Whether Non-Signatory Bound By Arbitration Agreement Can Be Decided By Tribunal, Not Referral Court U/S 11 Of Arbitration Act: Allahabad HC

Brief Facts

The instant application under Section 11 of the Arbitration and Conciliation Act, 1996 has been filed by the applicants invoking the power of this Court to constitute an arbitral tribunal in respect of the disputes arising between the parties out of partnership agreements dated 29 August 2016, 2 March 2020 and 20 February 2021.

A partnership agreement was executed on 29 August 2016 between applicant no. 1 (Ram Taulan Yadav) and one Sheela Yadav for doing business in the name of M/s Autar & Associates. As per Clause 14 of the said agreement, all disputes and differences arising between the parties would be referred to mutually acceptable arbitration.

On 20 February 2021, a supplementary deed of partnership was executed whereby Ram Milan Yadav retired from the partnership firm with effect from 31 March 2021 and Radhey Shyam Mishra (opposite party No. 3) was inducted as a new partner.

Thereafter a memorandum of understanding (MoU) dated 09.09.2022 was executed between the partners of the firm and thereunder, the parties agreed that the properties given by the applicants in mortgage to secure the loan taken by the firm from the financial institutions would be released and thereafter, the applicants would retire from the partnership firm. In compliance of the said arrangement, four properties of the applicants were redeemed from mortgage, however, five properties remained mortgaged.

The applicants suggested names of three arbitrators vide its notice dated 15 April 2023. Opposite party no. 1 agreed to the name of Mr. Justice 2 Vipin Sinha, Former Judge of this Court whereas opposite parties No. 2 & 3 did not respond to the notice. Opposite party No. 3 has filed counter affidavit and has opposed the appointment of an arbitral tribunal.

This gave rise to disputes and differences between the parties, the resolution of which has been sought through arbitration.

Contentions

The opposite party submitted that the partnership firm was unregistered and the partnership deed was not properly stamped, therefore, bar of Section 69 of the Partnership Act, 1932 and Sections 33 and 35 of the Stamp Act, 1899 would apply and that there was no arbitration clause in the supplementary partnership agreement dated 20 February 2021 whereby opposite party No. 3 was inducted as partner in the partnership firm for the first time.

It said that the arbitration clauses in the previous agreements are not binding on opposite party No. 3 as he was not signatory to these agreements.

Per contra, the applicants submitted that the bar under Section 69 of the Partnership Act does not apply to arbitration proceedings and that in case, there is any deficiency in stamp duty, the same can be agitated before the arbitral tribunal but on this ground the prayer for appointment of arbitrator cannot be rejected. Reliance was placed on reliance on a recent Constitution Bench judgment in Interplay Between Arbitration Agreements under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899, In Re., 2024.

That the supplementary agreement whereby opposite party no. 3 was inducted as partner in the partnership firm was in continuation of the earlier two partnership agreements. Therefore, all the three agreements have to be read together.

They said that the question as to whether opposite party No. 3 was signatory and a consenting party to the arbitration clause should be left for being decided by the arbitral tribunal as laid down by Supreme Court in Cox & Kings Ltd. v. SAP India Pvt. Ltd. & another, 2024.

Court's Analysis

The court noted that in Umesh Goel vs. Himachal Pradesh Cooperative Group Housing Society Limited, 2016, the Supreme Court has held that the expression “other proceedings” in Section 69(3) of the Partnership Act does not cover arbitral proceedings as well as arbitral award.

Based on the above, the court rejected the first contention that the dispute could not be referred to the arbitration.

The issue as to whether the agreements could not be enforced because of any deficiency in stamp duty is also squarely covered by the judgment of Supreme Court in Interplay Between Arbitration Agreements under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899, In Re-2024

In the above case, the Apex Court has held that in case, there is any deficiency in stamp duty an objection to the said effect can be taken before the arbitral tribunal but the same would not detain the Court from entertaining application for constitution of an arbitral tribunal.

The next issue whether the arbitration clauses in two previous agreements between the earlier partners is enforceable as against opposite party no.3, who was inducted into the partnership firm in pursuance of the supplementary partnership agreement dated 20 February, 2021 and which admittedly does not contain any arbitration clause.

The court noted that the supplementary partnership deed dated 20 February, 2021 whereby opposite party no.3 was inducted as a partner and Ram Milan Yadav retired from the partnership firm since 31 March, 2021 also refers to the previous partnership deed dated 2 March, 2020 which contains arbitration clause.

Supplementary partnership deed was executed in continuation of the earlier partnership deed. It specifically mentions that the same was executed so as to reduce to writing the amended terms and conditions governing the said partnership, the court noted.

The court further noted that It is only the terms which required amendment as a result of reconstitution of the firm which were mentioned in the supplementary partnership deed. The intention of the parties that their legal relationship in respect of other matters would continue to be governed by the previous partnership deed is also borne out from the preamble of the supplementary partnership deed, wherein it is specifically mentioned that the supplementary partnership deed was being executed to have a record of the amended terms and conditions of the partnership deed.

The court noted that Calcutta High Court in Juggilal Kamlapat v. N.V. Internationale CredietEn-Handels Vereeninging 'Rotterdam-1955 the court has held that the arbitration clause contained in the earlier deeds would continue to govern the rights and obligations of the parties.

Similarly, the issue before the Gujarat High Court in Creative Infocity Ltd. vs. Gujarat Informatics Ltd.,2009 was whether arbitration clause in concession agreement would survive after execution of master lease agreement. The entire objective of the scheme was examined and it was concluded that the master lease agreement was entered into between parties in pursuance of concession agreement. Accordingly, the arbitration clause in the original concession agreement was held to govern the jural relationship between the parties.

The court came to the conclusion that prima facie, opposite party No.3, though not signatory to the said agreement, had consented to its terms and conditions to the extent not altered or amended by subsequent supplementary partnership deed dated 20.02.2021.

The Constitution Bench in Cox and Kings Ltd. (supra) examined the issue as to whether a non-signatory to an agreement can be held bound by it. It is held that the said issue may require consideration of evidence on factual aspects and ordinarily it should be left to the tribunal to decide the same. At the referral stage, a referral court should not enter into the said issue, the court noted.

Accordingly, the present application was allowed and the arbitrator was appointed.

Case Title: Ram Taulan Yadav And Another versus Himanshu Kesarwani And 2 Others

Case Reference: ARBITRATION AND CONCILI. APPL.U/S11(4) No. - 95 of 2023

Judgment Date: 8/11/2024

Counsel for Applicant :- Prabhav Srivastava,Rishabh Srivastava,Ujjawal Satsangi