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.

Kishanganga Dispute between India and Pakistan

The Indian Express has reported that the hearings in the Kishanganga dispute arbitration between Pakistan and India would begin from January 2011. The Tribunal consists of the following members:

1. Justice Stephen M Schwebel (Presiding arbitrator) 
2. Justice Sir Franklin Beman 
3. Prof Howard S Wheater 
4. Justice Bruno Simma 
5. Jan Paulsson 
6. Justice Peter Tomka and 
7. Lucius Caflisch

The said newsreport also suggests that the international law expert R.K.P. Shankar Dass and the noted jurist Mr. Fali Nariman might represent India in the dispute.

For more insights into the dispute, one may access our earlier posts on the Kishanganga dispute from here and here.

Can there be a partially honest judiciary?

This is a reproduction of a statement issued by Mr. Bijo Francis on Indian Judiciary in the website of AHRC.

The simmering debate between three senior judges in India, involving the suspect in a criminal case and a former Union Minister from Tamilnadu state, Mr. A. Raja, and his alleged attempt to influence the court to obtain bail for the suspect with the assistance of the former Chairperson of the Tamilnadu and Pondicherry Bar Council, Mr. R. K. Chandramohan, has once again brought the lingering question of judicial independence and accountability in the country into the forefront of national debates. Of the three judges involved in the debate, one is a sitting judge of the Supreme Court, Justice H. L. Gokhale, the other is the former Chief Justice of India who is now the current Chairperson of the National Human Rights Commission and the third judge is a former judge of the Madras High Court, Justice Regupathi. Chandramohan, the lawyer involved in the case has been temporarily suspended from practice and from the powerful post he occupied at the Bar Council, as it's Chairperson.

Four central questions that should be addressed and clarified in this issue are:

(1) Why did the courts -- the Madras High Court, when one of its judges were approached in his chamber, by none other than the Chairperson of the State Bar Council intervening criminally in the judicial process, and the Supreme Court of India, when its Chief Justice was addressed by the Chief Justice of Madras High Court at the request of the judge who was approached by the lawyer -- fail to immediately take actions against the bail petitioner, the lawyer and the minister?

(2) What prevented Justice Regupathi from initiating criminal proceedings against the lawyer, the accused and the minister when they tried to interfere with the court proceedings? The judge was empowered to do so. The courts in India have done it on several occasions in the past. The Indian courts have even misused the contempt of court proceedings often when the judges faced public criticism. Most of these cases involved, in lay language, 'small fries'. But in this case, which involved a powerful lawyer and a minister in the Union Cabinet, the judge appeared to be seeking consensus from his senior colleagues. One cannot be blamed if it is said that in cases involving powerful persons the court hesitates to act.

(3) What prompted the minister or his lawyer to engage in this otherwise audacious attempt of illegally approaching a High Court Judge to decide a case in favour of a particular person? Is it a practice that in this instance got exposed? It is difficult to believe that any lawyer worthy of his salt will dare to do such a task, risking his career. In this case, the lawyer involved is not a novice. He is the Chairperson of the State Bar Council.

(4) Why did not the State Bar Council take action when the judge himself first exposed the case, by his remarks in open court? The Bar Council is a statutory body empowered to take disciplinary actions against lawyers for misconduct. How did such a person become the Chairperson of the Bar Council? Is this the standard of the Bar Council? Now that the case has been exposed, what action has been taken to find the truth behind the matter other than the suspension of the lawyer from the Bar? Why no enquiry is initiated into the case?

Indeed these are some of the many questions that anyone could ask, coming to know the details about the case. Unfortunately, it is a sad irony in India that none in the country would dare to ask such questions, since that could amount to contempt, the way this miserably misused law is practiced in India.

The case not only casts shadow upon a former Union Minister or a retired Chief Justice or other judges in the country. The incident is one more indicator to the fact that it is time to seriously consider looking into the state of affairs within the Indian justice system. The country's judges must know that accountability, transparency and honesty are virtues that they can afford to insist upon the rest of the world only if they practice it among themselves.

The judiciary, irrespective of the geopolitical and legislative environment in which it works, has an inherent problem. It is the very notion of justice. In that, there cannot be a 'partially honest' judiciary. The nature of the institution demands absoluteness. It can be only either completely open, transparent and honest or absolutely dishonest. Justice cannot be 80 percent honest.

Those judges in India, who claim that 20 percent of their colleagues are dishonest, also have the responsibility to disclose the names and details of those judges who are corrupt, so that the litigants and lawyers can avoid such judges. There can never be percentages of honesty and dishonesty awarded to justice. Sadly, in India, it is so. Even worse is the fact that many in the country feel contented about the so-called 80 percent honest judges and thus about the judiciary as an institution. Any comments against it, other than from judges of the Supreme Court, warrants immediate contempt of court action.

This leads to the following additional questions. Can India continue to afford to have a judiciary that house judges having their names tainted with corruption? How long can the Supreme Court afford to have judges who will be transferred to High Courts in Sikkim or Guwahati, whenever their names and credential starts appearing in every place where a judge or his name should not be mentioned? How long can the Indian judiciary expect the people in Assam, Sikkim and Manipur to face the burden of having some of the tainted names in the country's justice system?

What would have been the approach of the higher judiciary, had the judges involved are from the lower courts, like a Magistrate or a Munsiff? Would the Supreme Court or the High Court allow a retired lower court judge to make such remarks like those made by the senior judges in this case? If not, what additional rights do these senior judges have than their colleagues in the lower courts?

Last but not least, how long can India continue to have this mess, what Indians today call as their judiciary?

Once More the Court has Taken the Rein of Investigation

The SC has given a 7 point direction in the PIL filed on the 2G spectrum issue. (Centre for Public Interest Litigation v. The Union of India, Arising out of SLP (C) No. 24873 of 2010. Decided on 16/12/10)

SC though rejected the plea of instituting a Special Investigating Team, ordered the continuation investigation by CBI and Enforcement, monitored by the court. iI followed the Vineet Narain line and directed the investigation agencies to file periodic report on the investigation directly to the court.

The directions of the court is reproduced below

1. The CBI shall conduct thorough investigation into various issues highlighted in the report of the Central Vigilance Commission, which was forwarded to the Director, CBI vide letter dated 12.10.2009 and the report of the CAG, who have prima facie found serious irregularities in the grant of licenses to 122 applicants, majority of whom are said to be ineligible, the blatant violation of the terms and conditions of licences and huge loss to the public exchequer running into several thousand crores. The CBI should also probe how licences were granted to large number of ineligible applicants and who was responsible for the same and why the TRAI and the DoT did not take action against those licensees who sold their stakes/equities for many thousand crores and also against those who failed to fulfill rollout obligations and comply with other conditions of licence.
2. The CBI shall conduct the investigation without being influenced by any functionary, agency or instrumentality of the State and irrespective of the position, rank or status of the person to be investigated/probed.
3. The CBI shall, if it has already not registered first information report in the context of the alleged irregularities committed in the grant of licences from 2001 to 2006-2007, now register a case and conduct thorough investigation with particular emphasis on the loss caused to the public exchequer and corresponding gain to the licensees/service providers and also on the issue of allowing use of dual/alternate technology by some service providers even before the decision was made public vide press release dated 19.10.2007.
4. The CBI shall also make investigation into the allegation of grant of huge loans by the public sector and other banks to some of the companies which have succeeded in obtaining licences in 2008 and find out whether the officers of the DoT were signatories to the loan agreement executed by the private companies and if so, why and with whose permission they did so.
5. The Directorate of Enforcement / concerned agencies of the Income Tax Department shall continue their investigation without any hindrance or interference by any one.
6. Both the agencies, i.e., the CBI and the Directorate of Enforcement shall share information with each other and ensure that the investigation is not hampered in any manner whatsoever.
7. The Director General, Income Tax (Investigation) shall, after completion of analysis of the transcripts of the recording made pursuant to the approval accorded by the Home Secretary Government of India, hand over the same to CBI to facilitate further investigation into the FIR already registered or which may be registered hereinafter.