"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.

Monday, December 27, 2010

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.

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