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.