Hans Raj and others vs Santosh Kumar and others

Prim Chand Pandit, J.—On 9th May, 1972, Hans Raj and his son Ram Lal brought a suit far dissolution of partnership and rendition of accounts against Santosh Kumar, his brother Jaswant Rai, Tarsem Chand, Bhoj Raj and Raj Kumar, defendants Nos. 1 to 5. The case of the plaintiffs was that they, Santosh Kumar and Tarsem Chand, defendants, entered into a partnership on 26th April, 1970, and constituted a firm by the name of Messrs Madan Mohan and Company, Patran, District Patiala. This firm had to carry on the work of a rice shelter and other allied business. The parties in fact started the business with effect from 1st September, 1969. In the said firm, Hans Raj, plaintiff, had 70 per cent share, while Ram Lal, Santosh Kumar and Tarsem Chand had 10 per cent each. The parties made investments in the said business according to their shares. It was agreed that the defendants would have no concern with the land and the capital expenditure for the instalation and fixing of the machinery etc., which would be done by Hans Raj, plaintiff, alone. The defendants would be only partners In the profits and losses of the business Hans Raj, plaintiff, purchased the land at Patran for Rs. 33,500/- and that land was being used as the site of the factory. He also got the machinery fixed and the business was done according to the terms and conditions mentioned in the partnership-deed. On 28th February, 1972, the parties agreed to constitute a new partnership, in which apart from the old partners, three new partners, viz. Jaswant Rai, Bhoj Raj and Raj Kumar, defendants, would be taken. Hans Raj would have 30 per cent share, Santosh Kumar 15 per cent, Raj Kumar 13 percent, and Bhoj Raj 12 per cent, while the remaining three, namely. Ram Lal, Tarsem Chand and Jaswant Rai 10 per cent each For this purpose, an agreement was executed between the parties But according to the plaintiffs, no formal partnership-deed was actually drawn up-and the laid agreement "was an Inchoate document" and it did not supersede the former partnership-deed dated 26th April, 1970. It was only an agreement to constitute a new partnership and the previous deed continued to regulate the rights and liabilities of the parties It was further alleged by the plaintiffs that even if the new agreement dated 28th February, 1972, was considered to constitute a covation of the contract and the Court found that by that document, a new partnership with terms and conditions mentioned therein was formed, then the plaintiff''s and the defendants would have the above mentioned new shares in the business. It was said that Hans Raj, plaintiff, in compliance with the terms of the fresh agreement, purchased stamps of Rs. 2100/- to execute the sale-deed regarding the land, which was the site of the rice-sheller and the factory, in favour of the partnership. He also got three drafts of Rs. 26,500/-, Rs. 11,000/- and Rs. 13,000/- for payment to Messrs Madan Mohan and Company. The drafts were duly endorsed by the plaintiff in favour of the above firm. All this was done on 21st March, 1972. The plaintiffs were anxious to comply with the terms of the new agreement and Hans Raj did the abovementioned acts for the implementation thereof, but the defendants put him off on false pretexts The plaintiffs were still ready and willing to perform their part of the agreement. But in order to harm the plaintiffs, the defendants had now started carrying on the above business in the name of the firm to the exclusion of the plaintiffs. The defendants openly told them that they had constituted a new partnership in which the plaintiffs had got no concern They were committing acts of malversation and misappropriation, with the result that it was not in the interest of the plaintiffs that the firm might continue its work any longer and that necessitated the filing of the suit. Along with the same, the plaintiffs also made an application for the appointment of a receiver.

On 10th May, 1970 notice of the said application was given to the defendants for 16th May, 1972. On that date, the case was adjourned to 19th May, 1972, because the presiding officer was on leave. On 19th May, 1972 the defendants appeared and prayed for time to put In a reply to the application for the appointment of a receiver and also wanted a copy of the plaint to be supplied to them. The Court fixed 23rd May, 1972, for the reply of the defendants and on that day, an application u/s 34 of the Arbitration Act was filed by Tarsem Chand and Raj Kumar, defendants. It was stated therein that in the partnership-deed dated 26th April, 1970, there was an arbitration clause No. 12 that In case of any dispute, no party would be entitled to go to a Court of law in the first Instance and the dispute would be referred to the arbitrator or arbitrators to be mutually appointed by the partners and that in view of the said clause, the suit of the plaintiffs was liable to be stayed, because the parties to the partnership deed dated 26th April, 1970, were also parties to the suit. The plaintiffs, being parties to the said deed, could not institute the suit. It was also stated that the applicants were always ready and willing to refer the matter to arbitration. It was further said that the plaintiffs had tried to make out a case in the alternative that the agreement dated 26th April, 1970, was superseded. But if they relied upon the partnership deed dated 26th April, 1970, then the suit was not maintainable because the said deed contained an arbitration clause.

This application was contested by the plaintiffs. It was pleaded by them that the defendants had taken concrete steps in the proceedings of the above salt and, therefore, they could not now make an application u/s 34 of the Arbitration Act. It was denied that simply because there was an arbitration clause in the partnership-deed dated 26th April, 1970, the suit could be stayed u/s 34 of the Arbitration Act, meaning thereby that the alternative case put up by the plaintiffs on the basis of the agreement dated 28th February, 1972, in which concededly there was no arbitration clause, had also to be tried.

Both the trial Court and the lower Appellate Court have come to the conclusion that there was an arbitration clause in the partnership-deed dated 26th April, 1970, and the alternative claim based on the agreement dated 28th February, 1972, was illusory and there was not much merit it the sense and, consequently, the suit should be stayed u/s 34 of the Arbitrator, Act, because the defendants bed not taken any steps in the proceedings of the suit, before they made the said application. Against this decision, the plaintiffs have come here in revision.

Section 34 of the Arbitration Act lays down:

Where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party to the agreement or any person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time before filing a written statement or taking any other steps in the proceedings, apply to the judicial authority before which the proceedings are pending to stay the proceedings ; and if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration, such authority may make an order staying the proceedings.

One of the pleas taken by the plaintiffs was that the application u/s 34 was not maintainable, because the defendants had taken other steps in the proceedings of the suit before making the said application.

The finding of the Courts below on this paint was against the plaintiffs and it was held that the defendants had not debarred themselves from making the application u/s 34 or the Arbitration Act, by taking steps in the proceedings of the suit before filing the same. This finding has not been challenged by the learned counsel for the petitioners. We are, therefore, not concerned with this plea of the plaintiffs.

The main reason for the Courts below to grant the said application was that the alternative case set up by the plaintiffs on the basis of the agreement dated 28th February, 1972, in which admittedly there was no arbitration clause, was illusory and there was no merit in the same. From the allegations made by the plaintiffs in the plaint, which I have given above, it would be apparent that the plaintiffs had put forward an alternative case on the strength of the new agreement dated 28th February, 1972. It is true that their main reliance was on the partnership-deed dated 26th April, 1970 and according to them, the agreement dated 28th February, 1972, was an inchoate document and did not supersede the partnership dated 26th April. 1970, because no regular deed was drawn up between the parties and as such the previous partnership-deed continued to regulate the rights and liabilities of the parties in the above business But their case in the alternative was that if the new agreement dated 28th February, 1972 was considered to constitute a fresh contract and the Court was of the view that a new partnership with the terms and conditions mentioned therein had corns into existence, even then she plaintiffs and defendants would be bound by the new shades specified therein and as a matter of fact, the plaintiffs, in compliance with the terms of that agreement, had purchased stamps of Rs. 2100/- to execute the sale-deed regarding the land and also got the three drafts for payment to Messrs Madan Mohan and Company. There is no manner of doubt that the alternative case set up by the plaintiffs had also to be tried by the Court.

It is common ground that in the partnership-deed, dated 26th April, 1970, there was an arbitration clause, while there was none in the agreement dated 28th February, 1972 It is further true than in the latter agreement, three new partners, viz. Jaswant Rat, Bhoj Raj and Raj Kumar had corns in, and the shares of the various partners hid also changed, as already mentioned above.

Section 34 will corns into operation only if a party to an arbitration agreement commences any legal proceedings against any other party to the agreement in respect of any matter agreed to be referred. "Arbitration agreement" has been defined in section 2 (a) as "a written agreement to submit present or future differences to (sic) whether an arbitrator is named therein or not." In order to attract the provisions of this section, therefore, it seams necessary that the suit filed must predate to a matter, which was agreed by the parties to be referred to arbitration. In the present case, in the plaint, two agreements dated 26th April, 1970, and 28th February, 1972, have been referred to. The alternative case has indisputably been set up on the basis of the latter agreement. But there is no manner of doubt that the matters, which were agreed to be referred to arbitration by virtue of the arbitration clause in the deed dated 26th April, 1970, were completely intermingled with those, which were mentioned in the latter agreement dated 28th February, 1972, in which there was no arbitration clause Under these circumstances it is not possible to refer the disputes covered by the first agreement to an arbitrator and permit the suit to proceed in relation to the matters covered by the subsequent agreement. The suit cannot be split up in this way and it has, therefore to go on as a whole. Besides, it appears from the definition of the word ''arbitration agreement'' and the provisions of section 34, that all the parties to the suit should be parties to the arbitration agreement. In instant the case, since there was no arbitration clause in the agreement dated 28th February, 1972, the three defendants, namely, Jaswant Rai, Bhoj Raj and Raj Kumar were not parties to the arbitration agreement, which was contained in the partnership-deed dated 26th April, 1970. It cannot, therefore, be said that all the parties to the suit in the present case were parties to the arbitration agreement. For these reasons, the suit should not have been stayed u/s 34 of the Arbitration Act.

It is true that the making of an order staying the proceedings in a snit u/s 34 is within the discretion of the Court. In the facts and circumstances of this case, in my view, however, the Courts below had not judicially exercised their discretion in staying the proceedings in the suit.

If the suit bed been based on the partnership-deed dated 26th April, 1970, alone and only Santosh Kumar and Tatsem Chand were the defendants, the suit could be stayed at the instance of either of them. But, in the present case, as I have already said, the suit had been filed on the strength of both the partnership-deed dated 26th April, 1970, as well as the agreement dated 28th February, 1972, and there was an arbitration clause in the former and not in the latter. At the time of deciding the application u/s 34 of the Arbitration Act, the Court cannot pronounce upon the merits of the alternative claim put forward by the plaintiffs; because the same have still to be tried by the Court. The whole case cannot be prejudged at the stage of disposing of the said application both the Courts below had, consequently, approached the consideration of this case from an erroneous point of view, with the result that their judgments are vitiated.

The result is that this revision petition succeeds and the application u/s 34 of the Arbitration Act filed by the defendants is rejected. The Court below is directed to proceed with the trial of the suit in accordance with law. In the circumstances of the case, however, there will be no order as to costs.