2008 (1) TMI 949 - SC - Indian Laws

Reference to arbitration - application under Section 34 - Validity of reconstituted partnership deed - non-compliance of sub-section (2) of Section 8 of the Arbitration and Conciliation Act 1996 (Act) - share of profits from the partnership business - HELD THAT - For getting this relief the plaintiffs undoubtedly rely upon the partnership deed dated 13.1.1989. However this deed of 1989 could be relied upon and form the basis of the claim of the plaintiffs only if the partnership deed dated 17.2.1992 was declared as void. If the deed dated 17.2.1992 was not declared as void and remained valid and operative the plaintiffs could not fall back upon the earlier partnership deed dated 13.1.1989 to claim rendition of accounts and their share of profits. Therefore in order to get their share of profits from the partnership business it was absolutely essential for the plaintiff appellants to have the partnership deed dated 17.2.1992 declared as illegal void and inoperative. The relief for such a declaration could only be granted by the civil Court and not by an arbitrator as they or Shri Rajendra Prasad Singh through whom the plaintiffs derive title are not party to the said deed. The trial Court had therefore rightly held that the matter could not be referred to arbitration and the view to the contrary taken by the High Court is clearly illegal. There is no whisper in the petition dated 28.2.2005 that the original arbitration agreement or a duly certified copy thereof is being filed along with the application. Therefore there was a clear non- compliance of sub-section (2) of Section 8 of 1996 Act which is a mandatory provision and the dispute could not have been referred to arbitration. Learned counsel for the respondent has submitted that a copy of the partnership deed was on the record of the case. However in order to satisfy the requirement of sub-section (2) of Section 8 of the Act defendant no.3 should have filed the original arbitration agreement or a duly certified copy thereof along with the petition filed by him on 28.2.2005 which he did not do. Therefore no order for referring the dispute to arbitration could have been passed in the suit. Thus the appeal is allowed with costs and the impugned order passed by the High Court in Civil Revision is set aside.

Summary

Issues Involved:
1. Validity of the reconstituted partnership deed dated 17.2.1992.
2. Applicability of Section 8 of the Arbitration and Conciliation Act, 1996.
3. Compliance with the requirements of Section 8(2) of the Arbitration and Conciliation Act, 1996.
4. Jurisdiction of civil courts versus arbitrators in declaring a partnership deed void.

Issue-wise Detailed Analysis:

1. Validity of the Reconstituted Partnership Deed Dated 17.2.1992:
The appellants filed a suit seeking a declaration that the reconstituted partnership deed dated 17.2.1992 was illegal, void, and without jurisdiction, asserting that Shri Rajendra Prasad Singh had no intention to retire from the partnership. They also sought a decree for rendition of accounts from 1.4.1992 onwards and claimed their share of profits, interest, and the principal amount of an unsecured loan. The plaintiffs argued that the defendants fraudulently executed the partnership deed without the consent of Shri Rajendra Prasad Singh, who was not shown as a partner in the deed dated 17.2.1992. The trial court rejected the defendants' prayer for referring the dispute to arbitration, emphasizing that the main relief sought was a declaration of the partnership deed's invalidity, which could only be decided by a civil court.

2. Applicability of Section 8 of the Arbitration and Conciliation Act, 1996:
The defendant No. 3 moved applications under Section 34 of the Arbitration Act, 1940, and later under Section 8 of the Arbitration and Conciliation Act, 1996, to refer the dispute to arbitration. The trial court dismissed these applications, reasoning that neither Shri Rajendra Prasad Singh nor the plaintiffs were parties to the partnership deed dated 17.2.1992. The High Court, however, allowed the revision petition filed by defendant No. 3, setting aside the trial court's order. The Supreme Court emphasized that for Section 8 to apply, an arbitration agreement must exist between the parties. Since neither Shri Rajendra Prasad Singh nor the plaintiffs were parties to the deed dated 17.2.1992, Section 8 was deemed inapplicable.

3. Compliance with the Requirements of Section 8(2) of the Arbitration and Conciliation Act, 1996:
Section 8(2) mandates that an application for referring disputes to arbitration must be accompanied by the original arbitration agreement or a duly certified copy thereof. Defendant No. 3's applications were not accompanied by the original or a certified copy of the arbitration agreement. The Supreme Court noted that this non-compliance with a mandatory provision invalidated the application for referring the dispute to arbitration.

4. Jurisdiction of Civil Courts Versus Arbitrators in Declaring a Partnership Deed Void:
The Supreme Court underscored that the relief for declaring the partnership deed dated 17.2.1992 as void could only be granted by a civil court, not an arbitrator. The plaintiffs' claim for rendition of accounts and their share of profits was contingent upon the deed dated 17.2.1992 being declared void. The Court cited precedents, including Khardah Company Ltd. v. Raymon & Company (India) Pvt. Ltd., to support the principle that an arbitration clause cannot be enforced when the agreement containing it is alleged to be illegal and void.

Conclusion:
The Supreme Court allowed the appeal, set aside the High Court's order, and upheld the trial court's decision that the dispute could not be referred to arbitration. The Court emphasized the necessity of a valid arbitration agreement between the parties and the jurisdiction of civil courts in declaring a partnership deed void. The appeal was allowed with costs, reaffirming that the relief sought by the plaintiffs could only be adjudicated by a civil court.