This article is written by Vaibhvee Jangid, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho. This article has been edited by Aatima Bhatia (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
This case of V.G. Santhosam and Others vs Mrs. Shanthi Gnanasekaran and Others was decided in 2020 by Hon’ble Justice S.M. Subramaniam. It involves very important issues regarding whether an arbitrator can implead a third party to the arbitration proceedings or not and whether he can use inherent power under Order I, Rule 10 of Civil Procedure Code which is available to the civil courts? These all issues are analyzed in detail in this article.
These miscellaneous civil appeals arise out of the order passed by the sole arbitrator on 2/11/2019. The sole arbitrator compelled the first respondent Mrs. Shanthi Gnanasekaran to participate in the adjudicative process in the arbitration.
A partnership firm named M/s. V.G.P Beach housing was formed on 27/03/1979 by and between and between late Mr. V.G. Panneerdas, Mr. V.G. Santhosam, Mr. V.G. Selvaraj, Mr. V.G.P. Ravidas, and Mr. V.G.P. Rajadas. Then two more partners namely Mr. V.G.P. Babudas and Mr. V.G.S Rajesh were inducted on 16/12/1982 and thus every partner was entitled to 1/7th of the net profits. The partnership deed stated that upon death of any of the partners, the nominees of the deceased partner would get absolute rights.
Thereby when Mr.V.G.Panneerdas died on 7/05/1988 his wife Mrs. Parijatham was appointed as the nominee and thus was the sole beneficiary of the rights of her husband. However, vide partnership deed dated 7/05/1988 the partnership firm was reconstituted with Mrs. Parijatham along with the original 6 partners and two more partners were added, were Mr. V.G.P. Prasaddas and V.G.P. Murphydas. Therefore, then every partner was entitled to 1/9th share of the net profits.
Then when Mrs. Parijatham died on 25/08/1992 she nominated Mr. V.G.P. Ravidas as her nominee and thereafter the partnership firm was reconstituted according to the partnership deed dated 27/08/1993 which also inducted Mr. V.G.S. Vinodhraj as a partner in the firm and they all decided that each partner should get 1/9th share only and then it can be said that Mr. Vinodhraj became the sole beneficiary of the 1/9th share of late Mrs. Parijatham
According to clause 13 of the partnership agreement dated 27/08/1993, only the nominees would get the net profits. Mr. V.G.Panneerdas had constituted this firm with all the male members as his daughters were already married and living lavish lives. And also his sons for the past 37 years had been contributing to the revenue and the profits of the business.
However, the problem arose when Mr. V.G.Selvaraj, Mr. V.G.S Vinodhraj, and Mr. V.G.S.Rajeshbegan illegally started dealing with the firm’s property and thereby created many encumbrances over several properties which belonged to the partnership firm. Therefore the appellants in the present case approached the court to grant an interim injunction under Section 9 of Arbitration Act, 1996 restraining the aforementioned partners from encumbering the properties of the firm.
The court thereby granted the interim injunction and then the appellants further filed a petition under Section 11 of the Arbitration Act, 1996 for the appointment of the arbitrator, and thus retired justice K. Kannan of Punjab and Haryana High court was appointed as the sole arbitrator to adjudicate the disputes between the parties and thereby he impleaded the first respondent bypassing the order dated 2/11/2019. Therefore this led to the filing of these civil miscellaneous appeals under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996.
The main contention of the first respondent is that though she didn’t deny the reconstitution of the partnership firm several times before, she raised the issue that her father late Mr. V.G. Panneerdas would have included his daughters as well as the Partners in the firm, as his legal heirs are entitled to equal shares in the profits and in the business of the partnership firm. She also claimed that the entire partnership firm was intended to be run as a family business and that could very well be seen that at all the times when the partnership firm was reconstituted dated 25/08/1993, 27/08/1993, and 01/10/1994 only the male lineal descendants of Mr. V.G. Panneerdas, were made partners when they attained the age of majority- which is illegal and unlawful. She further claimed that if she is not made a party to the arbitration proceedings, an irreparable loss would be caused to her and her rights would be infringed. Her claim rests on the point that as a legal heir she is entitled to the profits of the business and the illegal selling of the properties by the male family members had led to the dispute between them.
On behalf of the appellants
- That the first respondent was not a party to the partnership agreement dated 27/08/1993 which is in dispute and thus she cannot be a party in the arbitration as well.
- The dispute raised by the first respondent is barred by limitation, as the cause of action arose for the first time when Mr. Panneerdas died and a second time when Mrs. Parijatham died and the firm was reconstituted. And thus Section 113 of the Limitation Act, 1963 was applicable to the case.
- They also contended that impleading the first respondent to the arbitration proceedings does not come under Section 17 of the Arbitration Act, 1996. and therefore the question of legal heirship does not arise as the nominees are the sole beneficiaries of their respective shares.
- The nominees are not trustees that the first respondent thinks, as they are the beneficiaries according to the partnership agreement. The said question of legal heirs will subsist only upon the death of a partner without a nominee or in the case where a partner died intestate.
- They also argued that since the daughters were already married and living lavish lives, constituting the partnership firm of only male members was valid and also they are the ones who have extensively contributed to the business and made goodwill in the market whereas the first respondent has done nothing in pursuant of it.
- They also argued that the arbitral tribunal does not possess the power under Order I, Rule 10 of Civil Procedure Code which is applicable only in cases of civil court proceedings and thus the third parties cannot be impleaded as they were not the signatories to the arbitration agreement and thus their no right arises from it. And therefore they argued that the first respondent does not have locus standi as well.
On behalf of the first respondent
- She contended that since she is a legal heir she is entitled to be impleaded and regarding the merits and demerits of the claim the arbitrator would decide during the arbitral proceedings and therefore there is no error as such in impleading the first respondent.
- They argued that the impleading the first respondent cannot be termed as an interim measure of the tribunal under Section 17 of the Arbitration Act, 1996 and thus the civil miscellaneous appeals filed under Section 37(2)(b) is not maintainable.
- Regarding the law of limitation, exclusion of her and the rights of all the other parties are to be decided during the arbitration claims when the issue of dissolution of the partnership is taken in the arbitral adjudication.
- Also, the point of limitation would be decided by the arbitrator during the proceedings and thus the present appeals are untenable.
- Chloro Controls India (P) Ltd vs. Severn Trent Water Purification Inc., held that it is not absolutely barred to not include third parties who were not the signatories to the contract as sometimes the claim is made against or by someone who is not originally named as a party. But yes the heavy onus lies on that person to prove in fact and in law.
- Also, it was contended that the house property which stood in the name of their father was transferred to Mr. V.G.P.Ravidas by the sons of her father representing as the legal heirs and without obtaining no objection certificate from the daughters of Mr. Panneerdas. The respondent states that the properties were acquired during the lifetime of their father and he always intended to share the proceeds equally with all the family members as seen from the balance sheet filed during the lifetime of Mr. V.G.Panneerdas showing the share application money in the name of 15 family members.
- She also had sent notices to the appellants for unlawfully withholding the rightful shares in the property of their father, which were ignored by the appellants.
- Whether the order of the sole arbitrator of impleading the first respondent is maintainable?
- Whether the principles laid down by the Hon’ble Supreme Court of India in the case of Chloro Controls India (P) Ltd vs. Severn Trent Water Purification Inc. (2013), would be applicable with reference to the facts and circumstances of the present case, which is a domestic arbitral proceeding and the dispute is among the partners?
- Whether the arbitrator was right in using the inherent power under Order I, Rule 10 of the Civil Procedure Code for impleading a person?
Analysis of the judgment
In Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, it was said that the bifurcation of the subject matter cannot happen because this was not contemplated by the legislature while they made Section 8 of the Act.
In Indowind Energy Ltd v. Wescare (I) Ltd, the supreme court held, where there was no arbitration agreement between Wescare and Indowind, then the latter’s claim cannot be a subject matter of reference to an arbitrator. This can be understood from a plain reading of Section 7 of the Act itself. The same decision was reiterated in S.N.Prasad v. Monnet Finance Ltd., the case was related to guarantee, where the guarantor was to be impleaded as a party in the arbitral proceedings but was not made a party because he was not a party to the loan agreement signed between the lender and borrower. The loan agreement contained the arbitration clause and thus the guarantor was not a party to the agreement.
According to the Redfern and Hunter on International commercial arbitration, they have said that the agreement must be in writing as affirmed by Section 7 of the Arbitration and Conciliation Act, 1996 so that it is properly established that through this agreement the parties would refer their case to a private forum for dispute resolution and excludes the power of adjudicating of the national courts. However, this doesn’t exclude the non-signatories to the agreement as according to the evolving concept of business around the world and also according to the “group of companies” doctrine provided in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) supra, pursuant to which “the duties or any benefits arising out of the arbitration agreement may be extended to the other people as well connected to the actual parties by way of general rules of private law, succession, assignment, agency…”
Section 7(1) of the Arbitration & Conciliation Act, 1996 defines Arbitration agreement as “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…..” and thus the first respondent cannot be impleaded in the arbitral proceedings. Also according to section 7(4), if an arbitration agreement is in writing, a third party cannot be subjected to application. Only in exceptional situations or cases where the rights of the parties are flowing under the arbitration agreement, third parties can be subjected to arbitration. The exceptions have to be examined by the court by determining the direct relationship, if any, of the third party/parties with the signatory parties.
The arbitrator is not empowered to implead a person by exercising the inherent power and the wide power under Order I, Rule 10 of the CPC because the right to implead a person can be allowed under Section 17(1)(ii)(e) of the Act but it is also said that the power is to be exercised within the ambit of the Act and cannot be exercised to include inherent power under Order I, Rule 10 of CPC. Thus the arbitrator cannot exercise wide power as it is beyond the scope of the arbitral proceedings and the Act itself. This was understood from the case of Transcore v. Union of India. The sole objective of the ADR mechanism is to reduce the burden on the courts but that does not mean to usurp the power of the civil courts by the arbitral tribunal. Section 16 of the Act cannot be interpreted to include that the arbitrator can implead any person to the arbitral proceedings according to the competence of the arbitral tribunal to rule of its jurisdiction.
The order of the arbitrator to implead the first respondent would be characterized as an interim measure under Section 17(1)(ii)(e) of the Act, which states that this interim measure of protection may appear to the arbitral tribunal to be just and convenient. (Though subsequently, the court has held that the arbitrator cannot implead a third party) And thus the civil miscellaneous appeals under Section 37(2)(b) are maintainable. The reason for this was that no order of the arbitrator can remain without remedy as there is no express provision regarding impleading a third party in the proceedings. And thus it would fall under Section 17(1)(ii)(e).
There is no express provision in the Act that covers other departments other than the disputes that are covered under the arbitration agreement because there cannot be a splitting of the cause of action. The point that the first respondent not being a partner and claiming her right to inheritance as a legal heir in her father’s property, the partnership firm was reconstituted several times after that but as only the nominee would be getting all the share in the profits and therefore the first respondent does not fall under dispute to be adjudicated by the arbitral tribunal.
Decision of the court
As per issue 1, the first respondent claimed the right of inheritance through her father Mr. Panneerdas, and her capacity as a legal heir. Then she can claim such right in the competent civil court and establish her rights by evidence and not in the arbitration proceedings because the arbitration agreement is a contracted thing and otherwise it would lead to submerging of the rights of the inheritance of properties and the disputes that are within the scope of the contracted arbitration agreement. Thus the arbitrator cannot implead a person by Order I, Rule 10 of the CPC as this would lead to widening of the power of the arbitrator which would defeat the scope of the Act itself where the parties must refer to arbitration when they have already decided on it while forming the contract. Thus the order of impleading the first respondent as a party was rejected by the court.
As per issue no.2, though in the opening of this case itself the apex court has talked about widening the scope of arbitral proceedings. The supreme court unambiguously held that any third party cannot be impleaded in the proceedings unless there are some exceptional circumstances, such as where there are multi-party agreements with intrinsically interlinked causes of actions and more so where the performance of the ancillary agreements depends upon the proper execution of the principle agreement. These circumstances would mostly arise in multinational companies, and in businesses. And thus such exceptional circumstances are also exceptions in domestic arbitration but the parties who are filing an application must establish such intrinsically interlinked causes of actions for participating in the adjudication process. And thus the above-mentioned case may not be applicable with reference to the facts and circumstances of the present case.
As per issue 3, the arbitrator was not right in using such a wide power under Order I, Rule 10 of CPC that is given to civil courts, and thus the arbitrator cannot implead a person when its right flows from the contractual basis and as the power of the arbitrator is statutory in nature, therefore, the inherent power cannot be vested. And thus adjudication of the civil rights of the first respondent shall be done by a competent court of law and not the arbitral tribunal. And thus the adjudication must be done within the parameters of the disputes raised by the parties in the arbitration agreement. And also in accordance with Section 7 of the Act, the first respondent was not a signatory to the partnership deed and as the arbitration agreement must be in writing and signed by the parties to the agreement, this could not be established by the first respondent and thus she is not a party to the arbitration proceedings.
Further the other very valid ground for not allowing an arbitrator to decide on the civil rights of the parties is, the ADR mechanism though in vogue nowadays cannot be used against the competent civil court of law as the arbitrators are appointed according to the contract between the parties and the parties give them the remuneration and thereafter they act as a neutral third party but this would be a gross misuse of the law if the civil rights are also adjudicated by the tribunals as then it would be exercising the inherent powers of the civil court. It would be an infringement of the constitutional structure of the judicial system.
Through this case, we understood that the arbitrator does not possess inherent power under Order I, Rule 10 of the Civil Procedure Code, and thus cannot implead a party in arbitration proceedings. The arbitral tribunal can adjudicate only those disputes that the parties had intended to do so under the contract and not the civil rights of the parties. Thereby the first respondent in the present case seeking to claim the right of inheritance through her father late Mr. Panneerdas had to file a case in a competent civil court of law and not in the arbitration proceedings.
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