N. Radhakrishnan vs M/S. Mastero Engieers & Ors

N. Radhakrishnan -------Appellant

Versus

M/s. Maestro Engineers & Ors. -----Respondents

JUDGMENT

TARUN CHATTERJEE,J.

1. Leave granted.

2. This appeal is directed against the final judgment and order dated,

8th of January, 2007, of the High court of Judicature at Madras in

CRP No 1246 of 2006, whereby the High Court had dismissed the

Civil Revision Petition filed by the appellant against the order

dated 7th of June, 2006 passed in I.A. No. 494 of 2006 (in O.S. No.

526 of 2006) by the 1st Addl. District Munsif at Coimbatore,

wherein the appellant had prayed for appointment of an Arbitrator.

1

3. The facts leading to the filing of this appeal which could be derived

from the case made out by the appellants are summarized in a

nutshell for the better understanding of the dispute at hand:

The appellant had entered into a partnership with the

respondents on 7th of April, 2003 to constitute a partnership firm for

the purpose of carrying on the business of Engineering Works under

the name and style of "Maestro Engineers". The abovementioned firm

had initially commenced its functioning from the premises situated at

41, KPR Lay Out 5th Street, Nanda Nagar Singanallur, Coimbatore-5,

(in short the "suit premises"), which belonged to the father of the

appellant. The appellant took active part in setting up the firm and

was instrumental for the construction of the same.

Differences started creeping up between the appellant and the

respondents and the appellant sent a notice dated 3rd of November,

2005, to the respondents, being dissatisfied with their conduct. The

appellant had asserted in the notice that the firm was set up by a

partnership deed dated 7th of April, 2003 and that he and the

respondent no 3 had initially invested a sum of Rs.2,70,000/-, each

for the capital investment of the firm but in the partnership deed it was

only mentioned as Rs.1,00,000/- against the name of the appellant.

2 He had further asserted malpractices happening inside the firm,

which were supported by the respondents. There were also

allegations of collusion amongst the respondents for driving out the

clients of the appellant and forging the accounts of the firm. The

appellant also offered his retirement from the firm and asked for his

share of the salary and the profits incurred by the firm.

In response to the notice sent by the appellant, the respondents

sent a reply dated 11th of November, 2003, wherein they admitted the

factum of the partnership entered into by them with the appellant but

allegedly denied the claim of the appellant that he had invested a

sum of Rs.2,70,000/- towards the establishment of the firm.

In response to the reply sent by the respondents, the appellant

sent a notice dated 1st of December, 2005, wherein he again

reiterated his stand that he had invested a sum of Rs.2,70,000/- for

the establishment of the firm and not an amount of Rs.2,50,000/- as

was alleged by the respondents in their reply.

The appellant, thereafter, sent another notice dated 24th of

February, 2006, to the respondents stating that the respondents were

responsible for the problems created by the parties and it was their

responsibility to resolve the disputes amicably between them. It was

3 alleged that the respondents had colluded themselves in order to

siphon of the money of the partnership firm for their personal gain. In

the notice dated 3rd of November, 2005, the appellant had reiterated

that he was ready to retire from the firm if the share of profits and

arrears of salary due to him and the interest thereon was given to

him. He had further called upon the respondents to settle the arrears

of amount within 15 days and to make arrangements for his

retirement failing which he had put them on notice to refer the matter

to arbitration.

The respondents subsequently filed a suit being O.S. No. 526

of 2006, under Order 7 Rule 1 of CPC before the Court of the District

Munsif of Coimbatore for a declaration that the appellant is not a

partner of the Respondent No 1 (the firm herein) after 18th of

November, 2005, and to prevent him from causing any disturbance to

the respondent no 1 for its peaceful running by way of a permanent

injunction.

The appellant thereafter filed an application under Section 8 of

the Arbitration Act 1996, (hereinafter referred to as the "Act") being

I.A.No.494 of 2006 in the Court of the District Munsif at Coimbatore

on 12th of March 2006, which was rejected by his order dated 7th of

4 June, 2006. Feeling aggrieved by the aforesaid order, the appellant

filed a civil revision case being CRP(PD) No. 1246 of 2006 along with

a petition for stay being M.P. No. 1 of 2006 in the High Court of

Judicature at Madras. The High Court by its order dated 8th Of

January, 2007, affirmed the aforesaid order of the District Munsif at

Coimbatore and dismissed the civil revision petition and also the

petition for stay filed by the appellant. It is against this order of the

High Court in respect of which the instant special leave petition was

filed by the appellant, which on grant of leave was heard by us in the

presence of the learned counsel for the parties.

4. We have heard the learned counsel appearing for the parties and

perused the materials on record. The learned counsel appearing

for the appellant at the first instance contended that the dispute

was relatable to the factum of retirement of the appellant from the

partnership firm and its reconstitution after the respondents had

created a new partnership deed to that effect without the appellant

being a part of it, was unfair and not proper. It was his contention

that the appellant had only made a conditional offer to retire from

the firm provided his dues were settled and the respondents had

5 grossly made a willful error in considering his offer as a final one

and, therefore, committed a grave error by reconstituting the

partnership firm after taking the appellant to have retired from the

same. The learned counsel appearing for the respondents on the

other hand contended that the offer of the appellant to retire from

the firm was an unequivocal one and the same was accepted by

the respondents after a meeting amongst themselves, thus under

the provisions of the Indian Contract Act, this was a binding

contract amongst the parties and the respondent could not deny

the same. Moreover, the learned counsel for the respondents

argued that they had sent a notice to the effect to the appellant

stating that his offer to retire from the firm was accepted by them

and his dues would be settled accordingly within 15 days from the

receipt of the notice dated 3rd of March, 2005 sent by the appellant

intimating about his retirement. Therefore, the appellant had prior

knowledge of the fact that the respondents had accepted his

notice offering to retire and they were acting upon the same. The

appellant on the other hand contended that the respondents had

only claimed to act which in reality they did not, and no

cooperation was provided to the appellant when he had

6 approached the Auditor of the respondents to inspect his

accounts. We are not in a position to determine the veracity of the

statements of either parties. The main issues which need to be

determined is whether the case falls within the jurisdiction of the

Arbitrator, and if it does, whether the procedural requirements

under Section 8 (2) of the Act had been complied with to the

satisfaction of the court.

5. The learned counsel for the respondents further argued that the

subject matter of the suit being OS No. 526 of 2006 was a different

one and it was not within the ambit of the arbitration clause of the

partnership deed dated 7th of April, 2003 and that the partnership

deed had ceased to exist after the firm was reconstituted due to

the alleged retirement of the appellant. Therefore, the trial court

was justified in not referring the matter to the Arbitrator. The

appellant had on the other hand contended that the subject matter

of the suit was within the ambit of the arbitration clause since

according to him the dispute related to his retirement and the

settlement of his dues after he was deemed to have retired

according to the respondents. Further, it was his contention that

7 the partnership deed dated 6th of December, 2005 was not a valid

one as it was not framed in compliance with the requirements

under the Partnership Act. Therefore, the argument of the

respondents that the subject matter of the suit did not fall within

the ambit of the arbitration clause of the original partnership deed

dated 7th of April, 2003, cannot be sustained. We are in agreement

with the contention of the appellant to this effect. It is clear from a

perusal of the documents that there was a clear dispute regarding

the reconstitution of the partnership firm and the subsequent deed

framed to that effect. The dispute was relating to the continuation

of the appellant as a partner of the firm, and especially when the

respondents prayed for a declaration to the effect that the

appellant had ceased to be a partner of the firm after his

retirement, there is no doubt in our mind that the dispute squarely

fell within the purview of the arbitration clause of the partnership

deed dated 7th of April, 2003. Therefore, the Arbitrator was

competent to decide the matter relating to the existence of the

original deed and its validity to that effect. Thus the contention that

the subject matter of the suit before the 1st Addl. District Munsif

Court at Coimbatore was beyond the purview of the arbitration

8 clause, cannot be accepted. Having found that the subject matter

of the suit was within the jurisdiction of the Arbitrator, we now

proceed to decide whether the Arbitrator was competent to deal

with the dispute raised by the parties. The learned counsel for the

appellant contended that the High Court was wrong in its

interpretation of the clause "difference of opinion" and held that it

did not mean dispute under the Act. This, in our view, cannot be

sustained. Difference of opinion leads to dispute, and it is very

difficult to imagine that difference of opinion and disputes are an

altogether different thing in the circumstances leading to this case.

6. The appellant had cited a catena of judicial pronouncements to

contend that when there is an express provision to that effect, the civil

courts are bound to refer the matter to an Arbitrator in case of any

disputes arising between the parties. The appellant had raised

various issues relating to misappropriation of funds and malpractices

on the part of the respondents and the allegations to that effect have

been made in the notice sent to the respondents and subsequently in

its written statement filed before the civil court. The learned counsel

for the respondents on the other hand argued that when a case

9 involves substantial questions relating to facts where detailed

material evidence (both documentary and oral) needed to be

produced by either parties, and serious allegations pertaining to fraud

and malpractices were raised, then the matter must be tried in court

and the Arbitrator could not be competent to deal with such matters

which involved an elaborate production of evidence to establish the

claims relating to fraud and criminal misappropriation.

7. In our opinion, the contention of the respondents relating to the

jurisdiction of the Arbitrator to decide a dispute pertaining to a matter

of this proportion should be upheld, in view of the facts and

circumstances of the case. The High Court in its impugned judgment

has rightly held that since the case relates to allegations of fraud and

serious malpractices on the part of the respondents, such a situation

can only be settled in court through furtherance of detailed evidence

by either parties and such a situation can not be properly gone into by

the Arbitrator.

8. Reliance was placed by the learned counsel for the appellant

on a decision of this Court in the case of Hindustan Petroleum

1 Corpn. Ltd. vs. Pinkcity Midway Petroleums [2003 (6) SCC 503],

wherein this Court in Para 14 observed:

"If in an agreement between the parties before the civil court, there is a clause for arbitration, it is mandatory for the civil court to refer the dispute to an arbitrator. In the instant case the existence of an arbitral clause in the Agreement is accepted by both the parties as also by the courts below. Therefore, in view of the mandatory language of section 8 of the Act, the courts below ought to have referred the dispute to arbitration."

9. The learned counsel for the appellant relying on the above-

mentioned observations of this Court in the aforesaid judgment

submitted that the High Court was wrong in ignoring the ratio of the

case and should have accordingly allowed the petition of the

appellant for setting aside the order of the trial court.

10. The learned counsel appearing on behalf of the respondents on

the other hand contended that the appellant had made serious

allegations against the respondent alleging that they had manipulated

the accounts and defrauded the appellant by cheating the appellant

of his dues, thereby warning the respondents with serious criminal

action against them for the alleged commission of criminal offences.

In this connection, reliance was placed in a decision of this Court in

1 the case of Abdul Kadir Shamsuddin Bubere vs. Madhav

Prabhakar Oak and Another,[ AIR 1962 SC 406] in which this

court under para 17 held as under:

"There is no doubt that where serious allegations of fraud are made against a party and the party who is charged with fraud desires that the matter should be tried in open court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and not to make the reference......."

11. In our view and relying on the aforesaid observations of this

Court in the aforesaid decision and going by the ratio of the above

mentioned case, the facts of the present case does not warrant the

matter to be tried and decided by the Arbitrator, rather for the

furtherance of justice, it should be tried in a court of law which would

be more competent and have the means to decide such a

complicated matter involving various questions and issues raised in

the present dispute. This view has been further enunciated and

affirmed by this Court in the decision of Haryana Telecom Ltd. vs.

Sterlite Industries (India) Ltd.[ AIR 1999 SC 2354], wherein this

court under para 4 observed :

"Sub-section (1) of section 8 provides that where the judicial authority before whom an action is brought in a matter, will refer the parties to

1 arbitration the said matter in accordance with the arbitration agreement. This, however, postulates, in our opinion, that what can be referred to the Arbitrator is only that dispute or matter which the Arbitrator is competent or empowered to decide."

12. The learned counsel for the respondent further elaborated his

contention citing the decision of the High Court of Judicature at

Madras in the case of Oomor Sait HG Vs. Asiam Sait, 2001 (3) CTC

269, wherein it was held:

"......Power of civil court to refuse to stay of suit in view of arbitration clause on existence of certain grounds available under 1940 Act continues to be available under 1996 Act as well and the civil court is not prevented from proceeding with the suit despite an arbitration clause if dispute involves serious questions of law or complicated questions of fact adjudication of which would depend upon detailed oral and documentary evidence.

..Civil Court can refuse to refer matter to arbitration if complicated question of fact or law is involved or where allegation of fraud is made.

....Allegations regarding clandestine operation of business under some other name, issue of bogus bills, manipulation of accounts, carrying on similar business without consent of other partner are serious allegations of fraud, misrepresentations etc., and therefore application for reference to Arbitrator is liable to be rejected."

1

13. We are in consonance with the above-referred decision made

by the High Court in the concerned matter. In the present dispute

faced by us, the appellant had made serious allegations against the

respondents alleging him to commit malpractices in the account

books and manipulate the finances of the partnership firm, which, in

our opinion, cannot be properly dealt with by the Arbitrator. As such,

the High Court was justified in dismissing the petition of the appellant

to refer the matter to an Arbitrator. In this connection, it is relevant to

refer the observation made by the High Court in its impugned

judgment :

"The above decision squarely applies to the facts of the present case. In the present case as well there is allegation of running rival firm, interference with the smooth administration of the firm. As already stated since the suit has been filed for declaration to declare that the revision petitioner is not a partner with effect from 18.11.2005, and for consequential injunction restraining the petitioner from disturbing the smooth functioning of the first respondent firm, the issue relates to the causes which compelled the respondents to expel the revision petitioner from the partnership firm and the necessity to reconstitute the firm by entering into a fresh partnership deed. Therefore such issues involve detailed evidence which could be done only by a civil court......"

1

14. Arguments were favoured by either parties relating to the ambit of

Section 8 (2) of the Act wherein the scope of the mandatory

requirement to file the original copy of the partnership deed dated

7th of April, 2003 was elaborately discussed. It is to be noted that

since we have already decided that there is no requirement to

appoint an Arbitrator in view of the matter that the issues involved

in the case involved detailed investigations into the same and

production of elaborate evidence to prove the allegations or refute

the same, there is no need to dwell into this matter. Even

assuming that a dispute subsists and an Arbitrator is appointed,

still the appellant cannot absolve himself from the mandatory

requirement of filing an original copy of the deed. The learned

counsel for the appellant, however, argued that since the

notarized copy of the deed was already filed by the respondents

before the 1st Addl. District Munsif Court at Coimbatore, there was

no need for the appellant to produce the same. Learned counsel

for the appellant cited various decisions to substantiate his claim.

But from a careful perusal of the order of the 1st Addl. District

Munsif Court at Coimbatore, in I.A. No. 494 of 2006 (in O.S. No.

526 of 2006) it would be evident that the learned Munsif had noted

1 that the appellant had filed a Xerox copy of the partnership deed

dated 7th of April 2003 and had not filed the original copy thereof.

Further, Ex-P23 is the notarized copy of the Partnership deed

dated 6th of December, 2005, which was the reconstituted deed

formed after the alleged retirement of the appellant from the firm.

The learned counsel for the appellant pointed out to this deed and

argued that since the original copy of this deed was filed by the

respondents, there was no need for him to file the original copy

thereof under section 8 (2) of the Act. But it is to be noted herein

that the claim of the appellant regarding the dispute was under the

arbitration clause mentioned under the original partnership deed

and not on the subsequent one. Since the original deed was not

filed within the requirement of Section 8(2) of the Act, it must be

held that the mandatory requirement under the Act had not been

complied with. Accordingly, even if we accept the factum of a

dispute relating to the retirement of the appellant under the original

deed dated 7th of April, 2003, still the Court would not be

empowered to refer the matter to an Arbitrator due to the non

compliance of the provisions mentioned under Section 8(2) of the

Act. For the above-mentioned reasons and in view of our

1 discussions made hereinabove, we, therefore, do not find any

merit in this appeal and we direct the 1st Addl. District Munsif at

Coimbatore to dispose of the suit being O.S.No.526 of 2006 filed

by the respondents for a declaration that the appellant was not a

partner of the Respondent No 1 (the firm herein) after 18th of

November, 2005 and to prevent him from causing any disturbance

to the respondent no 1 for its peaceful running by way of a

permanent injunction within a period of six months from the date of

receipt of a copy of this judgment.

15.It will be open to the parties to adduce evidence (both

documentary and oral) to prove their respective claims relating to

the contentions of fraud and the retirement of the appellant in

consonance with the original partnership agreement.

16.The appeal is thus dismissed. There will be no order as to costs.

.................................J. [Tarun Chatterjee]

New Delhi; ...................................J. October 22, 2009. [V.S.Sirpurkar]

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