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Banala Yasoda Devi And Another v. Bilakanti Venkateswarlu And Others

Andhra Pradesh High Court

Aug 23, 1990

Judgment

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Comprehensive Summary of the Opinion

Factual and Procedural Background

This is an appeal against the order dated 21-9-1989 of the learned Subordinate Judge, Gadwal, which dismissed IA Nos. 146 and 175 of 1989 in O.S. No. 10/89. The appellants are the plaintiffs in O.S. No. 10/89 who sued for recovery of Rs. 23,900 and ancillary reliefs. The defendants invoked Section 34 of the Indian Arbitration Act (1940) by filing the two interlocutory applications, seeking a stay of further court proceedings until completion of arbitration. The lower court allowed both applications and stayed the proceedings; the plaintiffs appealed.

Admitted factual background: the parties conducted a chit fund business as "Sri Durga Chits and Financiers" (the Firm). A partnership deed dated 13-11-1985 was executed. The plaintiffs alleged deposits and advances totaling amounts (including Rs. 9,500 said to be share capital, and various fixed deposits in the names of the plaintiffs' children) which they claim were not repaid and for which they seek recovery with interest.

The defendants contended (among other things) that: (i) as partners the plaintiffs could not seek specific sums but only dissolution and accounts; and (ii) non-joinder of the plaintiffs' children (in whose names certain FDRs were held) rendered the suit defective. The court below stayed the proceedings relying on Clause 15 of the partnership deed (an arbitration clause) and Section 34 of the Arbitration Act. The present opinion examines whether the lower court erred in invoking Section 34 and whether part or all of the suit should proceed in court.

Legal Issues Presented

Whether the lower court erred in invoking Section 34 of the Arbitration Act (1940) to stay the suit proceedings.
Whether Clause 15 of the partnership deed (a reference to arbitration) constitutes a valid and enforceable arbitration agreement such that the suit (or part of it) must be referred to arbitration.
Whether the defendants had taken any step in the proceedings (such as obtaining time for filing written statement) which would disentitle them from invoking Section 34.
Whether the entire suit is arbitrable under Clause 15, or whether part of the reliefs (notably certain deposits in third parties' names) fall outside the arbitration clause and must be independently tried by the court.

Arguments of the Parties

Appellants' (Plaintiffs') Arguments

The lower court erred in staying the proceedings under Section 34 of the Arbitration Act.
There is no evidence of the existence of an arbitration agreement and therefore the defendants cannot invoke the arbitration clause (relying on Jamuna Dass Rameswar Dass v. Allahabad Bank).
Clause 15 is vague/unforceable because it does not name arbitrators; thus Section 34 cannot be invoked.
The defendants had taken time for filing written statements (a step in proceedings), which disentitles them from invoking Section 34.

Respondents' (Defendants') Arguments

Clause 15 of the partnership deed dated 13-11-1985 requires disputes to be referred to arbitration under the Indian Arbitration Act, 1940; therefore the suit cannot proceed in court and should be stayed under Section 34.
The subject-matter of the dispute (claims arising out of the partnership) falls within the arbitration agreement.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
K. Malla Reddy v. Soma Srinivas, AIR 1978 Andhra Pradesh 289	Set out the conditions required to be fulfilled for invoking Section 34 of the Arbitration Act (enumerated conditions).	The court reproduced these conditions as part of the framework for deciding whether Section 34 could be invoked in the present case.
Rachappa v. Gurusiddappa, (1989) 3 SCC 245 : AIR 1989 Supreme Court 635	Detailed conditions that must be satisfied before a stay under Section 34 can be granted (six conditions enumerated in the judgment).	The court relied on these conditions to analyze whether the defendants qualified for a stay under Section 34.
V. Subramanium Raju v. Chandramouli Raju, AIR 1985 Orissa 23	Affirmed that relief under Section 34 is discretionary and the discretion must be exercised judiciously.	The court noted that the stay under Section 34 is discretionary and must be exercised judiciously, applying that principle in its analysis.
Jamuna Dass Rameswar Dass v. Allahabad Bank, AIR 1985 Allahabad 311	Applied by appellants to argue that there was no evidence of the arbitration agreement and hence defendants could not invoke the arbitration clause.	The court considered this submission and rejected it on the facts because Clause 15 of the partnership deed was specifically pleaded and relied upon by the defendants and referred to by the lower court.
M.S. Sadhu Singh Ghuman v. Food Corporation of India, (1990) 2 SCC 68 : AIR 1990 Supreme Court 893	Clarified the meaning of "a step in the proceedings" that would disentitle a party from invoking Section 34 — not every step, but a step tantamount to submission to the court's jurisdiction on merits.	The court applied this principle to find there was no material showing the defendants took such steps as would disentitle them from invoking Section 34.
Sri Venkateswara Constructions v. Union of India, AIR 1974 A.P. 378	Supports the proposition that proceedings may be stayed as to part only where appropriate (partial reference to arbitration).	The court invoked this authority to permit reference of part of the claim (the Rs. 9,500 share-capital claim) to arbitration while allowing the court to proceed on the remaining claims.
Russell on the Law of Arbitration (20th edn. 1982) — cited (text)	Textual authority asserting the desirability of staying only part of proceedings when only part falls within an arbitration agreement or where partial matters involve separate questions.	The court used the passage to support its conclusion that part-only stays and partial references to arbitration are permissible where the matters are separable.

Court's Reasoning and Analysis

The court proceeded in a stepwise manner:

Identification of the arbitration clause: The court found Clause 15 of the partnership deed (dated 13-11-85) expressly provided that disputes "shall be referred to the arbitration in accordance with the provisions of the Indian Arbitration Act, 1940." The clause was extracted and relied upon by the lower court.
Applicability of Section 34: The court set out Section 34 of the Act and the conditions required for invoking it, drawing on K. Malla Reddy and Rachappa to enumerate the specific conditions (e.g., proceedings commenced by a party to an arbitration agreement; subject-matter of the suit must be the same as that agreed to be referred; applicant must be a party and must not have taken steps in the proceedings; applicant must be ready and willing to conduct arbitration; court must be satisfied there is no sufficient reason why matter should not be referred).
Discretionary nature of Section 34 relief: The court noted, following V. Subramanium Raju, that relief under Section 34 is discretionary and must be exercised judiciously.
Evaluation of appellants' contention that there was no evidence of an arbitration agreement: The court rejected this submission because the defendants specifically relied upon Clause 15 in their petitions under Section 34, and the lower court had referred to Clause 15 in its order.
Evaluation of appellants' contention that Clause 15 was vague because no arbitrators were named: The court observed that the First Schedule of the Act and Section 20 provide for appointment procedures where parties fail to agree on an arbitrator, so absence of nominative arbitrators in Clause 15 does not render the clause unenforceable or vague.
Determination whether defendants had taken "any other steps in the proceedings": Applying M.S. Sadhu Singh and the concept that a disqualifying "step" must be one amounting to submission to the court's jurisdiction, the court found no material that the defendants had taken time for filing written statements or any other step that would disentitle them from invoking Section 34.
Separability analysis — which parts are arbitrable: The court analyzed the reliefs pleaded. It held that the claim for Rs. 9,500 (share-capital deposited by the first plaintiff) squarely fell within Clause 15 and therefore was referable to arbitration. However, other specific sums — deposits made on behalf of the plaintiffs' children (FDRs in the names of B. Swapna and B. Eshwar Babu) and certain advances/deposits to the firm — were characterized as deposits with the firm and had to be independently inquired into by the court; such claims could not be referred to arbitration.
Partial reference to arbitration: The court accepted the authorities (Sri Venkateswara Constructions and Russell on Arbitration) that partial staying and partial reference to arbitration is permissible where only part of the dispute falls within the arbitration agreement and where separate adjudication will not create irreconcilable conflict. The court considered whether independent adjudication could lead to conflicting conclusions and found the two matters (the Rs. 9,500 share-capital claim and the other deposit claims) were sufficiently separable.
Resultant practical directions: The court concluded that the lower court's order referring the matter to arbitration was correct, but only in respect of the first plaintiff's claim for Rs. 9,500. The plaintiffs were permitted to proceed with trial on the balance of the suit claims. Defendants were permitted to raise all legal pleas available to them in defence. Each party to bear its own costs.

Holding and Implications

Holding:

APPEAL ALLOWED IN PART

The court affirmed the lower court's referral to arbitration only to the extent that the claim of the first plaintiff for Rs. 9,500 (alleged share-capital in the Firm) is referable under Clause 15 of the partnership deed and Section 34 of the Arbitration Act. The remaining claims (including amounts deposited in the names of B. Swapna and B. Eshwar Babu and other advances/deposits to the Firm) are not referable to arbitration and must be tried by the court.

Direct consequences and practical effects:

The defendants' applications under Section 34 were correctly allowed by the trial court only in part — insofar as they referred the first plaintiff's Rs. 9,500 claim to arbitration.
The trial court is to proceed with the hearing of the balance of the suit claim that was held non-arbitrable by the appellate court.
The defendants remain free to raise all legal defences available to them in respect of the court-triable portion of the suit.
The parties shall bear their own costs.

The opinion does not purport to announce any new legal principle beyond applying existing authorities; it applies established tests for Section 34, confirms the discretionary nature of a Section 34 stay, and endorses partial reference to arbitration where appropriate.

Show all summary ...

1. This is an appeal against the order dt. 21-9-89 of the learned Subordinate Judge Gadwal dismissing IA Nos. 146 and 175 of 1989 in O.S No. 10/89 on his file. Aggrieved by the same the appellants who are plaintiffs in the suit filed this miscellaneous appeal. The plaint for consideration is whether the Court below erred in invoking the provisions of section 34 of the Arbitration Act.

2. The appellants are the plaintiffs in O.S 10/89. They filed the said suit for recovery of a sum of Rs. 23,900/- and for ancillary reliefs. Having received notices, the 5th defendant filed IA 146/89 while defendants I to 4 and 6 filed IA 175/89 invoking the provisions of Sec. 34 of the Arbitration Act and requesting the Court to stay all further proceedings in the suit, till the completion of arbitration proceedings. Having considered the matter the lower court allowed both the said applications. Aggrieved by the same the plaintiffs have come up with this appeal. The admitted facts are plaintiffs and the defendants etc., carried on Chit Fund business under the name and style of Sri Durga Chits and Financiers at Gadwal” (herein after referred to on the Firm). A partnership deed was also executed between the partners under the deed dated 13th November 1985. It is the contention of the plaintiffs that they advanced a sum of Rs. 9,500/- towards their share capital the plaintiffs also deposited a sum of Rs. 4,300/- in the name of their son B. Eswar Babu on 11-1-86 and Rs. 8,000/- on 11-1-86 in the name of their daughter B. Swapna and a further sum of Rs. 1,200/- was already deposited by them in the name of their daughter B. Swapna on 13-11-85. The deposits in the names of the children of the plaintiffs were intended to be kept in fixed deposit carrying interest at the rate of 18% per annum. Alleging that the said amounts were not re-paid the plaintiffs have filed the suit for recovery of the amounts along with interest.

3. Before proceeding further it is the contention of the defendants that the suit as filed is not maintainable as the plaintiffs being partners cannot ask for specific amounts and what all they can do is to ask for dissolution of the Firm and for rendition of accounts. Similarly it is submitted that the suit is bad for non-joinder of the children of the plaintiffs since admittedly fixed deposits were made in their names. I am not inclined to give any opinion on the said contentions at this stage and it is for the lower court to consider these matters.

4. It is the specific contention of the defendants that by virtue of Clause 15 of the partnership deed dt. 13-11-85 the matter has to be referred to an arbitrator and the suit cannot be further proceeded with. Clause 15 of the partnership deed reads as follows:—

Clause 15:— That any dispute or differences which may arise among the parties the differences shall be referred to the arbitration in accordance with the provisions of the Indian Arbitration Act, 1940 or any Statutory Modifications in force therein.”

5. Relying upon clause 15 of the partnership deed it is submitted that the Court below cannot proceed further with trial of the case and rightly the matter was stayed as per the provisions of section 34 of the Arbitration Act. Opposing the impugned order on more than one ground it is submitted that the lower Court erred in staying the proceedings by invoking the provisions of section 34 of the Arbitration Act, which is herein after referred, as the ‘Act’. Section 34 of the Act reads as follows

Section 34:— Where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party to the agreement or any person claiming under him in respect of any matter agreed to be referred any party to such legal proceedings may, at any time before filing a written statement or taking any other steps in the proceedings apply to the judicial authority before which the proceedings are pending to stay the proceedings and if satisfied that there is no sufficient reason why the matter should not be referred to in accordance with the arbitration agreement and that the applicant was at the time when the proceedings were commenced and still remains ready and willing to do all things necessary to the proper conduct of the arbitration such authority may make an order staying the proceedings.

6. In K. Malla Reddy v. Soma Srinivas AIR 1978 Andhra Pradesh 289 the conditions required to be fulfilled for invoking section 34 of the Act are given us follows.

“the legal proceedings must have been commenced by a party to the arbitration agreement against the other party to the agreement.

(2) The subject-matter of reference to the arbitration must be same as the subject-matter of the legal proceedings.

(3) The legal proceedings sought to be stayed must be in respect of the matter agreed to be referred to the arbitration.

(4) The right conferred upon the party under Section 34 of the Act to have the legal proceedings stayed can be exercised at any time before the filing a written statement or taking any other steps in the proceedings. Lastly.

(5). The Court shall have to be satisfied that there was sufficient reason why the matter should not be referred to an arbitration in accordance with the arbitration agreement.”

7. In Rachappa v. Gurusiddappa (1989) 3 SCC 245 : AIR 1989 Supreme Court 635 the conditions required to be fulfilled before invoking the provisions of Section 34 of the Act are given as follows:

“An analysis of the aforesaid section makes it clear that in order to have the proceedings in the suit stayed there must be an arbitration agreement between the patties covering the disputes in question. The section stipulates that in order that stay may be granted under section it is necessary that the following conditions are fulfilled;

(i) The proceedings must have commenced by a party to an arbitration agreement against any other party to the agreement.

(ii) the legal proceeding in this cast the suit which is sought to be stayed must be in respect of a matter agreed to be referred.

(iii) the applicant for stay must be a party to the legal proceeding the suit in this case.

(iv) the applicant must have taken no steps in the proceeding after appearance.

(v) the applicant must satisfy that only the applicant was at the time when the proceedings were commenced ready and willing to do every thing necessary for the proper conduct of the arbitration: and

(vi) the court must also be satisfied that there was no sufficient reason why the matter should not be referred to arbitration”.

8. Before proceeding further, it is to be seen that the relief under section 34 of the Act is discretionary and, of-course, the said discretion has to be exercised judiciously as laid down in V. Subramanium Raju v. Chandramouli Raju AIR 1985 Orissa 23.

9. Relying upon the decision in Jamuna Dass Rameswar Dass v. Allahabad Bank AIR 1985 Allahabad 311 it is submitted on behalf of the appellants that there it no evidence about the existence of the arbitration agreement and consequently the defendants have no right to invoke the arbitration clause. This submission is incorrect. It is the specific case of the defendants that as per clause 15 of the partnership deed, the disputes between the parties have to be referred for arbitration. A specific reference was made in the petitions filed invoking section 34 of the Act and the lower Court also referred to the same Clause 15 of the partnership deed dt. 13-11-85, which is extracted in the course of the judgment, clearly speaks of the arbitration clause. In view of this, the submission made on behalf of the plaintiffs that there is no evidence about the existence of the arbitration agreement is incorrect.

10. On behalf of the plaintiffs it is submitted that, as per Clause 15 of the partnership deed, the names of the arbitrators are not given and, therefore, this is submitted that this is a case where the arbitration clause is unforceable being vague and hence Section 34 of the Act cannot be invoked. This submission is not correct. Clause 15 of the partnership deed categorically shows that the parties agreed to refer the matter to arbitrators. The first schedule appended to the Act shows that, unless a different intention is expressed in an arbitration agreement, it shall be deemed to include the provisions set out in the First schedule, but only in so far as they are applicable to the reference. In a case where the parties failed to agree upon any arbitrator, provision is provided therefor under section 20 of the Act. Hence, I find that this is not a case where the arbitration clause cannot be invoked, being vague.

11. On behalf of the plaintiffs it is submitted that by invoking the provisions of section 34 of the Act, the defendants should not take “any other steps in the proceedings” that in the present case the defendants have taken time for filing written statement and that in view of that, the defendants are not entitled to invoke the provisions of section 34 of the Act. There is no material on record to show that the defendants have taken time to file written statement in the trial court. The order under appeal also does not show that the defendants have taken any time before the said Court for filing their written statement.

12. In M.S Sadhu Singh Ghuman v. Food Corporation of India (1990) 2 SCC 68 : AIR 1990 Supreme Court 893, the Supreme Court observed this;

“It may be noted that the expression “a step in the proceeding” which would disentitle the defendant from invoking section 34 of the Arbitration Act is not every step taken by him in the suit. It should be a step to abandon the right to have the suit stayed. It should be a step in and of the progress of the suit. The step must have been consciously taken with a view to submit to the jurisdiction of the Court for the purpose of adjudicating the controversy on the merits.”

13. Thus it is to be seen that there is no material on record to show that the defendants have takes any steps subjecting themselves to the jurisdiction of the Court.

14. It is to be seen that clause 15 of the partnership deed dated 13-11-85 categorically shows that the disputes between the partners have to be inferred to the arbitration in accordance with the provisions of the Act. One of the reliefs asked for is for recovery of a sum of Rs. 9,500/- representing the share-capital. The said relief is one squarely failing under the purview of clause 15 of the partnership deed dt. 13-11-85 and consequently the order of the lower Court is correct 10 that extent.

15. But it is to seen that the reliefs prayed for in the plaint include Rs. 1200/- deposited on 13-11-85 as FDR. In the name of B. Swapna Rs. 321-35 interest from 30-9-88 till 27-3-89 thereon, Rs. 4366/- deposited on 11-1-86 in the name of B. Eshwar Babu and interest thereon Rs. 1151/-; Rs. 5000/- deposited on 11-1-86 in the name of B. Swapna Rs. 1338-90 interest from 30-9-88 till 27-3-89 Rs. 1000/- deposited by the second plaintiff on 11-1-88. It is to be seen that these amounts were said to have been deposited with the firm. It is further alleged that the persons concerned were also paid interest thereon. This part of the relief can never be referred to the arbitration and has to be independantly enquired into in the suit as the said amounts were paid only as deposits in the ‘Firm’. It is now to be seen whether part of the claim can be referred to the arbitration while allowing the trial court to proceed with further hearing of the remaining portion of the suit claim. Such a course is not prohibited as laid down in Sri Venkateswara Constructions v. Union of India AIR 1974 A.P 378. To the same effect are the following observations in Russell on the law of Arbitration at page 193 (20th edition 1982):

“It may be desirable to stay proceedings as to part only, if only that part is appropriate to be decided by arbitrations as where only that part is within the agreement to refer, or the dispute involves in addition to that part a pure question of construction.”

16. Of course the guidelines to be followed in such circumstances is to see whether there is any possibility for arriving at conflict conclusions and whether the two matters can be dealt with independently. The case on hand is on where the arbitrator will enquire into the claim of the plaintiff regarding Rs. 9500/- said to have been deposited by the first plaintiff towards her share capital in the firm while the other claims referred to above are advances made to the Firm by third parties which can be recovered provided the debt is established and further provided the said claim is in order. Of course it is also to be seen that the persons B. Swapna and B. Eswhar Babu are not parties to the partnership deed and they are not parties to the suit. Under the circumstances I am of the clear opinion that the order of the lower court referring the matter for arbitration is correct, partly only to the extent of referring the 1st plaintiff's claim Rs. 9,500/- towards her share in the Firm and the plaintiffs are permitted to proceed further with the trial of the case so far the balance of the suit claim is concerned. The defendants are permitted to raise all such pleas that are open to them under law in the defence. To this extent only the appeal is allowed in part. Under the circumstances each party shall bear its own costs.