Delhi High Court

Smt. Priya Rani Jaggi vs Sh. Om Prakash Jaggi & Another on 1 September, 2008

Author: Aruna Suresh

                    "REPORTABALE"
*            HIGH COURT OF DELHI AT NEW DELHI

+            IA NO. 7764/2006 & CS (OS) No. 1798/2002

                          Date of decision : September 1, 2008

# Smt. Priya Rani Jaggi              ..... PLAINTIFF
!               Through : Mr. Raj Malhotra, Adv.
                          Mr. Sujoy Kumar, Adv.


                              Versus


$ Sh. Om Prakash Jaggi & Another     .....DEFENDANTS
^               Through : Mr. Rajat Aneja, Adv.

%
       CORAM:
       HON'BLE MS. JUSTICE ARUNA SURESH

      (1) Whether reporters of local paper may be
          allowed to see the judgment?

      (2) To be referred to the reporter or not?            Yes

      (3) Whether the judgment should be reported
          in the Digest ?                                   Yes

                              ORDER

ARUNA SURESH, J.

1. An application under Section 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.

2. 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.

3. Plaintiff has contested this application and has averred that

plaintiff had filed a suit bearing No. 663/2002 under

Section 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 Code of Civil

Procedure (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.

4. 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 1/3rd

share.

5. 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.

6. 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.

7. 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

under Section 8 of the 1996 Act along with another

application seeking exemption from filing the written

statement till the disposal of this application.

8. 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 under

Section 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.

9. 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 under Section 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.

10. 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:

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

11. 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

under Section 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.

12. 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 under

Section 69 sub-section 1 of the Act, as the said provision is

an embargo on filing of a suit by an unregistered

partnership firm.

13. 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.

14. Under Section 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 sub-section 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.

15. 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 v. Sheo Narain Jaiswal and others - (1196) 11

SCC 225)

16. Under Section 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 under Section

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.

17. In Firm Ashok Traders v. Gurumukh Das Saluja -

(2004) 3 SCC 155 it was held that Section 69 of the

Partnership Act would not have bearing on the right of a

party to an arbitration clause under Section 9 of Act.

However, the said order is not under challenge before this

Court and hence needs no consideration.

18. 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 under Section 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.

19. In Kalpana Kothari (Smt) v. Sudha Yadav (Smt)

and Others - (2002) 1 SCC 203 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 under Section 34

of the 1940 Act was filed by Smt. Kalpana Kothari which

she subsequently withdrew and was dismissed as

withdrawn. Appellant filed an application under Section 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 under Section 8(1) of the 1996 Act, the arbitration proceedings are enabled, under Section 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."

20. 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.

21. 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:

"8. 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 o 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."

22. 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.

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.

23. 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.

24. Defendants filed the present application under Section

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. v. Sri Lakshmi Knits & Wovens and others

- (2007) 3 SCC 686 and Hindustan Petroleum Corpn.

Ltd. v. Pinkcity Midway Petroleums - (2003) 6 SCC

503) are relied upon).

25. Similar issue arose in Rashtriya Ispat Nigam Ltd.

and another v. Verma Transport Co. - (2006) 7 SCC

275 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 under

Section 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. Under Section 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 under Section 8 of the 1996 Act, may not be held wholly unmaintainable. We would deal with this question in some detail, a little later."

26. 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."

27. 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 under Section 8 of the 1996 Act was

made. An application filed under Section 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 under Section 42 of the 1996

Act.

28. In Prem Lata (Smt) and Another v. M/s Ishar Dass

Chaman Lal and Others - (1995) 2 SCC 145 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 under Section 20 of the Act is maintainable.

            The      High     Court   has,    therefore,
            committed manifest error of law in
            holding otherwise."



29.   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.

30. 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.

31. In V.H. Patel & Company and Others v. Hirubhai

Himabhai Patel and Others - (2000) 4 SCC 368 where

a similar clause appeared in the partnership deed, it was

observed:

"....Merely because the disputes between the parties have been 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...."

32. 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.

33. Hence, application is allowed. The suit is accordingly

dismissed. Under these circumstances there are no orders

as to costs.

34. Either of the parties shall initiate arbitration