Mr. Chelamatla Krishna Reddy vs Mr. Kagithapuram Ravinder Reddy ...
2022 Latest Caselaw 2415 Tel

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        THE HON'BLE SRI JUSTICE UJJAL BHUYAN

           ARBITRATION APPLICATION No.77 OF 2020

ORDER:

Heard Mr.Ch.Krishna Reddy, M/s. Chandrasen Law

Offices, learned counsel for the applicant and Mr.Sharad

Sanghi, learned counsel for the respondents.

2 This application has been filed under Section 11 (6) of

the Arbitration and Conciliation Act, 1996 (briefly, 'the 1996

Act', hereinafter) for appointment of arbitrator.

3 According to the applicant, he and respondent No.1

were promoters and directors of a company called M/s.RKR

Builders and Promoters Private Limited, which was

incorporated under the provisions of the Companies Act, 1956

on 09.12.2002. Principal objective of the aforesaid company

was to acquire lands, develop the plots and make

construction thereon. Company had purchased lands under

two registered sale deeds bearing No.9238 of 2003 dated

04.08.2003 and bearing No.10961 of 2003 dated 05.09.2003,

details of which are mentioned in paragraph No.2 of the

supporting affidavit.

4 Apart from the above two sale deeds, applicant and

respondent No.1 had also purchased land individually vide

sale deeds bearing No.9730 of 2002 dated 28.10.2002 and

bearing No.9992 of 2002 dated 28.10.2002, the details of

which are mentioned in paragraph No.3 of the supporting

affidavit. It is stated that the above two properties were

jointly purchased by the applicant and respondent No.1 by

sharing 50% of the sale consideration. All the above four sale

deeds were registered documents.

5 Applicant and respondent No.1 had entered into an

unregistered partition deed dated 06.11.2015 agreeing to

divide the entire properties including those belonging to

M/s.RKR Builders and Promoters Private Limited in the

manner provided in paragraph No.4 of the supporting

affidavit. It was also agreed in the partition deed that

applicant would pay an amount of Rs.62,85,000-00 to

respondent No.1 for the alleged expenses incurred by

respondent No.1. In terms thereof applicant has paid

Rs.40,00,000-00 to respondent No.1 in the presence of three

persons who were mediating between applicant and

respondent No.1.

6 Thereafter, the company i.e. M/s.RKR Builders and

Promoters Private Limited was converted into a Limited

Liability Partnership (LLP) on 24.11.2016.

7 Applicant paid the balance amount of Rs.30,00,000-00

to the three private mediators which included interest of

Rs.7,15,000-00. Thereafter, applicant and respondent No.1

representing the LLP sold certain plot of land for total

consideration of Rs.2,72,50,000-00.

8 After the above transaction, a supplemental deed dated

23.11.2019 was executed. It was agreed between the

applicant and the first respondent that an amount of

Rs.2,21,78,730-00 should be paid to the retiring partner i.e.

the applicant which was equivalent to the applicant's

shareholding, right, title and interest in the LLP. However,

respondents did not handover the cheque for such amount to

the applicant.

9 The entire transactions with regard to the immovable

property of the LLP were filed before the Registrar of

Companies. Based on the partition deed dated 06.11.2015,

applicant was to be paid the sale consideration amount of the

property sold by the LLP. After retirement of the applicant,

respondent No.2 being the wife of respondent No.1 came to be

inducted as a partner in the LLP.

10 Applicant has paid Rs.2,22,00,000-00 to the first

respondent as agreed to in the Memorandum of

Understanding (MoU) dated 05.08.2007. The manner of

payment has been described in paragraph No.8 of the

supporting affidavit. According to the applicant, respondent

Nos.1 and 2 had cheated him and therefore he would like to

cancel the supplemental deed dated 23.11.2019 and continue

as partner of the LLP. Applicant issued notice dated

20.08.2020 invoking the arbitration clause No.40 in the LLP

agreement dated 24.11.2016.

11 Applicant also filed a petition under Section 9 of the

1996 Act before the Principal District Judge, Ranga Reddy

district, which was numbered as OP No.25 of 2020. It is

stated that learned Court below had granted injunction on

11.09.2020 restraining respondent Nos.1 and 2 from

withdrawing the sale consideration of Rs.2,72,50,000-00.

12 Respondents had sent reply notice dated 17.09.2020

stating that Clause 40 of the LLP agreement dated 24.11.2016

would not be applicable as the applicant was no longer a

partner of the LLP.

13 According to the applicant, the supplemental deed dated

23.11.2019 would no longer be applicable as respondent No.1

had not handed over Rs.2,21,78,730-00 to the applicant on

account of his retiring from the partnership. Therefore, the

supplemental deed would not be binding. From a conjoint

reading of Clause 6 of the supplemental deed and the recital

thereof it is evident that the supplemental deed has to be read

along with the LLP agreement dated 24.11.2016. Clause 40

of the LLP agreement provides for an arbitration clause.

14 Since respondents failed to chose or nominate any

arbitrator within a period of 30 days from the date of receipt

of the notice dated 20.08.2020, the present application has

been filed.

15 Respondent Nos.1 to 3 have filed common counter

affidavit. Stand taken in the said affidavit is that applicant

and respondents have got incorporated one company by the

name of RKR Builders and Promoters Private Limited in terms

of the Companies Act, 1956 dated 09.12.2002, applicant and

respondent No.1 being the promoters/directors of the

company. As per the articles of association, objective of the

company was to acquire and purchase the properties, develop

the same into residential and commercial plots and thereafter

to sell the same. Details of properties purchased by the

applicant and respondent No.1 in their individual capacities

and also in the name of the company are mentioned in

paragraph No.4 of the counter affidavit.

16 Because of differences between applicant and

respondent No.1, the same was referred to private arbitration

of Mr.K.Bal Reddy and four others. A private award was

passed on 01.07.2007 in pursuance of which a Memorandum

of Understanding (MoU) was executed between applicant and

respondent No.1 on 05.08.2007. As per the MoU applicant

was required to pay Rs.2,24,25,000-00 to respondent No.1

and in lieu thereof respondent No.1 would forego his 1/4th

share in a particular plot of land at Nallakunta, Hyderabad. It

is stated that on the day of execution of the MoU, applicant

paid only Rs.50,00,000-00 to respondent No.1 and agreed to

pay the balance amount of Rs.1,74,25,000-00 by enchasing

four post dated cheques. But applicant failed to make such

payment till date. In addition, applicant had also agreed to

pay Rs.22,85,000-00 towards his part of the expenses

incurred to fight the litigation by respondent No.1 against

third parties. In all, applicant is required to pay

Rs.1,97,10,000-00 together with interest to the first

respondent.

17 Consequent upon further differences between the

parties an oral partition took place vis a vis personal

properties and these were incorporated in an unregistered

partition deed dated 06.11.2015. Thereafter, M/s. RKR

Builders and Promoters Private Limited got converted into LLP

Partnership firm under the name and style of RKR Builders

and Promoters LLP by way of agreement dated 24.11.2016.

18 Applicant retired from the partnership under a

supplemental deed between applicant and respondent No.1

wherein and whereby applicant had opted to retire from the

partnership. The partnership firm continued with respondent

No.1 and his wife respondent No.2 as partners. According to

the supplemental agreement, a sum of Rs.2,21,78,730-00 was

paid to the retiring partner after deducting taxes and legal

expenses.

19 Thus, on execution of the supplemental agreement on

23.11.2019 there was total novation of contract between the

parties. Respondents have also stated that the entire

property owned and possessed by the LLP has been sold by

the partnership firm to a third party. Therefore, the LLP

agreement dated 24.11.2016 had come to an end. Reference

has been made to Section 62 of the Contract Act, 1872 to

contend that there is novation of contract between applicant

and respondent No.1. Therefore, the LLP agreement dated

24.11.2016 cannot be implemented. The supplemental

agreement has superseded the LLP agreement. In the

supplemental agreement there is no arbitration clause.

20 According to respondent No.1, instead of him making

payment to the applicant, it is the other way around. By

giving the particulars it is stated that it is the applicant who

has to pay an amount of Rs.6,70,14,000-00 to respondent

No.1. Additionally it is stated that applicant has filed a suit

for partition being O.S.No.184 of 2020 which is pending on

the file of V Additional District Judge, Ranga Reddy. If the

applicant has any grievance, the same can be pleaded before

the aforesaid Court. Therefore, the prayer made in the

arbitration application should be rejected.

21 Additional counter affidavit has been filed by respondent

Nos.1 to 3. In this additional counter affidavit, stand taken is

that respondent Nos.2 and 3 are not signatories to the LLP

agreement dated 24.11.2016 which contains arbitration

clause i.e. Clause No.40. Therefore, respondent Nos.2 and 3

do not come within the definition of 'party' as has been

defined under Section 2 (1) (h) of the 1996 Act. As such claim

to arbitration is not maintainable insofar respondent Nos.2

and 3 are concerned.

22 Alternatively, it is contended that respondent Nos.2 and

3 have not been appraised of the contents of the earlier LLP

agreement dated 24.11.2016 including the arbitration clause.

Therefore, there is no conscious acceptance of any of the

clauses contained in the LLP agreement dated 24.11.2016.

Since only respondent No.1 is bound by the LLP agreement

and respondent Nos.2 and 3 are not bound by the said

agreement, there cannot be a split in the cause of action.

Resultantly, a part of the lis cannot be referred to arbitration.

23 Finally, it is contended that the LLP agreement dated

24.11.2016 is nothing but a partnership deed which has not

been registered with the Registrar of firms. Hence the present

application would be barred under Section 69 (3) of the

Partnership Act, 1948.

24 Applicant has filed a rejoinder affidavit. A major part of

the rejoinder is devoted to clarification on merit vis-a-vis

claim raised by respondent No.1 against the applicant in

terms of the MoU dated 05.08.2007. However, applicant has

denied and disputed that by virtue of execution of the

supplemental agreement dated 23.11.2009 there was total

novation of contract between the parties and the LLP

agreement dated 24.11.2016 has ceased to exist. Refuting

the contention as to application of Section 62 of the Contract

Act, 1872, it is contended that the primary contract has to be

substituted by a new contract which is not the case in the

instant application. It is stated that arbitration notice was

first issued by the applicant on 08.05.2020. But as the same

was not responded to, fresh legal notice invoking arbitration

clause was issued on 20.08.2020 which also remained

unresponded. Regarding O.S.No.184 of 2020, it is submitted

that the same has been filed for different schedule of property

which has no bearing either on the application filed under

Section 9 of the 1996 Act or on the present application.

Applicant has also placed reliance on a number of judgments.

25 Short point for consideration is whether there is a

dispute between the parties? And if so, whether such dispute

is arbitrable? Corollary to the above question is whether there

is any arbitration agreement by and between the parties?

26 To appreciate the above question, it is necessary to

advert to the LLP agreement dated 24.11.2016. The said LLP

agreement is between applicant and respondent No.1 who

were collectively referred to as partners. As per Clause (1),

the LLP is to be called as "RKR Builders and Promoters LLP".

Clause (3) says that contribution of the LLP was

Rs.20,00,000-00 to be contributed by the two partners in

equal proportion of Rs.10.00 lakhs each clarifying that further

contribution if required would be brought by the partners in

their profit sharing ratio. Insofar induction of new partner is

concerned, Clause (7) says that no person shall be introduced

as a partner without the consent of the existing partner(s).

27 Under Clause (32) an existing partner may cease to be a

partner of the LLP by giving a notice in writing of not less

than 30 days to the other partners of his intention to resign

as partner.

28 Clause (40) is relevant and is extracted as under:

"All disputes between the partners or between the Partner and the RKR BUILDERS & PROMOTERS LLP arising out of the limited liability partnership agreement which cannot be resolved in terms of this agreement shall be referred for arbitration as per the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996)."

29 From the above, it is seen that what Clause (40) says is

that all disputes between the partners or between a partner

and the LLP arising out of the limited liability partnership

agreement which cannot be resolved in terms of the said

agreement, shall be referred to arbitration as per the

provisions of the 1996 Act.

30 Applicant, respondent No.1 and respondent No.2

thereafter entered into a supplemental agreement dated

23.11.2019.

31 Applicant was referred to as "discontinuing / retiring

partner" whereas respondent No.1 was referred as "existing

partner and continuing partner". On the other hand,

respondent No.2 was described as "new partner and

continuing partner". As per the recital of the supplemental

deed, the existing partners were carrying on the business as

mentioned in the initial agreement dated 24.11.2016 under

the name and style of "RKR Builders and Promoters LLP". It

was mentioned that the retiring partner (applicant) had given

notice to the continuing partners and the LLP of his desire to

retire from the LLP with effect from 23.11.2019. Therefore,

after accounts were drawn up, including assets and goodwill

and after deducting taxes, professional and legal expenses, it

is stated that a sum of Rs.2,21,78,730-00 was paid to the

retiring partner vide cheque No.000001, HDFC Bank, Kokapet

branch being equivalent to his shareholding, right, title and

interest in the LLP business.

32 Thereafter, the new partner i.e. second respondent was

inducted. Clause (1) of the supplemental deed says that the

supplemental deed is supplemental to the LLP agreement

dated 24.11.2016. Thereafter, it is clarified that respondent

Nos.1 and 2 would continue as the partners of the LLP.

Clause (6) says that except as modified by the supplemental

deed, the LLP agreement dated 24.11.2016 and the

supplemental agreement entered into between the existing

partner and new partner on 23.11.2019 shall be read and

construed as if the same had been executed by the existing

partners and new partner.

33 Before proceeding further it is interesting to note that as

per the recital in the supplemental deed dated 23.11.2019 it

is stated that a sum of Rs.2,21,78,730-00 was paid to the

retiring partner (applicant) vide cheque No.000001 HDFC

Bank, Kokapet branch. Interestingly, neither the cheque date

nor the date on which the cheque was handed over to the

applicant are mentioned. This assumes significance in the

light of the assertion made by the applicant that the aforesaid

amount was not paid by respondent No.1 to the applicant.

34 Applicant had issued letter dated 05.05.2020 to the

respondents against withholding of the retirement benefit

amount to the extent of Rs.2,21,78,730-00. It was stated

therein that the said amount was not paid to the applicant.

Therefore, the notice was issued calling upon the respondents

to pay the said amount with interest at the rate of 18% p.a.

from the date of supplemental deed till actual payment, failing

which it was stated that the applicant would be compelled to

resort to legal action, including arbitration. This was

disputed by the respondents vide letter dated 12.05.2020. In

the said letter respondents raised counter payment of

Rs.1,74,25,000-00 + a further sum of Rs.22,85,000-00, not

paid by the applicant. It was thereafter that applicant

invoked the arbitration clause and issued notice dated

08.05.2020. In the said notice applicant nominated

Mr.K.Sanga Reddy, retired District Judge, as his nominee

arbitrator calling upon the respondents to accept his nominee

as the arbitrator. This was followed by further legal notice to

the respondents dated 20.08.2020. In this notice a statement

was made that there was no proper correlation between the

LLP agreement and the supplemental deed in the earlier

notice. Therefore, the previous notice dated 08.05.2020 was

withdrawn. In the notice dated 20.08.2020 applicant

specifically invoked the arbitration clause No.40 of the LLP

agreement dated 24.11.2016, clarifying that the said notice

was issued to rule out any ambiguity. Applicant proposed

names of three retired Judges of this Court viz., Justice CVN

Sastry, Justice Vaman Rao and Justice Ramakrishnam Raju

and requested the respondents to chose any one name to be

appointed as the sole arbitrator.

35 From the above, it is evident that there is a clear dispute

between the parties. On one hand applicant says that in

terms of the supplemental deed he was not paid

Rs.2,21,78,730-00 which he claims now with interest. On the

other hand, respondents contend that the aforesaid amount

was paid to the applicant. Rather it is the applicant who has

to pay Rs.1,97,10,000-00 to the respondents. So, therefore,

there is a clear dispute between the parties.

36 Insofar the LLP agreement dated 24.11.2016 is

concerned, that was between applicant and respondent No.1.

Clause 40 of the said agreement clearly provides that all

disputes between partners or between a partner and the LLP

arising out of the LLP agreement which cannot be resolved in

terms of the LLP agreement, shall be referred to arbitration as

per the provisions of the 1996 Act. Thus, the dispute to be

referred to arbitration must be between the parties, which is

present in this case. Secondly, it must arise out of the LLP

agreement. In other words, the genesis of the dispute must be

traceable to the LLP agreement.

37 Now from the supplemental deed dated 23.11.2019 it is

seen that applicant was retiring as a partner of the LLP and in

his place respondent No.2 was inducted as a partner to the

LLP. The retiring partner i.e. applicant was to be paid

Rs.2,21,78,730-00 which was found to be equivalent to his

shareholding, right, title and interest in the LLP business.

This the applicant claims as not paid.

38 Already Clause (1) and Clause (6) of the supplemental

deed have been adverted to. On a conjoint reading of the

aforesaid two clauses with the recital thereto it is evident that

the supplemental deed is a supplementary agreement to the

LLP agreement. It is neither an independent agreement nor

an agreement which replaces or substitutes the LLP

agreement. It is supplemental to the LLP agreement. The

supplemental deed has been structured in such a way that it

has to be read with the LLP agreement. The word

'supplement', as per the Concise Oxford English Dictionary,

South Asia Edition, means a thing added to something else to

enhance or complete it; the derivatives 'supplemental' or

'supplementary' would mean complete or enhance something.

Black's Law Dictionary, 9th edition, defines the word

'supplemental' as supplying something additional; adding

what is lacking.

39 Therefore, there is no independent identity of the

supplemental deed. It is a part of the LLP agreement dated

24.11.2016 and Clause 40 of the LLP agreement, as analysed

above, says that in case of a dispute arising out of the LLP

agreement it has to be referred to arbitration under the 1996

Act if it cannot be resolved in terms of the LLP agreement.

Obviously, there is no resolution in terms of the LLP

agreement dated 24.11.2016.

40 In Bharat Sanchar Nigam Limited Vs. M/s. Nortel

Networks India Pvt. Limited1 Supreme Court considered the

effect and impact of the Arbitration and Conciliation

(Amendment) Act, 2015 which came into force with effect from

23.10.2015. As per Sub-Section (6A) of Section 11 inserted by

way of the aforesaid amendment, Supreme Court or the High

Court, as the case may be, while considering any application

under Sub-Section (4) or Sub-Section (5) or Sub-Section (6)

shall notwithstanding any judgment, decree or order of any

Court confine to the examination of the existence of an

arbitration agreement. Thus the effect of the amendment is

that if the existence of the arbitration agreement is not in

dispute, all other issues would be left for the arbitral tribunal

to decide. It has been held as follows:

"The effect of the amendment was that if the existence of the arbitration agreement was not in dispute, all other issues would be left for the arbitral tribunal to decide. This was in reinforcement of the doctrine of kompetenz- kompetenz, which empowers the tribunal to rule on its own jurisdiction, including any objections with respect to the validity of the arbitration agreement; and thereby minimize judicial intervention at the pre-reference stage."

41 Supreme Court referred to and extracted its earlier

decisions where it has been held that post 2015 amendment,

all that the Courts are required to examine is as to whether

an arbitration agreement is in existence or not - nothing

more, nothing less. Supreme Court has held as follows:

31. Sub-section (6-A) came up for consideration in Duro Felguera, S.A. v. Gangavaram Port Ltd. (2017) 9 SCC 729, wherein this Court held that the legislative policy was to minimise judicial intervention at the appointment stage. In an application under Section 11, the Court should only look into the existence of the arbitration agreement, before making the reference. Post the 2015 Amendment, all that the courts are required to examine is whether an arbitration agreement is in existence -- nothing more, nothing less.

"48. Section 11(6-A) added by the 2015 Amendment, reads as follows:

'11. (6-A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any

judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.' (emphasis supplied) From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one aspect--the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple--it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.

59. The scope of the power under Section 11(6) of the 1996 Act was considerably wide in view of the decisions in SBP & Co. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] and Boghara Polyfab [National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 : (2009) 1 SCC (Civ) 117]. This position continued till the amendment brought about in 2015. After the amendment, all that the courts need to see is whether an arbitration agreement exists--nothing more, nothing less. The legislative policy and purpose is essentially to minimise the Court's intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11(6-A) ought to be respected."

42 Finally, Supreme Court concluded as under:

34. In view of the legislative mandate contained in the amended Section 11(6-A), the Court is now required only to examine the existence of the arbitration agreement. All other preliminary or threshold issues are left to be decided by the arbitrator under Section 16, which enshrines the kompetenz-kompetenz principle. The doctrine of kompetenz-kompetenz implies that the Arbitral Tribunal is empowered, and has the competence to rule on its own jurisdiction, including determination of all jurisdictional issues. This was intended to minimize judicial intervention at the pre-reference stage, so that the arbitral process is not thwarted at the threshold when a preliminary objection is raised by the parties.

43 Insofar respondent Nos.2 and 3 are concerned, they are

intrinsically connected with the dispute raised by the

applicant against the LLP being a partner of the LLP and the

LLP itself. Therefore, it is not open for them to contend that

they should be kept out of arbitration.

44 For all the aforesaid reasons, Court holds that there is

an arbitration agreement between the parties; there is a

dispute between the parties; such dispute could not be

resolved in terms of the LLP agreement dated 24.11.2016;

therefore, the dispute is required to be referred to arbitration

to be conducted by a sole arbitrator.

45 Accordingly, this Court appoints Justice A.Rajasheker

Reddy, a former Judge of this Court, as the sole arbitrator to

arbitrate on the dispute between the parties. Let the parties

appear before the learned arbitrator on 06.07.2022 at 11.00

am, whereafter the learned arbitrator may proceed with the

arbitration. Registry to furnish a copy of this order to the

learned arbitrator.

46 This disposes of the arbitration application.

                                      ____________________________
                                        JUSTICE UJJAL BHUYAN
Date:       .06.2022.
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