2001 (6) TMI 821 - HC - Indian Laws

Court dismisses revision petition, upholds decision on arbitration clause post-partnership dissolution. Third-party involvement and fraud allegations necessitate civil court adjudication.

The court dismissed the revision petition, upholding the subordinate judge's decision to refuse referring the dispute to arbitration. The arbitration ... - Issues Involved:1. Maintainability of the suit in light of Section 69 of the Partnership Act.2. Applicability of the arbitration clause post-dissolution of the partnership.3. Involvement of third parties in the suit and its impact on arbitration.4. Allegations of fraud, mismanagement, and diversion of funds.5. Jurisdiction of the Civil Court versus the Arbitrator under the Arbitration and Conciliation Act, 1996.Detailed Analysis:1. Maintainability of the Suit in Light of Section 69 of the Partnership Act:The second defendant contended that the suit was not maintainable as it was hit by Section 69 of the Partnership Act, which pertains to the bar on suits by unregistered firms. The firm was dissolved after the suit was filed, and the allegations were deemed vague without specifying the period for which the accounts were sought. The plaintiff was accused of making unreasonable demands and contributing little to the business.2. Applicability of the Arbitration Clause Post-Dissolution of the Partnership:The arbitration clause in the partnership agreement stated that any disputes 'during the continuance of the Partnership' would be referred to arbitration. The court noted that the partnership was dissolved prior to the filing of the present suit, rendering the arbitration clause inoperative. The clause was specific to disputes arising during the partnership's existence, and the dissolution terminated its applicability.3. Involvement of Third Parties in the Suit and Its Impact on Arbitration:Defendants 4 and 5 were not parties to the partnership agreement and hence, the arbitration clause could not apply to them. The court observed that the inclusion of these third parties was genuine and not a ruse to bypass the arbitration clause. The reliefs claimed against these third parties were substantial and could not be adjudicated by an arbitrator.4. Allegations of Fraud, Mismanagement, and Diversion of Funds:The plaintiff made serious allegations of fraud, collusion, and misappropriation of funds against the defendants. The court emphasized that such allegations require detailed scrutiny of oral and documentary evidence, which is best left to the civil court. The nature of arbitration proceedings being summary and not bound by rules of evidence made it unsuitable for resolving such complex issues.5. Jurisdiction of the Civil Court versus the Arbitrator under the Arbitration and Conciliation Act, 1996:The court discussed the mandatory nature of Section 8 of the Arbitration and Conciliation Act, 1996, which requires disputes to be referred to arbitration if an arbitration agreement exists. However, the court noted that the Act does not place a total embargo on the civil court's discretion to proceed with the suit. The inadequacies of arbitration proceedings, especially in dealing with substantial questions of law and serious allegations of fraud, justify the civil court's jurisdiction in such cases.Conclusion:The court dismissed the revision petition, upholding the subordinate judge's decision to refuse referring the dispute to arbitration. The arbitration clause was deemed inoperative post-dissolution of the partnership, and the involvement of third parties and serious allegations of fraud necessitated adjudication by the civil court. The civil court's discretion to proceed with the suit, despite the arbitration agreement, was justified given the complexities and nature of the disputes involved.