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Raja Picture Palace, Rajahmundry and ors. Vs. Marina Jagga Rao - Court Judgment

LegalCrystal Citation
SubjectArbitration;Contract
CourtAndhra Pradesh High Court
Decided On
Case NumberA.A.O. No. 285 of 1981
Judge
Reported inAIR1981AP410
ActsArbitration Act, 1940 - Sections 34
AppellantRaja Picture Palace, Rajahmundry and ors.
RespondentMarina Jagga Rao
Appellant AdvocateG.R. Subbarayan, Adv.
Respondent AdvocateS. Venkat Reddy and ;D.S.R. Krishna, Advs.
DispositionAppeal dismissed
Excerpt:
.....threatre, he never rendered any account for the reasons best known to him. where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party to the agreement or any person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time before filing a written statement or taking any other steps in the proceedings, apply to the judicial authority before which the proceedings are pending to stay proceedings :and if satisfied mat there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all..........defendant is a double graduate -- b. sc., b. ed.3. the plaintiff and defendants 2 to 5 executed a deed of partnership dated 19-4-1978. by virtue of the said deed, they are the partners of the 1st defendant-firm, raja picture palace, rajahmundry. the said deed is stated to be with the 2nd defendant. under the deed of partnership, the plaintiff is having a 20% share and the second defendant and his children hold the rest of the 80% share. by virtue of his education, the second defendant was put in the management of the first defendant-firm. the plaintiff does not know english. the second defendant alone got the partnership deed drafted and out of confidence in his younger brother the plaintiff subscribed his signature on the deed of partnership without attempting to understand the terms.....
Judgment:

Chennakesav Reddi, J.

1. The problem that stands pre-eminently to the fore in this case relates to the limitations and conditions circumscribing the spacious sweep of Section 34 of the Arbitration Act to order stay of legal proceedings where there is agreement for arbitration between the parties.

2. The relevant facts and circumstances giving rise to the legal proceedings are these : The plaintiff is the elder brother of the second defendant. Defendants 3 and 4 are the sons and the 5th defendant is the daughter of the 2nd defendant. The 2nd defendant is a double graduate -- B. Sc., B. Ed.

3. The plaintiff and defendants 2 to 5 executed a deed of partnership dated 19-4-1978. By virtue of the said deed, they are the partners of the 1st defendant-firm, Raja Picture Palace, Rajahmundry. The said deed is stated to be with the 2nd defendant. Under the deed of partnership, the plaintiff is having a 20% share and the second defendant and his children hold the rest of the 80% share. By virtue of his education, the second defendant was put in the management of the first defendant-firm. The plaintiff does not know English. The second defendant alone got the partnership deed drafted and out of confidence in his younger brother the plaintiff subscribed his signature on the deed of partnership without attempting to understand the terms of the deed.

4. For the construction of the theatre, Raja Picture Palace, a loan of Rs. 2,30,000/-was taken by the Firm from the State Bank of India. Rajahmundry. The theatre was completed in May, 1979 and films were being exhibited since then in the theatre. Ever since the commencement of the cinema business by the first defendant-firm, the second defendant alone has been looking after the entire business. It is the case of the plaintiff that the 1st defendant-firm has been doing good business just like the other theatres in Rajahmundry town. But, it appears, the second defendant with a mala fide intention failed to maintain correct accounts of the first defendant-firm and was not showing the accounts of the 1st defendant-firm to the plaintiff in spite of repeated requests. The 2nd defendant also failed to pay the monthly instalment due on the loan to the State Bank of India, Rajahmundry. with a mala fide intention. He did not also pay the share of profit to each of the partners after rendering true and correct accounts. He could successfully do so because all the other partners are his own children. Though the plaintiff demanded the second defendant to render true and correct account of the profit and loss of the threatre, he never rendered any account for the reasons best known to him. The plaintiff also suggested to the second defendant to lease out the threatre if he was not in a position to run profitably as there were several offers to pay an annual rent of Rs. 1,25,000/-. But the second defendant, it is alleged, with a view to cause loss to the plaintiff and misappropriate the income was not willing to lease out the theatre.

5. The plaintiff made several attempts through mediators viz., Sri Marni Papaji Rao. Sri Nekkanti Ramanna Tata, Sri Thamminee di Subba Rao and Sri G.R. Subbarayan to advice the second defendant to render the true and correct accounts of the business of the first defendant firm, and those efforts did not yield any result. But the mediators, however, advised the plaintiff not to go to a Court of law and assured him that they would bring about a fair 'settlement. But, however, as no settlement could be arrived at and the plaintiff being vexed with the conduct of the second defendant was about to file a suit for rendition of accounts and for leasing out the theatre to avoid any further loss to him. Again the mediators persuaded him not to go to a Court promissing the plaintiff that they would see that the plaintiff's share of profits are paid to him. Therefore, having regard to the advice of the mediators, the plaintiff did not take any action to precipitate the matters.

6. While so, the plaintiff received a letter from the 2nd defendant that a meeting of the partners of the Firm would be held at the 1st defendant-Firm Raja Picture Palace, Rajahmundry on 16-2-1981 at 10.30 A.M., to discuss about the problems of the firm. In pursuance of the said notice, the plaintiff went to the Raja Picture Palace to participate in the meeting at 10.30 A. M. on 16-2-1981 and waited for an hour. But none of the other partners turned up and no meeting was held. The plaintiff thereupon sent a notice dated 18-2-1981 to the second defendant questioning the conduct of the 2nd defendant in issuing a false notice for a meeting while he did not intend to hold any meeting on 16-2-1981.

7. To the surprise of the plaintiff he received a letter dated 16-2-1981 on 19-2-1981 from the second defendant informing him that the majority of the partners had expelled the plaintiff from the partnership firm as per the resolution said to have been passed at the meeting held on 16-2-1981. The plaintiff alleges that the said resolution and the consequential resolutions brought forth by defendants 2 to 5 are void, illegal, inoperative and unenforceable in law and the plaintiff still continues to be the partner of the 1st defendant-firm irrespective of the said resolutions said to have been passed by the defendants 2 to 5 in the meeting alleged to have been held on 16-2-1981. According to him it was done with a view to get rid of the plaintiff by paying him a paltry amount basing on the book value which is far less than the real value. The plaintiff thereupon issued a registered notice dated 20-2-1981 to all the partners viz. defendants 2 to 5 questioning the resolutions dated 16-2-1981 said to have been passed by them expelling him from the firm. A reply dated 5-5-1981 from the advocate of defendants 2 to 5 was sent containing false allegations to the effect that the plaintiff has been acting detrimental to the interests of the Firm. The plaintiff submits that he had no occasion to act detrimental to the interests of the first defendant-firm and never interfered with the business of the Firm. He, therefore filed the suit before the subordinate Judge, Rajahmundry, for declaration that the resolution dated 16-2-1981 alleged to have been passed by defendants 2 to 5 expelling him as partner of the first defendant-firm was void, illegal, inoperative and unenforceable and that the plaintiff continues to be the partner of the Firm and for rendition of true and correct accounts by the 2nd defendant of the partnership business from its inception up to the dale and for payment of the plaintiff's 1/5th share of profits.

8. Before riling the written statement in the suit defendants 1 to 5, filed an application I. A. No. 576 of 1981 under Section 34 of the Arbitration Act for stay of all proceedings in the suit. In support of the application it is stated that under the deed of partnership dated 19-4-1978 enterd into between the plaintiff and the defendants there is a provision for arbitration in case of dispute of any nature among the partners and so if the plaintiff felt aggrieved by the expulsion from the partnership, his remedy was only to seek arbitration and as such he had no right to commence a legal proceeding and much less to claim any interim relief. It was stated on behalf of the defendants that all of them were ready and willing for reference to arbitration and do all things necessary for the proper conduct of arbitration.

9. In the counter-affidavit of the plaintiff he swore that he did not know to read and write English and the 2nd defendant obtained his signature on the partnership deed as the Manager without appraising him of the various terms in the partnership deed. He also staled that he had signed the partnership deed out of confidence in his brother and that the 2nd defendant did not even furnish him a copy of the deed of partnership in spite of repeated demands by him. As a matter of fact according to the plaintiff, till he received the notice, he was not aware of any such clause enabling the other partners to expel a partner. According to the plaintiff, the 2nd defendant played fraud on him and got introduced the clause relating to the expulsion of a partner and the clause relating to reference to arbitration without the knowledge and consent of the plaintiff and that he would never have agreed to such clauses when the other partners viz., defendants 2 to 5 belong to or members of one family. It is stated that the Court has ample discretion in exercising its right not to stay the proceedings and particularly in cases where there are allegations of fraud and the question raised is also one relating to the expulsion of the plaintiff-respondent from the partnership of the 1st defendant-firm. According to the plaintiff, the suit involves determination of subtle points of law and allegations of fraud and collusion in introducing certain clauses in the deed without the knowledge of the plaintiff they can only be decided by a Court of law and cannot be decided by arbitrators. So it is contended that the discretion of the Court under Section 34 of the Arbitration Act cannot be exercised to stay the legal proceedings.

10. The learned subordinate Judge, on a consideration of the entire facts and circumstances of the case, held that in view of the fact that the suit is for a declaration that the expulsion of the plaintiff from the partnership firm was illegal and void and since the plaintiff alleges that he was not aware of the clauses inserting expulsion of partners and reference to arbitration and even a copy of partnership deed was not furnished to him in spite of repeated requests, the matter cannot be referred to the Arbitration and the suit alone is the proper forum for deciding the issues in the case. Accordingly, he declined to exercise his discretion to order slay of the legal proceedings under Section 34 of the Arbitration Act and dismissed the application. Therefore, the defendants in the suit have come up to this Court by way of an appeal.

11. The question, therefore, that requires determinations is: What are the limitations and conditions circumscribing the spacious sweep of Section 34 of the Arbitration Act, 1940 (hereinafter called 'the Act') to order stay of legal proceedings in a case where there is agreement for arbitration between the parties. The answer to the question must necessarily be found on the evaluation and interpretation of the real amplitude of Section 34 of the Act. Section 34 reads as follows:

'Where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party to the agreement or any person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time before filing a written statement or taking any other steps in the proceedings, apply to the judicial authority before which the proceedings are pending to stay proceedings : and if satisfied mat there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration, such authority may make an order staying the proceedings.'

12. A scrutiny of the section at once strikes one that in order to invoke the provisions of the section, there must be an undisputed arbitration agreement between the parties to the legal proceedings. When the first essential pre-requisite is fulfilled, a party to such legal proceeding at any time before filing a written statement may apply to the judicial authority before which the legal proceedings are pending to stay the said proceedings. Then the Court may make an order staying the proceedings if the Court is satisfied that there was no sufficient reason why the matter should not be referred to arbitration in accordance with the arbitration agreement. That leads to the real issue in many cases. When can the Court reach the satisfaction that 'there is no sufficient reason'. The words employed in the section 'no sufficient reason' are not magic words intended to be uttered. Nor is the satisfaction of the Court required to be reached by esoteric meditation or computer calculation or a process of perception. It is the satisfaction of the judicial conscience on an overview of the peculiar facts and circumstances of the particular case. In other words, the discretion given to the Court to stay or not to stay legal proceedings is a judicial discretion intended to be exercised to further the ends of justice. The discretion given to the Court is no doubt spacious in its sweep. It is neither possible nor desirable to lay down any rigid rules or precise limitation under which the Court may reach the satisfaction required under the section not to stay the proceedings. To state broadly, without intending to be exhaustive, the Court would be rightly exercising its discretion not to grant stay in cases where: (i) the dispute involves grave allegations of fraud or misrepresentation; (ii) the plaintiff alleges collusion and conspiracy among the defendants; (iii) the dispute involves determination of complicated questions of law which can be properly decided by a Court; (iv) the arbitration agreement itself is disputed; (v) there is good ground for apprehending that the arbitrators will not act fairly in the matter.

13. The learned counsel for the appellant submits that the Court below, in exercising its discretion, acted unreasonably and unfairly and ignored the relevant facts and adopted on unjudicial approach. Let us now, therefore, proceed to scrutinise the relevant fads and examine the soundness of the contention.

14. In this case, the plaintiff disputes the existence of any agreement of arbitration. He also disputes the clause in the agreement relating to expulsion of a partner by the other partners. He submits that he was not shown the arbitration agreement at all and that he signed the agreement since he reposed full confidence in his younger brother who happened to be the Managing Partner of the firm. In other words, he alleges fraud and misrepresentation. It is also the case of the plaintiff that he has been expelled from the partnership by a resolution and in the suit he has questioned the validity of his expulsion from the partnership firm by the other partners. The first prayer in the suit is for a declaration that the resolution dated 16-2-1981 expelling him from the partnership was illegal and void. It was alleged that he is ignorant of any clauses to that effect in the deed of partnership and that the second defendant played fraud on him and got introduced the clause relating to the expulsion of the partner. It is undisputed that the other 3 partners of the firm are kith and kin of the Managing Partner; the 3rd and 4th defendants being his sons and the 5th defendant being his daughter. Under Clause 16 of the agreement, the arbitrator has to be chosen by the majority of the partners and the decision of such arbitrator shall be final. What justice can be expected from an arbitrator chosen by defendants 2 to 5 who are all so closely related and undoubtedly hostile to the plaintiff? Therefore, the apprehension of the plaintiff that the Arbitrators are likely to act unfairly and capriciously is well founded. It is now well settled that the appellate Court will not lightly interfere with the discretion exercised by the trial Court which is found to be neither unjudicial nor otherwise improper. Vide : Printers (Mysore) P. Ltd. v. Pothan Joseph, : [1960]3SCR713 . In the aforesaid circumstances, we do not think that the discretion exercised by the Court below in declining to stay the proceedings was improper or unjudicial.

15. It may now be useful to refer to some of the decided cases on the limitation and scope of Section 34 of the Act:

16-17. The Supreme Court in Uttar Pradesh Cooperative Federation Ltd. v. Sunder Bros., Delhi, : AIR1967SC249 observed (at p. 253):

'It is manifest that the strict principle of sanctity of contract is subject to the discretion of the Court under Section 34 of the Indian Arbitration Act, for there must be read in every such agreement an implied term or condition that it would be enforceable only if the Court, having due regard to the other surroundings circumstances thinks fit in its discretion to enforce it. It is obvious that a party may be released from the bargain if he can show that the selected arbitrator is likely to show bias or by sufficient reason to suspect that he will act unfairly or that he has been guilty of continued unreasonable conduct.'

18. In our opinion, it is impossible to hold that the arbitrator chosen by defendants 2 to 5 is not likely to show bias or act unfairly in determining the dispute.

19. In Appalaraju v. Official Receiver, : AIR1951Mad879a (2) the Madras High Court ruled :

'Where the existence of an arbitration agreement is denied, the arbitrators have no jurisdiction to decide whether the agreement as such exists or not and they are not competent to function as well. In such circumstances the suit cannot be stayed under Section 34.'

20. The Calcutta High Court in R. E. Works Ltd. v. Union of India, : AIR1972Cal281 held:

'When the plaintiff alleged fraud against the petitioner who however desires to have the dispute tried by the arbitrators, suit should not be stayed,'

21. In this case, the plaintiff has alleged fraud and surreptitious introduction of clause regarding the expulsion of a partner and arbitration without the knowledge and consent of the plaintiff.

22. The learned counsel, however, placed strong reliance on the decision of the Madras High Court in A Sankara Sadasivam v. A Kumaravel, : AIR1977Mad259 and submits that even in cases where the existence of arbitration agreement is disputed, the Court should decide the existence of valid agreement first before rejecting the application for stay. But in this case the plaintiff has alleged fraud against the defendants in introducing the clause for arbitration and expulsion of the partner.

23. Some other cases have been relied upon by the learned counsel for the appellant. But they are all cases in which existence of the arbitration agreement is not disputed. Therefore, they are of no relevance to the facts of this case.

24. The Supreme Court in Ruby General Insurance Co. Ltd., v. Pearey Lal Kumar, : [1952]1SCR501 held that if the dispute is whether the contract which contains the clause has ever been entered into at all, the issue cannot go to arbitration. Such is the dispute in this case. Therefore, the Court below rightly exercised its discretion in rejecting the application for stay under Section 34 of the Act.

25. The appeal therefore, fails and it is accordingly dismissed with costs.


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