1 * IN THE HIGH COURT OF DELHI AT NEW DELHI + Date of Decision: 10.08.2010 % ARB.P. 344/2009 RAJ PAL MANCHANDA Petitioner Through: Mr. [ENTITY], Mr. [ENTITY], Mr. [ENTITY] & Mr. [ENTITY], Advocates versus KAMAL KISHORE MANCHANDA & ORS. Respondents Through: Mr. [ENTITY] and Ms. [ENTITY], Advocates for respondent No.1 Mr. [ENTITY], Advocate for respondent Nos.2 to 5 CORAM: HON'BLE MR. JUSTICE [ENTITY] 1. Whether the Reporters of local papers may be allowed to see the judgment? : No 2. To be referred to Reporter or not? : Yes 3. Whether the judgment should be reported in the Digest? : Yes [ENTITY], J. (Oral)
1. This petition has been preferred under [SECTION] of the [ACT] (the Act) to seek the appointment of an arbitrator. The parties, admittedly, entered into a partnership deed dated 01.02.2008. The said partnership was, however, unregistered. This partnership deed contains the following arbitration clause:
"15. Any controversy or claim arising out of or relating to the contract or breach thereof shall be settled by arbitration under the [ACT] then in force. The decision given there under shall be binding on all the parties."
2. The petitioner, who is one of the partners and the father of respondent No.1 and also related to the other respondents, submits that the partnership firm has been working under the name and style of M/s The Punjab Steel Works., which is engaged in the business of manufacturing, forging and sale of iron and steel goods. The share of the various partners in the profits and losses of the firm have been clearly set out in the partnership deed. It is stated that the accounts of the partnership firm were being maintained with Bank of India, but in the year 2006 one more account with ICICI Bank, Rajouri Garden, New Delhi, was opened in the name of the firm. The petitioner states that earlier he was primarily looking after the day-to-day affairs of the firm, but with age catching up, he could not undertake the day-to-day decision making for running of the business of the firm, and the responsibility of running the firm was shouldered by his son [ENTITY], i.e. respondent No.1. Presently, it is the respondent No.1, who is looking after the business of the firm.
3. The grievance of the petitioner is that respondent No.1 is mismanaging the affairs of the firm. He has opened another bank account with the name of the firm. Incomes of the firm are being diverted to the said account opened by, and being operated by respondent No.1 alone. Due to the alleged aforesaid conduct of respondent No.1, disputes have arisen between the parties. In this background, the petitioner seeks appointment of an arbitrator as, it is contended, despite the notice dated 28.07.2009 invoking the arbitration agreement, the parties have not been able to agree on any person to act as an arbitrator.
4. Upon notice being issued, the respondents put in appearance and filed their reply. The petition is contested by respondent No.1 alone. Learned counsel for the other respondents Mr. [ENTITY] submits that the dispute is primarily between the petitioner and respondent No.1 i.e. the father and son and they do not have much concern with the said dispute.
5. Since there is no denial that the partnership deed was executed between the parties, the existence of the arbitration agreement is not really in dispute. The existence of the disputes in relation to and arising out of the partnership deed between petitioner and respondent No.1, in the light of the allegations made in the petition and the reply filed thereto, also cannot be doubted. I, therefore, proceed to record the objections of respondent no.1, before I record the submissions of the petitioner.
6. Respondent No.1 has raised two submissions to oppose the appointment of the arbitrator by the Court. The first submission of Mr. [ENTITY], learned counsel for respondent no.1 is that the partnership firm, being an unregistered firm, the present petition is not maintainable to seek the dissolution of the firm in the light of the provision contained in [SECTION] of the [ACT]. In this regard, he places strong reliance on the decisions of the Supreme Court in [PRECEDENT]. The second submission is that the petitioner has made serious allegations of fraud, misappropriation and even alleged criminal conduct on the part of the respondent No.1. Such allegations of fraud or other criminal conduct cannot be adjudicated upon in arbitration proceedings since they involve a serious threat to the reputation of respondent No.1. He submits that respondent No.1 insists that such allegations should be examined only in an open Court. In support of the second submission, Mr. [ENTITY] has placed reliance on [ENTITY] v. Maestro Engineers & Ors. 2009 IX AD (S.C.)
7. The submission of Mr. [ENTITY] in relation to the bar under [SECTION] of the [ACT] is that [SECTION] of the [ACT] contains a clear bar to the filing of a suit by a partner of an un-registered firm to enforce a right arising from a contract or conferred by the [ACT] against the firm or against any other partner of the firm. He submits that even under [SECTION], which, inter alia, states that the provisions of sub- sections (1) & (2) "shall not affect the enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm, or any right or power to realize the property of a dissolved firm", would not permit the petitioner to institute this petition, as the petitioner is not entitled to seek the dissolution of the firm in the light of the terms of the partnership deed. In support of this submission, he places reliance on the decision of this Court in [PRECEDENT].
8. In response to the aforesaid submission of Mr. [ENTITY], Mr. [ENTITY] places reliance on the plain reading of the exceptions carved out in [SECTION] of the [ACT], and on [SECTION] of the Act to submit that the arbitral tribunal is entitled to rule on its own jurisdiction. He submits that the issue whether the partnership is at will, i.e. whether it can be dissolved by the petitioner, or not can only be determined by an arbitral tribunal as that is an issue relating to the interpretation of the partnership deed. He relies on clause 4 of the partnership deed, which inter alia, states that the partnership shall be at will.
9. In my view, the aforesaid objection raised by Mr. [ENTITY] has no merit in the light of the provisions contained in the Act and the [ACT]. In Krishna Motor Service (supra), four partners, who were parties before the Supreme Court, issued a notice dissolving the partnership firm. The respondent accepted the dissolution of the partnership firm. Subsequently, he filed an application under [SECTION] of the [ACT] to seek reference of disputes to the arbitrator in terms of the agreement. Some claims of the respondent were referred to arbitration by the Civil Judge. The High Court added two more items to the reference. The appellants approached the Supreme Court. The contention of the appellants was that as the partnership firm was not registered, the respondent was not entitled to seek reference under [SECTION] of the [ACT] to arbitration.
10. The aforesaid submission of the appellant was rejected by the Supreme Court. A perusal of the judgment shows that the Supreme Court relied on its earlier decision in Smt. [ENTITY] & Anr. v. M/s. Ishar Dass [ENTITY], (1995) 2 SCC 145. The discussion in [ENTITY] (supra), I find is more useful for the present case than even the discussion in Krishna Motor Service (supra).
11. In [ENTITY] (supra), the appellant was the widow of the deceased partner [ENTITY]. The widow called upon the respondent to render accounts of the firm. Since this was not done, she invoked clause 16 of the partnership deed which contained the arbitration agreement to resolve the dispute. The respondent did not agree to refer the dispute to arbitration. The appellant then invoked the jurisdiction of the Civil Court under [SECTION] of the [ACT].
12. The respondent resisted the suit on the ground that the partnership firm was not registered and consequently, by operation of [SECTION] of the [ACT], the application under [SECTION] of the [ACT] would not lie. The objection of the respondent was rejected by the trial court, but accepted by the High Court, to hold that [SECTION] and main part of [SECTION] exclude application of [SECTION] of the [ACT] and consequently the suit is not maintainable.
13. The contention of the appellant before the Supreme Court was that the appellant was only seeking to enforce the rights of the parties arising from dissolution of the firm for rendition of the accounts of the dissolved firm and to take the property or rights therein as per the terms of the contract, to which the deceased partner was entitled. Instead of filing a suit, the appellant had invoked the arbitration clause for reference to resolve the dispute by alternative dispute resolution forum agreed by the parties. It was argued that [SECTION] of the [ACT] carved out an exception to the main part of [SECTION] and therefore, there was no prohibition for the appellant to invoke clause 16 of the partnership deed. It was thus contended that the suit filed under [SECTION] of the [ACT] is maintainable.
14. On the other hand, the submission of the respondent was that since the partnership firm was an unregistered one, the rights arising under the contract, namely, to seek reference to arbitration under clause 16 of the contract, itself is a right to sue under the contract and that therefore, the suit under [SECTION] of the [ACT] is not maintainable.
15. The question considered by the Supreme Court was "whether the suit filed under [SECTION] of the Act is maintainable to work out the rights given to the parties under [SECTION] of the [ACT]?". The Supreme Court, while answering the aforesaid issue, held as follows:
"[SECTION](a) carves out three exceptions to [SECTION] and also to the main part of [SECTION], namely, (1) the enforcement of any right to sue for the dissolution of firm; (2) for accounts of the dissolved firm; and (3) any right or power to realise the property of the dissolved firm. Having excluded from the embargo created by the main part of [SECTION], the right to sue would not again to be construed to engulf the exceptions carved out by [SECTION] or [SECTION] of the Act. Any construction otherwise would render the exceptions, legislature advisedly has carved out in [SECTION], otiose. The object appears to be that the partnership having been dissolved or has come to a terminus, the rights of the parties are to be worked out in terms of the contract of the partnership entered by and between the partners and the rights engrafted therein. The exceptions carved out by [SECTION] are to enforce those rights including the rights to dissolution of the partnership despite the fact that the partnership firm was an unregistered one. Having kept that object in view, we are of the considered opinion that the alternative resolution forum agreed by the parties, namely, reference to a private arbitration is a mode of enforcing the rights given under Clause (a) of [SECTION] of the Act and gets excluded from the main part of [SECTION]. The enforcement of the right to sue for dissolution includes a right for reference to an arbitration in terms of the agreement of the partnership by and between the parties. Therefore, there is no embargo for filing a suit under [SECTION] of the Act." (emphasis supplied) The aforesaid judgment has been followed in [PRECEDENT].
16. I may refer to the decision of the Supreme Court in [PRECEDENT]. [PRECEDENT]. In this case the Supreme Court has held that, prima facie, the bar enacted by [SECTION] of the [ACT], does not affect the maintainability of application of [SECTION] of the Act as the right conferred under [SECTION] of the Act cannot be said to be one arising out of the contract. The Supreme Court held that under the scheme of the Act an arbitration clause is separable from other clauses of the partnership deed. The arbitration clause constitutes an agreement by itself.
17. Now, if proceedings under [SECTION] of the Act are maintainable and not hit by [SECTION] (1) or main part of [SECTION] of the [ACT], it follows that the arbitration agreement itself is enforceable at the behest of one or more of the partners of the unregistered partnership firm. This is so, because, if the right to seek arbitration itself cannot be enforced by one or more partners of an unregistered firm, [SECTION] too cannot be invoked. There has to be a valid and enforceable arbitration agreement in existence to invoke [SECTION] of the Act. If the party moving the Court for interim measures of protection under [SECTION] of the Act is not entitled to invoke the arbitration agreement, there would be no question of a petition under [SECTION] of the Act being maintainable at his behest.
18. This is evident from a plain reading of the opening words of [SECTION] of the Act, which provide that "before or during arbitral proceedings or at any time after the making of the arbitral award", a party may apply to the Court to seek interim measures. A "party" means party to an arbitration agreement. An arbitration agreement can only mean an agreement which is enforceable at law. An arbitration agreement which is not enforceable cannot possibly result in arbitral proceedings and therefore, the question of a party seeking interim measures from Court before or during arbitral proceedings or after the making of the award would not arise.
19. I may also refer to the judgment of the Supreme Court in [PRECEDENT]. In this case the [ACT], whereby [SECTION] was inserted and [SECTION] was substituted in [SECTION] of the [ACT], was challenged as being unconstitutional. By the said amendment, which came into effect on 01.01.1985, a partner in an unregistered partnership firm in the State of Maharashtra could not file a suit for dissolution or for account of a dissolved firm or realized properties of a dissolved firm, unless the duration of the firm was only 6 months or its capital was upto Rs.2,000/-. The Supreme Court quashed the said State Amendment by holding that the effect of the State Amendment was to put stringent disabilities on a firm which are of crippling nature. Paragraphs 23 to 25 of the said decision are instructive and read as follows:
"23. The primary object of registration of a firm is protection of third parties who were subjected to hardship and difficulties in the matter of proving as to who were the partners. Under the earlier law, a third party obtaining a decree was often put to expenses and delay in proving that a particular person was a partner of that firm. The registration of a firm provides protection to the third parties against false denials of partnership and the evasion of liability. Once a firm is registered under the Act the statements recorded in the Register regarding the constitution of the firm are conclusive proof of the fact contained therein as against the partner. A partner whose name appears on the Register cannot deny that he is a partner except under the circumstances provided. Even then registration of a partnership firm is not made compulsory under the Act. A partnership firm can come into existence and function without being registered.
24. However, the [ACT] effects such stringent disabilities on a firm as in our opinion are crippling in nature. It lays down that an unregistered firm cannot enforce its claims against third parties. Similarly, a partner who is not registered is unable to enforce his claims against third parties or against his fellow partners. An exception to this disability was a suit for dissolution of a firm or a suit for accounts of a dissolved firm or a suit for recovery of property of a dissolved firm. Thus a partnership firm can come into existence, function as long as there is no problem, and disappear from existence without being registered. This is changed by the 1984 Amendment extending the bar of the proceedings to a suit for dissolution or recovery of property as well.
25. The effect of the Amendment is that a partnership firm is allowed to come into existence and function without registration but it cannot go out of existence (with certain exceptions). This can result into a situation where in case of disputes amongst the partners the relationship of partnership cannot be put an end to by approaching a court of law. A dishonest partner, if in control of the business, or if simply stronger, can successfully deprive the other partner of his dues from the partnership. It could result in extreme hardship and injustice. Might would be right. An aggrieved partner is left without any remedy whatsoever. He can neither file a suit to compel the mischievous partner to cooperate for registration, as such a suit is not maintainable, nor can he resort to arbitration if any, because the arbitration proceedings would be hit by [SECTION] of the Act [[PRECEDENT]]."
20. In the present case, the allegation of the petitioner father of respondent No.1 is that respondent No.1 has taken complete control of the partnership firm and ousted the petitioner from not only the management of the firm, but also from sharing the profits of the firm. The denial of the right of the petitioner to sue for dissolution of the firm or for other reliefs permissible by resort to the exceptions carved out in [SECTION] of the [ACT] by resort to the arbitration mechanism, which was agreed to by the parties, would leave the petitioner high and dry. That was not the purpose of creating a bar against the right of the partner of an unregistered firm to initiate an action against the firm or the other partners to enforce the right arising from the contract or partnership or conferred by the [ACT].
21. I am, therefore, of the view that the enforcement of any right to sue for dissolution of an unregistered firm is saved by the exception carved out in [SECTION] of the [ACT] and that right cannot be curtailed by resort to [SECTION] or the main part of [SECTION]. As already held by the Supreme Court, the invocation of the arbitration agreement contained in the unregistered partnership deed to sue for the dissolution of the firm is permissible, as arbitration is merely an alternative resolution forum agreed by the parties to enforce the right to issue for dissolution, which is saved by [SECTION] of the Act.
22. I may also note that the decision in Krishna Motor Service (supra) pertained to the [ACT] (the old Act). The old Act did not contain a provision similar to [SECTION] of the Act which empowers the arbitral tribunal to rule its own jurisdiction, including the ruling of any objection with respect to the existence or validity of the arbitration agreement. It is well settled that decisions rendered by the Courts founded upon provisions of the [ACT] cannot be applied to cases arising out of the Act, as the Schemes of the two enactments are in various respects different. Reference may be made to Firm Ashok Traders & Anr. (supra).
23. I may also note that the Supreme Court in Krishna Motor Service (supra) was concerned with the rights of the respondent to seek reference of disputes/claims in respect of a partnership firm which had been dissolved by consent of parties. The issue as to whether the partner of an unregistered firm had the right to seek "the enforcement of any right to sue for the dissolution of a firm" had not been squarely considered by the Supreme Court. This issue had been squarely considered and answered, inter alia, in [ENTITY] (supra) which was even applied by the Supreme Court in Krishna Motor Service (supra).
24. The contention of respondent No.1 that the petitioner does not have the right to seek the dissolution of the partnership firm on an interpretation of the terms of the partnership deed is a contention which can appropriately be raised before the arbitral tribunal and would have to be answered by the tribunal, even if that issue impinges on the jurisdiction of the tribunal. The raising of such an objection by the respondent would not come in the way of the Court appointing an arbitrator in terms of the arbitration agreement contained in the partnership deed. In this regard, I may also refer to the decision of the Supreme Court in [PRECEDENT].
25. I, therefore, reject the first objection raised by Mr. [ENTITY] with regard to the maintainability of this petition on the ground that the partnership deed is unregistered.
26. In support of his second submission that the disputes between the parties cannot be referred to arbitration, since the petitioner has raised serious allegations of fraud and mis-feasence and even alleged criminal conduct on the part of the respondent No.1, also does not appear to have any merit. Mr. [ENTITY] has placed reliance on the decision of the Supreme Court in [ENTITY] (supra). In this case, there were serious allegations against the respondent alleging that he had committed malpractice in the accounts books and manipulated the finances of the partnership firm. A suit for declaration had been filed by the respondent to declare that the appellant was not a partner of the partnership firm and to prevent him from causing any disturbance in the running of the firm. The appellant preferred an application under [SECTION] of the Act, which was dismissed by the Court. The Supreme Court held that in the facts before it, it did not warrant the matter to be tried and decided by the arbitrator. It was held that the civil Court can refuse to refer the matter to arbitration if complicated question of fact or law are involved or where allegations of fraud are made. Where issues involved in the case required detailed investigation into the same and production of elaborate evidence to prove the allegations or refute the same, the disputes could not be referred to arbitration.
27. In response to the second objection of Mr. [ENTITY], Mr. [ENTITY] has made twofold submissions. Firstly, he submits that it is not that in every case involving allegations of fraud or siphoning of funds, that the matters would not be referred to arbitration. Mr. [ENTITY] has placed reliance on two decisions, firstly, of the Calcutta High Court and the other of Karnataka high Court, both of which have explained the aforesaid decision of the Supreme Court in [ENTITY] (supra). The Calcutta High Court in its decision in [PRECEDENT]. in [CASE NUMBER] decided on 07.04.2010 dealt with similar allegations of siphoning of funds of the partnership firm to the near relatives of one of the partners. The Calcutta High Court relied on the earlier decision of the Supreme Court in [ENTITY] Samsuddin Bubere v. Madhav Prabhakar Oak AIR 1962 SC 406, wherein it had been held that where the allegations were not of serious nature it would not warrant the refusal of a reference to arbitration. The Supreme Court observed:
" even though questions relating to accounts which might involve misconduct amounting even to dishonesty on the part of some partner might arise in the arbitration proceedings and even cases where moral dishonesty or moral misconduct is attributed to one party or the other might be referred to arbitration. It seems to us that every allegation tending to suggest or imply moral dishonesty or moral misconduct in the matter of keeping accounts would not amount to such serious allegation of fraud as would impel a Court to refuse to order the arbitration agreement to be filed and refuse to make a reference."
28. The Calcutta High Court also points out that the case of [PRECEDENT], relied upon by the Supreme Court in [ENTITY] (supra), was a creditors petition for winding up of a company under [SECTION], [SECTION] & [SECTION] of the [ACT]. The said relief could obviously not have been granted by an arbitral tribunal. It is in this light of the matter that the reference of the disputes to arbitrator was refused under [SECTION] of the Act. The Calcutta High Court has taken the view that even in cases involving allegations of fraud and malpractice, it is only in exceptional cases that the matter would be retained by the Court and not sent to arbitration on the ground that "it cannot be properly dealt with by the arbitrator" ( as observed in [ENTITY] (supra). The Calcutta High Court further held as follows:
"Though there is a charge of malpractice and though there is a charge of the respondents having siphoned off funds, it does not appear that such charges are such that the arbitrator or the arbitral tribunal would not be able to address the same. The extent of oral or documentary evidence that would be necessary to deal with likely issues in the reference is not such that warrant the exercise of the extraordinary discretion which has now been recognised, to negate the mandate of the 1996 Act in the present case.
In any event, [SECTION] of the 1996 Act permits an arbitrator or arbitral tribunal to seek the assistance of the Court in the event the arbitrator or arbitral tribunal is faced with any problem relating to evidence being received.
It is also to be noticed that the nature of the allegations made herein is not unusual going by the disputes that arise in partnership firms. As has been noticed in [ENTITY] , it would only be a serious allegation of fraud that would impel the Court to refuse a party seeking reference to go to arbitration. The [ENTITY] judgment cannot be read to imply that upon every allegation of fraud or malpractice being made there can no longer be any adjudication of such matters in an arbitration reference. [ENTITY] has to be read to imply that an exception may be made to the general rule when it appears to Court that a matter involving serious charges with heavy documentary and oral evidence may not be referred to arbitration notwithstanding the disputes being covered thereby."
29. Mr. [ENTITY] secondly submits that the petitioner undertakes to the Court that no personal allegations of fraud, mis-feasence or which involve moral turpitude or criminality would be raised by the petitioner before the arbitral tribunal. This, however, does not mean that the petitioner would not make allegations of wrong doings by respondent No.1 in the arbitration proceedings in relation to the accounts and business of the partnership firm. The Karntaka High Court in Future Metal Private Limited represented by its [PRECEDENT] in [CASE NUMBER] in [CASE NUMBER] decided on 08.04.2010 has taken a similar view. In this case, the party alleging fraud had undertaken to the Court that in the arbitral proceedings no allegations of fraud or serious malpractice would be raised and that such allegations would stand withdrawn.
30. I find myself in complete agreement with the view taken by the Calcutta High Court, and the course adopted by the Karnataka High Court.
31. In the light of the aforesaid submissions, I am of the view that there is no impediment in referring the disputes between the parties to arbitration in terms of the arbitration agreement contained in the partnership deed as set out hereinabove. It shall be open to the parties to raise their objections, including with regard to the jurisdiction of the arbitral tribunal, and it shall be for the tribunal to deal with all such questions. The petitioner, however, shall not raise personal allegation of fraud, misfeasance or which involve moral turpitude or criminality against respondent No.1 before arbitral tribunal. This would, however, not preclude the petitioner from making allegation of wrongdoings by respondent No.1 in relation to his conduct and management of the business of the partnership firm before the arbitral tribunal. Accordingly, this petition is allowed.
32. At this stage, I have put it to the parties that they may consider holding the arbitration under the rules of Delhi High Court Arbitration Centre. This is agreeable to the petitioner. However, learned counsel for the respondent No.1 submits that he would like to reserve his rights to challenge the present order in appeal. He submits that eventually, if the matter has to go to arbitration, he would agree to arbitration being conducted by Delhi High Court Arbitration Centre under its rules.
33. It has been made clear to Mr. [ENTITY] that the mere giving of his consent, at this stage, to the conduct of the arbitration under the Rules of Delhi High Court Arbitration Centre would not come in his way to challenge the present order in appeal. In these circumstances, Mr. [ENTITY] has agreed to give his consent while retaining his right to appeal against the present order. Mr. [ENTITY], who appears for the other respondents, is also agreeable that the arbitration be conducted under the Rules of the Delhi High Court Arbitration Centre.
34. Accordingly, I appoint Mr. [ENTITY], retired Additional District Judge, as the sole arbitrator to adjudicate upon the disputes between the parties, to be conducted under the Rules of the Delhi high court Arbitration Centre.
35. A copy of this order be communicated to the learned arbitrator as well as to the Delhi High Court Arbitration Centre.
36. Petition stands disposed of.
[ENTITY], J.
AUGUST 10, 2010 rsk