"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.

Friday, December 10, 2010

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.

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