Supreme Court clarifies maintainability of arbitration in unregistered partnerships: Bhagwan Das Goel vs. Pyare Kishan Agarwal (2019)

Introduction

Date of the Judgment: April 4, 2019

Citation: 2019 INSC 310

Judges: Abhay Manohar Sapre, J., Dinesh Maheshwari, J.

Can a dispute arising from an unregistered partnership be resolved through arbitration? The Supreme Court of India addressed this question in a case concerning the maintainability of an application under Section 20 of the Arbitration Act, 1940, when the underlying partnership was unregistered. This case highlights the interplay between arbitration law and partnership law, particularly regarding the bar imposed by Section 69(3) of the Indian Partnership Act, 1932. The Supreme Court, in this judgment, did not delve into the merits of the case but remanded it to the High Court for fresh consideration in light of a previous judgment on the matter. The judgment was authored by Justice Abhay Manohar Sapre, with Justice Dinesh Maheshwari concurring.

Case Background

The case involves a dispute between the legal representatives of the original defendants (appellants) and the plaintiff (respondent). The respondent filed an application under Section 20 of the Arbitration Act, 1940, against the appellants’ predecessors, alleging the existence of a partnership firm named “Gupta Bus Service” formed on July 5, 1960.

Disputes arose among the partners, leading to the dissolution of the firm. The respondent claimed that Clause 11 of the Partnership Deed mandated arbitration for resolving disputes. Consequently, the respondent sought the appointment of an arbitrator to settle the partnership-related disagreements.

The appellants raised a preliminary objection, arguing that the partnership was unregistered. They contended that Section 69(3) of the Partnership Act, 1932, barred the application under Section 20 of the Arbitration Act, 1940.

Timeline

Course of Proceedings

The Civil Judge, Jhansi, on March 18, 1993, overruled the appellants’ objection, holding the respondent’s application to be maintainable. Aggrieved, the appellants filed a writ petition under Article 227 of the Constitution of India in the High Court of Judicature at Allahabad.

The High Court dismissed the writ petition on May 14, 2012, upholding the Civil Judge’s order. The appellants then appealed to the Supreme Court by way of a special leave petition.

Legal Framework

The case revolves around the interpretation of Section 69(3) of the Indian Partnership Act, 1932, which states:

“The provisions of sub-sections (1) and (2) shall apply also to a claim of set-off or other proceeding to enforce a right arising from a contract, but shall not affect,—
(a) 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 realise the property of a dissolved firm, or
(b) the powers of an official assignee, receiver or Court under the Presidency-towns Insolvency Act, 1909 (3 of 1909) or the Provincial Insolvency Act, 1920 (5 of 1920) to realise the property of an insolvent partner.”

This section essentially bars suits by an unregistered partnership firm or its partners against a third party to enforce a right arising from a contract, with certain exceptions. The appellants argued that this bar applied to the respondent’s application under Section 20 of the Arbitration Act, 1940, since the partnership was unregistered.

Arguments

Appellants’ Arguments:

• The appellants contended that the partnership firm, “Gupta Bus Service,” was unregistered.
• They argued that Section 69(3) of the Partnership Act, 1932, bars any legal proceedings by an unregistered firm to enforce a right arising from a contract.
• The appellants submitted that the application under Section 20 of the Arbitration Act, 1940, was essentially an attempt to enforce a right arising from the partnership deed, which is a contract.
• Therefore, the appellants argued that the application was not maintainable due to the bar under Section 69(3) of the Partnership Act, 1932.

Respondent’s Arguments:

• The respondent argued that the application under Section 20 of the Arbitration Act, 1940, was maintainable.
• The respondent’s arguments were not detailed in the judgment. The respondent’s arguments would have been that the bar under Section 69(3) of the Partnership Act, 1932, does not apply to arbitration proceedings.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the High Court was justified in dismissing the appellants’ writ petition.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court relied on the following authority:

Judgment

The Supreme Court observed that the High Court had failed to consider the law laid down in Krishna Motor Service vs. H.B. Vittala Kamath [1996 (10) SCC 88]. The Court stated, “In our view, the High Court should have noticed the aforementioned decision and decided the question accordingly in the light of law laid down therein.”

The Court found that the High Court’s oversight constituted an error necessitating the Supreme Court’s intervention. The Court stated, “The High Court unfortunately did not take note of the said decision and has thus committed an error requiring interference of this Court.”

The Supreme Court, therefore, set aside the High Court’s order and remanded the case for a fresh decision, stating, “The case is remanded to the High Court for deciding the writ petition, out of which this appeal arises, afresh on merits as observed above.”

What weighed in the mind of the Court?

The Supreme Court’s decision to remand the case to the High Court was primarily driven by the High Court’s failure to consider the precedent set in Krishna Motor Service vs. H.B. Vittala Kamath [1996 (10) SCC 88]. The Court emphasized the importance of adhering to established legal principles and precedents. The sentiment analysis reveals a strong focus on ensuring that the High Court properly applies existing law, rather than delving into the merits of the case itself. The Court’s reasoning was centered on procedural correctness and adherence to legal precedent. The Court did not express any opinion on the merits of the case, but rather focused on the procedural lapse by the High Court.

Key Takeaways

• The Supreme Court did not decide on the merits of whether an application under Section 20 of the Arbitration Act, 1940, is maintainable in the case of an unregistered partnership.
• The case was remanded to the High Court for fresh consideration.
• The High Court must consider the precedent set in Krishna Motor Service vs. H.B. Vittala Kamath [1996 (10) SCC 88].
• This case highlights the importance of considering existing legal precedents in judicial decisions.

Directions

The Supreme Court directed the High Court to dispose of the writ petition as expeditiously as possible, preferably within six months.

Development of Law

The ratio decidendi of this case is that the High Court must consider the precedent set in Krishna Motor Service vs. H.B. Vittala Kamath [1996 (10) SCC 88] when deciding on the maintainability of an application under Section 20 of the Arbitration Act, 1940, in the context of an unregistered partnership. This case does not change the law but emphasizes the importance of following established legal precedents.

Conclusion

In conclusion, the Supreme Court’s decision in Bhagwan Das Goel vs. Pyare Kishan Agarwal did not resolve the core issue of whether an arbitration application is maintainable for an unregistered partnership. Instead, it emphasized the need for the High Court to adhere to established legal precedents, specifically Krishna Motor Service vs. H.B. Vittala Kamath [1996 (10) SCC 88]. The case was remanded to the High Court for a fresh decision, highlighting the importance of procedural correctness and proper application of the law.