M/s Umesh Goel v Himachal Pradesh Cooperative Group Housing Society Ltd (2016)

Section 69 is the sanction the Partnership Act attaches to non-registration: an unregistered firm, and a partner of one, cannot sue to enforce a contractual right. Sub-section (3) extends the ban to "a claim of set-off or other proceedings". The question every problem on s. 69 eventually raises is how far those two words, other proceedings, reach. Do they catch an arbitration?

Jagdish Chandra Gupta v Kajaria Traders (1964) had given "other proceeding" a wide reading and applied the bar to an application in court under the Arbitration Act 1940. This case confines that reading. It holds that arbitral proceedings under the 1996 Act, and the award made in them, are outside s. 69(3), so an unregistered firm can win and keep an arbitral award. Read the two cases together: the older one tells you how wide "other proceedings" can be; this one tells you it still has to be tied to a suit in a court.

The respondent, a cooperative group housing society, invited tenders in May 1998 for the construction of 102 dwelling units with basement at Dwarka, New Delhi. The appellant, an unregistered partnership firm, was the successful bidder, and the contract was awarded to it at an estimated cost of Rs. 9.80 crores. The construction agreement was signed on 02.02.1999, and the contract contained an arbitration clause.

Disputes arose over delay and the work. The appellant moved the Delhi High Court under s. 9 of the 1996 Act for interim protection. The respondent appointed an arbitrator, an advocate, on 17.03.2003, and the appellant took part in the arbitration. Claims and counter-claims were made on both sides.

Before the arbitrator, in oral argument, the respondent made what the Court calls "a faint attempt" to argue that because the appellant firm was unregistered, its counter-claim was barred by s. 69. The arbitrator rejected the objection and by the award of 05.05.2005 allowed the appellant's claim to the extent of Rs. 1,36,24,886 with interest.

The respondent challenged the award under s. 34. A Single Judge of the Delhi High Court dismissed the challenge (and a review). On appeal under s. 37, the Division Bench reversed: it held that a counter-claim in arbitral proceedings is covered by "other proceedings" in s. 69(3), so the unregistered firm's award could not stand. The firm appealed to the Supreme Court.

1. Does the expression "other proceedings" in s. 69(3) of the Partnership Act include arbitral proceedings under the 1996 Act?
2. Does the s. 69 ban invalidate an arbitral award in favour of an unregistered firm?
3. Can an arbitrator be treated as a "Court", or arbitral proceedings as civil court proceedings, by reason of s. 14 of the Limitation Act, s. 2(a) of the Interest Act, or ss. 35–36 of the 1996 Act?

For the appellant firm: sub-sections (1) and (2) must be read into sub-section (3), so "other proceedings" means proceedings connected with a suit in a court. An arbitrator is not a court; he draws his powers from the parties' agreement, not the State. Section 36 of the 1996 Act is only a fiction for enforcement.

For the society: "other proceedings" includes arbitral proceedings; arbitral proceedings have been treated on par with civil proceedings under s. 14 of the Limitation Act; s. 2(a) of the Interest Act defines "Court" to include an arbitrator; and ss. 35–36 treat the award like a decree.

The appeal was allowed. The Division Bench's judgment was set aside and the Single Judge's judgment, upholding the award, was restored. No costs.

Reading s. 69 as a whole

The Court accepted the appellant's argument that sub-sections (1) and (2) are carried whole into sub-section (3): "the entirety of the said two sub-sections should be held to be bodily lifted and incorporated in sub-section (3)."

The common feature of (1) and (2) is a suit in a court. So the ban in (3) can operate on a set-off or other proceeding "only when such claim of set off or other proceedings are intrinsically connected with the suit that is pending in a Court." Put as a condition: "the condition precedent for the operation of ban under sub-section (3) is that the launching of a suit in a Court of law should be present".

The Court's holding on the structure of the section is in these words: "in order to attract the said Section, first and foremost the pending proceeding must be a suit instituted in a Court". And: "a claim of set off or other proceedings cannot have independent existence."

The Court drew support from the tail of s. 69(4)(b), which speaks of "other proceeding incidental to or arising from" small suits. That, it said, shows the "other proceeding" in the section "can only relate to a pending suit in a Court and not to any other different proceeding".

Jagdish Chander Gupta explained

In Jagdish Chander Gupta v Kajaria Traders, Hidayatullah J had said "the words “other proceeding” in sub-section (3) must receive their full meaning untrammeled by the words “a claim of set-off”." The Court did not depart from that, but explained it by its setting. That case arose under s. 8 of the Arbitration Act 1940 — an application to a civil court to appoint an arbitrator. Under the 1940 Act, courts supervised arbitration at every stage "as if it were a regular civil suit", whereas under the 1996 Act the court's role is limited to specified provisions.

So Jagdish Chander was held to rest on its facts: what it says "can have application in the special facts of that case and that it can have no application to a proceedings which emanated under the 1996 Act". The Court held that the ratio of Jagdish Chander "does not in anyway conflict with the view which we have taken herein".

The Court also relied on Kamal Pushp Enterprises v D.R. Construction Co (2000), which had held that s. 69 has no application to proceedings before an arbitrator or to post-award proceedings.

The respondent's three arguments rejected

• Limitation Act, s. 14. A judgment binds only on the question of law canvassed and decided in it. So "any interpretation made under the Limitation Act while construing Section 14 to treat Arbitral proceedings on par with civil proceedings cannot be applied to the case on hand."
• Interest Act, s. 2(a). That definition includes an arbitrator within "Court", but it cannot be imported: "it will not be appropriate to import the definition clause under Section 2(a) of the Interest Act to the Partnership Act".
• 1996 Act, ss. 35–36. "Section 36 only creates a statutory fiction which is limited for the purpose of enforcement of the Award." The Court relied on State of W.B. v Sadan K. Bormal (a fiction must not be extended beyond its purpose) and Paramjeet Singh Patheja v ICDS Ltd ("The legal fiction created is for the limited purpose of enforcement as a decree.").

Conclusion

"Arbitral Proceedings will not come under the expression “other proceedings” of Section 69(3) of the Partnership Act, the ban imposed under the said Section 69 can have no application to Arbitral proceedings as well as the Arbitration Award."

The ban in s. 69(3) of the Partnership Act operates only where there is a suit instituted in a court, with the set-off or "other proceedings" intrinsically connected to that suit. Arbitral proceedings under the Arbitration and Conciliation Act 1996, and the award made in them, are not "other proceedings" within s. 69(3); an unregistered firm's claim or counter-claim before an arbitrator is therefore not barred, and the award is not vitiated by non-registration. Jagdish Chandra Gupta v Kajaria Traders, decided on a court application under the 1940 Act, is confined to its own setting.

• Direct question: Discuss the effect of non-registration of a firm under section 69 of the Indian Partnership Act. Does the bar apply to arbitration? Set out s. 69(1), (2), (3); give Jagdish Chandra Gupta for the wide reading of "other proceeding"; then Umesh Goel for the limit — a suit in a court must be the foundation, and arbitral proceedings and awards under the 1996 Act fall outside.
• Problem question: an unregistered firm obtains an award; the other side challenges it under s. 34 citing s. 69. Answer: the challenge fails on this ground. Distinguish carefully if the firm has instead applied to a court (for example to appoint an arbitrator) — that is the Jagdish Chandra Gupta situation, which this case explains rather than overrules.
• Point worth marks: why the award-as-decree argument fails. Section 36 is a fiction for enforcement only; a fiction is not to be stretched beyond its purpose (Sadan K. Bormal; Paramjeet Singh Patheja).
• Short note: "Other proceedings" in section 69(3) of the Partnership Act.