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Krishnarao Narayanrao Chawate Vs. Shankar Sahadev Mungekar - Court Judgment

LegalCrystal Citation
SubjectContract
CourtMumbai High Court
Decided On
Case NumberO.C.J. Suit No. 1020 of 1950
Judge
Reported in(1954)56BOMLR973
AppellantKrishnarao Narayanrao Chawate
RespondentShankar Sahadev Mungekar
Excerpt:
.....on similar business of manufacturing and selling certain kinds of goods manufactured by dissolved firm-suit by continuing partner against outgoing partner for breach of stipulations contained in clause of deed of dissolution-suit whether barred under section 69(1) of indian partnership act as dissolved firm not registered--whether suit a suit to enforce a right arising from contract and to enforce a right conferred by indian partnership act--whether agreement contained in clause of deed of dissolution imposed unreasonable restrictions and, therefore, void-tests for determining reasonableness of restraint-construction.;the operation of section 69(1) of the indian partnership act, 1932, can only extend to any suit in which a partner sues his co-partner or the firm to enforce any right..........subjected in the matter of proving as to who were the persons carrying on the business of that firm as partners. as to the provisions affecting partners themselves it seems clear that the main object and intention of the legislature was to prevent a partner from enforcing his claims against his fellow partners if the firm was not registered and to compel in such a case dissolution of the firm by laying down that the court will entertain suits between partners relating to the partnership business only where dissolution and account and winding up of the affairs of the firm is sought or where account and winding up of the affairs of an already dissolved firm is sought. in case of an enactment of this nature it is reasonable to expect that the legislature would not leave its intention to.....
Judgment:

Desai, J.

1. [His Lordship, after narrating the facts and dealing with the evidence in the case, proceeded]:-I now pass to the legal contention which was pressed before me at the very outset of the hearing of this case by Mr. Jethmalani, learned Counsel for the defendant, The contention was that the suit was not maintainable as the dissolved firm of Cipra Bakelite Co. in which plaintiff No. 1 and the defendant were partners had not boon registered under the Partnership Act. The argument was that this was a suit substantially by plaintiff No. 1 who was suing to enforce a right arising from a contract and also to enforce a right conferred by the Partnership Act and fell within the purview of Section 69(1) of that Act which is as follows :

69.(1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court by or on behalf of any person being as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.

It was then said that the exception contained in the first part of Sub-section 3(a) of that section which rendered the provisions of Sub-section (1) inapplicable to suits for enforcement of any right to sue for the dissolution of the firm or for accounts of a dissolved firm had no bearing on the present case. Therefore, so it was argued, this suit must fail. Now, there is no doubt that this case does not fall under any exception laid down in Sub-section (3) of that section. The question yet remains whether the agreement before me is hit by the provisions of Sub-section (1). I have been asked by learned Counsel to sub-scribe to the proposition which was boldly and baldly thus stated: An agreement between partners of a dissolved firm or between partners in anticipation of dissolution of the firm, whereby a partner intending to continue the business on his own account agrees to take over the same on certain stipulations, is not enforceable unless the firm had been registered. The argument by which this proposition was sought to be sustained was that a suit to enforce any stipulation of such a nature was a suit by a partner to enforce a right arising from a contract or to enforce a right conferred by the Partnership Act. My decision here must rest on a neat question of construction of Sub-section (1) of Section 69. I have read and re-read that sub-section in the light of principles governing such cases and the irresistible conclusion seems to me to be that its operation can only extend to any suit in which a partner sues his co-partner or the firm to enforce any right arising from the contract between the partners as such or to enforce any right which the Act can be said to have conferred on partners. The contract between them would be the contract of partnership regulating their rights and obligations inter se. Ordinarily the rights, duties and obligations of partners are to be ascertained from the agreement of partnership entered into by them since the agreement is the very foundation of the relationship. It is also open to partners, if all of them agree, to vary from time to time any arrangement regulating their mutual rights and obligations. Now, the rights and obligations arising from their relation are regulated primarily by the express contract between the partners, so far as the express contract extends and continues in force; and when there is no express contract or the express contract does not reach to all those rights and obligations, they are enforced if any implied agreement is established. The implied agreement may be inferred from the course of dealings between the partners. Section 11 of the Act in terms lays down that the contract of partnership may be express or may be implied by a course of dealing. The law allows an agreement between partners to be made and varied from time to time, formally or informally, on all matters affecting their rights and obligations to one another. All these would be 'rights arising from a contract' as envisaged by that expression in Sub-section (1) of Section 69.

2. The Act also confers various rights on partners. The contract between partners at times does not reach to all the rights and obligations which should normally exist in case of partners and such rights are, therefore, in terms recognized and conferred by the Act. Some instances of these rights are to be found in Sections 12 and 13 of the Act, which relate to the conduct of the business and the mutual rights and liabilities of partners. These rights are often of importance when determining the relation of partners inter se. Of course, they are subject to contract between the partners, that is, they regulate the relation in so far as they are not varied or negatived by express agreement or course of dealing amounting to an implied agreement. An examination of the provisions of the Act shows that there are a number of provisions which recognise and confer rights most of which may be regulated and some of which cannot be regulated by the contract of the partners themselves. Thus, for instance, there is the right of a partner, recognised by Section 10 to claim indemnity for any loss caused to the firm by any fraud by the other partner or partners in the conduct of the business. Another instance of this, but of a different kind, is the right of a partner to claim interest on advances made by him to the firm which is recognised in Section 13(d). These and similar rights are envisaged by the expression 'rights conferred by this Act' to be found in the first part of Sub-section (1) of Section 69.

3. Learned Counsel for the defendant argued that the 'contract' to which the first part of Sub-section (1) of Section 69 applies would include any contract between partners who were at the time of making the contract partners as well as persons who had ceased to be partners if the contract is in respect of any matter arising out of the relationship of partners. Reliance was placed on Patel v. Husseinbhai (1986) 30 Bom. L.R. 280 where Sir John Beaumont expressed the view that this sub-section covers a suit by a partner suing in respect of a right vested in him or acquired by him as a partner in a firm and that it is not essential that the firm should be in actual existence at the date when the suit was instituted. I am in respectful agreement with the view expressed by the learned Chief Justice in the decision relied on in support of this proposition. In that case the plaintiff and the defendant had been partners with equal shares. The partnership was dissolved in August 1934. The accounts were made up and the defendant paid the plaintiff a sum of Rs. 600 on account of income-tax which it was estimated the firm would be liable to pay. Subsequently an assessment of Rs. 3,400 was made against the plaintiff on account of the firm for the year ending March 1934. Plaintiff paid the whole amount and sued the defendant for half the amount, giving credit for the sum of Rs. 600 already paid by him to the plaintiff. The firm was not registered and the plea of absence of registration was upheld as on the facts of the case the plaintiff's cause of action was and could have been only based on the original contract creating the relationship of partners and not on any new agreement to pay half the amount of income-tax which might have furnished an independent cause of action. I do not see how that decision or the observations relied on advance the defendant's case. Now, the right which plaintiff No. 1 seeks to enforce is not a right vested in him or acquired by him as a partner in a firm but a right acquired by him under a distinct subsequent agreement. This agreement does not in any way regulate the rights of partners as such i.e. it does not in any way regulate their actual rights and obligations as partners, but is on the contrary a new and independent right furnishing an entirely different cause of action. Whether such an agreement is arrived at in anticipation of dissolution of the firm or after dissolution of the firm does not affect the question.

4. The section enacts provisions which are express and mandatory and it is the paramount duty of the judicial interpreter to give full effect to the language used by the law-maker. At the same time there is an equally important duty on the Court in expounding stringent provisions like those contained in the present section which forbid certain suits being instituted in respect of partnerships which have not been registered by entailing dismissal of such suits, to see that no case is brought within the enactment which is not covered by its express language or manifest intention. Now, the mischief primarily intended to be prevented by the mandatory provisions of Section 69 was the hardship and difficulty to which third parties dealing with a firm were subjected in the matter of proving as to who were the persons carrying on the business of that firm as partners. As to the provisions affecting partners themselves it seems clear that the main object and intention of the Legislature was to prevent a partner from enforcing his claims against his fellow partners if the firm was not registered and to compel in such a case dissolution of the firm by laying down that the Court will entertain suits between partners relating to the partnership business only where dissolution and account and winding up of the affairs of the firm is sought or where account and winding up of the affairs of an already dissolved firm is sought. In case of an enactment of this nature it is reasonable to expect that the Legislature would not leave its intention to be gathered by mere doubtful inferences or from vague words but would express it in words of sufficient clarity and comprehensiveness. I am, therefore, unable to see how it can be said that the intention of the Legislature was to bring within the purview of Sub-section (1) any suit of the nature before me.

5. It was next argued that in any case the right which the plaintiffs seek to enforce is one expressly conferred by the Partnership Act. Reference was made to Section 54 of the Partnership Act which is as follows :-

Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits; and notwithstanding anything contained in section 27 of the Indian Contract Act, 1872, such agreement shall he valid if the restrictions imposed are reasonable.

It was strongly urged that but for this provision the plaintiffs would not have had the right to enforce the stipulations in question. The argument, presented with ingenuity and ability, was that plaintiff No. 1 is in the position of a partner suing an ex-partner in the firm and seeks relief in respect of a cause of action based on a right conferred by Section 54 of the Act. It was said that the plaintiffs must of necessity rely on that section if they are to succeed in their contention that they have a right to enforce the stipulations under consideration. I am unable to acquiesce in this reasoning. The rule contained in Section 54 merely lays down an exception to the general rule contained in Section 27 of the Contract Act that all agreements in restraint of trade are void. It is true that the plaintiffs have to rely on the rule laid down in Section 54 of the Partnership Act, but that is not in support of any part of their cause of action but in defence and only to meet the contention that the agreement contained in these stipulations is void as being contrary to public policy. This in my opinion is quite a different matter. It is hard to see how it can be said that the plaintiffs' cause of action is founded on the rule laid down in Section 54. Their cause of action is the agreement of dissolution and the right arising from that agreement. The media upon which the plaintiffs seek relief is not that rule. The cause of action of a plaintiff in any suit has no relation whatever to the defence which may be set up by the defendant. In my judgment, therefore, it cannot be said that this is a suit to enforce a right conferred by the Partnership Act.

6. It is also possible to view the matter by considering whether this is a suit by a person suing as a partner. It frequently happens that upon or after a dissolution of partnership or upon retirement of a partner some agreement as to the adjustment or settlement of accounts between the parties or some other matters relating to partnership is entered into by the partners. In a case of this nature, where the partnership was not registered and a suit is filed, the plea is often raised that the suit is not maintainable by virtue of the ban imposed by Section 69. The usual type of case under this head is where a partner sues his other partner or partners to recover the amount of the settled accounts. A claim of this nature although it is by a person who was a partner and to enforce a claim arising from a contract cannot be regarded as something which he seeks to enforce as a partner. It would not be on the footing of the relationship of partners. The cause of action in such a case cannot be said to be based on the contract which created or regulated the original partnership, i.e. the relationship which had subsisted between them, but upon a contract putting an end to that relationship and giving rise to a distinct and independent cause of action.

7. Mr. Purandare, learned Counsel for the plaintiffs, has relied on a decision of the Madras High Court, Abdul Subhan v. Abdul Ravoof A.I.R [1042] Mad. 707. In that case there was an agreement arrived at between two partners after dissolution, and a contemporaneous taking of account. One of the partners agreed to pay a stated amount to the other. The partnership was not registered. A suit brought on that agreement to recover the amount therein mentioned was held maintainable. Another decision relied on by learned Counsel for the plaintiffs was Bajranglal Maniram v. Anandilal Ramchandra . The facts of that case were similar to the facts of the Madras case except that in this case the amount agreed upon as payable by the plaintiff to the defendant on dissolution was to be paid to a third party in discharge of the defendant's liability to that third party. It was held that the agreement afforded a fresh cause of action based on a new contract, and, therefore, the suit was maintainable. I am in agreement with the view, expressed in both these cases, that such an agreement between partners upon or after dissolution would afford a new and distinct cause of action on which a suit may be brought and that such a suit would not fall within the purview of Sub-section (1) of Section 69 of the Partnership Act.

8. There remains for consideration one more point urged before me by learned Counsel for the defendant. It was argued that the agreement contained in Clause 4 of the deed of dissolution was void and of no effect as it imposed unreasonable restrictions on the defendant, and must, therefore, be held to be in restraint of trade. Now, Section 54 of the Partnership Act in terms exempts such an agreement from the operation of the rule which renders an agreement in restraint of trade as void under our law provided the restrictions imposed are reasonable.

9. Section 27 of the Indian Contract Act in broad and comprehensive terms lays down the rule that every agreement by which any person is restrained from exercising a lawful trade or business of any kind, is, to that extent, void. Section 54 of the Partnership Act recognises one of the necessary exceptions to that general rule and it is competent to partners upon or in anticipation of the dissolution of the firm to make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits so long as the restrictions imposed are reasonable. Since the decision of the House of Lords in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Company [1894] A.C. 335 it has been held by Courts both in England and in India that the word 'reasonable' in such context means such as would afford a fair protection to the interest of the party concerned and not so large as to interfere with the interest of the public.

10. It is obviously impossible to formulate any abstract rules for determining the reasonableness of the restraint in any particular case, but the following tests are deducible from an analysis of the leading cases on the subject:-

(a) The generality of the covenant, whether as to time or space, may render it unreasonable; it is not necessarily valid because it is restricted as to time and place but may be void because it is not so restricted.

(b) Different degrees of protection are reasonable in different cases.

(c) The reasonableness of the restriction must be judged by the character and nature of the business or of its customers.

11. Now, in the case before me the restrictions imposed under Clause 4 are to operate for a period of three years and only in the city of Bombay. Therefore, there was nothing there which may be said to be an unreasonable restriction having regard to the character and nature of the business and of its customers. Then it was said that the defendant was being prevented either directly or indirectly and either as principal, clerk or agent from being concerned or engaged in a similar business of manufacturing bakelite bottle caps and containers. It was said that the defendant was not free even to serve as a clerk in any firm carrying on similar business. I do not think that the clause read as a whole has the effect of preventing the defendant from bona fide serving as a clerk or working as an agent of any rival firm. The words 'concerned or engaged in' read in their context seem to me to be intended only to prevent the defendant from himself conducting or carrying on any rival business in the type of goods mentioned in the clause, under the guise of being designated a clerk or an agent. The restriction, in my judgment, did not reach to any bona fide employment which the defendant might have felt compelled to seek with a rival firm as long as he did not under the cloak of such employment himself engage in conducting or carrying on any business in the type of goods mentioned in the clause in the City of Bombay for a period of 3 years. I do not, therefore, think that the restrictions imposed by Clause 4 of the deed of dissolution can be regarded as unreasonable. Again, it has to be noted that the defendant was not being restrained from being concerned or engaged in any business of manufacturing bakelite articles other than bottle caps and containers. The restriction operated only in respect of bottle caps and containers or boxes of CB-9 and CB-10 types of the capacity of six ounces and two ounces respectively, which were manufactured by the dissolved firm. It was left open to the defendant to manufacture any bakelite goods of any other type or kind. The restrictions imposed by Clause 4 appear to me to be reasonable.

12. It was finally argued that the words at the end of Clause 4 did not restrict the operation of the stipulation to the period of three years mentioned in the beginning of the clause but operated for all time. By those words the defendant agreed not to interfere with or intervene in or divert or endeavour to divert any of the business intended to be carried on by plaintiff No. 1, in the manner already stated in the agreement. It was strongly urged before me that in any event this part of the agreement should be held to be void as imposing unreasonable restrictions on an outgoing partner. Learned Counsel for the plaintiffs has drawn my attention to a Form of a Deed of Dissolution on retirement of a partner from Butterworth's Encyclopoedia of Precedents, (2nd edn.), p. 522, in which there appears a clause in almost similar terms. I do not, however, intend to express any opinion in this case as to whether these words impose any restrictions which are unreasonable or otherwise, because it is not necessary for me to do so. The relief sought by the plaintiffs in their plaint by way of injunction is asked for in prayer (e) of the plaint and there they have sought to restrain the defendant from acting in any manner contrary to Clause 4 for a period of three years and that period of three years commencing from April 27, 1948, has already expired. The amount of damages of Rs. 33,000 which is the principal relief claimed by the plaintiffs as damages in the suit is confined to the covenant contained in the earlier part of Clause 4 of the deed of dissolution. Therefore, as I have already observed, it is not necessary to consider this aspect of the case. It was also said that if the last part of Clause 4 was void as being in restraint of trade the whole of Clause 4 would be void. I do not think this argument is tenable because they are separate and severable covenants, For all these reasons the present contention must fail.

13. The conclusion I have reached is that the defendant has committed a breach of the covenant contained in Clause 4 of the deed of dissolution. He has been concerned and engaged in carrying on business of manufacturing bakelite bottle caps and containers of certain types which he was not entitled to do. He has, therefore, rendered himself liable to compensate the plaintiffs for the breach of that covenant.


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