Rajasthan High Court - Jaipur

Akshay Verma Son Of Late Shri Dinesh ... vs Late Smt. Sita Devi Verma Wife Of Late ... on 25 April, 2024

Author:
Manindra Mohan Shrivastava

Bench:
Manindra Mohan Shrivastava

[2023:RJ-JP:41479]

HIGH COURT OF JUDICATURE FOR RAJASTHAN
BENCH AT JAIPUR

S.B. Arbitration Application No. 104/2022
Akshay Verma Son Of Late Shri Dinesh Kumar Verma, Aged 36
Years, Resident Of G-51 Vaishali Nagar, Anasagar Circular Road,
Ajmer Partner Of M/s Verma & Company, Jaipur Road, Ajmer.
----Applicant
Versus

1. Late Smt. Sita Devi Verma Wife Of Late Shri Bhim Singh
Verma, Resident Of Ghee Mandi, Ajmer At Present 346,
Gyatri Nagar-A Durgapura, Near Railway Bridge, Jaipur
Now Deceased through her Legal Heir:-
1/1. Smt. Shankuntala Verma Wife Of Shri Atual Karel
Daughter Of Late Smt. Sita Devi Verma, 346, Gyatri
Nagar-A Durgapura, Near Railway Bridge, Jaipur.
1/2. Late Shri Rajendar Verma, Resident Of 614, Saket Nagar,
Anasagar Circular Road, Ajmer Through its Legal Heirs-
1/2/1. Smt. Rajni Verma Wife Of Late Rajendar Verma, Aged
About 60 Years,
1/2/2. Smt. Kirti Verma Daughter Of Late Shri Rajendar Verma,
Aged About 32 Years,
1/2/3. Smt. Tripati Verma Daughter Of Late Shri Rajendar Verma,
Aged About 30 Years,
1/2/4. Kumari Gini Verma Daughter Of Late Shri Rajendar Verma,
Aged About 21 Years.
All resident of 614, Saket Nagar, Anasagar Circular Road,
Ajmer.
----Respondents/Non-Applicants.

For Petitioner(s) : Mr. Ashish Kishore Saksena Advocate
Mr. Harshit Mittal Advocate.

For Respondent(s) : Mr. Manoranjan Singh Kanak Advocate.

HON'BLE THE CHIEF JUSTICE MR. MANINDRA MOHAN SHRIVASTAVA
(Through V.C.)

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Order
Reportable

Pronounced on: 25/04/2024

1. Applicant has filed this application under
Section 11(6)
of the

Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the

Act of 1996') for appointment of an arbitrator in the matter of alleged

dispute between the parties to a contract providing for adjudication of

disputes through the process of arbitration.

2. As pleaded by the applicant, M/s. Verma & Company, 214, Jaipur

Road, Ajmer is a registered firm under the provisions of
Indian

Partnership Act, 1932
(hereinafter referred to as 'the Act of 1932').

After the death of one of the two partners namely; Dinesh Kumar

Verma, his son Akshay Verma was admitted as partner w.e.f.

24.12.2013 and new partnership was constituted which came into

existence vide partnership deed executed on 24.12.2013 between

Sita Devi Verma and Akshay Verma, which is duly signed by each of

them. Clause-9 of the partnership deed provided that all the disputes

shall be settled by the arbitration according to the provisions of the

Act of 1996.

3. On 14.03.2022, one of the partners Sita Devi Verma addressed

a communication to the Branch Manager, Bank of Baroda stating

therein that the accounts in the name of the firm be stopped/closed

and she also informed that she had executed a Power of Attorney in

the name of her son-in-law Atul Karel. The Branch Manager of the

Bank informed the other partner Akshay Verma regrading letter of

Sita Devi Verma for freezing of the accounts of the firm. On

21.03.2022, Akshay Verma replied that the firm had been a very old

customer of the bank, therefore, no action or cognizance should be

taken on the basis of the communication sent by the other partner

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Sita Devi Verma. This was followed by another communication dated

26.03.2022 through the advocate repeating request not to initiate any

action or take cognizance of the communication sent to the bank by

Sita Devi Verma. Sita Devi Verma again sent a letter on 21.04.2022

to the Branch Manager of the bank with a request to restart overdraft

account of the firm in the name of M/s. Verma & Company.

It is further averred that Akshay Verma had submitted an

affidavit stating therein that misunderstanding between the parties

had been cleared and, therefore, consent was given to operate the

overdraft account. It was also stated in the application that Sita Devi

Verma vide communication dated 29.06.2022, addressed to the

Marketing Division, Indian Oil Corporation Ltd., stated that she was an

illiterate lady of 89 years, thus, she had forwarded the nomination of

her daughter Shakuntala Karel for partnership. In the meanwhile,

Sita Devi Verma expired on 12.07.2022.

4. In the aforesaid background, Bank of Baroda sent a legal notice

on 04.08.2022 to the firm M/s. Verma & Company, Akshay Verma,

legal representatives of deceased Sita Devi Verma and legal

representatives of deceased Rajendar Verma for execution of

necessary documents in favour of the firm by reconstituting the firm

or repay outstanding amount of Rs.1,75,33,186/- along with interest

and other expenses, failing which appropriate legal action would be

taken.

5. As dispute had already arisen between applicant-Akshay Verma

and Sita Devi Verma (since deceased), the applicant requested the

non-applicants, i.e., legal representatives of deceased Sita Devi

Verma to settle the dispute, but despite repeated requests, non-

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applicants have not taken any step for settlement, therefore,

application has been filed for appointment of an arbitrator.

6. By filing reply to the application, the legal representative of

deceased Respondent No.1/1-Shakuntala Verma, daughter of

deceased partner Sita Devi Verma, while denying all the allegations,

opposed the application as misconceived and not maintainable. In

reply, it has been stated that present is not a case of any financial

dispute or any other kind of dispute between the partners of the firm

as one of the partners had died. Legal representatives of Sita Devi

Verma are being pressurized to become partners. As they are not

partners either by operation of law or the act of parties, the dispute, if

any, cannot be said to be a dispute between the partners of the firm.

The terms of the partnership deed regarding appointment of an

arbitrator in case of dispute have no legal existence as the

partnership itself stands dissolved on account of death of one of the

two partners. Respondent No.1/1-Shakuntala Verma is not even a

partner in the firm, nor has ever been associated with the firm. She

cannot be forced to enter into a contract or become a partner in the

firm against her will, therefore, there is no dispute between the

parties to a contract containing an arbitration clause. The applicant

has no cause of action against Respondent No.1/1-Shakuntala Verma,

who is nowhere concerned with day-to-day operation of the

partnership firm. Once one of the partners out of the two partners of

a partnership firm dies, the firm stands automatically dissolved under

the law and there is no partnership in existence. The partnership

deed, as existed between the applicant and deceased Sita Devi

Verma, did not have any clause that upon death of one of the

partners, the legal representatives of the deceased shall be inducted

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as partners in the firm. Therefore, there is no automatic induction of

legal representatives of deceased Sita Devi Verma in the partnership

firm, as existed between the applicant and Sita Devi Verma, while

Sita Devi Verma was alive. The arbitration clause in the partnership

deed between applicant-Akshay Verma and Sita Devi Verma can no

longer be invoked against legal representative of deceased Smt. Sita

Devi Verma. Answering Respondent No.1/1-Shakuntala Verma,

daughter of Sita Devi Verma was neither a partner, nor has

constituted any new partnership with applicant-Akshay Verma, nor

she has any intention of getting inducted as partner. The applicant is

forcing the answering Respondent No.1/1-Shakuntala Verma to enter

into a partnership firm and forestall recovery of bank dues by

liquidating security in the form of equitable mortgage of a residential

property. It is further stated that not only Sita Devi Verma gave her

consent while she was alive, to the bank to liquidate the security and

recover the amount due, but later on Respondent No.1/1-Shakuntala

Verma has also given similar consent. The consent also states that if

excess money realises, the same be given to Respondent No.1/1-

Shakuntala Verma. As the liability of the firm was increasing day by

day due to overdraft facility, Sita Devi Verma wrote to the bank to

stop overdraft facility.

7. Learned counsel for the applicant would submit that

notwithstanding death of one of the partners Sita Devi Verma, dispute

which existed as between the applicant, one of the partners in the

firm, with the deceased partner, is an arbitrable dispute in view of

arbitration clause contained in the partnership deed between the

applicant and deceased Sita Devi Verma. Even after death of Sita Devi

Verma, the dispute between the partners of the firm may be referred

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to arbitration as the legal representative of deceased partner Smt.

Sita Devi Verma represents the estate of the deceased, which is a

secured asset against loan advanced by the bank to the firm. He

would further submit that vide communication dated 29.06.2022, Sita

Devi Verma had forwarded nomination of her daughter Shakuntala

(Respondent No.1/1) to the Indian Oil Corporation Ltd. in respect of

dealership of M/s Verma & Company. He would further submit that

death of one of the partners does not necessarily follow that the firm

is also dissolved. Dissolution of firm in such a contingency subject to

contract between the parties and intention to continue business in

partnership with legal representatives may be gathered from the

contract of the parties. He would further submit that the rule that the

partnership would be dissolved by the death of one of the partners, is

subject to a contract between the parties, which may be expressed or

implied. In the absence of any agreement to the contrary, share of

deceased partner in assets including goodwill devolves upon his/her

legal representatives, therefore, the dispute is clearly arbitrable and

an arbitrator may be appointed to adjudicate the dispute between the

applicant and the legal representative of the deceased partner.

8. Per-contra, leaned counsel appearing for the respondents would

submit that the partnership firm in the name of M/s Verma &

Company consisted of only two partners namely; the applicant and

deceased Sita Devi Verma. Though partnership deed as between the

applicant and deceased Sita Devi Verma contained an arbitration

clause to the effect that the dispute shall be referred to arbitrator

under the Act of 1996, upon death of one of the two partners, the

firm stood automatically dissolved by operation of law. Neither before

death of Sita Devi Verma, Respondent No.1/1-Shakuntala Verma was

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inducted as partner in the then existed firm, nor thereafter, any new

partnership firm had been reconstituted between applicant-Akshay

Verma and Shakuntala Verma, or any other legal representatives of

deceased Sita Devi Verma. There is no agreement between the

parties, i.e., between the applicant and Shakuntala Verma, or other

legal representatives of deceased Sita Devi Verma to resolve their

dispute through the process of arbitration. The agreement between

applicant-Akshay Verma and Sita Devi Verma to resolve their dispute

through the process of arbitration attained its natural demise upon

death of Sita Devi Verma on account of automatic dissolution of the

partnership firm. The said agreement cannot be enforced against the

legal representatives of deceased Sita Devi Verma. Even if it is

assumed, though not admitted that there existed a dispute between

present applicant-Akshay Verma with the legal representatives of

deceased Sita Devi Verma, insofar as liquidation of secured assets

towards realisation of the bank loan and respective claims qua the

secured assets and in the absence of there being any agreement, to

refer the dispute through the process of arbitration as between the

present applicant and the legal representatives of deceased Sita Devi

Verma, no recourse could be availed to arbitration proceeding at the

instance of the applicant. Leaned counsel for the respondents would

further submit that even if it is assumed that Sita Devi Verma, when

she was alive, had sent a letter to the Indian Oil Corporation Ltd. on

29.06.2022 expressing her intention to induct non-applicant

Respondent No. 1/1 namely; Shakuntala Verma as one of the

partners, the fact remains that Shakuntala Verma was never inducted

as partner in the firm during life time of Sita Devi Verma. It is not the

case of the applicant that after death of Sita Devi Verma, a new

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partnership had been constituted between present applicant- Akshy

Verma and Shakuntala Verma, the daughter of deceased Sita Devi

Verma. Therefore, it is contended, the dispute is non arbitrable.

9. The non-applicants, opposing the application for reference of

dispute by appointing an arbitrator, has denied existence of an

agreement between the parties mainly on the ground that upon death

of one of the partners, the partnership firm stood dissolved and there

exists no agreement between the parties containing a clause that in

the event of any dispute between the parties, it shall be referred to

arbitration. Secondly, respondents have raised an issue regarding non

arbitrability of the dispute sought to be raised by the applicant.

Therefore, the two aforesaid issues are required to be decided before

granting applicant's application.

10. Before I deal with the factual aspects of the case, it is apposite

to refer to recent judicial pronouncements of the Hon'ble Supreme

Court both on the aspects of existence of arbitration agreement and

non-arbitrability of the dispute.

11. A Larger Bench of the Hon'ble Supreme Court in the case of

Vidya Drolia & Others Versus Durga Trading Corporation,

(2021) 2 Supreme Court Cases 1, while deciding a reference made

to it, has examined in great details the legal position with regard to

scope of judicial review at the referral stage both on the aspects of

existence of agreement and non arbitrability. Navigating through

various provisions of the Act of 1996, amendments made from time

to time and survey of earlier decisions dealing with the aforesaid

aspects, the Hon'ble Supreme Court examined legal position as

below:-

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"26. Questions as to the existence of an arbitration
agreement also arise when a party opposing the reference
raises plea of novation of contract by entering into a new
contract in substitution of the original or 'accord and
satisfaction' by acceptance of modified obligations in
discharge of the contract by performance or simple
termination by express or implied consent. Similar plea of
discharge can be raised opposing an application for
reference on the ground that the claim is long barred and
dead or there are no outstanding disputes as the parties
have accepted part performance or have absolved the other
side from performance, fully or partly, on account of
frustration or otherwise. The contention is that once the
original contract stands extinguished, abandoned,
repudiated or substituted, the arbitration clause in the
underlying/original contract perishes with it.

27. ................

31. We are clearly bound by the dictum of the
Constitutional Bench judgment in Patel Engineering Ltd. that
the scope and ambit of court's jurisdiction under
Sections 8

or 11 of the
Arbitration Act
is similar. An application under

Section 11
of the Arbitration Act need not set out in detail
the disputes or the claims and may briefly refer to the
subject matter or broad contours of the dispute. However,
where judicial proceedings are initiated and pending,
specific details of the claims and disputes are normally
pleaded and, therefore, the court or the judicial authority
has the advantage of these details. There is a difference
between a non-arbitrable claim and non-arbitrable subject
matter. Former may arise on account of scope of the
arbitration agreement and also when the claim is not
capable of being resolved through arbitration. Generally
non-arbitrability of the subject matter would relate to non-

arbitrability in law. Further, the decision in Sukanya
Holdings (P) Ltd. has to be read along with subsequent
judgment of this Court in
Chloro Controls India Private
Limited v. Severn Trent Water Purification Inc.
(2013) 1
SCC 641.

32. ............

71. Complexity is not sufficient to ward off arbitration. In
terms of the mandate of Section 89 of the Civil Procedure
Code and the object and purpose behind the
Arbitration Act

and the mandatory language of
Sections 8
and
, the
mutually agreed arbitration clauses must be enforced. The
language of
Sections 8
and
of the Arbitration Act are
peremptory in nature.
Arbitration Act
has been enacted to
promote arbitration as a transparent, fair, and just
alternative to court adjudication. Public policy is to
encourage and strengthen arbitration to resolve and settle
economic, commercial and civil disputes. Amendments from
time to time have addressed the issues and corrected the
inadequacies and flaws in the arbitration procedure. It is for
the stakeholders, including the arbitrators, to assure that

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the arbitration is as impartial, just, and fair as court
adjudication. It is also the duty of the courts at the post-
award stage to selectively yet effectively exercise the
limited jurisdiction, within the four corners of
Section 34(2)

(b)(ii) read with Explanations 1 and 2 and check any conflict
with the fundamental policy of the applicable law. We would
subsequently refer to the 'second look' principle which is
applicable in three specific situations dealing with
arbitrability as per the mandate of
Section 34
of the
Arbitration Act.

72. Recently, the Supreme Court of Canada in TELUS
Communications Inc. v. Avraham Wellman, (2019) SCC 19
while conceding that arbitration as a method of dispute
resolution was met with "overt hostility" for a long time on
public policy grounds as it ousts jurisdiction of courts,
observed that the new legislation, the
Arbitration Act
of
1991, marks a departure as it encourages parties to adopt
arbitration in commercial and other matters. By putting
party autonomy on a high pedestal, the Act mandates that
the parties to a valid arbitration agreement must abide by
the consensual and agreed mode of dispute resolution. The
courts must show due respect to arbitration agreements
particularly in commercial settings by staying the court
proceedings, unless the legislative language is to the
contrary. The principle of party autonomy goes hand in
hand with the principle of limited court intervention, this
being the fundamental principle underlying modern
arbitration law. Party autonomy is weaker in non-negotiated
"take it or leave it" contracts and, therefore, the legislature
can through statutes shield the weakest and vulnerable
contracting parties like consumers. This is not so in
negotiated agreements or even in adhesion contracts having
an arbitration clause in commercial settings. Virtues of
commercial and civil arbitration have been recognised and
accepted and the courts even encourage the use of
arbitration.

73 ...............

76. In view of the above discussion, we would like to
propound a four-fold test for determining when the subject
matter of a dispute in an arbitration agreement is not
arbitrable:

76.1 (1) when cause of action and subject matter of the
dispute relates to actions in rem, that do not pertain to
subordinate rights in personam that arise from rights in
rem.

76.2 (2) when cause of action and subject matter of the
dispute affects third party rights; have erga omnes effect;

require centralized adjudication, and mutual adjudication
would not be appropriate and enforceable.

76.3 (3) when cause of action and subject matter of the
dispute relates to inalienable sovereign and public interest
functions of the State and hence mutual adjudication would
be unenforceable.

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76.4 (4) when the subject-matter of the dispute is expressly
or by necessary implication non-arbitrable as per mandatory
statute(s).

76.5 These tests are not watertight compartments; they
dovetail and overlap, albeit when applied holistically and
pragmatically will help and assist in determining and
ascertaining with great degree of certainty when as per law
in India, a dispute or subject matter is non-arbitrable. Only
when the answer is affirmative that the subject matter of
the dispute would be non-arbitrable.

76.6. However, the aforesaid principles have to be applied
with care and caution as observed in Olympus
Superstructures (P) Ltd.: (SCC p.669, para 35)
"35...Reference is made there to certain disputes
like criminal offences of a public nature, disputes
arising out of illegal agreements and disputes
relating to status, such as divorce, which cannot be
referred to arbitration. It has, however, been held
that if in respect of fats relating to a criminal matter,
say, physical injury, if there is a right to damages
for personal injury, then such a dispute can be
referred to arbitration (Keir v. Leeman).
Similarly, it
has been held that a husband and a wife may refer
to arbitration the terms on which they shall
separate, because they can make a valid agreement
between themselves on that matter (Soilleux v.
Herbst,
Wilson v. Wilson
and Cahill v. Cahill)."

77. Applying the above principles to determine non-
arbitrability, it is apparent that insolvency or intracompany
disputes have to be addressed by a centralized forum, be
the court or a special forum, which would be more efficient
and has complete jurisdiction to efficaciously and fully
dispose of the entire matter. They are also actions in rem.
Similarly, grant and issue of patents and registration of
trademarks are exclusive matters falling within the
sovereign or government functions and have erga omnes
effect. Such grants confer monopoly rights. They are non-
arbitrable. Criminal cases again are not arbitrable as they
relate to sovereign functions of the State. Further,
violations of criminal law are offenses against the State and
not just against the victim. Matrimonial disputes relating to
the dissolution of marriage, restitution of conjugal rights
etc. are not arbitrable as they fall within the ambit of
sovereign functions and do not have any commercial and
economic value. The decisions have erga omnes effect.
Matters relating to probate, testamentary matter etc. are
actions in rem and are a declaration to the world at large
and hence are non-arbitrable.

78. ............

82. Issue of non-arbitrability can be raised at three
stages. First, before the court on an application for
reference under
Section 11
or for stay of pending judicial
proceedings and reference under
Section 8
of the

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Arbitration Act
; secondly, before the arbitral tribunal during
the course of the arbitration proceedings; or thirdly, before
the court at the stage of the challenge to the award or its
enforcement. Therefore, the question - 'Who decides non-
arbitrability?' and, in particular, the jurisdiction of the court
at the first look stage, that is, the referral stage.

83. .............

84.
Under the Arbitration Act, 1940
, the jurisdiction to
settle and decide non-arbitrability issues relating to
existence, validity, scope as well as whether the subject
matter was capable of arbitration, with possible exception
in case of termination, novation, frustration and 'accord
and satisfaction' when contested on facts, was determined
and decided at the first or at the reference stage by the
courts. The principle being that the court should be
satisfied about the existence of a valid arbitration
agreement and that the disputes have arisen with regard to
the subject matter of the arbitration agreement. At this
stage, the court would be, however, not concerned with the
merits or sustainability of the disputes. Despite best efforts
to contain obstructive tactics, adjudication and final
decision of non-arbitrability issues at the reference stage
would invariably stop, derail and thwart the proceedings in
the courts for years.

85. ...............

103. On the ambit of the Court's jurisdiction at the
reference stage, it was observed in
Shin-Etsu Chemical Co.
Ltd. v. Aksh Optifibre Ltd. and Another
(2005) 7 SCC 234
that the correct approach to the review of the arbitration
agreement would be restricted to prima facie finding that
there exists an arbitration agreement that is not null and
void, inoperative or incapable of being performed. The key
rationale for holding that the courts' review of the
arbitration agreement should be limited to a prima facie
standard is the principle of competence- competence.
Further, were the courts are to be empowered to fully
scrutinize the arbitration agreement an arbitral proceeding
would have to be stayed until such time that the court
seized of the matter renders a decision on the arbitration
agreement. If the finding of the courts would be a final and
determinative conclusion, then it is obvious that, until such
a pronouncement is made, the arbitral proceedings would
have to hang in abeyance. This evidently would defeat the
credo and ethos of the
Arbitration Act
, which is to enable
expeditious arbitration without avoidable intervention by
the judicial authorities. As a result, the approach to be
adopted at the reference stage is whether it is 'plainly
arguable' that the arbitration agreement is in existence.
The judgment laid emphasis on the fact that the rule of
priority in favour of the arbitrators is counter-balanced by
the courts' power to review the existence and validity of
the arbitration agreement at the end of the arbitral

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process.

It was elucidated: (
Shin-Etsu Chemical Co. Ltd
,
Supra).

"74..... Even if the court takes the view that the
arbitral agreement is not vitiated or that it is not
invalid, inoperative or unenforceable, based upon
purely a prima facie view, nothing prevents the
arbitrator from trying the issue fully and rendering a
final decision thereupon ....

75..... Even after the court takes a prima facie view
that the arbitration agreement is not vitiated on
account of factors enumerated in
Section 45
, and the
arbitrator upon a full trial holds that there is no
vitiating factor in the arbitration agreement and
makes an award, such an award can be challenged
under
Section 48(1)(a)
. The award will be set aside if
the party against whom it is invoked satisfies the
court inter alia that the agreement was not valid
under the law to which the parties had subjected it or
under the law of the country where the award was
made. The two basic requirements, namely,
expedition at the pre-reference stage, and a fair
opportunity to contest the award after full trial,
would be fully satisfied by the interpreting
Section 45

as enabling the court to act on a prima facie view.

* * *

105. ..... [T]he object of the Act would be defeated if
the proceedings remain pending in the court even
after commencing of the arbitration. It is precisely
for this reason that I am inclined to the view that at
the pre-reference stage contemplated by
Section 45
,
the court is required to take only a prima facie view
for making the reference, leaving the parties to a full
trial either before the Arbitral Tribunal or before the
court at the post-award stage."

104. ...........

132. The courts at the referral stage do not perform
ministerial functions. They exercise and perform judicial
functions when they decide objections in terms of
Sections
and
of the Arbitration Act.
Section 8
prescribes the
courts to refer the parties to arbitration, if the action
brought is the subject of an arbitration agreement, unless it
finds that prima facie no valid arbitration agreement exists.
Examining the term 'prima facie', in
Nirmala J. Jhala v.
State of Gujarat
, (2013) 4 SCC 301, this Court had noted:

(SCC p.320, para 48)
"48. '27.... A prima facie case does not mean a case
proved to the hilt but a case which can be said to be
established if the evidence which is led in support of
the case were [to be] believed. While determining
whether a prima facie case had been made out or not
the relevant consideration is whether on the evidence
led it was possible to arrive at the conclusion in
question and not whether that was the only

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conclusion which could be arrived at on that
evidence.' "

133. Prima facie case in the context of
Section 8
is not to
be confused with the merits of the case put up by the
parties which has to be established before the arbitral
tribunal. It is restricted to the subject matter of the suit
being prima facie arbitrable under a valid arbitration
agreement. Prima facie case means that the assertions on
these aspects are bona fide. When read with the principles
of separation and competence-competence and
Section 34

of the Arbitration Act, the referral court without getting
bogged-down would compel the parties to abide unless
there are good and substantial reasons to the contrary.

134. Prima facie examination is not full review but a
primary first review to weed out manifestly and ex facie
non-existent and invalid arbitration agreements and non-
arbitrable disputes. The prima facie review at the reference
stage is to cut the deadwood and trim off the side branches
in straight forward cases where dismissal is barefaced and
pellucid and when on the facts and law the litigation must
stop at the first stage. Only when the court is certain that
no valid arbitration agreement exists or the
disputes/subject matter are not arbitrable, the application
under
Section 8
would be rejected. At this stage, the court
should not get lost in thickets and decide debatable
questions of facts. Referral proceedings are preliminary and
summary and not a mini trial. This necessarily reflects on
the nature of the jurisdiction exercised by the court and in
this context, the observations of B.N. Srikrishna, J. of
"plainly arguable" case in
Shin-Etsu Chemical Co. Ltd.

(Supra) are of importance and relevance.

Similar views are
expressed by this Court in
Vimal Kishor Shah v. Jayesh
Dinesh Shah
(2016) 8 SCC 788 wherein the test applied at
the pre-arbitration stage was whether there is a "good
arguable case" for the existence of an arbitration
agreement.

135. ..........

139. We would not like be too prescriptive, albeit observe
that the court may for legitimate reasons, to prevent
wastage of public and private resources, can exercise
judicial discretion to conduct an intense yet summary prima
facie review while remaining conscious that it is to assist
the arbitration procedure and not usurp jurisdiction of the
arbitral tribunal. Undertaking a detailed full review or a
long-drawn review at the referral stage would obstruct and
cause delay undermining the integrity and efficacy of
arbitration as a dispute resolution mechanism. Conversely,
if the court becomes too reluctant to intervene, it may
undermine effectiveness of both the arbitration and the
court. There are certain cases where the prima facie
examination may require a deeper consideration. The
court's challenge is to find the right amount of and the
context when it would examine the prima facie case or

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exercise restraint. The legal order needs a right balance
between avoiding arbitration obstructing tactics at referral
stage and protecting parties from being forced to arbitrate
when the matter is clearly non-arbitrable.

140. ............

143. We would now examine
Section 11
of the Arbitration
Act. As noticed above sub-section (6-A) was inserted by
the Act 3 of 2016 with retrospective effect from 23-10-
2015 and omitted by Act 33 of 2019.
Section 11 (6)

requires the court to appoint an arbitrator on an application
made by a party. Section (6-A) to
Section 11
stipulates
that the court shall, at the stage of appointment under sub-
sections (4), (5) or (6), confine itself to the examination of
the existence of an arbitration agreement. Sub-section (6-
A) was omitted by Act 33 of 2019, but the omission is in
view of the introduction of a new regime of institutionalised
arbitration as per the report of the committee headed by
Justice B. N. Srikrishna, dated 30-07-2017 which records
for the reason of recommending the omission as:

"Thus, it can be seen that after the Amendment Act of
2019,
Section 11
(6-A) has been omitted because
appointment of arbitrators is to be done
institutionally, in which case the Supreme Court or
the High Court under the old statutory regime are no
longer required to appoint arbitrators and
consequently to determine whether an arbitration
agreement exists."

144. As observed earlier, SBP & Co. v. Patel Engineering
Ltd. (2005) 8 SCC 618 explains and holds that
Sections 8

and
are complementary in nature as both relate to
reference to arbitration.
Section 8
applies when judicial
proceeding is pending and an application is filed for stay of
judicial proceeding and for reference to arbitration.
Amendments to
Section 8
vide Act 3 of 2016 have not been
omitted.
Section 11
covers the situation where the parties
approach a court for appointment of an arbitrator.
Mayavati
Trading Private Ltd. v. Pradyuat Deb Burman
, (2019) 8
SCC 714 in our humble opinion, rightly holds that Patel
Engineering Ltd. (Supra) has been legislatively overruled
and hence would not apply even post omission of Sub-
section (6-A) to
Section 11
of the Arbitration Act.

Mayavati
Trading Private Ltd.
(Supra) has elaborated upon the object
and purposes and history of the amendment to
Section 11
,
with reference to Sub-section (6-A) to elucidate that the
Section, as originally enacted, was facsimile with
Article 11

of the UNCITRAL Model of law of arbitration on which the

Arbitration Act
was drafted and enacted. Referring to the
legislative scheme of
Section 11
, different interpretations,
and the Law Commission's Reports, it has been held that
the omitted Sub-section (6-A) to
Section 11
of the
Arbitration Act would continue to apply and guide the
courts on its scope of jurisdiction at stage one, that is, the
pre-arbitration stage.

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145. Omission of Sub-section (6-A) by Act 33 of 2019 was
with the specific object and purpose and is relatable to by
substitution of Sub-sections (12), (13) and (14) to
Section
of the Arbitration Act by Act 33 of 2019, which, vide
Sub-section (3A) stipulates that the High Court and this
court shall have the power to designate the arbitral
institutions which have been so graded by the Council
under Section 43-I, provided where a graded arbitral
institution is not available, the concerned High Court shall
maintain a panel of arbitrators for discharging the function
and thereupon the High Court shall perform the duty of an
arbitral institution for reference to the arbitral tribunal.
Therefore, it would be wrong to accept that post omission
of Sub-section (6-A) to
Section 11
the ratio in Patel
Engineering Ltd. (Supra) would become applicable.

146. We now proceed to examine the question, whether
the word 'existence' in
Section 11
merely refers to contract
formation (whether there is an arbitration agreement) and
excludes the question of enforcement (validity) and
therefore the latter falls outside the jurisdiction of the court
at the referral stage. On jurisprudentially and textualism it
is possible to differentiate between existence of an
arbitration agreement and validity of an arbitration
agreement. Such interpretation can draw support from the
plain meaning of the word "existence'. However, it is
equally possible, jurisprudentially and on contextualism, to
hold that an agreement has no existence if it is not
enforceable and not binding. Existence of an arbitration
agreement presupposes a valid agreement which would be
enforced by the court by relegating the parties to
arbitration. Legalistic and plain meaning interpretation
would be contrary to the contextual background including
the definition clause and would result in unpalatable
consequences. A reasonable and just interpretation of
'existence' requires understanding the context, the purpose
and the relevant legal norms applicable for a binding and
enforceable arbitration agreement. An agreement
evidenced in writing has no meaning unless the parties can
be compelled to adhere and abide by the terms. A party
cannot sue and claim rights based on an unenforceable
document. Thus, there are good reasons to hold that an
arbitration agreement exists only when it is valid and legal.
A void and unenforceable understanding is no agreement to
do anything. Existence of an arbitration agreement means
an arbitration agreement that meets and satisfies the
statutory requirements of both the Arbitration Act and the
Contract Act and when it is enforceable in law.

147. We would proceed to elaborate and give further
reasons:

147.1.
In
Garware Wall Ropes Ltd. v. Coastal Marine
Constructions & Engg. Ltd.
(2019) 9 SCC 209, this Court
had examined the question of stamp duty in an underlying
contract with an arbitration clause and in the context had

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drawn a distinction between the first and second part of

Section 7(2)
of the Arbitration Act, albeit the observations
made and quoted above with reference to 'existence' and
'validity' of the arbitration agreement being apposite and
extremely important, we would repeat the same by
reproducing para 29 thereof: (SCC p.238)
"29. This judgment in United India Insurance Co.

Ltd. v. Hyundai Engg. & Constructions Co. Ltd.

(2018) 17 SCC 607 is important in that what was
specifically under consideration was an arbitration
clause which would get activated only if an insurer
admits or accepts liability. Since on facts it was
found that the insurer repudiated the claim, though
an arbitration clause did "exist", so to speak, in the
policy, it would not exist in law, as was held in that
judgment, when one important fact is introduced,
namely, that the insurer has not admitted or
accepted liability. Likewise, in the facts of the
present case, it is clear that the arbitration clause
that is contained in the sub-contract would not
"exist" as a matter of law until the sub-contract is
duly stamped, as has been held by us above.

The
argument that
Section 11
(6-A) deals with
"existence", as opposed to
Section 8
,
Section 16
and

Section 45
, which deal with "validity" of an
arbitration agreement is answered by this Court's
understanding of the expression "existence" in

United India Insurance Co. Ltd. v. Hyundai Engg. &
Construction Co. Ltd., (Supra
), as followed by us."
Existence and validity are intertwined, and arbitration
agreement does not exist if it is illegal or does not satisfy
mandatory legal requirements. Invalid agreement is no
agreement.

147.2. The court at the reference stage exercises judicial
powers. 'Examination', as an ordinary expression in
common parlance, refers to an act of looking or considering
something carefully in order to discover something (as per
Cambridge Dictionary). It requires the person to inspect
closely, to test the condition of, or to inquire into carefully
(as per Merriam-Webster Dictionary). It would be rather
odd for the court to hold and say that the arbitration
agreement exists, though ex facie and manifestly the
arbitration agreement is invalid in law and the dispute in
question is non-arbitrable. The court is not powerless and
would not act beyond jurisdiction, if it rejects an application
for reference, when the arbitration clause is admittedly or
without doubt is with a minor, lunatic or the only claim
seeks a probate of a will.

147.3. Most scholars and jurists accept and agree that the
existence and validity of an arbitration agreement are the
same. Even Starvos Brekoulakis accepts that validity, in
terms of substantive and formal validity, are questions of
contract and hence for the court to examine.

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147.4. Most jurisdictions accept and require prima facie
review by the court on non-arbitrability aspects at the
referral stage.

147.5.
Sections 8
and
of the Arbitration Act are
complementary provisions as was held in Patel Engineering
Ltd.(Supra). The object and purpose behind the two
provisions is identical to compel and force parties to abide
by their contractual understanding. This being so, the two
provisions should be read as laying down similar standard
and not as laying down different and separate parameters.

Section 11
does not prescribe any standard of judicial
review by the court for determining whether an arbitration
agreement is in existence.
Section 8
states that the judicial
review at the stage of reference is prima facie and not final.
Prima facie standard equally applies when the power of
judicial review is exercised by the court under
Section 11
of
the Arbitration Act. Therefore, we can read the mandate of
valid arbitration agreement in
Section 8
into mandate of

Section 11
, that is, 'existence of an arbitration agreement'.
147.6. Exercise of power of prima facie judicial review of
existence as including validity is justified as a court is the
first forum that examines and decides the request for the
referral. Absolute "hands off" approach would be
counterproductive and harm arbitration, as an alternative
dispute resolution mechanism. Limited, yet effective
intervention is acceptable as it does not obstruct but
effectuates arbitration.

147.7. Exercise of the limited prima facie review does not
in any way interfere with the principle of competence-
competence and separation as to obstruct arbitration
proceedings but ensures that vexatious and frivolous
matters get over at the initial stage.

147.8. Exercise of prima facie power of judicial review as to
the validity of the arbitration agreement would save costs
and check harassment of objecting parties when there is
clearly no justification and a good reason not to accept plea
of non-arbitrability.
In
Subrata Roy Sahara v. Union of
India
, (2014) 8 SCC 470, this Court has observed: (SCC
p.642, para 191)
"191. The Indian judicial system is grossly afflicted
with frivolous litigation. Ways and means need to be
evolved to deter litigants from their compulsive
obsession towards senseless and ill-considered claims.
One needs to keep in mind that in the process of
litigation, there is an innocent sufferer on the other
side of every irresponsible and senseless claim. He
suffers long-drawn anxious periods of nervousness and
restlessness, whilst the litigation is pending without
any fault on his part. He pays for the litigation from
out of his savings (or out of his borrowings) worrying
that the other side may trick him into defeat for no
fault of his. He spends invaluable time briefing counsel
and preparing them for his claim. Time which he

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should have spent at work, or with his family, is lost,
for no fault of his. Should a litigant not be
compensated for what he has lost for no fault? The
suggestion to the legislature is that a litigant who has
succeeded must be compensated by the one who has
lost. The suggestion to the legislature is to formulate a
mechanism that anyone who initiates and continues a
litigation senselessly pays for the same. It is
suggested that the legislature should consider the
introduction of a "Code of Compulsory Costs"."

147.9 Even in
Duro Felguera, S.A. v. Gangavaram Port Ltd.

(2017) 9 SCC 729, Kurian Joseph, J., in para 52, had
referred to
Section 7(5)
and thereafter in para 53 referred
to a judgment of this Court in
M.R. Engineers and
Contractors (P) Limited v. Som Datt Builders Limited
,
(2009) 7 SCC 696 to observe that the analysis in the said
case supports the final conclusion that the Memorandum of
Understanding in the said case did not incorporate an
arbitration clause.

Thereafter, reference was specifically
made to SBP & Co. v. Patel Engineering Ltd. (Supra) and

National Insurance Co. Ltd. v. Boghara Polyfab (P) Limited

(2009) 1 SCC 267 to observe that the legislative policy is
essential to minimise court's interference at the pre-arbitral
stage and this was the intention of sub-section (6) to

Section 11
of the Arbitration Act.

Paragraph 48 in
Duro
Felguera, S.A.
(Supra) specifically states that the resolution
has to exist in the arbitration agreement, and it is for the
court to see if the agreement contains a clause which
provides for arbitration of disputes which have arisen
between the parties. Para 59 is more restrictive and
requires the court to see whether an arbitration agreement
exists - nothing more, nothing less. Read with the other
findings, it would be appropriate to read the two
paragraphs as laying down the legal ratio that the court is
required to see if the underlying contract contains an
arbitration clause for arbitration of the disputes which have
arisen between the parties - nothing more, nothing less.

Reference to decisions in Patel Engineering Ltd. (Supra)
and
Boghara Polyfab Private Limited
(Supra) was to
highlight that at the reference stage, post the amendments
vide Act 3 of 2016, the court would not go into and finally
decide different aspects that were highlighted in the two
decisions.

147.10.
In addition to
Garware Wall Ropes Ltd.
(Supra),
this Court in
Oriental Insurance Co. Ltd. v. Narbheram
Power & Steel (P) Ltd.
(2018) 6
SCC 534 and Hyundai
Engg. & Construction Co. Ltd.
(Supra), both decisions of
three Judges, has rejected the application for reference in
the insurance contracts holding that the claim was beyond
and not covered by the arbitration agreement.

The court
felt that the legal position was beyond doubt as the scope
of the arbitration clause was fully covered by the dictum in

Vulcan Insurance Co. Ltd v. Maharaj Singh
(1976) 1 SCC

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943. Similarly, in M/s. PSA Mumbai Investments PTE.

Limited v. Jawaharlal Nehru Port Trust
, (2018) 10 SCC 525,
this Court at the referral stage came to the conclusion that
the arbitration clause would not be applicable and govern
the disputes. Accordingly, the reference to the arbitral
tribunal was set aside leaving the respondent to pursue its
claim before an appropriate forum.

147.11. The interpretation appropriately balances the
allocation of the decision-making authority between the
court at the referral stage and the arbitrators' primary
jurisdiction to decide disputes on merits. The court as the
judicial forum of the first instance can exercise prima facie
test jurisdiction to screen and knockdown ex facie
meritless, frivolous and dishonest litigation. Limited
jurisdiction of the courts ensures expeditious, alacritous
and efficient disposal when required at the referral stage.

148. ............

153. Accordingly, we hold that the expression 'existence of
an arbitration agreement' in
Section 11
of the Arbitration
Act, would include aspect of validity of an arbitration
agreement, albeit the court at the referral stage would
apply the prima facie test on the basis of principles set out
in this judgment. In cases of debatable and disputable
facts, and good reasonable arguable case, etc., the court
would force the parties to abide by the arbitration
agreement as the arbitral tribunal has primary jurisdiction
and authority to decide the disputes including the question
of jurisdiction and non-arbitrability.

154. Discussion under the heading "Who decides
Arbitrability?" can be crystallized as under:

154.1. Ratio of the decision in Patel Engineering Ltd.

(Supra) on the scope of judicial review by the court while
deciding an application under
Sections 8
or 11 of the

Arbitration Act
, post the amendments by Act 3 of 2016
(with retrospective effect from 23-10-2015) and even post
the amendments vide Act 33 of 2019 (with effect from 09-
08-2019), is no longer applicable.

154.2. Scope of judicial review and jurisdiction of the court
under
Section 8
and
of the Arbitration Act is identical
but extremely limited and restricted.

154.3. The general rule and principle, in view of the
legislative mandate clear from Act 3 of 2016 and Act 33 of
2019, and the principle of severability and competence-
competence, is that the arbitral tribunal is the preferred
first authority to determine and decide all questions of non-
arbitrability. The court has been conferred power of
"second look" on aspects of non-arbitrability post the award
in terms of sub-clauses (i), (ii) or (iv) of
Section 34(2)(a)

or sub-clause (i) of
Section 34(2)(b)
of the Arbitration Act.
154.4. Rarely as a demurrer the court may interfere at the

Sections 8
or 11 stage when it is manifestly and ex facie
certain that the arbitration agreement is non-existent,
invalid or the disputes are non-arbitrable, though the

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nature and facet of non-arbitrability would, to some extent,
determine the level and nature of judicial scrutiny. The
restricted and limited review is to check and protect parties
from being forced to arbitrate when the matter is
demonstrably 'non-arbitrable' and to cut off the deadwood.
The court by default would refer the matter when
contentions relating to non-arbitrability are plainly
arguable; when consideration in summary proceedings
would be insufficient and inconclusive; when facts are
contested; when the party opposing arbitration adopts
delaying tactics or impairs conduct of arbitration
proceedings. This is not the stage for the court to enter into
a mini trial or elaborate review so as to usurp the
jurisdiction of the arbitral tribunal but to affirm and uphold
integrity and efficacy of arbitration as an alternative
dispute resolution mechanism."

In the case of Indian Oil Corporation Limited Versus NCC

Limited, (2023) 2 Supreme Court Cases 539, the Hon'ble

Supreme Court, after survey of its earlier judicial pronouncements,

particularly the decision in the case of Vidya Drolia & Others

(Supra), observed as below:-

"73.
In the recent decision of this Court in
DLF Home
Developers Ltd. v. Rajapura Homes (P) Ltd
(2021) 16 SCC

743) in which this Court also had an occasion to consider

Section 11
(6-
A) of the Arbitration Act
and ultimately has
observed, after referring to and considering the decision of
the three-Judge Bench of this Court in Vidya Drolia (supra)
that the jurisdiction of the Court under
Section 11
of the
Arbitration Act is primarily to find out whether there existed
a written agreement between the parties for resolution of
the dispute and whether the aggrieved party has made out
a prima facie arguable case, it is further observed that
limited jurisdiction, however, does not denude the Court of
its judicial function to look beyond the bare existence of an
arbitration clause to cut the deadwood. In the said decision,
this Court had taken note of the observations made in the
case of Vidya Drolia (supra) that with a view to prevent
wastage of public and private resources, the Court may
conduct 'prima facie review' at the stage of reference to
weed out any frivolous or vexatious claims."

12. In another decision in the case of NTPC Limited Versus

SPML Infra Limited, (2023) 9 Supreme Court Cases 385,

the Hon'ble Supreme Court considered the legal position with

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regard to the non-arbitrability of the dispute. It was explained

by the Hon'ble Supreme Court as below:-

"Position of Law

16. In the present case, we are concerned with the pre-
referral jurisdiction of the High Court under
Section 11
of
the Act and would like to underscore the limited scope
within which an application under
Section 11(6)
of the
Arbitration and Conciliation Act, 1996 has to be considered.

17. The position of law with respect to the pre-referral
jurisdiction, as it existed before the advent of
Section 11
(6-

A) in the Act
, was based on a well-articulated principle
formulated by this Court in National Insurance Co. Ltd. v.

Boghara Polyfab (P) Ltd (2009) 1 SCC 267. In Boghara
Polyfab, this Court held that the issue of non-arbitrability of
a dispute will have to be examined by the Court in cases
where accord and discharge of the contract is alleged.
Following the principle in Boghara Polyfab, this Court in

Union of India v. Master Construction Co.
(2011) 12 SCC
349 observed that when the validity of a discharge
voucher, no-claim certificate or a settlement agreement is
in dispute, the Court must prima facie examine the
credibility of the allegations before referring the parties to
arbitration.

Yet again in
New India Assurance Co. Ltd. v.
Genus Power Infrastructure Ltd.
(2015) 2 SCC 424, this
Court observed that allegations of fraud, coercion, duress
or undue influence must be prima facie substantiated
through evidence by the party raising the allegations.

18. In a legislative response to these precedents, through
the
Arbitration and Conciliation (Amendment) Act
2015,
sub-section (6-A) was added to
Section 11
of the Act,
which reads as follows:

11. (6-A) The Supreme Court or, as the case may
be, the High Court, while considering any application
under sub-section (4) or sub-section (5) or sub-

section (6), shall, notwithstanding any judgment,
decree or order of any Court, confine to the
examination of the existence of an arbitration
agreement."

(emphasis supplied)

19. Taking cognizance of the legislative change, this Court
in Duro Felguera, SA Versus Gangavaram Port Ltd., (2017)
9 SCC 729 noted that post the 2015 Amendments, the
jurisdiction of the Court under
Section 11(6)
of the Act is
limited to examining whether an arbitration agreement
exists between the parties-"nothing more, nothing less"

20. However, in the year 2019, in
United India Insurance
Co. Ltd. v. Antique Art Exports (P) Ltd.
(2019) 5 SCC 362,
this Court had nevertheless accepted an objection of

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"accord and satisfaction" in opposition to an application for
reference to arbitration.

21. It did not take much time for this Court to reverse the
approach in
Antique Art Exports (P) Ltd.
(Supra).

A three-
Judge Bench in Mayavati Trading (P) Ltd. Versus Pradyuat
Deb Burman (2019) 8 SCC 714 expressly overruled the
abovereferred decision in Antique Art Exports, observing
that: (
Mayavati Trading
case, SCC pp. 724-25, Para-10)

"10. This being the position, it is clear that the law
prior to the 2015 Amendment that has been
laid down
by
this Court, which would have included going into
whether accord and satisfaction has taken place, has
now been legislatively overruled. This being the
position, it is difficult to agree with the reasoning
contained in the aforesaid judgment, as
Section 11
(6-
A) is confined to the examination of the existence of an
arbitration agreement and is to be understood in the
narrow sense as has been
laid down in
the judgment in
Duro Felguera, SA."

(emphasis in original)

Having navigated through various judicial pronouncements

and the common thread of prima-facie test, it was

authoritatively held as below:-

"24. Following the general rule and the principle
laid down
in
Vidya Drolia (Supra) this Court has consistently been
holding that the Arbitral Tribunal is the preferred first
authority to determine and decide all questions of non-
arbitrability. In Pravin Electricals (P).
Ltd. v. Galaxy Infra
and Engg. (P
).

Ltd. (2021) 5 SCC 671, Sanjiv Prakash v.
Seema Kukreja
(
2021) 9 SCC 732 and Indian Oil
Corporation Ltd. v. NCC Ltd
(2023) 2 SCC 539., the parties
were referred to arbitration, as the prima facie review in
each of these cases on the objection of non-arbitrability
was found to be inconclusive.
Following the exception to
the general principle that the Court may not refer parties to
arbitration when it is clear that the case is manifestly and
ex facie non-arbitrable, in BSNL v. Nortel Networks (India)
(P) Ltd. (2021) 5 SCC 738 (hereinafter "Nortel Networks")
and Secunderabad Cantonment Board v. B.
Ramachandraiah & Sons (2021) 5 SCC 705, arbitration was
refused as the claims of the parties were demonstrably
time-barred.

Eye of the needle

25. The above-referred precedents crystallise the position
of law that the pre-referral jurisdiction of the courts under

Section 11(6)
of the Act is very narrow and inheres two
inquiries. The primary inquiry is about the existence and
the validity of an arbitration agreement, which also

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includes an inquiry as to the parties to the agreement and
the applicant's privity to the said agreement. These are
matters which require a thorough examination by the
referral court. The secondary inquiry that may arise at the
reference stage itself is with respect to the non-arbitrability
of the dispute.

26. As a general rule and a principle, the arbitral Tribunal is
the preferred first authority to determine and decide all
questions of non-arbitrability. As an exception to the rule,
and rarely as a demurrer, the Referral Court may reject
claims which are manifestly and ex-facie non-arbitrable.
Explaining this position, flowing from the principles laid
down in Vidya Drolia & Others (supra), this Court in a
subsequent decision in Nortel Networks (Supra) held:

(Nortel Networks case, SCC p.764, para 45)
"45. ..45.1. ... While exercising jurisdiction under

Section 11
as the judicial forum, the court may exercise
the prima facie test to screen and knockdown ex facie
meritless, frivolous, and dishonest litigation. Limited
jurisdiction of the courts would ensure expeditious and
efficient disposal at the referral stage. At the referral
stage, the Court can interfere "only" when it is
"manifest" that the claims are ex facie time-barred and
dead, or there is no subsisting dispute."

27. The standard of scrutiny to examine the non-
arbitrability of a claim is only prima facie. Referral courts
must not undertake a full review of the contested facts;
they must only be confined to a primary first review and let
facts speak for themselves. This also requires the Courts to
examine whether the assertion on arbitrability is bona fide
or not. The prima facie scrutiny of the facts must lead to a
clear conclusion that there is not even a vestige of doubt
that the claim is non-arbitrable. On the other hand, even if
there is the slightest doubt, the rule is to refer the dispute
to arbitration."

13. In yet another recent judicial pronouncement in the case of

Magic Eye Developers Private Limited Versus M/s. Green

Edge Infrastructure Private Limited & Others, (2023) 8

Supreme Court Cases 50, following pertinent observations

were made by the Hon'ble Supreme Court:-

"8. While considering the aforesaid issue,
Section 11
(6-
A)
of the Arbitration Act
which has been added through the

Arbitration and Conciliation Amendment Act, 2015
is
required to be read, which reads as follows:

"11. (6-A) The Supreme Court or, as the case may
be, the High Court, while considering any application

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under sub-section (4) or sub-section (5) or sub-
section (6), shall, notwithstanding any judgment,
decree or order of any court, confine to the
examination of the existence of an arbitration
agreement"

(emphasis supplied)

9. Thus, post
Arbitration and Conciliation Amendment Act,
, the jurisdiction of the court under
Section 11(6)
of
the Act is limited to examining whether an arbitration
agreement exists between the parties- "nothing more,
nothing less". Thus, as per
Section 11
(6-
A) of the Act
, it is
the duty cast upon the Referral Court to consider the
dispute/issue with respect to the existence of an arbitration
agreement.

10. At this stage, it is required to be noted that as per the
settled position of law, pre-referral jurisdiction of the court
under
Section 11(6)
of the Arbitration Act is very narrow
and inheres two inquiries. The primary inquiry is about the
existence and the validity of an arbitration agreement,
which also includes an inquiry as to the parties to the
agreement and the applicant's privity to the said
agreement. The said matter requires a thorough
examination by the Referral Court. (para 25 of the decision
in NTPC). The Secondary inquiry that may arise at the
reference stage itself is with respect to the non-arbitrability
of the dispute. Both are different and distinct."

14. Keeping in forefront the above settled legal position with

regard to existence of an arbitration agreement, non-

arbitrability and the scope of judicial review at the referral

stage while dealing with the application under
Section 11 (6)
of

the Act of 1996 seeking appointment of an arbitrator, I shall

now deal with the issues raised in the present application.

15. The pleadings of the parties reveal an admitted position to

the effect that M/s Verma & Company was a registered firm

under the Act of 1932 and after the death of one of the two

partners namely; Dinesh Kumar Verma, his son Akshay Verma

(applicant herein) was admitted as partner w.e.f. 24.12.2013

and new partnership was constituted which came into existence

vide partnership deed executed on 24.12.2013 between Sita

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Devi Verma and Akshay Verma, which is duly signed by each of

them. It is not in dispute that Clause-9 of the partnership deed

provided that all the disputes shall be settled by the arbitration

according to the provisions of the Act of 1996. Clause-9 of the

Partnership deed reads as under:-

"9. All disputes shall be settled by arbitration according
to the provisions of the Indian Arbitration Act."

16. However, a dispute arose when Sita Devi Verma addressed

a communication to the Bank on 14.03.2022 requesting closer

of the accounts in the name of the firm. When Bank informed

the other partner Akshay Verma regrading request of Sita Devi

Verma for freezing of the accounts of the firm, the other

partner requested the bank not to proceed with the request. It

is also the case of the applicant that later on Sita Devi Verma

sent a letter on 21.04.2022 to the Branch Manager of the bank

with a request to restart overdraft account of the firm followed

by a letter of applicant-Akshay Verma that misunderstanding

between the parties has been cleared. In the meanwhile, Sita

Devi Verma expired on 12.07.2022. The bank, however, sent a

legal notice on 04.08.2022 to the firm M/s. Verma & Company,

Akshay Verma, legal representatives of deceased Sita Devi

Verma and legal representatives of deceased Rajendar Verma

for execution of necessary documents in favour of the bank by

reconstituting the firm or repay outstanding amount of

Rs.1,75,33,186/- along with interest and other expenses, failing

which appropriate legal action would be taken.

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17. A legal issue, therefore, which arises for consideration is

as to whether the firm stood dissolved, there being only two

partners and one partner having died.

The legal position in this regard was examined by the

Hon'ble Supreme Court in the case of Mohd. Laiquiddin &

Anr. Versus Kamla Devi Mishra (Dead) By L.Rs & Ors.

(2010) 2 Supreme Court Cases 407. One of the issues

which arose for consideration was whether the partnership firm

stood dissolved by virtue of
Section 42(c)
of the Act of 1932 on

account of the death of one of the partners, on facts, that being

a case where partnership consisted of only two partners and

one of them died.

18. In the light of the provisions contained in
Section 42
of

the Act of 1932 and despite there being a clause in the

partnership deed to keep the same alive despite death of any

partner, legal position was examined as below:-

"22. The sole issue raised by the Respondents in this
appeal, who are the appellants in Appeal No. 4411-12 of
2002, is whether the finding of the Courts below that the
Partnership firm stood dissolved on account of death of
one of the partners was correct in the light of the express
provisions of the
Partnership Act
, namely,
Section 42 (c)

of the same.

23. Before we proceed to examine the correctness of this
concurrent findings arrived at by the Courts below, it is
necessary to examine the relevant provisions of the

Partnership Act, 1923
and the relevant clauses of the
partnership deed entered between the original plaintiff and
the original defendant. "Partnership" is defined under

Section 4
of the Act which reads as under:

"4. Definition of 'partnership', 'partner', 'firm' and
'firm name.- "Partnership is the relation between
persons who have agreed to share the profits of a
business carried on by all or any of them acting for
all."

24.
Section 42
of the Act reads as under:

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"42. Dissolution on the happening of certain
contingencies:- Subject to contract between the
partners a firm is dissolved-

(a) if constituted for a fixed term, by the
expiry of the term;

(b) if constituted to carry out one or more
adventures or undertakings, by the
completion thereof;
(c) by the death of a partner; and
(d) by the adjudication of a partner as an
insolvent."
(emphasis supplied)

25. Dissolution of a partnership firm on account of death
of one of the partners is subject to the contract entered
into by the parties. In this context, it is pertinent to refer
to the terms of the deed of partnership. Clause 22 of the
Partnership deed reads as follows:

"The partnership shall be in force for a period of
42 years certain from this date and the death of any
partner shall not have the effect of dissolving the
firm."

This clause clearly states that death of any partner shall
not have the effect of dissolving the firm. However, in the
facts and circumstances of the case, we are not in a
position to give absolute effect to this clause of the deed of
partnership.

26. The learned counsel for the Respondents contended
that since the parties agreed that in spite of the death of
any of the partners, the firm shall continue for 42 years
irrespective of the death of the original plaintiff (since
deceased). They further, argued that it clearly
contemplates that the legal representative of the partner,
who dies, would be under a duty to enter into a fresh deed
of partnership. The legal representatives were precluded
from claiming benefits if they deny entering into a fresh
partnership agreement.

27.
In order to arrive at the conclusion that the
partnership firm stood dissolved on account of death of
one of the partners, the High Court had rightly placed
reliance on
Smt. S. Parvathammal v. CIT
(1987) 163 ITR
161 (Mad.), wherein this Court held that in a firm
consisting of two partners on account of death of one of
the partners, the firm automatically dissolved and
observed as follows: (ITR pp.161-62)
".... a partnership normally dissolves on the death of
the partner unless there was an agreement in the
original partnership deed. Even assuming that there
was such an agreement in a partnership consisting of
two partners, on the death of one of them the
partnership automatically comes to an end and there
is no partnership which survives and into which a third
party can be introduced. Hence on the death of S, the
original partnership was dissolved. The subsequent

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taking in of the assessee as a partner was only as a
result of entering into of a new partnership between R
and the assessee. Partnership was not a matter of
heritable status but purely one of contract."
In the light of aforementioned case, it is clear that when
there are only two partners constituting the partnership
firm, on the death of one of them, the firm is deemed to
be dissolved despite the existence of a clause which says
otherwise. A partnership is a contract between the
partners. There cannot be any contract unilaterally without
the acceptance by the other partner.

28. The Appellants, the legal representatives of original
plaintiff (since deceased) was not at all interested in
continuing the firm or constitute a fresh firm and they
cannot be asked to continue the partnership, as there is no
legal obligation upon them to do so as partnership is not a
matter of heritable status but purely one of contract,
which is also clear from the definition of partnership under

Section 4
. Therefore, the trial court was justified in holding
that the firm dissolved by virtue of death of one of the
partners and the first appellate court as well as the High
Court have taken the correct view in upholding the same."

19. In view of the aforesaid decision, the legal position is

crystal clear that irrespective of any clause in the partnership

deed between the two partners, to keep alive the partnership

even after death of one of the partners, upon death of one of the

partners, the partnership stands dissolved by operation of law.

20. However, the crucial question for determination would be

whether despite dissolution of the firm, the arbitration clause

contained in the partnership deed would still survive and binding

on the legal representatives of the deceased partner, for the

purposes of the Act of 1996. The legal position in this regard is

fully explained by the Hon'ble Supreme Court in the case of Ravi

Prakash Goel Versus Chandra Prakash Goel & Another,

(2008) 13 Supreme Court Cases 667. The issues which arose

for consideration and answered, were as below:-

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"16. On the above pleadings, the following questions of law
emerge for our consideration:

(a) Where right to sue for rendition of accounts survives
on the legal legal representative of a deceased partner,
are the legal representatives not entitled to invoke
arbitration clause contained in the Partnership Deed?

(b) Whether the arbitration can be commenced by the
heirs after the death of partner especially where the
dispute had arisen already during the life time of the
partner?

(c) Whether in view of
section 46
read with
section 48
of
the Indian Partnership Act as well as
section 40
of the
Arbitration Act, 1999, the petitioner is entitled to claim
appointment of arbitrator under the arbitration clause of
the Partnership Deed and the Hon'ble Chief Justice of the
Allahabad High Court has erred in overlooking these
provisions?"

The legal position with reference to provisions contained

both in the Act of 1932 and the Act of 1996 was examined by the

Hon'ble Supreme Court which reads as below:-

"17. Before we proceed further, it is useful to reproduce

Section 40
of the Arbitration Act and
Sections 46
,
and
of the Indian Partnership Act:

"40. Arbitration agreement not to be discharged by death
of party thereto.- (1) An arbitration agreement shall not
be discharged by the death of any party thereto either as
respects the deceased or as respects any other party, but
shall in such event be enforceable by or against the legal
representative of the deceased.

(2) The mandate of an arbitrator shall not be terminated
by the death of any party by whom he was appointed.
(3) Nothing in this section shall affect the operation of
any law by virtue of which any right of action is
extinguished by the death of a person."

* * * *
"46. Right of partners to have business wound up after
dissolution.- On the dissolution of a firm every partner or
his representative is entitled, as against all the other
partners or their representatives, to have the property of
the firm applied in payment of the debts and liabilities of
the firm, and to have the surplus distributed among the
partners or their representatives according to their rights.

47. Continuing authority of partners for purposes of
winding up.- After the dissolution of a firm the authority
of each partner to bind the firm, and the other mutual
rights and obligations of the partners, continue
notwithstanding the dissolution, so far as may be
necessary to wind up the affairs of the firm and to

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complete transactions begun but unfinished at the time of
the dissolution, but not otherwise:

Provided that the firm is in no case bound by the
acts of a partner who has been adjudicated insolvent; but
this proviso does not affect the liability of any person
who has after the adjudication represented himself or
knowingly permitted himself to be represented as a
partner of the insolvent.

48. Mode of settlement of accounts between partners.- In
settling the accounts of a firm after dissolution, the
following rules shall, subject to agreement by the
partners, be observed :-

(a) losses, including deficiencies of capital, shall be
paid first out of profits, next out of capital, and
lastly, if necessary, by the partners individually in
the proportions in which they were entitled to share
profits;

(b) the assets of the firm, including any sums
contributed by the partners to make up deficiencies
of capital, shall be applied in the following manner
and order-

(i) in paying the debts of the firm to third parties;

(ii) in paying to each partner rateably what is due
to him from the firm for advances as
distinguished from capital;

(iii) in paying to each partner rateably what is due
to him on account of capital; and

(iv) the residue, if any, shall be divided among
the partners in the proportions in which they were
entitled to share profits."

18. It is clear from
Section 40
of the Arbitration Act that an
arbitration agreement is not discharged by the death of any
party thereto and on such death it is enforceable by or
against the legal representatives of the deceased, nor is the
authority of the arbitrator revoked by the death of the party
appointing him, subject to the operation of any law by virtue
of which the death of a person extinguishes the right of
action of that person.

19.
Section 2(1)(g)
defines "legal representative" which
reads thus:

"2. (1)(g) "Legal Representative" means a person who
in law represents the estate of a deceased person, and
includes any person who intermeddles with the estate
of the deceased person, and, where a party acts in a
representative character, the person on whom the
estate develops on the death of the party so acting;"

20. The definition of 'legal representative' became necessary
because such representatives are bound by and also entitled
to enforce an arbitration agreement.
Section 40
clearly says
that an arbitration agreement is not discharged by the death
of a party. The agreement remains enforceable by or against
the legal representatives of the deceased. In our opinion, a
person who has the right to represent the estate of deceased

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person occupies the status of a legal person (sic
representative).
Section 35
of the 1996 Act which imparts the
touch of finality to an arbitral award says that the award shall
have binding effect on the "parties and persons claiming
under them". Persons claiming under the rights of a deceased
person are the personal representative of the deceased party
and they have the right to enforce the award and are also
bound by it. The arbitration agreement is enforceable by or
against the legal representative of a deceased party provided
the right to sue in respect of the cause of action survives.

21. We have already extracted
Sections 46
,
&
of the
Partnership Act.
Section 46
provides two things, namely, first
is to realize the assets of the business and then to apply the
same for discharge of liabilities and finally to distribute the
surplus, if any, among the partners. All that
Section 46

empowers is that every partner shall claim that this is to be
done for ultimate distribution of the surplus to the partners
according to their shares. A suit to enforce the latter right
relating to the distribution of surplus is generally called a suit
for an account which means account taken up accordingly.
This right to a partner to file a suit for account is not affected
by the fact that the retiring partner has already inspected the
accounts of the firm.
Section 46
is, however, merely
declaratory of the rights of the partners or their legal
representatives in the surplus and does not set out the mode
of calculating the surplus. The share of a partner upon the
winding up of a dissolved firm, is only in the residue which is
left after the liabilities mentioned in the various clauses of

Section 48
have been paid out. Payment of capital and
advances to partners is not out of the residue. The amount
paid as capital investment to a partner will have to be
deducted in order to find the value of the residue, because the
value of a partner's share is only his proportion of the residue.

22. "Right of Representative of a Partner.- The right of a
representative of a partner is really a claim against the
surplus assets on realisation-whether the surplus consists
entirely of the proceeds of realisation or whether they
include some specific items of property, which existed on
the death of the partner. The proper remedy of a partner
in the circumstances is to have accounts taken to
ascertain his share and if the right to sue for accounts is
barred by limitation, the partner cannot sue any partner
in possession of the assets for a share therein, and the
limitation will be governed by
Art.5
of the Limitation Act."

23. On the dissolution of the firm, the arbitration clause
does not come to an end and so if a dispute had arisen
during the lifetime of the deceased partner, his legal
representatives would be entitled to take proceedings under

Section 20
of the Arbitration Act, 1940.

24. When a partner dies and the partnership comes to an
end it is not only right but also the duty of the surviving
partner to realize the assets for the purpose of winding up of
the partnership affairs including the payment of the

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partnership debts. However, it is true that in a general sense
the executors or administrators of the deceased partner may
be said to have a lien upon the partnership assets in respect
of his interest in the partnership and taking the partnership
account.

25.
Section 47
: It is clear that the commencement of the
dissolution does not at once terminate the authority of the
partners. Such authority continues at least for 2 purposes,
namely, (1) so far as necessary to wind up the affairs of the
firm; and (2) to complete the transaction begun but had not
yet been completed.

26.
Section 48
: It lays down two fundamental propositions
which are in line of the provisions of
Section 46
of the
Partnership Act, namely, (1) as to the payment of the losses;
and (2) as to the application of the assets. It is to be noted
that the provisions of
Section 48
are the culmination of the
provisions of
Section 46
of the Partnership Act. Therefore,
both the sections have to be harmoniously read together and
interpreted.

27. We are of the opinion that in view of the provisions of

Section 46
read with
Section 48
of the Indian Partnership Act
as well as
Section 40
of the Arbitration and Conciliation Act,
1996, the application for appointment of an arbitrator under
the arbitration clause of the partnership deed was liable to be
allowed and the learned Chief Justice has erred in overlooking
the said provisions. While right to sue for rendition of
accounts of partnership firm survives on the legal
representative of a deceased partner, he is also entitled to
invoke the arbitration clause contained in the partnership
deed."

21. Though decisions of various High Courts on this aspect have

also been cited before this Court, it is not necessary to burden

the view of this Court with other authorities in view of

authoritative pronouncement of the Hon'ble Supreme Court in the

case of
Ravi Prakash Goel
(Supra). Therefore, the submissions

of learned counsel for the respondents that after the death of Sita

Devi Verma, there does not exist any arbitration agreement so as

to entitle the applicant to seek appointment of an arbitrator in the

matter of dispute fails and is hereby rejected, particularly when

no other ground to assail existence and/or validity of the

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agreement has been put forth by the respondent except death of

Sita Devi Verma.

22. The next issue arising for consideration would be whether the

dispute is non-arbitrable. Contents of the application seeking

appointment of arbitrator and the notice for appointment of

arbitrator reveal that even while Sita Devi Verma was alive, a

dispute in relation to operation of the accounts of the firm M/s.

Verma & Company had arisen on account of letter sent by Sita

Devi Verma to the bank to freeze the accounts of the firm though

according to the applicant later on, she had withdrawn such a

request and consented for operation of the accounts. It is also

revealed that the bank has also given legal notice to the firm and

the legal representatives of the deceased Sita Devi Verma. The

applicant seeks adjudication on mutual rights and duties of the

partnership firm and determination thereof as the bank has sent a

legal notice for realisation of the loan advanced to the bank. The

applicant's claim is that all the partners are entitled to equal

share in the loss and profit in the absence of there being any

agreement in that regard and partners are jointly and severely

liable for all acts of the firm done. According to the applicant, all

the disputes with regard to the rights and liabilities are required

to be determined through appropriate proceedings and, therefore,

legal notice was given seeking appointment of an arbitrator. The

legal representatives of the deceased are in possession of the

estate of the deceased Sita Devi Verma.

23. Applying test of non-arbitrability as laid down succinctly by

the Hon'ble Supreme Court in plethora of decisions referred to

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[2023:RJ-JP:41479] (35 of 37) [ARBAP-104/2022]

herein above, and applying "Eye of the needle" test, it cannot be

held that the present case is classifiable as "non-arbitrable

dispute".

24. In a recent judicial pronouncement in the case of VGP

Marine Kingdom Private Limited and Another Versus Kay

Ellen Arnold, (2023) 1 Supreme Court Cases 597, the legal

position, as discussed in detailed herein above was reiterated as

below:-

"11. ...............As per the decision of this Court in the case of
Vidya Drolia & Others (supra) unless on the facet it is found
that the dispute is not arbitrable and if it requires
further/deeper consideration, the dispute with respect to the
arbitrability should be left to the arbitrator. The decision of
this Court in the case of Vidya Drolia & Others (supra) is a
three judges' bench subsequent decision in which the entire
law on the scope and ambit of the Court at the stage of
application under
Section 11(6)
of the Act, 1996 has been
dealt with and considered by the Court."

In another recent judicial pronouncement in the case of

Meenakshi Solar Power Pvt. Ltd. Versus Abhyudaya Green

Economic Zones Pvt. Ltd, 2022 SCC OnLine SC 1616, the

legal position, relying upon dictum in Vidya Drolia & Others

(Supra), was reaffirmed as below:-

"17. Further, this Court observed that the court at the
referral stage can interfere only when it is manifest that the
claims are ex facie time-barred and dead, or there is no
subsisting dispute. In the context of issue of limitation
period, it should be referred to the Arbitral Tribunal for
decision on merits. Similar would be the position in case of
disputed "no-claim certificate" or defence on the plea of
novation and "accord and satisfaction"

25. The legal position that when contention relating to non-

arbitrability are plainly arguable or when facts are contested,

Court would prefer to refer the matter for arbitration while

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considering an application for appointment of an arbitrator under

Section 11
of he Act of 1996 has been authoritatively settled in

not only Vidya Drolia & Others (Supra), but also many other

decisions including Mohammed Masroor Shaikh Versus

Bharat Bhushan Gupta & Others, (2022) 4 Supreme Court

Cases 156 wherein, following pertinent observations were

made:-

"19. Thus, this Court held that while dealing with petition
under
Section 11
, the Court by default would refer the
matter when contentions relating to non-arbitrability are
plainly arguable. In such case, the issue of non-arbitrability
is left open to be decided by the Arbitral Tribunal. On perusal
of the impugned order, we find that the issues of non-
arbitrability and the claim being time barred have not been
concluded by the learned Single Judge of the Bombay High
Court. In fact, in clause (vii) of the operative part of the
impugned Order, the learned Single Judge has observed that
the contentions of the parties have been kept open. The
petitions filed by the appellant under
Section 34
of the
Arbitration Act, challenging the Order dated 25-5-2021 are
pending before the High Court in which the appellant can
raise all permissible contentions."

Similar are the observations made in plethora of decisions

which were quoted with approval in the case of Sanjiv Prakash

Versus Seema Kukreja and Others, (2021) 9 Supreme

Court Cases 732, which reads as below:-

"20. The Court in Vidya Drolia & Others (supra) then
concluded, on the facts of that case, that it would be unsafe
to conclude one way or the other that an arbitration
agreement exists between the parties on a prima facie
review of facts of that case, and that a deeper consideration
must be left to an arbitrator, who is to examine the
documentary and oral evidence and then arrive at a
conclusion.

21. Likewise, in
Bharat Sanchar Nigam Ltd. v. Nortel
Networks India Pvt. Ltd.
, (2021) 5 SCC 738, another Division
Bench of this Court referred to Vidya Drolia & Others (supra)
and concluded:(BSNL) (Supra), SCC pp. 765-66, paras 46-

47)

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[2023:RJ-JP:41479] (37 of 37) [ARBAP-104/2022]

"46.The upshot of the judgment in
Vidya Drolia &
Others v. Durga Trading Corporation
, (2021) 2 SCC 1 is
affirmation of the position of law expounded in
Duro
Felguera, S.A.
(Supra) and
Mayavati Trading (P) Ltd.

(Supra), which continue to hold the field.

It must be
understood clearly that
Vidya Drolia & Others
(Supra)
has not resurrected the pre-amendment position on the
scope of power as held in SBP & Co. v. Patel
Engineering SBP & Co. v. Patel Engg. Ltd., (Supra).

47. It is only in the very limited category of cases,
where there is not even a vestige of doubt that the
claim is ex facie time- barred, or that the dispute is
non-arbitrable, that the court may decline to make the
reference. However, if there is even the slightest doubt,
the rule is to refer the disputes to arbitration, otherwise
it would encroach upon what is essentially a matter to
be determined by the tribunal."

22. On the contrary, a
Section 11
court would refer the
matter when contentions relating to non-arbitrability are
plainly arguable, or when facts are contested. The court
cannot, at this stage, enter into a mini trial or elaborate
review of the facts and law which would usurp the
jurisdiction of the arbitral tribunal."

26. Resultantly, the application seeking appointment of an

arbitrator is required to be allowed and the same is, accordingly,

allowed. Hon'ble Mr. Justice P.K. Agarwal (Retd.), C-82, Ram

Nagar, Shastri Nagar, Jaipur is appointed as the Sole Arbitrator to

adjudicate upon the dispute between the parties and pass an

award. The Sole Arbitrator shall be entitled to fee, as provided

under Fourth Schedule appended to the Act of 1996.

27. The Registry is directed to intimate Hon'ble Mr. Justice P.K.

Agarwal (Retd.) regarding his appointment as Sole Arbitrator. The

parties are also directed to intimate the Sole Arbitrator towards

commencement of arbitral proceedings in accordance with law.

(MANINDRA MOHAN SHRIVASTAVA),CJ

SANJAY KUMAWAT-15

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