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Brij Gopal Binani v. Sreelal Binani

Calcutta High Court

Mar 15, 1978

Judgment

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Factual and Procedural Background

This is an application under Section 34 of the Arbitration Act, 1940 for a stay of Suit No. 229 of 1978. The suit was instituted by Sreelal Binani against 14 defendants. According to the plaint, defendants Nos. 1 to 10 were partners of Pioneer Match Factory and defendants Nos. 11 to 13 were alleged to be benamdars (name-lenders) of defendants Nos. 1 to 10; defendant No. 14 was a concern in which defendants Nos. 11 to 13 were partners. The partnership deed dated 7th December 1971 contained, among other clauses, Clause 3 (partnership duration) and Clause 12, a wide arbitration clause which provided for reference to a sole arbitrator if parties agreed or for nomination of arbitrators by the partners in case of disagreement, and stated that parties shall not refer disputes to any court.

The plaintiff alleges that the partnership business effectively ceased in or about October 1972; plant and machinery were stored in the factory premises, portions of the premises were let out without the plaintiff's consent, and a new partnership called Joyshree Corporation was constituted which, according to the plaintiff, was a device to realise rents for the benefit of defendants Nos. 1 to 10 through the name-lenders (defendants 11–13). The plaintiff claims to have dissolved the firm by notice dated 11th January 1978 and alternatively seeks a declaration and decree for dissolution and winding up, and an accounting of amounts realised by Joyshree Corporation and others. The present application seeks a stay of the suit under Section 34 of the Arbitration Act, 1940.

Procedurally, an application for appointment of a Receiver was earlier moved before Mr. Justice Deb (opposed on 18th January 1978), and an event on 8th February 1978 is described where, after indication of appointment of an independent Receiver, the parties agreed to appointment of a party-Receiver. The application under Section 34 for stay was already made before some of these steps (the court considers timing relevant).

Legal Issues Presented

Whether there is a valid and workable arbitration clause in the partnership deed that covers the disputes in Suit No. 229 of 1978.
Whether steps taken by the defendants in the suit (including conduct relating to appointment of a Receiver) disentitle them from obtaining a stay under Section 34.
Whether the defendants are ready and willing to go to arbitration and whether their conduct shows waiver of the arbitration right.
Whether arbitrators have jurisdiction to grant dissolution of a partnership, and if so, whether that affects the exercise of the court's discretion to stay the suit.
Whether disputes that involve parties who are not signatories to the arbitration agreement (alleged name-lenders/benamdars — defendants Nos. 11–13) prevent the matter from being referred to arbitration, thereby precluding stay of the entire suit.
Whether allegations of fraud constitute a ground for refusing a stay (this issue was raised but the court did not decide it on the facts).

Arguments of the Parties

Respondent (Plaintiff) — Key Contentions

The arbitration clause in the partnership deed is vague and uncertain: the clause contemplates a sole arbitrator if parties agree, or that "both the partners" shall nominate arbitrators; the use of the word "both" implies two sides and is said to be inapplicable where there are more than two disputing parties, making the clause unworkable.
The plaintiff was not willing to agree to defendants' nominations; the arbitration procedure would leave the plaintiff's arbitrator in a minority if other parties nominated arbitrators — this possibility was advanced as a reason for refusing a stay.
The defendants have taken steps in the suit (opposing the receiver application and agreeing to a party-Receiver), which, it was argued, disentitles them to seek a stay under Section 34.
The dispute includes a prayer for dissolution of partnership and winding up on just and equitable grounds, and the contention was raised that arbitrators may not have jurisdiction to grant dissolution, so the court should not stay the suit.
Allegations of fraud were made; it was contended that this should weigh against granting a stay.

Applicant (Defendants) — Key Contentions

The arbitration clause is sufficiently wide and workable; it should be construed pragmatically rather than technically so that the word "both" can be construed to mean all disputing partners.
The defendants assert they have always been ready and willing to refer disputes to arbitration; they had earlier, by letter dated 10th May 1975, suggested that any real grievance should be referred to arbitration.
The steps argued to be taken in the suit (relating to the Receiver) were subsequent to the application under Section 34 and therefore do not disentitle them to seek a stay; in any event, participation in selecting a Receiver does not amount to submission to the court's jurisdiction for adjudicating the disputes.
Some defendants (Nos. 11–13) are willing to go to arbitration, although the court addresses whether their willingness makes them parties to the arbitration agreement.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Union of India v. D.N. Revri & Co., (1976) 4 SCC 147 : AIR 1976 SC 2257	Authority for taking a pragmatic, non-doctrinaire construction of arbitration clauses; warning against a highly technical approach.	The court relied on this principle to construe the word "both" in the arbitration clause to include all disputing partners and held the clause was not uncertain or vague.
Biswanath Rungta v. O.I. Engineering Co., AIR 1975 Cal 222	Consideration of what constitutes a "step in aid" or other steps in proceedings that may disentitle a party from seeking arbitration.	The court relied on observations in this case to hold that the defendants' actions in relation to the Receiver did not evince submission to the court's jurisdiction and so did not disentitle them to a stay; it viewed the conduct relied on as not amounting to an overt act of submission.
Food Corporation of India v. Thakur Shipping Co., (1975) 4 SCC 815 : AIR 1975 SC 469	Relevant to whether silence or inaction amounts to waiver of arbitration; circumstances where stay may be refused if party maintains silence to arbitration requests.	The court held the case to be inapplicable because here the defendants themselves had suggested arbitration (letter dated 10th May 1975) and the plaintiff did not pursue arbitration thereafter; thus the Supreme Court's observations did not bar granting a stay on these facts.
Ballavdas Acharyya v. Shyam Sundar Halwasiya, ILR (1946) 1 Cal 203	Discusses whether arbitrators can award dissolution of partnership; holds the contention that arbitrators lack power to award dissolution was not sound where clause is wide enough.	The court cited this authority to support the proposition that arbitrators may have power to dissolve a partnership if the arbitration clause is sufficiently wide.
Ganesh Chandra v. Kamal Kumar, AIR 1971 Cal 317	Holds that in a suit for dissolution under Sections 44(f) and (g) of the Partnership Act, the dispute should be decided by the Court and that the Court may exercise discretion not to stay such a suit.	The court noted this authority but observed that, given the facts (partnership at will and the wide arbitration clause), it would not refuse stay solely on the ground that arbitrators might lack power in certain situations.
Nitya Kumar Chatterjee v. Sukhendu Chandra, AIR 1977 Cal 130	Division Bench observation that in suits for dissolution on just and equitable grounds the Court's jurisdiction to grant relief is not necessarily ousted by an arbitration clause; the decision to stay is discretionary.	The court recorded this as precedent for the discretionary nature of staying dissolution suits, but indicated that the present facts did not justify refusal of stay on that ground alone.
Banwarilal Agarwalla v. Inderjit Singh, AIR 1955 NUC (Cal) 2937	Division Bench view that arbitrators in appropriate cases have the power to grant dissolution of partnership.	The court cited this to support the proposition that arbitrators can, in appropriate circumstances, dissolve partnerships when the arbitration clause permits.

Court's Reasoning and Analysis

The court proceeded in a stepwise manner:

Validity and construction of the arbitration clause: The court set out Clause 12 of the partnership deed and found it wide enough to include disputes between the plaintiff and defendants Nos. 1–10. Rejecting a hyper-technical approach, and relying on Union of India v. D.N. Revri & Co., the court construed the word "both" pragmatically to mean "all the disputing partners" (and observed that dictionary meanings can cover more than two). Accordingly, the clause was not uncertain or ambiguous as to appointment of arbitrators: if there are many parties, each may appoint an arbitrator.
Minority/representation objection: The plaintiff's submission that the plaintiff's arbitrator would be in a minority and therefore at a disadvantage was dismissed as merely a speculative possibility. The court emphasized that arbitrators are expected to act in the best interests of all and not as mere party representatives; this possibility did not justify refusal to stay.
Steps taken in the suit and timing: The court analyzed the timing of actions under Section 34, which allows a stay "any time before filing written statement or taking any other steps." It held that steps taken after the application for stay were irrelevant to the question of whether steps had already been taken at the time of the application. The conduct on 8th February 1978 (agreeing to a party-Receiver) occurred after the stay application and thus did not disentitle the defendants. Moreover, the court considered that participation in submissions about the identity of a Receiver did not constitute submission to the court's jurisdiction for adjudicating the disputes.
Willingness to arbitrate: The court accepted the defendants' assertion of willingness to arbitrate, supported by a letter dated 10th May 1975 in which the defendants asked that real grievances be referred to arbitration. Because the defendants had proactively suggested arbitration and the plaintiff did not pursue it, the court found Food Corporation of India v. Thakur Shipping Company inapplicable.
Arbitrators' power to dissolve partnership: The court reviewed authorities (including Ballavdas Acharyya, Banwarilal Agarwalla) indicating arbitrators can dissolve a partnership if the arbitration clause is wide. It also noted older Calcutta High Court decisions (Ganesh Chandra; Nitya Kumar Chatterjee) recognizing that in suits for dissolution on just and equitable grounds the court's jurisdiction is discretionary and may not be ousted by an arbitration clause. However, on the facts (a partnership at will and a broad arbitration clause), the court would not refuse a stay solely because arbitrators might lack dissolution power in certain cases.
Presence of non-signatory parties (defendants Nos. 11–13) and composite cause of action: The court identified the central difficulty: the suit alleged that defendants 11–13 were name-lenders/benamdars and that amounts realised by defendant No. 14 (in which 11–13 were partners) should be brought into account of the partnership. The question whether 11–13 are benamdars is not covered by the arbitration clause because those parties were not parties to the arbitration agreement (even if they now express willingness to arbitrate, that does not retroactively make them parties to the original arbitration agreement). The court regarded this as an issue "intimately connected" to dissolution and accounts; because the accounts could not be properly taken unless the status of 11–13 and the inclusion of amounts realised by Joyshree Corporation were determined, the court concluded the suit was a composite cause of action and could not properly be split so as to stay only part and send part to arbitration.
Allegations of fraud: The court acknowledged that allegations of fraud were made and that the defendants sought arbitration rather than public trial. The court said it was unnecessary to decide whether fraud alleged against parties seeking stay is a relevant ground to refuse stay in this instance.

Holding and Implications

Holding: The application under Section 34 of the Arbitration Act, 1940 for stay of Suit No. 229 of 1978 was DISMISSED.

Implications:

The immediate consequence is that no stay was granted and the suit proceeds in the Court; the costs of this application were ordered to be the costs in the suit.
The court's reasoning turned decisively on the existence of non-signatory parties (defendants Nos. 11–13) whose status as benamdars/name-lenders and the question whether amounts realised by defendant No. 14 must be brought into account are core to the relief sought; because these issues cannot be resolved by referring only the disputes between signatories to arbitration, the entire suit could not be stayed.
The opinion does not purport to create or announce a new legal precedent beyond applying existing principles (the court treated existing case law and statutory provisions as guiding authorities and exercised discretion based on the specific composite character of the cause of action in this case).

Order: Application dismissed. Costs to be costs in the suit.

Show all summary ...

1. This is an application under Section 34 of the Arbitration Act, 1940 for stay of Suit No. 229 of 1978. This is a suit by Sreelal Binani against 14 defendants. Of the 14 defendants, the defendants Nos. 1 to 10 are said to be the partners of Pioneer Match Factory and defendants Nos. 11 to 13 are alleged to be the benamdars and name lenders of the defendants Nos. 1 to 10 and defendant No. 14 is said to be a concern in which the defendants Nos. 11, 12 and 13 are the partners. In the plaint, it is alleged that Pioneer Match Factory has its head office at 11, Sovaram Basak Street Calcutta and its factory is situated at 16, Dum Dum Road, 24-Parganas. The said partnership was carried on under a Deed of Partnership dated 7th Dec. 1971. The said Deed of Partnership contained, inter alia, the following clauses;

“Cl. 3 : That partnership shall continue till such time as the partners hereof agree to continue.

Cl. 12 : That all disputes and differences which may arise amongst the partners or between one of them and the personal representatives of the others or between other respective personal representatives and whether during or after the determination of the partnership or whether in relation to the interpretation of this Deed or as to any act or omission by any party to the dispute or any act which ought to have been done by the parties in disputes or in relation to any other matters whatsoever touching the partnership affairs shall be referred to a Sole Arbitrator if the parties agree upon one or in case of disagreement both the partners shall be entitled to nominate and appoint one such arbitrator. Such Arbitrator shall be governed by the Arbitration Act, 1940 and the statutory modifications thereof for the time being in force. But, in any case, the parties hereto shall not be entitled to refer their disputes and differences to any Court of Law.”

2. It is the case of the petitioner that the parties had carried on the business under the said Deed of Partnership. In or about Oct. 1972, the business of the said partnership firm was closed as it was neither practicable nor profitable to carry on the said business of manufacture and sale of matches. After the said closure of that business the machinery including the plant of the factory, according to the plaintiff, were kept in a godown within the said factory premises and a portion of the factory premises was let out, without any prior knowledge or consent of the plaintiff, to certain concerns mentioned in the plaint. Even after letting out the portion of the factory premises by the parties, a considerable portion of land in the said factory premises remained vacant, and according to the plaintiff, instead of letting out the remaining vacant portion of land at the market rate in the name of the said partnership firm, the defendants Nos. 1 to 10 took recourse to a fraudulent device, whereby a new partnership was constituted in the name of Joyshree Corporation in which defendants Nos. 11 to 13 were made partners and the partners of Joyshree Corporation, being Nos. 11 to 13, according to the plaintiff, were the name lenders of the defendants Nos. 1 to 10. Therefore, the plaintiff in this suit states that by its notice dated 11th Jan. 1978 the plaintiff has dissolved the firm and in the alternative has prayed for dissolution of the partnership and also further asked for a declaration that the said firm stood dissolved on or about 11th Jan., 1978 and alternatively a decree for dissolution of the said firm of Pioneer Match Factory and on just and equitable grounds to wind up the business of the firm. The plaintiff after coming to know of the purported tenancy as also the fact of earning profit by Joyshree Corporation by way of letting out the said factory premises has refused to ratify the same. The allegation of the plaintiff is that the defendants Nos. 1 to 10 of the said partnership firm, of which the plaintiff was the partner, are realising rent from Joyshree Corporation about Rs. 2,000 and odd and the said Joyshree Corporation is realising rents over Rupees 7,000 from different other tenants. Therefore, it is the case of the plaintiff that really the defendants Nos. 1 to 10 are realising for themselves the said amounts through Joyshree Corporation and the said Joyshree Corporation is the defendants' firm benamidar. It is this suit that is sought to be stayed in this application under Section 34 of the Arbitration Act, 1940. The first question, therefore, which requires consideration is, whether there is a valid arbitration clause between the parties in respect of the matters in dispute in this suit. I have set out before the arbitration clause. The arbitration clause in the partnership deed is wide enough to include the disputes between the plaintiff and the defendants Nos. 1 to 10, here respondents Nos. 1 to 10 in this application. It was urged on behalf of the respondent that the arbitration clause was vague and uncertain. It was submitted that the clause envisaged a reference to a sole arbitrator if the parties agreed and if the parties did not agree then it was stipulated that both the partners were entitled to nominate one each arbitrator. It was urged on behalf of the plaintiff-respondent that the plaintiff was not willing to agree with the defendants to nominate an arbitrator. Then, it was submitted that the other alternative contemplated by the arbitration clause was that both the partners would be entitled to nominate. Emphasis was laid on the use of expression ‘both’ and it was submitted that in English language it contemplated ‘two’ sides. It was, therefore, submitted that in this case, as there were more than two disputing parties, the expression ‘both’ would not fit in. Therefore, it was urged that the arbitration clause was not workable. A clause of this nature should not be looked at from a technical point of view but a pragmatic and reasonable view of such a clause should be taken. It was in this light, the Supreme Court in the case of Union of India v. D.N Revri and Co., (1976) 4 SCC 147 : AIR 1976 SC 2257 observed that a highly technical and doctrinaire approach should not be taken in a matter of this type and a plain and common sense view should be preferred. In that light, the expression ‘both’ in my opinion can be construed to mean all the disputing partners. Even, according to the dictionary meaning the expression ‘both’ may cover parties more than two. If that is the position, then, in my opinion, there is no uncertainty or ambiguity in the clause for arbitration so far as the appointment of the arbitrator is concerned. If there are ten parties, each party may appoint one arbitrator. On this aspect, however, it was submitted on behalf of the plaintiff respondent that in that case the plaintiff respondent would be in a minority and for that reason discretion should be exercised in favour of refusal to stay the suit. The fact that the arbitrator who would be nominated by the plaintiff-respondent might be in a minority if the other arbitrators nominated by the other parties take one view, is a mere possibility and in the background of the situation of this case it is not proper, in my opinion, to exercise judicial discretion on such a problematic possibility, and furthermore, the arbitrators are expected to act not as a representative of parties but in the best interest of all concerned. Viewed from that angle it is not possible to say that the plaintiff-respondent would be at a disadvantage by the procedure of ten or eleven different disputants each nominating an arbitrator for itself. I am, therefore, unable to accept the submission that there was no valid arbitration clause or the same was vague.

3. It was, then, urged that the stay should not be granted because the defendants have taken steps in aid of the suit and secondly the defendants were not ready or willing to go to arbitration. In support of this in para 19 onwards of the affidavit-in-opposition Shrilal Binani has stated that when the application was made before Mr. Justice Deb for appointment of Receiver, the same was opposed on the 18th Jan., 1978 and on the 8th Feb., 1978 when his Lordship had indicated that he was going to pass an order appointing an independent person as a Receiver, the parties including the defendants agreed to the appointment of a party-Receiver. It was, therefore, submitted that the defendants had taken steps in the suit disentitling them to ask for a stay. It was further submitted that the defendants were not ready or willing to go to arbitration. Now, so far as taking steps in the suit is concerned, it appears that according to the plaintiff-respondent the defendants had opposed the application for appointment of Receiver on the 8th February, 1978 and had asked for adjournment of the same. Thereupon they had agreed to the appointment of a party-Receiver. This step as is apparent was taken subsequent to the making of an application for stay under Section 34 of the Arbitration Act. Section 34 authorises a person to ask for a stay “any time before filing written statement or taking any other steps in the proceedings.” Steps taken which are contemplated must be before the making of an application under Section 34 of the Act. Section 34 does not contemplate of the steps in the proceeding after steps have been taken for stay. Therefore, the conduct of the parties on 8th Feb., 1978, after the application had been made for stay of the suit, in my opinion, would be irrelevant for considering whether any steps had been taken in the proceeding so as to disentitle the applicant from obtaining a stay under Section 34 of the Act. Furthermore, in my opinion, by making the submission as to who should be the Receiver a party does not evince an intention to submit to the jurisdiction of the Court for adjudication of the disputes by the Court nor does the party indicate any intention not to insist on the arbitration. I think also step in aid, in my opinion, should be such an overt Act which will indicate that the party intends to submit to the jurisdiction of the suit for adjudication of the disputes between the parties. Reliance in this connection may be placed on the observations in the case of Biswanath Rungta v. O.I Engineering Co., AIR 1975 Cal 222.

4. It is also not possible to accept the submission that the defendants were not ready or willing to go to arbitration. Indeed it appears that in a letter dated 10th May, 1975 the defendants had written to the plaintiff's Solicitor that if there be any real grievance the same should be referred to arbitration. The plaintiff did not proceed to take any steps for arbitration thereafter. The defendant-applicants to this application under S. 34 have stated that they are ready and willing and were always ready and willing to go to arbitration. No facts have been indicated not to accept this statement of the applicant. In that view of the matter, the observations of the Supreme Court in the case of Food Corporation of India v. Thakur Shipping Company, (1975) 4 SCC 815 : AIR 1975 SC 469 would not be applicable to the facts and circumstances of this case. Here there was not any question of maintaining a silence in the face of any request by the other party to go to the arbitration. On the other hand, the defendants had themselves suggested arbitration to which it seems the plaintiff paid no heed. I am, therefore, unable to accept this contention also.

5. It was, then, urged that in this case dissolution by the Court had also been prayed for. Therefore, it was submitted that the arbitrators would not have any jurisdiction to grant dissolution and on this ground the suit should not be stayed. It appears that in the cases of Ballavdas Acharyya v. Shyam Sundar Halwasiya, ILR (1946) 1 Cal 203 Mr. Justice Clough observed that the contention, that the arbitrators have no power to award dissolution of a partnership, was not sound. Therefore, according to his Lordship the arbitrators had such power if the clause of arbitration was wide enough to cover such a provision. In the case of Ganesh Chandra v. Kamal Kumar, AIR 1971 Cal 317 it was held by Mr. Justice Masud that in a suit for dissolution of partnership on the ground that it was just and equitable under Sections 44 (f) and (g) of the Partnership Act, the dispute relating to the partnership should be decided by the Court. Therefore, it was held that the Court should exercise discretion in not staying the suit in respect of the arbitration in such a case. In the case Nitya Kumar Chatterjee v. Sukhendu Chandra, AIR 1977 Cal 130 a Division Bench of this Court observed that in a suit for dissolution of partnership on the ground that it was just and equitable, Court's jurisdiction to give appropriate relief was not ousted by the provision of arbitration in a partnership deed and it was a matter of discretion. In the case of Banwarilal Agarwalla v. Inderjit Singh, AIR 1955 NUC (Cal) 2937 a Division Bench of this Court had also observed that the arbitrators in an appropriate case have the power to grant dissolution of partnership. In the facts of this case, where the plaintiff's main basis is that the plaintiff had dissolved the partnership, which according to the partnership deed, wag a partnership at will this point urged in opposition to this application cannot be of much substance. Furthermore, in view of the amplitude of the arbitration clause, if it was a matter of discretion I would have not exercised my discretion against the stay solely on the ground that the arbitrators might not have the power in certain cases to dissolve a partnership firm.

6. But this question as I shall presently note, does not arise for my consideration. The main difficulty in granting the stay in this case is that it is alleged that the defendants Nos. 11, 12 and 13 are the name-lenders and benamidars of the defendants Nos. 1 to 10 and the business carried on by the defendants Nos. 11, 12 and 13 in the name of the defendant No. 14 belonged to the defendants Nos. 11 to 13, as name-lenders of the defendants Nos. 1 to 10 and unless the amounts realised by the defendant No. 14 are brought in, no proper accounting can be made. This is a dispute which is not covered by the arbitration clause in the sense that the defendants Nos. 11, 12 and 13 are not parties to the arbitration agreement and neither the plaintiff nor these defendants have agreed to the adjudication of this question by arbitration as to whether the defendants Nos. 11, 12 and 13 are benamdars or name-lenders of defendants Nos. 1 to 10. It is true that the defendants Nos. 11, 12 and 13 are willing to go to arbitration. But that would not make them parties to the arbitration agreement, wide though the definition of the arbitration agreement is under Section 2(a) of the Arbitration Act.

7. If this dispute, which is intimately connected with the dispute of the dissolution of the partnership and taking of accounts, as claimed in this suit, cannot be the subject-matter of arbitration because all the parties concerned are not parties to the arbitration agreement, in my opinion, no part of the suit can really therefore, be stayed because the entire suit is a composite cause of action and the accounts cannot be taken unless this contention is decided whether the defendants Nos. 11, 12 and 13 are name-lenders of the defendants Nos. 1 to 10 and whether the amounts realised by Joyshree Corporation are to be brought into account of the partnership firm of the plaintiffs and the defendants Nos. 1 to 10. If that is the position then, in my opinion, the suit cannot be stayed.

8. It was further contended that in this case there are allegations of fraud and, therefore, the discretion should be exercised against stay. It is true that allegations have been made against the defendants and the defendants do not wish a public trial but are rather asking for stay. It is not necessary in the view I have taken, to consider whether the fraud alleged against parties who are asking for stay, is a relevant ground for the exercise of discretion in the matter of stay.

9. In the premises, this application fails and is accordingly dismissed. Costs of this application will be the costs in the suit.

10. Application dismissed.