Arbitration Judgements in India (Fortnight 2- January 2011)

Atmiya Chemicals v. Gas Authority Of India Ltd. (Delhi HC: 31.01.2011)
Key Aspects:
Reference by a Writ Court of a Dispute to Arbitration, of Discrimination in Gas Transmission Charges, Power of a Writ Court to Review PSU actions pertaining to Gas Transmission Agreement for Fairness

Birla Gtm-Enterpose Ltd. And Ors. v. Union Of India & Anr. (Delhi High Court: 31.01.2011)
Key Aspects:
Blacklisting Entities from Participating in Bidding Process, Tender by Joint Ventures, Rescission of Contract

Airports Authority Of India v. M/S Grover International Ltd. (Delhi High Court: 28.01.2011)
Key Aspects:
Arbitrability of Issues under Public Premises (Eviction of Unauthorized Occupants) Act, 1971

Solutions Advertising v. Thane Municipal Corporation (Bombay High Court: 28.01.2011)
Key Aspects:
Appointment of Arbitrator by Court, Unilateral Appointment of Arbitrator, Appoint of Employee/ Member of one of the Parties as Arbitrator, Independence and Impartiality of Arbitrators,

Modern Food Industries (India) v. M/S Nandlal & Co. (Patna HC: 28.01.2011)
Key Aspects:
Unregistered partnership Firm and the Right to Invoke Arbitration, Consequence of not Pleading Lack of Jurisdiction to Decide a Dispute Initiated by an Unregistered Partnership against a Third Party

Indian Renewable Energy Development Agency Ltd. v. The Official Liquidator, High Court, Madras, as the Provisional Liquidator of Arunachalam Sugar Mills Ltd & Ors.  (Madras HC: 19.01.2011)
Key Aspects
Application to Court for Interim Measures, Invoking Arbitration against a Company in Liquidation,
Role of a Provisional Liquidator, Right of Lien, Rights of an Unpaid Seller.

Ringspann Elecon (India) Limited v. Ringspann Gmbh (Gujarat HC: 18.01.2011)
Key Aspects
Application for Interim Measures of Protection, Existence of a Dispute as a Pre-requisite.

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.

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.