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Prem Lata (Smt) And Another v. M/S Ishar Dass Chaman Lal And Others
Factual and Procedural Background
M/s Ishar Dass Chaman Lal was a partnership firm constituted on 13-12-1965 by Ishar Dass and his sons, Chaman Lal and Om Prakash. The firm was never registered under Section 69 of the Indian Partnership Act, 1932. Upon the death of partner Chaman Lal on 06-03-1978, the partnership stood dissolved by operation of law. Chaman Lal’s widow and alleged son (the appellants) demanded rendition of accounts and realisation of the dissolved firm’s property. Relying on clause 16 of the partnership deed—which provided for reference of disputes to named arbitrators—the appellants sought arbitration. The surviving partners (respondents) refused, prompting the appellants to file an application under Section 20 of the Arbitration Act, 1940 before the civil court.
The trial court allowed the application, but the High Court of Punjab and Haryana, in Civil Revision No. 660 of 1985 dated 07-05-1985, reversed that decision, holding that Section 69 barred the proceeding because the firm was unregistered. The appellants obtained special leave to appeal to the Supreme Court.
Legal Issues Presented
- Whether Section 69(1) and the main part of Section 69(3) of the Partnership Act bar a proceeding under Section 20 of the Arbitration Act for reference to arbitration when the partnership is unregistered.
- Whether the exceptions in Section 69(3)(a)—relating to suits for dissolution, accounts of a dissolved firm, or realisation of its property—extend to enforcement of an arbitration clause contained in the partnership deed.
Arguments of the Parties
Appellants’ Arguments
- The appellants are enforcing rights that arise upon dissolution—namely, rendition of accounts and realisation of partnership property—which fall squarely within the exceptions in Section 69(3)(a).
- Clause 16 of the deed provides an alternative forum agreed upon by the parties; invoking it through Section 20 of the Arbitration Act is permissible because Section 69(3)(a) removes such proceedings from the statutory bar.
Respondents’ Arguments
- The phrase “to sue” in Section 69(1) and the main part of Section 69(3) encompasses any attempt to enforce contractual rights, including a right to arbitrate; hence, an unregistered firm cannot invoke the arbitration clause through court proceedings.
- Accordingly, the Section 20 application is barred and the High Court correctly dismissed it.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Jagdish Chander Gupta v. Kajaria Traders (India) Ltd., (1964) 8 SCR 50; AIR 1964 SC 1882 | The expression “other proceedings” in Section 69(3) covers arbitration proceedings; the ejusdem generis rule does not limit its scope. | The Court accepted the precedent’s broad reading of “other proceedings” but emphasised that Section 69(3)(a) creates specific exceptions, allowing enforcement of rights concerning dissolution even when the firm is unregistered. |
Court's Reasoning and Analysis
The Supreme Court noted that with Chaman Lal’s death the firm was dissolved, and his legal representatives stepped into his position regarding partnership rights. Section 69(3)(a) explicitly excludes from the statutory bar any proceeding to enforce:
- the right to sue for dissolution of a firm,
- the right to accounts of a dissolved firm, and
- the right or power to realise property of a dissolved firm.
The Court reasoned that “the enforcement of any right to sue” for these purposes necessarily includes enforcing the agreed mechanism for dispute resolution—namely, arbitration under clause 16. Interpreting “to sue” narrowly would render the statutory exceptions futile, contrary to legislative intent.
While Jagdish Chander Gupta recognised that arbitration proceedings fall within “other proceedings” barred by Section 69, that decision also acknowledged that the statutory exceptions remain fully effective. Therefore, once a proceeding seeks relief covered by Section 69(3)(a), the prohibition in Section 69(1) and the main clause of Section 69(3) does not apply. Consequently, the appellants’ Section 20 application is maintainable, and the High Court erred in holding otherwise.
Holding and Implications
Appeal Allowed. The Supreme Court set aside the High Court’s judgment, upheld the trial court’s order, and awarded costs of Rs 5,000 to the appellants. The trial court was directed to forward the dispute immediately to the named arbitrators, who are expected to conclude the reference within six months.
Implications: The decision clarifies that parties to an unregistered partnership can invoke a contractual arbitration clause through Section 20 of the Arbitration Act when the dispute concerns dissolution, accounts, or realisation of partnership property. It reinforces the statutory exceptions in Section 69(3)(a) and encourages recourse to agreed alternative dispute-resolution mechanisms.
Order
1. Application for substitution is allowed.
2. This appeal, by special leave, arises from the judgment of the learned Single Judge of the Punjab and Haryana High Court in Civil Revision No. 660 of 1985, dated 7-5-1985.
3. M/s Ishar Dass Chaman Lal — partnership firm consists of Ishar Dass, the father, Chaman Lal and Om Prakash, his sons. By a deed of partnership dated 13-12-1965, the aforesaid partnership firm was constituted but the firm was not registered under Section 69 of the Indian Partnership Act. Chaman Lal, the eldest son died on 6-3-1978, by obvious reasons of which the partnership stood dissolved. By the death of one of the members, it is no longer possible to adhere to the original contract. The appellants — the widow and alleged son of the deceased Chaman Lal — called upon the respondents to render the accounts of the firm. Since they did not do so, invoking clause 16 of the partnership deed, the appellants had called upon the respondents to refer the dispute to M/s Tara Chand and Hans Raj Jain, income tax practitioners, the named arbitrators in the contract, to resolve the dispute. Since the respondents had refused to refer the dispute, the appellants invoked the jurisdiction of the civil court under Section 20 of the Arbitration Act, 1940, for short “the Act”. The respondents resisted the claim contending that since the partnership firm was an unregistered one, by operation of Section 69 of the Partnership Act, the application under Section 20 of the Act would not lie. The trial court negatived the contention of the respondents. But, on appeal and in revision, ultimately, the High Court held that sub-section (1) of Section 69 and main part of sub-section (3) of Section 69 exclude the application of Section 20 of the Act and consequently, the suit is not maintainable. Thus, this appeal, by special leave.
4. Shri Dhruv Mehta, the learned counsel appearing for the appellants neatly contended that the appellants are only seeking to enforce the rights of the parties arising from the dissolution of the firm for rendition of accounts of the dissolved firm and to take the property or the rights therein as per the terms of the contract to which Chaman Lal was entitled to. Instead of filing a suit, they invoked the arbitration clause 16 for reference to resolve the dispute by an alternative resolution forum created by the parties. Since sub-section (3)(a) of Section 69 of the Partnership Act carved out an exception to the main part of sub-sections (1) and (2) of Section 69, there is no prohibition for the appellants to invoke clause 16 of the partnership deed and that therefore, the suit filed under Section 20 of the Act is maintainable.
5. Shri Satish Chandra, the learned Senior Counsel for the respondents contended that “to sue”, as envisaged in sub-section (1) and main part of sub-section (3) of Section 69, includes entitlement to enforce the right created under the contract. Since the partnership firm was an unregistered one, the rights arising under the contract, namely, reference to the arbitration under clause 16 of the contract itself is a right to sue under the contract and that therefore, the suit under Section 20 of the Act is not maintainable.
6. The question, therefore, is whether the suit filed under Section 20 of the Act is maintainable to work out the rights given to the parties under clause (a) to sub-section (3) of Section 69 of the Partnership Act? Section 20 of the Arbitration Act provides that:
“20. Application to file in Court arbitration agreement.— (1) Where any persons have entered into an arbitration agreement before the institution of any suit with respect to the subject-matter of the agreement or any part of it, and where a difference has arisen to which the agreement applies, they or any of them, instead of proceeding under Chapter II, may apply to a Court having jurisdiction in the matter to which the agreement relates, that the agreement be filed in Court.
(2)***
(3)***
(4)***, the Court shall order the agreement to be filed, and shall make an order of reference to the arbitrator appointed by the parties, whether in the agreement or otherwise, or, where the parties cannot agree upon an arbitrator, to an arbitrator appointed by the Court.”
Clause 16 of the partnership deed provides that:
“16. That any dispute or question in connection with the partnership firm or this deed shall be referred to arbitration of Shri Tarachand and Shri Hansraj Jain, Income Tax Practitioners, and they shall be the arbitrators on behalf of the parties under the provision of the Indian Arbitration Act of 1940, or any statutory modification or re-enactment thereof for the time being in force.”
7. The question, therefore, is whether Section 69 prohibits the reference by the Court under Section 20 of the Act? Section 69(3)(a) of the Partnership Act reads thus:
“69. Effect of non-registration.— (1)***
(2)***
(3) The provisions of sub-sections (1) and (2) shall apply also to a claim of set-off or other proceeding to enforce a right arising from a contract, but shall not affect—
(a) 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 realise the property of a dissolved firm; or….”
Undoubtedly, Section 69(1) prohibits laying the suit to enforce a right arising from a contract or conferred by the Act by or on behalf of a person suing as a partner in the firm against the firm or any person alleged to be or to have been a partner in the firm. This Court in Jagdish Chander Gupta v. Kajaria Traders (India) Ltd. (1964) 8 SCR 50, AIR 1964 SC 1882, considering the words “other proceedings” in sub-section (3) of Section 69, held that the doctrine of ejusdem generis would not apply and the words “other proceedings” include the right arising under an arbitration agreement between the parties is a right arising under the contract. The words “other proceedings” in sub-section (3) must receive their full meaning untrammelled by the words “a claim of set-off”. The latter words neither intend nor can be construed to cut down the generality of the words “other proceedings”. In that case, since the parties sought to avail the remedy under Section 8 of the Act, this Court held that the words “other proceedings” include the proceedings under Section 8 of the Act and that, therefore, the application would not lie. However, this Court had expressly laid thus:
“In our judgment, the words ‘other proceedings’ in sub-section (3) must receive their full meaning untrammelled by the words ‘a claim of set-off’. The latter words neither intend nor can be construed to cut down the generality of the words ‘other proceedings’. The sub-section provides for the application of the provisions of sub-sections (1) and (2) to claims of set-off and also to other proceedings of any kind which can properly be said to be for enforcement of any right arising from contract except those expressly mentioned as exceptions in sub-section (3) and sub-section (4).”
Thus this Court also had given effect to the exceptions carved out by sub-sections (3) and (4) of Section 69 of the Partnership Act from the prohibition imposed by sub-sections (1) and (2) and main part of sub-section (3) even though the firm was not registered under Section 69.
8. It is seen that with the demise of the partners, ipso facto, the partnership stood dissolved. What the legal representatives of the deceased partner, are seeking to enforce is for accounts of a dissolved firm or any right or power to realise the property of the dissolved firm. The right “to sue” for the dissolution of the firm must, of necessity, be interpreted to mean the right to enforce the arbitration clause for resolution of the disputes relating to dissolved firm or for rendition of accounts or any right or power to realise the property of the dissolved firm.
9. Indisputably the first appellant is the widow of Chaman Lal — one of the partners. Therefore, she steps into the shoes of the deceased partner who had a right in the dissolved partnership firm. Sub-section (3)(a) carves out three exceptions to sub-sections (1) and (2) of Section 69 and also to the main part of sub-section (3) of Section 69, namely, (1) the enforcement of any right to sue for the dissolution of firm; (2) for accounts of the dissolved firm; and (3) any right or power to realise the property of the dissolved firm. Having excluded from the embargo created by the main part of sub-section (3) or sub-sections (1) and (2) of Section 69, the right to sue would not again be construed to engulf the exceptions carved out by sub-section (3) or sub-section (4) of Section 69 of the Act. Any construction otherwise would render the exceptions, legislature advisedly has carved out in sub-sections (3) and (4) of Section 69, otiose. The object appears to be that the partnership having been dissolved or has come to a terminus, the rights of the parties are to be worked out in terms of the contract of the partnership entered by and between the partners and the rights engrafted therein. The exceptions carved out by sub-section (3) are to enforce those rights including the rights to dissolution of the partnership despite the fact that the partnership firm was an unregistered one. Having kept that object in view, we are of the considered opinion that the alternative resolution forum agreed by the parties, namely, reference to a private arbitration is a mode of enforcing the rights given under clause (a) of sub-section (3) of Section 69 of the Act and gets excluded from the main part of sub-section (3) and sub-sections (1) and (2) of Section 69. The enforcement of the right to sue for dissolution includes a right for reference to an arbitration in terms of the agreement of the partnership by and between the parties. Therefore, there is no embargo for filing a suit under Section 20 of the Act.
10. It is fairly stated by Shri Satish Chandra that the party can enforce the right by a suit for rendering accounts and for realisation 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.
11. The appeal is allowed with costs of Rs 5000.
12. Since we have allowed the appeal, we direct the trial court to send the reference immediately to the named arbitrators and we do hope that the arbitrators would immediately enter upon the reference and decide the dispute as expeditiously as possible within a period of 6 months from the date of the receipt of this order as this is a matter pending for long time.
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