Smt. Priya Rani Jaggi vs Sh. Om Prakash Jaggi and Another

Aruna Suresh, J.—An application u/s 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 1996 Act) has been filed by defendant Nos. 1 and 2 for reference of the disputes inter se the parties to arbitration. This application has been filed by the defendants contending inter alia that plaintiff has filed a suit for dissolution of partnership and rendition of accounts, that few dates were taken by defendants to file the written statement as they were not supplied with complete paper book and also they sought time to have access to the records of the firm lying locked in the premises of the firm, that the partnership deed dated 22.8.1991 contained clause 9 which is an arbitration agreement inter se the parties and therefore, the suit as filed is not maintainable and the disputes are liable to be referred to arbitration and therefore the suit is liable to be dismissed as not maintainable.

Plaintiff has contested this application and has averred that plaintiff had filed a suit bearing No. 663/2002 u/s 9 of the Act in the lower court and in the said suit defendant No. 2 Sudesh Kumar Jaggi had moved an application under Order 7 Rule 11 of the CPC (hereinafter referred to as CPC) and the said suit was consequently dismissed on 19.8.2002 and therefore, this application is barred by the principles of res-judicata. It was further averred that another suit bearing No. 749/1996 filed by Sh. Tilak Raj Jaggi for partition, rendition of accounts and injunction against Smt. Priya Rani and others is pending adjudication in this court and some of the properties which are subject matter of the present suit also formed part of the subject matter in the said suit and the present application has been filed by the defendants to side away the order dated 17.5.2006 passed in this case whereby cost of Rs. 20,000/- was imposed upon the defendants while granting an adjournment in the case on behest of the defendant. Hence, application deserved dismissal with cost.

Brief facts of the case are that Sh. Darshan Lal Jaggi husband of the plaintiff, Priya Rani Jaggi, had incorporated a firm in the name and style of M/s Jaggi Ayurvedic Pharmacy as sole proprietor and started running the firm in house No. 1113, Main Bazar, Pahar Ganj, New Delhi. The business of the firm was to sell Ayurvedic medicines and subsequently this firm started manufacturing Ayurvedic and Unani medicines in house No. 751-53, Gali Dorewali, Pahar Ganj, New Delhi. Somewhere in the year 1959-60 Sh. Darshan Lal Jaggi joined Om Prakash Jaggi, his brother in the business of the firm and made him a partner. The constitution of the partnership continued to be changed as in the year 1962-63 he made his father Gian Chand Jaggi a partner in the firm and in 1970, Darshal Lal Jaggi joined Sudesh Kumar Jaggi his brother in the said firm as partner. Sh. Gian Chand Jaggi died and Sh. Darshan Lal Jaggi joined his mother Rukmani Devi as partner vide partnership deed dated 1.2.1975. After the death of Smt. Rukmani Devi; Om Prakash Jaggi, Darshan Lal Jaggi and Sudesh Kumar Jaggi executed a new partnership deed on 25.8.1987. Sh. Darshan Lal Jaggi died resulting into reconstruction of the partnership deed dated 22.8.1991 where in place of Darshan Lal Jaggi his wife, the present plaintiff, was made a partner to the extent of 1/3 rd share.

After commencement of the new partnership, Om Prakash Jaggi took charge of the business and maintained the entire books of accounts. Some disputes and differences arose in the family and also in the partnership business. Defendant No. 1 allegedly misappropriated large amount of funds for his personal benefit and use. Despite requests made by the plaintiff and her sons, defendants did not permit them to inspect or look into the accounts of the firm. In view of the arbitration clause in the partnership deed plaintiff wrote a letter on 16.8.2001 requesting the defendant No. 1 to allow her to inspect the accounts and allow her to refer the matter to arbitration. No reply to the letter was received and Om Prakash Jaggi/defendant No. 1 also failed to appoint an arbitrator for reference of the disputes. On coming to know of other unfair practices adopted by defendant No. 1 plaintiff had put locks on the outer gate of the premises No. 791-94, Gali Dorewali, Paharganj on 30.3.2002 and working portion of the property No. 751-53, Gali Dorewali, Paharganj and factory premises No. 37/1 Lawrence Road. She also wrote a letter on 30.3.2002 to the manager of UCO bank to freeze the accounts of the firm. The correspondence for resolution of disputes inter se the parties continued but in vain.

Plaintiff filed a suit on 21.5.2002 being suit No. 663/2002 under Sections 8 and 9 of the 1996 Act which was rejected by the learned Additional District Judge as not maintainable in view of the provisions contained in Section 69 of the Partnership Act (hereinafter referred to as Act) on an application filed by defendant No. 2 Sudesh Kumar Jaggi under order 7 Rule 11 CPC. Plaintiff served a notice dated 21.9.2002 upon the defendants for the dissolution of firm and for rendition of accounts. When the defendants failed to render the accounts, plaintiff filed the present suit for dissolution of partnership and for rendition of accounts.

Defendants refused to accept service of summons and notice issued to them and on the basis of affidavit of service, this Court drew the presumption of service upon the defendants and proceeded ex-parte against them on 29.5.2003. During trial of the case, defendants filed an application under order 9 rule 7 CPC for setting aside the ex-parte order dated 29.5.2003. This application was allowed by this Court vide order dated 2.5.2005 and on the same day defendants were asked to file the written statement. Defendants took number of adjournments for filing the written statement, might be for various reasons. A detailed order was passed by this Court on 17.5.2006 on an application of the defendants seeking direction to the plaintiff to give a complete set of documents and also praying to the court for enlargement of time for filing the written statement. While allowing this application, Court granted time to the defendants to file written statement, within four weeks subject to the cost of Rs. 20,000/-. The matter was adjourned to 11.8.2006 before the Court. In the meantime, this application was filed by the defendants u/s 8 of the 1996 Act along with another application seeking exemption from filing the written statement till the disposal of this application.

Mr. Rajat Aneja, learned counsel for the defendants has argued that in view of the arbitration clause contained in partnership deed the present suit is not maintainable and the disputes being covered by the arbitration clause are liable to be referred to arbitration and also that rejection of the plaint in suit No. 663/2002 filed by the plaintiff on an application under order 7 rule 11 CPC was in view of the embargo placed on an unregistered partnership firm u/s 69 of the Act. Learned counsel for the defendants has also argued that defendants have not submitted their statement of defence as per Section 8 sub-section 1 of the 1996 Act and therefore, the present application is maintainable and the suit is liable to be dismissed as not maintainable.

Mr. Raj Malhotra, learned counsel for the plaintiff, while refuting submissions made by learned counsel for the defendants has submitted that the present application is barred by the principles of res-judicata as the previous suit filed by the plaintiff u/s 9 of 1996 Act was dismissed on an application filed by defendant No. 2 under order 7 rule 11 CPC and therefore, present application is not maintainable. It is further submitted that defendants were given number of opportunities to file their written statement and finally an order was passed imposing cost of Rs. 20,000/- upon the defendants to file the written statement and the present application has been filed thereafter with a view to circumvent the said order and that the defendants after having joined the proceedings of the case have no right to file the present application. It is also argued by the learned counsel for the plaintiff that the properties in the present suit are subject matter in another suit No. 749/1996 filed by Tilak Raj Jaggi for partition, rendition of accounts and injunction. He has prayed that the present application being without any merits and misconceived is liable to be dismissed.

It is a common case of the parties that partnership deed was executed between the parties on 22.8.1991. Clause 9 of this partnership deed contains the arbitration agreement inter se the parties. It reads as follows:

If any dispute arises amongst the partners, it shall be decided under the provisions of the Indian Arbitration Act.

Thus, it is clear that the partnership deed executed between the parties contained an arbitration agreement and parties to the said partnership deed were bound by the said clause of arbitration. Plaintiff has not disputed the existence of arbitration agreement inter-se them. Since disputes arose between the parties, plaintiff filed a suit u/s 9 of the 1996 Act before the Additional District Judge, Delhi, seeking appointment of an arbitrator in terms of partnership deed dated 22.8.1991 and also prayed for the appointment of receiver till the arbitrator was appointed, with directions to him to take into his possession all books of accounts, other goods and stocks etc. of the firm.

Undoubtedly, the partnership firm M/s Jaggi Ayurvedic Pharmacy was an unregistered partnership firm. Therefore, on an application filed by defendant No. 2 under order 7 rule 11 CPC, learned Additional District Judge was pleased to reject the plaint of the plaintiff under order 7 rule 11 CPC on the basis of provisions contained u/s 69 subsection 1 of the Act, as the said provision is an embargo on filing of a suit by an unregistered partnership firm.

The only exception to Section 69 sub section 1 of the Act are contained in sub-section 3(a) of Section 69 of the Act, namely a partner can enforce any right to sue for dissolution of the partnership firm, a partner can seek accounts of a dissolved firm against other partners and he can enforce any right or power to realize the property of the dissolved firm. After the rejection of the plaint in the previous suit plaintiff served a notice dated 21.9.2002 for dissolution of partnership and for rendition of accounts. Since the firm was dissolved by way of the said notice, plaintiff filed the present suit for dissolution of partnership and rendition of accounts, this suit falls within the ambit of exceptions carved out in Section 69 sub-section 3(a) of the Act.

u/s 69(1) of the Act, a partner of a firm cannot file a suit against the other partner of the firm to enforce a right arising from a contract unless the firm is registered and similar bar is under subsection 3 of Section 69 of the Act by virtue of which a partner cannot file any proceedings to enforce a right arising from a contract as a partner against the other partners of an unregistered firm. Since the right to have recourse to arbitration flows from the contract between the parties contained in the partnership deed, a suit or any other proceeding by the partner to enforce the said clause contained in the said partnership deed against the other partners would normally be barred under the first part of sub-section 3 of Section 69 of the Act. However, this bar does not affect the enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm or any right or power to realize the property of a dissolved firm. Hence, even if a partnership firm is unregistered any partner of the said unregistered firm can sue the other partners for dissolution of the firm and for accounts of dissolved firm. This exception contained in sub-section 3(a) of the Act therefore applies not only to the suits but also to any proceedings for dissolution of partnership or for accounts of a dissolved firm or any right or power to realize the property of a dissolved firm.

Under these circumstances the arbitration clause in a partnership deed of an unregistered firm can be enforced for the purpose of securing inter alia dissolution of partnership firm and for accounts of the partnership firm or for obtaining the property of a dissolved firm. Defendants therefore are within their rights to enforce the arbitration clause contained in the partnership deed of the unregistered partnership firm M/s. Jaggi Ayurvedic Pharmacy. (Reference is made to Prabhu Shankar Jaiswal Vs. Sheo Narain Jaiswal and Others,

u/s 9 of the 1996 Act, a party may before or during arbitral proceedings or at any time after making of the arbitral award but before it is enforced u/s 36 of the said Act can apply to the court for any interim measure of protection on the grounds specified in the said section. Section 9 therefore only speaks of interim reliefs which a party to an arbitration agreement can claim before, during or after the arbitration proceedings and even after making of the arbitral award.

In Firm Ashok Traders and Another etc. Vs. Gurumukh Das Saluja and Others etc., it was held that Section 69 of the Partnership Act would not have bearing on the right of a party to an arbitration clause u/s 9 of Act. However, the said order is not under challenge before this Court and hence needs no consideration.

The present suit has been filed after dissolution of the firm and therefore, the rejection of plaint by the learned Additional District Judge in the suit u/s 9 of 1996 Act cannot operate as res-judicata since the trial court in the said suit did not consider the existence of an arbitration agreement and if any dispute had arisen between the parties within the meaning of the said arbitration agreement.

In Smt. Kalpana Kothari Vs. Smt. Sudha Yadav and Others, wherein under similar circumstances a dispute had arisen between the parties a suit was filed for dissolution of partnership and for rendition of accounts and an application u/s 34 of the 1940 Act was filed by Smt. Kalpana Kothari which she subsequently withdrew and was dismissed as withdrawn. Appellant filed an application u/s 8 of the 1996 Act after it came into force. While making distinction between Section 8 of the 1996 Act and Section 34 of the 1940 Act, the Court held:

...In striking contrast to the said scheme underlying the provisions of the 1940 Act, in the new 1996 Act, there is no provision corresponding to Section 34 of the old Act and Section 8 of the 1996 Act mandates that the judicial authority before which an action has been brought in respect of a matter, which is the subject-matter of an arbitration agreement, shall refer the parties to arbitration if a party to such an agreement applies not later than when submitting his first statement. The provisions of the 1996 Act do not envisage the specific obtaining of any stay as under the 1940 Act, for the reason that not only the direction to make reference is mandatory but notwithstanding the pendency of the proceedings before the judicial authority or the making of an application u/s 8(1) of the 1996 Act, the arbitration proceedings are enabled, u/s 8(3) of the 1996 Act to be commenced or continued and an arbitral award also made unhampered by such pendency. We have to test the order under appeal on this basis.

Having regard to the distinct provisions, distinct purpose, scope and object respectively contained in Sections 8 and 9 of 1996 Act, the plea of res-judicata cannot have any application to deprive the defendants of their legitimate right to invoke the comprehensive provisions of mandatory character contained in Section 8 of 1996 Act to have the matter relating to their disputes referred to arbitration in terms of the arbitration agreement.

Now it is to be seen if the defendants can invoke the arbitration clause contained in the partnership deed dated 22.8.1991 in the present suit and whether this court can refer the parties to arbitration under the Act. Section 8 of 1996 Act reads as follows:

Power to refer parties to arbitration where there is an arbitration agreement.-(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement of the substance of the dispute, refer the parties to arbitration.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.

The conditions which are required to be satisfied by the defendants under sub sections 1 and 2 of Section 8 of 1996 Act, before the Court can invoke its jurisdiction and exercise its powers are:

(a) There is an arbitration agreement.

(b) A party to the agreement brings an action in the Court against the other party.

(c) Subject matter of the action is the same as the subject matter of the arbitration agreement.

(d) The other party moves the Court for referring the parties to arbitration before it submits his first statement on the substance of the dispute.

The last condition creates a right in the person bringing the action to have the dispute adjudicated by the court only when the other party has submitted his first statement of defence. The emphasis therefore is on the words "Not later than when submitting his first statement on the substance of the dispute" appearing in Section 8(1) of 1996 Act.

Defendants filed the present application u/s 8 of 1996 Act before they filed their written statement in the Court and their seeking adjournments for filing of written statement cannot be termed as ''defendants submitting their first statement on the substance of the dispute''. In the present application the defendants have not disclosed their defence though they undisputedly have raised a dispute in regard to the claim of the plaintiff. The arbitration agreement entered into between the parties brings within its fold dispute of any nature, whatsoever, arisen between the partners of the firm. This clause is of wide amplitude. Disputes have arisen between the parties within the meaning of the arbitration agreement. The directions contained in Section 8 of the 1996 Act to make reference of the dispute to arbitration are mandatory. Not only this, by virtue of section 8, arbitration proceedings to be commenced or continued and conclusion thereof by an arbitral award are unhampered by such pendency before the Court. Section 8 of the 1996 Act is pre-emptory in nature. In a case where there exists an arbitration agreement, the Court is under obligation to refer the parties to arbitration in terms of the arbitration agreement. Once the matter is referred for arbitration no issue therefore would remain to be decided in a suit. Agri Gold Exims Ltd. Vs. Sri Lakshmi Knits and Wovens and Others, and Hindustan Petroleum Corpn. Ltd. Vs. Pinkcity Midway Petroleums, are relied upon).

Similar issue arose in Rashtriya Ispat Nigam Limited and Another Vs. Verma Transport Company, before the Division Bench of the Supreme Court. In the said case Verma Transport Company had filed a civil suit for permanent injunction against the appellant restraining them from, in any manner, blacklisting the firm or terminating the consignment agency contract. It had also filed an application seeking temporary injunction on which the Court directed the parties to maintain status quo in regard to the status of the respondent qua termination of the contract and also the order of blacklisting. The appellants sought time to file written statement and they also filed reply to the application for injunction. It was in the reply to the application for injunction, the appellants took specific plea that the subject matter of the suit was covered by the arbitration agreement entered into by and between the parties and therefore, the said suit was not maintainable. The appellants also filed application u/s 8 of 1996 Act. The civil judge dismissed the application filed by the appellants. Revision against the said order was also dismissed by the High Court. In SLP filed against the order of the High Court it was held by the Division Bench of the Supreme Court that Section 8 of the 1996 Act contemplated some departure from Section 34 of the 1940 Act. u/s 34 of the 1940 Act there was contemplation of stay of the suit whereas Section 8 of the 1996 Act mandates a reference. Exercise of discretion by the judicial authority which was the basis of Section 34 of the 1940 Act no longer finds place under the 1996 Act. The direction to make reference is not only mandatory but the arbitration proceedings to be commenced or continued and conclusion thereof by an arbitral award remain unhampered by such pendency. It was observed:

The expression "first statement on the substance of the dispute" contained in Section 8(1) of the 1996 Act must be contradistinguished with the expression "written statement". It employs submission of the party to the jurisdiction of the judicial authority. What is, therefore, needed is a finding on the part of the judicial authority that the party has waived its right to invoke the arbitration clause. If an application is filed before actually filing the first statement on the substance of the dispute, in our opinion, the party cannot be said to have waived its right or acquiesced itself to the jurisdiction of the court. What is, therefore, material is as to whether the petitioner has filed his first statement on the substance of the dispute or not, if not, his application u/s 8 of the 1996 Act, may not be held wholly unmaintainable. We would deal with this question in some detail, a little later.

It was further observed:

Waiver of a right on the part of a defendant to the lis must be gathered from the fact situation obtaining in each case. In the instant case, the court had already passed an ad interim ex parte injunction. The appellants were bound to respond to the notice issued by the Court. While doing so, they raised a specific plea of bar of the suit in view of the existence of an arbitration agreement. Having regard to the provisions of the Act, they had, thus, shown their unequivocal intention to question the maintainability of the suit on the aforementioned ground.

In the present case, the arbitration agreement covers all the disputes between the parties as pleaded in the plaint. Since the language of Section 8 of the 1996 Act is pre-emptory, it is therefore obligatory for this Court to refer the parties to arbitration in terms of the arbitration agreement contained in their partnership deed dated 22.8.1991. Nothing remains to be decided in the original action. All the rights, obligations and remedies of the parties would now be governed by the 1996 Act including the right to challenge the award. The court to which the party would have recourse to challenge the award would be the court which falls within the definition contained in clause (e) of Section 2 of the 1996 Act and not the court to which an application u/s 8 of the 1996 Act was made. An application filed u/s 8 of the 1996 Act before this Court has only brought to this court''s notice the subject matter of the action before it as the subject matter of an arbitration agreement. This application cannot be considered as an application u/s 42 of the 1996 Act.

In Smt. Premlata and another Vs. M/s. Ishar Dass Chaman Lal and others, it was observed:

It is fairly stated by Shri Satish Chandra that the party can enforce the right by a suit for rendering accounts and for realization of the property of the dissolved firm pro rata. When that is permissible by an exception carved out by sub-section (3)(a) to Section 69, we are of the view that there is no prohibition to invoke arbitration clause under the deed of partnership, agreed to by and between the parties to invoke Section 20 of the Act. Thus considered, we are of the view that the suit u/s 20 of the Act is maintainable. The High Court has, therefore, committed manifest error of law in holding otherwise.

Defendants being partners of unregistered and dissolved firm had the right to enforce the arbitration clause contained in the partnership deed. In the present suit for dissolution of partnership and rendition accounts there was no prohibition to invoke arbitration clause contained in the partnership deed as the partners had agreed to refer the disputes which might arise between the parties to be decided under the provisions contained in the 1996 Act. Therefore, application as filed is maintained.

Under the circumstances of the case once the dispute between the parties is referred to arbitration it would be open to them to claim dissolution of the partnership, seek rendition of accounts as well as realization of the partnership properties and assets etc. Power of the arbitrator primarily depends on the arbitration clause and the reference by the court to it. The arbitrators so appointed by the parties would have the jurisdiction to consider all the questions or any other dispute within the meaning of arbitration agreement and the arbitrator would not be prevented from deciding such a matter. As per the arbitration agreement any partner could refer all the matters in difference between the partners to arbitration and the arbitrator would have the power to decide whether or not the partnership should be dissolved and to award its dissolution.

In M/s. V.H. Patel and Company and Others Vs. Hirubhai Himabhai Patel and Others, where a similar clause appeared in the partnership deed, it was observed:

....Merely because the disputes between the parties have beep referred to arbitration, he is not prevented from raising such a question nor is the arbitrator prevented from deciding such a matter. Therefore, agreeing with the view expressed by the High Court, we reject the contention raised on behalf of the petitioner that it was not permissible for the arbitrator to enter upon the question of dissolution of the partnership. Though the disputes between the parties originated on the basis whether one or the other partner had not retired from partnership or as to the rights arising in relation to trademarks or otherwise, still when there is no mutual trust between the parties and the relationship became so strained that it is impossible to carry on the business as partners, it was certainly open to them to claim dissolution and such a question could be adjudicated. The scope of reference cannot be understood on the actual wording used in the course of the order made by this Court or the memorandum concerned filed before this Court, but it should be looked from the angle as to what was the spirit behind the reference to the arbitration....

Admittedly, there are strained relationship between the partners of the firm who happen to be close relatives and steps had already been taken by the plaintiff to dissolve the firm. A dispute has arisen within the meaning of arbitration agreement contained in clause 9 of the partnership deed. The defendants have therefore rightly moved this application for referring the dispute to arbitration in the present suit.

Hence, application is allowed. The suit is accordingly dismissed. Under these circumstances there are no orders as to costs. Either of the parties shall initiate arbitration proceedings and appoint an arbitrator without any further lose of time preferably within one month of this order as the parties have been litigating with each other for the last about 6 years.