22. The respondents claim that in the year 2009-10, Karnataka
property to M/s. Srishaila & Co., which, according to the
respondents, was "a partnership firm at that point of time". They
KIADB represented that M/s. Srishaila and Co., was a
in the name of M/s. Srishaila & Co.
23. It is apparent from the averments to the aforesaid effect that
(ii) KIADB had executed lease cum sale agreement in
favour of appellant No.1 on 30.06.2010 (which was
registered on 28.08.2010).
(iii) The Firm had applied for a PAN number, which was
dispatched by the Income Tax Department on
29.08.2012.
(iv) The disputes had arisen between the parties and a
settlement deed was entered into on 10.09.2012.
24. Notwithstanding that the partnership deed was executed on
property was purchased by the Firm. However, appellant No.1
M/s. Srishaila & Co., represented by him as a proprietor. However,
carried on from 01.04.2012. The following recitals of the
25. The first clause of the partnership deed also provides that
firm shall be "M/s. Srishaila & Co." and such other names as the
parties may determine. This also does not indicate that the parties
were already carrying on the business in partnership. It is also
- 13 -
at Shop No.117/10/6A, R.M.C. Link Road, Davangere -
577001".
"WHEREAS Mr. S.P.Sridhar, second party, Mrs.
Rajeshwari Mallikarjuna, third party and Mr.
S.P.Muralidhar, fourth party have expressed their desire
to join as partners along with Mr. M.Mallikarjuna, which
he readily accepted."
26. In view of the above, the respondents' claim that they had
constituted the Firm in 2008 and had been carrying on the business
from that year, is contrary to the explicit terms of the partnership
deed.
27. It is not disputed that the Firm did not have a bank account.
It is also relevant to refer to clause 10 of the partnership deed
which reads as under.
"10. Bank Accounts: The firm is herby authorized to
open S B or Current Accounts in any Scheduled Bank or
in any Co-operative Bank or Nationalized banks. The
same will be operated by the party of the First part or by
the party of the second part."
28. It is apparent from the above that the parties contemplated
that opening a bank account in the future, that is, after they
executed the partnership deed.
29. In the aforesaid circumstances, the arbitral clause, which
provides for the reference of disputes arising from the affairs of the
Firm, necessarily refers to disputes that may arise after it is
- 14 -
constituted. The said clause would not cover any dispute prior to its
constitution under the partnership deed. Whilst the respondents
rely on the partnership deed insofar as the arbitration clause is
concerned, they make claims in respect of a property purchased
prior to the constitution of the Firm under the partnership deed.
30. Even if the averments made by the respondents that parties
were carrying on their business in partnership in the name of M/s.
Srishaila & Co., since 2008 onwards, is accepted - which we do
not - the dispute relating to such partnership would not fall within
the scope of the arbitration agreement under clause 18 of the
partnership deed. This is because the said clause covers disputes
arising from the affairs of the Firm constituted in terms of the
partnership deed, that is, the partnership firm constituted with effect
from 01.04.2012. In this view, we are unable to accept that the
arbitration agreement covers the dispute raised by the
respondents. There was no arbitration agreement between the
parties for referring disputes relating to a period prior to the
constitution of the Firm under the partnership deed to arbitration.
31. The Arbitral Tribunal referred to Section 6 of the Partnership
Act, 1932, which reads as under.
- 15 -
"6. Mode of determining existence of
partnership.--In determining whether a group of
persons is or is not a firm, or whether a person is or is not
a partner in a firm, regard shall be had to the real relation
between the parties, as shown by all relevant facts taken
together."
32. On the strength of the aforesaid provision, the Arbitral
Tribunal observed as under:
"34. As per the above-extracted provision of law, the
Arbitral Tribunal has to examine all the incidents and
relations between the parties as shown by the written
agreements, verbal agreements together with the
surrounding circumstances at the time when the contract
was entered into and the subsequent conduct and
circumstances, which throw light on the nature of their
relationship. Whether the relationship of partners exists
or does not exist depends on what was intended by the
parties. The question as to whether a person is a partner
in a partnership firm is one of fact and has got to be
decided after taking into account all the relevant
circumstances and factors. Just because the partnership
deed is not registered, its very existence cannot be
disputed with any rate of success."
33. It is not necessary for us to consider the merits of the
aforesaid observations. Assuming that the Arbitral Tribunal could
refer to various communications, agreements and subsequent
conduct of the parties to determine whether a relationship of
partners existed between the parties and the same indicated that
the parties were partners prior to the execution of the partnership
deed; the disputes arising out of such relationship would not be
covered under the arbitration agreement (clause 18 of the
- 16 -
partnership deed). This is because the same are confined to the
disputes arising out of the partnership during the continuance of the
Firm. The relationship referred to in the arbitration clause is
confined to the partnership constituted under the partnership deed,
and not to any other contractual agreement that may or may not
have existed between the parties.
34. We may also note at this stage that the Arbitral Tribunal had
framed the following issues for consideration.
1. Whether the claimants prove that M/s. Srishaila and
Co., a Partnership Firm, had come into existence
pursuant to the Partnership Deed, dated
01.04.2012?
2. Whether the claimants prove that they are entitled to
the execution of the sale deeds in respect of the
properties shows as item Nos.2, 8, 11 and 16 of
schedule A property, as per the Settlement
Agreement dated 10.09.2012?
3. Whether the respondents prove that the claimants
are not the partners of M/s. Srishaila and Co., at all
and that the claimants are the partners of only M/s.
Manikeshwari Industries?
4. What order or award?
35. Insofar as the first issue is concerned, whether the Firm had
come into existence pursuant to a partnership deed dated
01.04.2012, the Arbitral Tribunal had answered in the affirmative.
Consequently, issue No.3 was answered in the negative.
- 17 -
36. The principal dispute was covered by issue No. 2, namely,
whether the respondents were entitled for execution of the sale
deed. The relief claimed, as well as the impugned award, rest on
the terms of the settlement deed between the parties. The same
states that the parties had established a Firm, M/s Manikeshwari
Industries, in the year 2006, and conducted business on an equal
share basis. However, thereafter, they included the firm, M/s
Srishaila & Co., with M/s Manikeshwari Industries, and the said
Firm was owned by the appellants. The relevant paragraph of the
settlement deed reads as follows:
"We the aforesaid two parties jointly had established
a Firm in the name and style of Sri. Manikeshwari
Industries at RMC Link Road, Davanagere in the year
2006 to conduct the business and we have conducted
the business through the firm by investing equal shares,
thereafter in the year 2008-09 included the firm viz.,
Srishyala and Co., with our firm and the said firm is under
the ownership of the First Party.
We have purchased the movable and immovable
properties as shown in the Schedule out of the profits
earned by the aforesaid two Partnership Firms by
investing the funds. The details of the movable and
immovable properties are shown in the Schedule
hereunder. We have taken financial assistance from the
Financial Institutions and private persons for
development of the business of the firm and also for
purchase of the said properties. The aforesaid movable
and immovable properties standing in the joint or
individual names on the consent of both the parties we
have agreed to sell/dispose of the said properties. In
future, at the time of dividing the immovable properties
between us, we have agreed to divide the same as per
the law."
- 18 -
37. As noted above, the respondents' claim is based on the said
settlement agreement. The Arbitral Tribunal had noted the said
settlement deed and had also observed that according to the said
document, M/s. Srishaila and Co., was merged with M/s
Manikeshwari Industries in the year 2008-09. Clearly, the reference
to M/s Srishaila and Co. could not be construed as a reference to
the partnership firm (the Firm) which was constituted under the
partnership deed dated 01.04.2012.
38. The settlement deed refers to the merger of M/s. Srishaila
and Co. with M/s. Manikeshwari Industries and notes that the said
concern was owned by the appellants. This clearly does not refer to
the Firm constituted under the partnership deed dated 01.04.2012.
39. The Arbitral Tribunal's jurisdiction to decide the disputes
was confined to only those disputes that had arisen in regard to the
Firm constituted under the partnership deed dated 01.04.2012, and
not any disputes in respect to the partnership firm named M/s.
Manikeshwari Industries, with which the sole proprietorship
concern M/s. Srishaila & Co., is stated to have merged.
- 19 -
40. The settlement deed purportedly records a settlement in
respect of various immovable properties, which were stated to have
been purchased by the profits earned by the partnership firm.
41. Indisputably, the subject property could not have been
considered as one that was purchased by the profits of the Firm
that was constituted in terms of the partnership deed dated
01.04.2012. It is not necessary to examine whether the said
property was purchased with profits earned by another firm in
which the parties were partners, as that would not be a dispute
covered by the arbitration agreement.
42. Appellant No.1 claims that his signature on the settlement
deed was taken forcibly. This contention was not accepted by the
Arbitral Tribunal. This brings us to the second aspect that needs to
be addressed. This is whether the claims arise from the settlement
deed. If so, the disputes would not be arbitrable, as the settlement
deed does not include an arbitration clause. There is no agreement
between the parties to refer the disputes arising from the
settlement agreement to arbitration.
43. It is contended by the learned counsel for the respondents
that the respondents had relied on the settlement deed only for the
- 20 -
purposes of pointing out the admissions on the part of the
appellants. However, the disputes were referable to those arising
from the Firm's affairs; therefore, the arbitration agreement covers
the said dispute. We find no merit in the said contention for
essentially two reasons. First, the settlement deed is an
independent agreement that refers to the distribution of properties
purportedly purchased with the earnings of the two firms. If it is
accepted, as the respondent claims, that the settlement agreement
was entered into to resolve all disputes, including those in respect
of the Firm, it would follow that the settlement agreement would be
required to be construed as a separate and independent
agreement.
44. The respondents essentially seek implementation of the
settlement deed. And any dispute regarding the implementation of
the same is not covered by the arbitration agreement.
45. In Young Achievers v. IMS Learning Resources Private
Limited1, the Supreme Court considered the question whether an
arbitration clause survives after the parties had entered into a later
agreement. In that case, the parties had entered into an agreement
which contained an arbitration clause. However, thereafter, the
(2013) 10 SCC 535
- 21 -
parties entered into a fresh agreement, referred to as the "Exit
Paper", which set out the terms and conditions on which the parties
had settled their respective claims. The exit paper did not contain
any arbitration clause. In this context, the Supreme Court
concluded that the arbitration agreement did not survive. The
relevant extract of the said judgment is set out below:
"6. We have now to examine terms of the
subsequent agreement titled "Exit Paper" dated 1.2.2011.
It is the common case of the parties that the exit
paper/agreement entered into between the parties does
not contain any arbitration clause. It is useful to extract
the relevant portion of the exit paper, which is as follows:
"With reference to your mail/letter dated 1-2-2011 on
closing the centre, from the aforesaid date with
mutual consent we have agreed on the following:
1. Enrolled students.--All enrolled students of
IMS with you will be serviced by you with respect to
their classes, workshops and conduct of test series,
GD/PI and any other servicing required as per the
product manual.
2. Premises.--IMS will reserve the first right
of utilisation to occupy the premises. In an
eventuality of IMS exercising the right to use the
premises, then IMS will reimburse the monthly rent
for the corresponding months before changing the
rental agreement on to IMS name.
3. Marketing.--From the abovementioned date
you are not eligible to do any marketing and
promotional activities in the name of IMS.
4. Brand.--From the abovementioned date you
are not eligible to use IMS brand in any form.
5. Monthly claims.--The partner abides to
deposit all the course fees collected for any of IMS
- 22 -
programs till now as per the deposit policy of IMS.
All monthly claims will be settled till 31-1-2011 and
the claims would be released after the date of
termination of the partner agreement.
6. Security deposit.--The security deposit
amount will be refunded back to you after the
completion of servicing of all enrolled IMS students.
In case of any due on partner to the Company
(unsettled fees, 9 loan or advance for centre
activities, etc.), same amount will be deducted from
the security deposit.
7. Non-compete clause.--The partner has
averred that neither he, nor his family members are
directly or indirectly interested in any business in
direct competition with that of IMS and the partner
agrees and undertakes to ensure that neither he nor
his family members shall be involved in or
connected to any business in direct competition with
that of IMS at any time during the currency of this
agreement and for a further period of six months
thereafter.
8. Full and final settlement.--I/We accept all the
abovementioned points and confirm that upon
receipt of the sum stated hereinafter in full and final
settlement of all my/our claims, neither me/we nor
any person claiming by or through me/us shall have
any further claims against IMS whatsoever.
Any violation of Points 1, 3, 4, 5 and 7 from the
partner's end will attract legal course of action and
penalties from IMS ranging from forfeiture of the
security deposit and pending claims.
I hereby accept the above terms and
conditions."
7. The exit paper would clearly indicate that it is a
mutually agreed document containing comprehensive
terms and conditions which admittedly does not contain
an arbitration clause. We are of the view that the High
Court is right in taking the view that the case on hand, is
not a case involving assertion by the respondent of
accord a satisfaction in respect of the earlier contracts
dated 1-4-2007 and 1-4-2010. If that be so, it could have
- 23 -
referred to the arbitrator in terms of those two
agreements going by the dictum in Union of India v.
Kishorilal Gupta and Bros. This Court in Kishorilal Gupta
case examined the question whether an arbitration
clause can be invoked in the case of a dispute under a
superseded contract. The principle laid down is that if the
contract is superseded by another, the arbitration clause,
being a component part of the earlier contract, falls with
it. But where the dispute is whether such contract is void
ab intio, the arbitration clause cannot operate on those
disputes, for its operative force depends upon the
existence of the contract and its validity. The various
other observations were made by this Court in the
abovementioned judgment in respect of "settlement of
disputes arising under the original contract, including the
dispute as to the breach of the contract and its
consequences." The principle laid down by the House of
Lords in Heyman v. Darwins Ltd. was also relied on by
this Court for its conclusion. The collective bargaining
principle laid down by the US Supreme Court in Nolde
Bros. case would not apply to the facts of the present
case.
8. We may indicate that so far as the present case is
concerned, parties have entered into a fresh contract
contained in the exit paper which does not even indicate
any disputes arising under the original contract or about
the settlement thereof, it is nothing but a pure and simple
novation of the original contract by mutual consent.
Above being the factual and legal position, we find no
error in the view taken by the High Court. The appeal,
therefore, lacks merit and stands dismissed, with no
order as to costs.
46. We may note that in the present case, the partnership deed
provides for a ratio in which the parties would share their profits
and the assets in the event of dissolution. The settlement deed
specified a different ratio in which the assets were to be distributed.
- 24 -
47. It is not possible to accept that the subject property
belonged to the Firm, as it was acquired prior to its constitution.
However, apart from that, it is also clear that the arbitration
agreement would not apply to any disputes arising out of the
settlement deed.
48. It is well settled that if an agreement containing an
arbitration clause is superseded by another, the arbitration clause
in the earlier agreement would also stand terminated with that
agreement. In these circumstances, the question of whether any
dispute is required to be referred to arbitration would necessarily
depend on whether there is any agreement to refer the disputes
arising from the later agreement to arbitration.
49. It is also relevant to refer to the following observations made
by the Supreme Court in the case of Damodar Valley Corporation
v. K.K.Kar2:
"7.... As the contract is an outcome of the
agreement between the parties it is equally open to the
parties thereto to agree, to bring it to an end or to treat it
as if it never existed. It may also be open to the parties to
terminate the previous contract and substitute in its place
a new contract or alter the original contract in such a way
that it cannot subsist. In all these cases, since the entire
contract is put an end to, the arbitration clause, which is
a part of it, also perishes along with it. Section 62 of the
(1974)1 SCC 141
- 25 -
Contract Act incorporates this principle when it provides
that if the parties to a contract agree to substitute a new
contract or to rescind or alter it, the original contract need
not be performed. Where, therefore, the dispute between
the parties is that the contract itself does not subsist
either as a result of its being substituted by a new
contract or by rescission or alteration, that dispute cannot
be referred to the arbitration as the arbitration clause
itself would perish if the averment is found to be valid. As
the very jurisdiction of the arbitrator is dependent upon
the existence of the arbitration clause under which he is
appointed, the parties have no right to invoke a clause
which perishes with the contract.'"
50. In the present case, there is no dispute that the parties have
entered into a fresh agreement. Plainly, there is a novation. Thus,
the arbitration clause under the earlier agreement is inapplicable.
Unless the parties have specifically agreed or are agreeable,
disputes regarding the novated agreement are not referable to
arbitration under the arbitration clause in the earlier agreement.
51. In view of the above, the appeal is allowed and the
impugned order and the award are set aside.
Sd/-
(VIBHU BAKHRU)
CHIEF JUSTICE
Sd/-
(C.M. POONACHA)
JUDGE
KMV
