"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Wednesday, December 8, 2010

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.

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:

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.

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