therefore, a decision on jurisdiction and on the existence of the arbitration agreement and of the person making the request being a party to that agreement and the subsistence of an arbitrable dispute require to be decided and the decision on these aspects is a prelude to the Chief Justice considering whether the requirements of sub-Section (4), sub-Section (5) or sub-Section (6) of Section 11 are satisfied when approached with the request for appointment of an arbitrator.”

This means that the court should also look at the subject matter arbitrability question. To put S 69 in a different way, a dispute pertaining to enforcement of a contractual obligation by an unregistered firm is a non-arbitrable dispute (the issue cannot even be taken to courts). So, as per SBP v. Patel Engineering, the appointing court ought to decide whether the dispute is arbitrable or not. It may be noted that determination of whether a claim is hit by S 69(3) can be held summarily, without resorting to elaborate evidence. The third party would be saved from the unnecessary costs of arbitrating on an issue which the court can decide summarily, based simply on affidavits and documents. Hence, going by the rationale of Patel Engineering (right or wrong it might be), the question as to whether S 69 barred reference to arbitration ought to be decided by the court. In the recent case of A.M.Prembhushan v. N.S.Thulasidas, the Single Bench of the Kerala High Court held otherwise:

“I am of the view that the question whether the arbitration proceedings are maintainable in view of Section 69(3) of the Indian Partnership Act itself can be made an issue before the Arbitrator. The review petitioner is permitted to raise this issue before the Arbitrator and the Arbitrator will decide on the issue of arbitrability of the issues R.P.No.357/08 referred to him under my order in the context of Section 69(3) of the Indian Partnership Act as the first issue and give a verdict on that issue before proceeding further in the matter.”

The approach of the Kerala High Court does not seem to be right. If the Chief Justice (or his designate) has to ensure that the jurisdictional facts for the exercise of his jurisdiction are in existence, and since the deciding the issue of whether the firm making the claims is registered or not does not entail production of elaborate evidence, this blawgger feels that the court has to decide whether any statute bars the claim from being arbitrated (or litigated, for that matter). In this regard, the approach of the Delhi High Court in Ess Vee Traders And Ors. vs Ambuja Cement Rajasthan Limited seems to be practical. Further, the parties would be saved from unnecessary costs to the arbitrator and the loss of man-hours.

To be Continued.

Applicability of S 69(3) of the Partnership Act to Arbitration

Texfield Engineers v. Texteema Engineering Industries
OP No. 139/ 2008
High Court of Madras
Chitra Venkatraman, J.
18.03.2010

Texfield Engineers (Texfield) was an unregistered partnership. Texteema Engineering Industries (Textema) was registered. Texfield and Texteema entered into a distribution agreement in respect of a certain equipment. Certain disputes arose. The matter was referred to arbitration in view of the arbitration clause contained in the said agreement. The arbitration clause read:

"11. ARBITRATION:

a) All disputes and controversies which may arise between the parties, out of, or in relation to or in connection with this AGREEMENT or for the breach thereof shall, unless settled by mutual consultation in good faith, be finally settled by arbitration in accordance with the ARBITRATION ACT."

Texteema and its partners approached the Madras High Court for the appointment of an arbitrator. An arbitrator was appointed by the High Court vide an order dated 24 February 2005 (An order prior to SBP v. Patel Engineering). The Court appointed Mr. TK Seshadri, Senior Advocate, for arbitration. Texfield was the claimant in the arbitration. Texteema, the respondent, raised counter-claims. Before the arbitrator, Texteema contended that Texfield, the claimant cannot raise a claim against Texteema in view of the bar under S. 69 of the Partnership Act, 1932 (PA), which disentitled an unregistered partnership from suing third parties.

The arbitrator, agreeing to the contention of Texteema, the respondent, held that the petition was not maintainable as Texfield was an unregistered partnership and therefore, its claim was hit by S 69(3) r/w S 69(2). Hence, he dismissed Texfield’s claim (but not Texteema’s counter-claim). Against this award by the arbitrator, Texfield filed an original petition before the Madras High Court (which has original civil jurisdiction like the other Chartered High Courts and the Delhi High Court) for setting aside the award of the arbitrator. Following were the contentions of Texfield:

• In the course of hearing of the petition for appointment of arbitrators under S 11 of the Arbitration and Conciliation Act, 1996, Texteema never even raised the issue that Texfield was an unregistered partnership. Hence, there was a deemed waiver on the objection to the jurisdiction of the arbitrator based on S 69 PA.
• Texfield’s claim was maintainable as S 69 PA was not applicable to the arbitration proceedings.

Legal Principles Involved:

We have few points on law to be clarified here [Note that these are not the issues that were framed by the Court. These are merely for our convenince to enable analyzing the law systematically]

1. Whether S 69 bars a suit filed by an unregistered partnership firm against third parties?

2. Whether the said bar is applicable if such firm refers the dispute to arbitration, instead of filing a suit?

3. Whether there was a waiver to the objection on the jurisdiction of the arbitrator based on S 69 PA?

4. Was the arbitrator right in his decision to dismiss the case in limine, without hearing the case on merits?

1. Whether S 69 bars a suit filed by an unregistered partnership firm against third parties?

S 69(2) reads:

“(2) No suit to enforce a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.”

Relevant portion of S 69(3) reads:

“(3) The provisions of sub-sections (1), (2) and (2A) shall apply also to a claim of set-off or other proceedings to enforce a right arising from a contract…”

 The above provisions are very clear. No suit can be filed on behalf of an unregistered partnership firm for disputes in respect of a contract entered into with a third party. In the present case, disputes arose in respect of the distributorship agreement. Hence, Texfield or any of its partner is barred from suing Texteema in a court in respect of the disputes arising under the Contract.

2. Whether the said bar is applicable if such firm refers the dispute to arbitration, instead of filing a suit?

As is obvious from the wordings of S 69, the bar is only for filing a suit. The provision is silent on whether the bar applies to resolution of the dispute by arbitration. What cannot be done directly as per law cannot be done indirectly. If an unregistered partnership firm  is barred from enforcing its right arising out of a contract by approaching a civil court, it cannot be allowed to enforce that right through an arbitral tribunal. This is more so because an arbitral award is given the status of a decree (see S 36 of the ACA 1996).

This point has already been dealt with by the oft-cited case of Jagdish Chandra Gupta v. Kajaria Traders (India) Ltd., decided almost half a century ago. The rationale of the court seems to be based more on the text of the statute rather than on principles (in the Dworkinian sense). The Supreme Court interpreted the phrase “other proceedings” in S 69(3) to include even proceedings under S 8 of the Arbitration Act, 1940 Act before a court to constitute the arbitral tribunal in respect of a dispute under a contract. The court held:

“Whether we view the contract between the parties as a whole or view only the clause about arbitration, it is impossible to think that the right to proceed to arbitration is not one of the rights which are founded on the agreement of the parties. The words of s. 69(3) "a right arising from a contract" are in either sense sufficient to cover the present matter.”

The court viewed the right under the arbitration clause as a right to get the dispute resolved through arbitration. It is the proceeding in respect of the enforcement of this right that the court held was barred under S 69(3) PA.

Now, it would seem that the ratio in Jagdish Chandra Gupta v. Kajaria Traders (India) Ltd was that a petition in the court for the constitution of the arbitral tribunal would be barred by S 69(3) of the PA. The said case did not specifically deal with whether an unregistered partnership firm  could invoke arbitration for enforcing a right arising from a contract. However, subsequent courts have taken Jagdish Chandra to have stated that “other proceeding” should be given an elastic meaning and have held that the phrase would include even arbitration proceedings. In any case, the position of law is that the bar in S 69 would equally apply to arbitration proceedings. An exception to this is the a petition for interim relief under S 9 of the 1996 Act [See, Firm Ashok Traders And Anr. Etc. vs Gurumukh Das Saluja where the court justified this proposition by stating that there was no right arising under a contract in a petition for interim relief under S 9 of the 1996 Act. It held:: “the Court under Section 9 is only formulating interim measures so as to protect the right under adjudication before the arbitral tribunal from being frustrated.”]

In this context, we also analyse the decision of the two judge bench (consisting of Mr. Justice D.Murugesan & Mr. Justice C.S.Karnan) of the Madras High Court in Indian Oil Corporation v. Devi Constructions. This blawgger is of the opinion that the said judgement of the two judge bench is faulty. An award was passed by the arbitrator enforcing the provisions of a contract and awarding around 22 lakhs in favour of Devi Constructions, an unregistered partnership firm despite Indian Oil Corporation contending that the arbitration was barred by S 69 of the PA. IOC filed an application for setting aside the award. IOC failed. The Madras High Court held (we quote extensively so that the readers can be certain that we do not commit the error of wrongly interpreting the judgement):

“Though the provision contemplates suits or proceedings, in our opinion, the said provision could be made applicable to any suit or proceeding instituted in any Court and would certainly not include a reference to an Arbitrator. A reference to the Arbitrator to adjudicate the dispute is governed by the terms of the contract. As the terms of the contract are mutually agreed, the same are binding on the parties to the contract. As far as the case on hand is concerned, there is no dispute that by clause 18 of the contract, both the appellant-Corporation as well as the respondent-Devi Constructions have agreed to refer the dispute, if arises in future out of the said contract, to a sole Arbitrator. Hence, the reference cannot be questioned by the appellant-Corporation, who is also a party to the contract, solely on the ground that there is a bar under section 69 of the Indian Partnership Act.”

The reasoning of the court is that when parties have mutually agreed to enter into a contract, one of the parties cannot later contend that it is not obligated to perform its obligations of the contract because of a statutory provision.

It is submitted that this reason is clearly erroneous in view of the wordings of S 69(3) [“(3) The provisions of sub-sections (1), (2) and (2A) shall apply also to a claim of set-off or other proceedings to enforce a right arising from a contract…”]. It is not that S 69(3) is oblivious of the fact that parties have agreed to certain obligations under the Contract. S 69(3) implies that notwithstanding the agreement of the parties, an unregistered partnership firm cannot enforce its right under the said agreement. What the Division Bench has done, essentially, is to abrogate S 69(3) as regards arbitration and overruled decades of precedents, even of the Supreme Court!

To be Contd.

Liability of the Purchaser for the Electricity Dues of the Previous Owner

Haryana State Electricity Board v. Hanuman Rice Mills & Ors.

Civil Appeal No. 6817 of 2010

20 August 2010

RV Raveendran & HL Gokhale, JJ.

This case involved an interesting issue. Haryana Financial Corporation (HFC) could not repay the money it had taken as loan from Durga Rice Mills (Durga). So HFC auctioned its rice mills to repay the dues. Hanuman Rice Mills (Hanuman) purchased it for a particular sum. At the time of purchase, the electricity connection was disconnected. So Hanuman obtained its own electricity connection in 1991. In 1995, Hanuman received a notice for payment of Rs. 2,39,251 towards arrears of electricity charges due by Durga. Against the said notice from the Haryana State Electricity Board (HSEB), Hanuman filed a suit for permanent injunction. Hanuman failed in the trial court and the first appellate court but succeeded in the High Court. So HSEB appealed against the HC decision. The fundamental issue was whether Hanuman was liable for clearing the dues of Durga. The Supreme Court, citing the previous cases (especially the case of Isha Marbles v. Bihar SEB), summarized the principles laid down in this connection:

“(i) Electricity arrears do not constitute a charge over the property. Therefore in general law, a transferee of a premises cannot be made liable for the dues of the previous owner/occupier.

(ii) Where the statutory rules or terms and conditions of supply which are statutory in character, authorize the supplier of electricity, to demand from the purchaser of a property claiming re-connection or fresh connection of electricity, the arrears due by the previous owner/occupier in regard to supply of electricity to such premises, the supplier can recover the arrears from a purchaser.”

In this case, since there were no statutory rules or terms authorizing the supplier of electricity to demand arrears of electricity charges due by the previous owner from the purchaser of a property who has been given a fresh connection. The court also took note of the case of Dakshin Haryana Bijli Vitran Nigam Ltd. v Paramount Polymers Pvt. Ltd., where the Supreme Court held that the subsequent purchaser was liable for the arrears of electricity charges due by the previous owner in view of the clear stipulation in the terms and conditions of supply. In Paramount Polymers, the said stipulation read:

"21-A (a) When there is transfer of ownership or right of occupancy of a premises, the registered consumer shall intimate the transfer of right of occupancy of the premises within 15 days to the Assistant Engineer/Assistant Executive Engineer concerned. Intimation having been received, the service shall be disconnected unless application for transfer is allowed. If the transferee desires to enjoy the service connection, he shall pay the outstanding dues, if any, to the Nigam and apply for transfer of the service connection within 30 days and execute fresh agreement and furnish fresh security. New Consumer number shall be allotted in such cases canceling the previous number.

(b) Reconnection or new connection shall not be given to any premises where there are arrears on any account due to the Nigam unless these are cleared in advance. If the new owner/occupier/allottee remits the amount due from the previous consumer, the Nigam shall provide reconnection or new connection depending upon whether the service remains disconnected/ dismantled as the case may be. The amount so remitted will be adjusted against the dues from the previous consumer. If the Nigam get the full or partial dues from the previous consumer through legal proceedings or otherwise, the amount remitted by the new owner/occupier to whom the connection has been effected shall be refunded to that extent. But the amount already remitted by him/her shall not bear any interest.

(c) The above proposed provisions of clause 21-A(a) & (b) shall be applicable to existing consumers also where defaulting amount exists against premises occupied by such consumer."

Note that 21-A(a) covered cases where the purchaser sought transfer of the connection of the previous owner and 21-A(b) covered cases where the purchaser sought a new connection. In both the cases, the obligation rested on the purchaser to clear the dues. Since the above term was notified only in 2002, it was not applicable to Hanuman.

The “moral of the story” is that purchasers of property ought to be careful when they buy property. It is better to include a clear indemnity clause in the transaction documents protecting the purchaser from such liability. As a preventive measure, enquiries may be made in the State Electricity Board if such dues are pending.