K.N. VENKITESHWARA PAI and K.V. JANARDHANA PAI v. K.G.SATHISH CHANDRA BABU and others

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.T.SANKARAN WEDNESDAY, THE 16TH MARCH 2011 / 25TH PHALGUNA 1932 AR.No. 10 of 2010() ------------------- PETITIONERS (S): -------------------- 1. K.N.VENKITESHWARA PAI, AGED 81 YEARS, S/O.LATE.K.NARAYANA PAI, RESIDING AT SHIVASHAKTHI, 41/745, KRISHNASWAMY ROAD, ERNAKULAM, KOCHI-682035 2. K.V.JANARDHANA PAI, AGED 43 YEARS, S/O.K.N.VENKITESHWARA PAI, RESIDING AT SHIVASAKTHI, KRISHNASWAMY ROAD, ERNAKULAM, KOCHI-682 035. BY ADV. SRI.V.R.KESAVA KAIMAL SRI.N.M.MADHU RESPONDENT(S): --------------- 1. K.G.SATHISH CHANDRA BABU, K.N.G.BROTHERS (ALAPPUZHA), D.NO.26/820, NEAR IRON BRIDGE, ALAPPUZHA 688 001. 2. ANIL S.PAI, K.N.G.BROTHERS(ALAPPUZHA), D.NO.26/820, NEAR IRON BRIDGE,ALAPPUZHA 688 001. 3. K.SUNDARESH.G.PAI, C/O.K.N.G.FRBRICS, NADAKKAVU ROAD, CHERTHALA 688 524. 4. K.G.SUDHEERJI PAI, C/O.PAIS TEXTILES, BEHIND DEVI TEMPLE,CHERTHALA 688 524. 5. K.G.SANJAYAN,C/O.K.N.G.BROTHERS, BEHIND DEVI TEMPLE,CHERTHALA 688 524. 6. SUDHA S.PAI, C/O.K.N.G.SONS, BEHIND DEVI TEMPLE,CHERTHALA 688 524. 7. P.K.REMA DEVI, C/O.K.N.G.SONS, BEHIND DEVI TEMPLE,CHERTHALA 688 524. AR 10/10 -2- 8. PRANITHA S.PAI, C/O.K.N.G.SONS, BEHIND DEVI TEMPLE,CHERTHALA 688 524. 9. UMA S.PAI, C/O.K.N.G.SONS, BEHIND DEVI TEMPLE,CHERTHALA 688 524. 10. M/S.K.N.G.BROTHERS, BEHIND DEVI TEMPLE,CHERTHALA 688 524. 11. M/S.K.N.G.SONS, BEHIND DEVI TEMPLE,CHERTHALA 688 524. 12. M/S.PAI TEXTILES, BEHIND DEVI TEMPLE,CHERTHALA 688 524. 13. M/S.ENGEE TRADERS, BEHIND DEVI TEMPLE,CHERTHALA 688 524. 14. M/S.GODAVARI GARMENTS, BEHIND DEVI TEMPLE,CHERTHALA 688 524. 15. M/S.K.N.G.FABRICS, NADAKAVU ROAD, CHERTHALA. 16. M/S.K.N.G.BROTHERS(ALAPPUZHA), NEAR IRON BRIDGE,D.NO.26/820,ALAPPUZHA 688 001. 17. M/S.K.N.G.AGENCIES, NEAR IRON BRIDGE, ALAPPUZHA. ADV. SRI.S.VINOD BHAT FOR R1-4,6-8,10-17 THIS ARBITRATION REQUEST HAVING BEEN FINALLY HEARD ON 16/03/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ## **K.T.SANKARAN, J.** ----------------------------------- ## A.R.No.10 of 2010 -----------------------------------Dated this the 16th day of March, 2011 ## **ORDER** The question involved in this Arbitration Request is whether the arbitration clause contained in the partnership deeds can be invoked by the partners, after their retirement from the partnership firm, when the retirement deeds do not provide for appointment of an arbitrator for resolving the disputes. 2. The petitioners and respondents 1 to 9 were partners of nine partnership firms shown in Annexure A in the Arbitration Request. In the firms, all of the petitioners and respondents 1 to 9 are not partners, but some of them are partners in respect of the firms mentioned in Annexure A. There is no dispute that Annexures B to I are the partnership deeds in respect of the firms. There is also no dispute that the AR No.10/2010 2 petitioners had retired from the firms and that Annexures J to Q retirement deeds were executed among the partners of the various firms. The terms and conditions therein contain the provisions for ascertaining all loss and profits and for preparation of general account as on 31[st] March, 2007. The retirement deeds provide that the amount payable to the retiring partner shall be paid within six months from 31[st] March, 2007 in full and final settlement of all the interests of the retiring partner in the business and the assets and liabilities of the firm. 3. In each of the partnership deed, there is an arbitration clause. The arbitration clauses in all the partnership deeds are similar except in one deed. However, there is no arbitration clause in the retirement deeds. 4. For the sake of convenience, clauses 17 to 20 of Annexure B partnership deed are extracted below: AR No.10/2010 3 “17. On death, retirement, insolvency or resignation of any one of the partners, the legal heirs of the deceased partner or the retired or resigned partner shall be entitled to receive from the firm, the balance standing to the capital account, current account and loan account together with the interest, if any, as increased or reduced by the share of profit or loss as the case may be till the date of death or retirement or resignation. 18. Retirement, death or insolvency of any partner shall not dissolve the firm but the firm shall stand reconstituted among the remaining partners. 19. Any dispute which may arise between the partners or their legal heirs about interpretation of this deed or their rights and liabilities hereunder or in relation to other matters whatsoever relating to the partnership affairs shall be settled by arbitration as provided for in the Indian Arbitration Act for the time being in force. 20. Any alteration, amendment or addition to the clauses of this deed evidenced AR No.10/2010 4 by a resolution in writing and signed by all the partners shall be read as a part of this deed and shall have the effect as if incorporated as a clause of this deed.” ## 5. The arbitration clause in Annexure I partnership deed reads as follows: “Any dispute arising among the partners or between the legal representatives of a deceased partner and the remaining partners regarding the interpretation of this deed or their rights and liabilities hereunder or in relation to any other matter whatsoever touching the partnership, shall be referred to arbitration by a sole arbitrator to the mutually agreed upon and if the parties cannot agree upon the choice of a sole arbitrator, each party to the dispute shall nominate one arbitrator and reference shall be made to such arbitrators jointly and the provisions of the Indian Arbitration Act, 1940 shall apply thereto.” AR No.10/2010 5 6. The petitioners estimated the amounts due to them at Rs.1,87,12,945.42/-. The petitioners issued a notice dated 21.12.2009 to the respondents requesting to settle the dispute by arbitration. The name of an advocate was also proposed as the arbitrator of the choice of the petitioners. The respondents issued a reply notice dated 6.1.2010 stating that all the issues among the partners were settled and that no dispute remains to be settled. It is also stated in the reply notice thus : “On receipt of the money paid by the continuing partners to the retiring partners your clients have expressed their satisfaction that all their rights are settled.” It is also contended in the reply notice that there is no arbitration clause provided in the agreement between the parties for resolving any alleged disputes. 7. The learned counsel for the petitioners contended as follows: The rights of parties would flow from the deeds of partnership. Those rights will continue up to the retirement AR No.10/2010 6 and could be enforced even after the retirement. The deeds of retirement should be treated as a continuation of the deeds of partnership. The conditions stipulated in the partnership deeds form part of the retirement deeds as well and therefore, the arbitration clause available in the partnership deeds would be available in resolving the disputes which arose between the parties before the date of retirement of the petitioners. The disputes are the outcome of the partnership business. Since the partnership deeds provide for settlement of disputes arising out of the partnership business, the dispute regarding the liability of the continuing partners to pay the amounts due to the retiring partners would also constitute a dispute which would attract the arbitration clause in the partnership deeds. 8. On the other hand, the learned counsel appearing for the respondents contended that there was no dispute between the parties on the date of retirement. They executed AR No.10/2010 7 the retirement deeds. Amounts are claimed by the petitioners on the basis of the retirement deeds. There is no arbitration clause in the retirement deeds and therefore, the disputes are not arbitrable. The learned counsel for the respondents also submitted that since all of the respondents 1 to 9 are not partners in all the firms, the Arbitration Request is bad for misjoinder of parties. A single Arbitration Request is not maintainable. 9. Section 7 of the Arbitration and Conciliation Act, 1996 (Hereinafter referred to as the Act) defines Arbitration agreement . Section 7 is extracted below: - “7. Arbitration agreement : - (1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. AR No.10/2010 8 (2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. (3) An arbitration agreement shall be in writing. (4) An arbitration agreement is in writing if it is contained in- - (a) a document signed by the parties; - (b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or - (c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. - (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.” AR No.10/2010 9 10. To constitute an arbitration agreement, the requirement is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. The arbitration agreement could be incorporated as an arbitration clause in a contract. It could even be in the form of a separate agreement. Sub Section 3 of Section 7 stipulates that an arbitration agreement shall be in writing. It does not insist that it should be in any particular form. Sub Section 4 of Section 7 provides that an arbitration agreement is in writing, if it is contained in any of the documents mentioned in clauses (a) to (c) therein. Sub Section 5 of Section 7 provides for situations where there is a reference in a contract, to a document containing an arbitration clause. 11. The requirement to attract Sub Section 5 of Section 7 of the Act are : AR No.10/2010 10 - (a) There must be a contract between the parties; - (b) There is a reference in that contract to a document containing an arbitration clause; - (c) The contract is in writing ; and - (d) the reference in the contract to the document containing an arbitration clause is such as to make that arbitration clause part of the contract. 12. Sub Section (5) of Section 7 does not indicate that any particular form of reference in the contract is necessary as to make the arbitration clause containing in a document part of the contract. It is sufficient, if the intention of the parties is clear, to make applicable the arbitration clause to the terms of the contract. If on a consideration of the terms of the contract, it is clear that the parties intended to make the arbitration clause part of the contract, Sub Section (5) of Section 7 would get attracted and the arbitration clause would be enforceable. AR No.10/2010 11 13. In the present case, there is reference in the deeds of retirement to the deeds of partnership executed among the parties. The terms and conditions of retirement were incorporated in the retirement deeds by the continuing and retiring partners, as they thought it necessary to do so. The retirement deeds provided that the amounts payable to the retiring partners “shall stand charged on the business now taken over by the continuing partners.” The retiring partners are made rateably liable for any tax, fee or other amounts up to 31[st] March, 2007. Clauses 7 and 8 in the retirement deeds read as follows: “7. The continuing partners alone hereafter be entitled to the assets of the firm including the firm name and shall be liable for its debts and liabilities and do hereby indemnify and agree to keep the retiring partner indemnified against all claims, demands, costs, losses and damages in respect of the said firm. 8. The retiring partner shall execute AR No.10/2010 12 all such instruments and documents as the continuing partners may require to give effect to the articles of this deed.” In the retirement deeds, there is reference to the partnership deeds. The terms of the retirement deeds would show that they constitute contracts between the parties therein. The retirement deeds also, therefore, would constitute a contract within the meaning of Sub Section (5) of Section 7 of the Act. 14. The aforesaid clauses in the retirement deeds would make the intention of the parties clear that the arbitration clause in the partnership deeds would also be applicable in respect of the terms agreed upon in the retirement deeds. Therefore, I am of the view that arbitration clause in the partnership deeds would form part of the retirement deeds. 15. Even without the aid of Sub Section (5) of Section 7 of the Act, existence of an arbitration agreement for resolving AR No.10/2010 13 the disputes between the petitioners and the continuing partners is discernible from clause 17 of the partnership deed (quoted above). Clause 17 provides for the entitlement of the retiring partner to receive from the firm, the balance outstanding to credit, till the date of retirement. Even without a specific provision in the retirement deed, the retiring partners could claim the amount due to them as provided in clause 17 of the partnership deed and invoke the arbitration clause contained in the partnership deed for resolution of the disputes in respect of the said claims. Therefore, I am of the view that the arbitration clause contained in the partnership deed would have life even after the retirement of one or more partners. In the retirement deeds, the mode of computing the amounts due to the retiring partners and how those amounts are secured, are provided. In the retirement deeds, there is reference to the partnership deed. Therefore, the conclusion is inevitable that the partnership deeds as well as the retirement deeds are liable to be construed together and the AR No.10/2010 14 arbitration clauses contained in the partnership deeds are to be read into the retirement deeds. ## 16. In **M.R.Engineers & Contractors Private Limited vs. Som Datt Builders Ltd. (2009(7) SCC 696)** , the Supreme Court interpreted the scope and intent of Section 7(5) of the Act and held thus : “The scope and intent of Section 7(5) of the Act may therefore be summarised thus : (i) An arbitration clause in another document, would get incorporated into a contract by reference, if the following conditions are fulfilled: (1) the contract should contain a clear reference to the documents containing arbitration clause, (2) the reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract, (3) the arbitration clause should be appropriate, that is capable of application in AR No.10/2010 15 respect of disputes under the contract and should not be repugnant to any terms of the contract. (ii) When the parties enter into a contract, making a general reference to another contract, such general reference would not have the effect of incorporating the arbitration clause from the referred document into the contract between the parties. The arbitration clause from another contract can be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause. (iii) Where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration), then, the terms of the referred contract in regard to execution/performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration AR No.10/2010 16 clause also. (iv) Where the contract provides that the standard form of terms and conditions of an independent trade or professional institution (as for example the standard terms and conditions of a trade association or architects association) will bind them or apply to the contract, such standard form of terms and conditions including any provision for arbitration in such standard terms and conditions, shall be deemed to be incorporated by reference. Sometimes the contract may also say that the parties are familiar with those terms and conditions or that the parties have read and understood the said terms and conditions. (v) Where the contract between the parties stipulates that the conditions of contract of one of the parties to the contract shall form a part of their contract (as for example the general conditions of contract of the Government where the Government is a party), the arbitration clause forming part of such general conditions of contract will apply AR No.10/2010 17 to the contract between the parties.” 17. The contention raised by the respondents that the Arbitration Request is bad for misjoinder of parties and that separate Arbitration Request should have been filed in respect of each partnership, to my mind, is unsustainable. According to the petitioners, the parties are members of a Hindu undivided family and that the firms detailed in Annexure A were created by the Hindu undivided family. In the course of the argument, the learned counsel for the respondents contended that there is no business for the Hindu undivided family. That the parties are related to each other is not disputed. The petitioners retired from all the partnership firms on 31.3.2007 and the retirement deeds were executed on 31.3.2007. If the disputes between the parties are referred to different arbitrators, it would cause hardship to the petitioners as well as the respondents. The lawyer's notice and the reply notice are common with reference to all the AR No.10/2010 18 firms. Common contentions and common evidence would be available in the cases. It would be ideal for both parties, if all the disputes are resolved together. For the aforesaid reasons, I reject the contentions raised by the learned counsel appearing for the respondents in this regard. Accordingly, the Arbitration Request is allowed. All the parties agreed that Advocate Sri.K.P.Balasubramanian may be appointed as the sole arbitrator. Accordingly, Sri.K.P.Balasubramanian is appointed as the arbitrator to resolve the disputes between the petitioners and respondents 1 to 9 arising out of Annexures B to Q partnership deeds and retirement deeds, relating to the amounts due to the petitioners and recovery thereof. The arbitrator will be entitled to fix his fee. **K.T.SANKARAN,** **JUDGE** csl