Sanganer Dal and Flour Mill vs F.C.I
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By:-Khan Ahmad Darvesh

In the Supreme Court of India

NAME OF THE CASESanganer Dal and Flour Mill vs F.C.I
CITATIONCivil Appeal no.1677 of 1984
DATE OF THE CASE22nd October, 1991
APPELLANTSanganer Dal and Flour Mill
RESPONDENTFood Corporation of India (FCI)
BENCH/JUDGE Ramaswamy, K. Yogeshwar Dayal (J)
STATUTES/CONSTITUTION INVOLVEDIndian Partnership Act; Constitution of India
IMPORTANT SECTIONS/ARTICLESArticle 136 of Indian Constitution; Section 18,19,20 of Indian Partnership Act.

ABSTRACT

This appeal was against the order of the high court which was appealed by the respondents. Sanganer dal and Flour mill is a firm consisted of nine partners. Satya Narain was one of the partners. Satya Narain on behalf of the firm submitted a tender to the respondents and the tender was accepted by them but the appellants committed a breach of the contract and as a result, the respondents filed an application against the appellants in the district court. The court allowed the appeal. The respondents filed an appeal against the order of the district judge in the high court and the high court dismissed the appeal. Therefore, the respondents filed an appeal under special leave under Art.136 of the Constitution in the Supreme Court.

INTRODUCTION

This case is a civil appeal no.1677 of 1984.

In this case, the order of the high court was challenged under the special leave of Art 136 of the constitution. The appellant contended that under Sec19(2)(a)[1] of the partnership act, there was no implied authority given to one of the partners to refer the dispute relating to the business of the firm for arbitration and therefore the reference made by the court, pursuant to a contract entered into by one of its partner, Satya Narain on behalf of the firm, was without jurisdiction and that the original contract did not contain arbitration clause.

FACTS OF THE CASE

One Satya Narain was one of the partners of the firm. He submitted a tender to the respondents on July 25, 1973 on behalf of the firm offering to supply 1000 quintals of Gram Dal at the rate of Rs.185/- per bag. Tender was accepted by the respondents. The appellant committed breach of the contract and as a result, the respondents filed an application under sec. 20 of the Arbitration Act, 1940 before the District Court for making reference for arbitration in terms of the contract.

The application was allowed and the dispute was re- ferred for arbitration. Against the order of the Addl. District Judge, an appeal was filed before the High Court and the High Court confirmed the order of the Additional District Judge. This appeal by special leave under Art. 136 of the Constitution is against the order of the High Court.

The appellant contended that by operation of Sec.19(2)(a) of the Partnership Act, 1932, there was no implied authority given to one of the partners to refer the dispute relating to the business of the firm for arbitration and therefore the reference made by the court, pursuant to a contract entered into by one of its partner, Satya Narain on behalf of the firm, was without jurisdiction and that the original contract did not contain arbitration clause.

In a separate letter with a rubber stamp (facsimile) of the firm, one of the partners agreed for reference to arbitration and there- fore the reference did not bind the other partners. Dismissing the appeal, the High Court held:

1. The operation of Secs. 18 & 19(1) is subject to the exceptions engrafted in sub-sec. (2) of Sec. 19. Sec. 19(2)(a) provides that in the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to submit a dispute relating to the business of the firm to arbitration.

2. None of the partners have entered into the witness box to deny the validity of the contract nor raised any objection that they had not authorised the partner (Satya Narain) to enter into the contract nor that they were bound by any acts done by him. When the partner signed the tender, at that time no other partners raised objection regarding the signing of the tender by the partner on behalf of the firm. In view of these facts it is clear that they ratified the contract.

3. The firm had entered into a binding contract with the corporation and contract contained the arbitration clause which binds the partners. [544 G]

4. The contract engrafts an arbitration clause and in terms thereof the dispute is to be referred to the arbitration. Therefore, the reference made by the Addl. District Judge under Sec. 20 of time Arbitration Act is within the jurisdiction and in terms of the contract.

ISSUE RAISED BEFORE THE COURT

  • Whether a valid contract which was not repudiated as per law, binds the other partners?

ARGUMENTS FROM THE APPELLANT SIDE

  • The learned counsel for the petitioner, Sri Lankan Sahir Kumar Jain, put forward the opinion that the lawyer appellant is that there is no implied under Section S.19(2)(a) India Partnership Act of 1932 (hereinafter referred to as the “Partnership Law”) The power is taken for granted. A partner refers to a commercial arbitration involving a company.
  • The learned counsel for the petitioner said that according to this, Satya Nara entered into on behalf of the company has no jurisdiction due to contract disputes. The High Court found that whether the partners had entered the witness stand to deny the validity of the contract, they also proposed that they did not authorize Satya Narain to sign the contract with the contractor for the conduct performed by him, and they were bound to any objection.
  • The learned counsel for the petitioner also said that people also discovered that Satya Narain signed the tender, and at that time no other partner put forward an objection to the bidding on behalf of the company signed by Satya Narain. In view of these facts, it is clear that they approved the contract.
  • The learned counsel for the petitioner also pointed out that, in the terms of the contract, the company has already allocated the deposit for the production of the appellant’s company, which is not an objection at any time. This in itself will strengthen the conclusion that the company has a binding contract with the company and the arbitration clause contained in the contract combines the conclusions of the partners.
  • The argument puts forward that the contract is invalid, and, in the terms of the contract, it is unfounded to make a reference without jurisdiction.

RELATED PROVISIONS

  • Section 18 of the Indian Partnership Act[2] prescribes that “a partner is the agent of the firm for the purposes of the business of the firm”. There is an implied authority that has been vested on the partner to bind the firm until and unless there is a clause or a statement that proves otherwise.
  • Section 19 of the Indian Partnership Act[3] defines ‘implied authority’ as the authority of a partner to bind the firm to his actions. While the first part of Sec.19 uses an affirmative rule in determining the implied authority of a partner, the latter provides a negative rule listing out all the functions that a partner is not permitted to do, and thereby draws a demarcation as to where the implied authority is extended and restricted. In order to determine implied authority, the act ought to be done in such a manner so as to imply an intention to bind the firm.
  • Sec.19(1) of the Partnership Act states that only the acts conducted by the partner in the usual course of business of the firm, binds the firm to the actions of the partner.
  • Sec.19(2) of the Partnership Act enumerates various matters such as submitting a dispute to arbitration, opening a bank account on behalf of the firm, transferring or acquiring immovable property on behalf of the firm, which a partner cannot do under the liberty of implied authority and this is in absence of any usage or custom to the contrary. Even though the list provided in Sec.19(2) is not exhaustive, it proves to be the only yardstick to measure and contain the implied authority of partners in the absence of any other statutory precedents. Though there are such restrictions that are prescribed by the legislation, any act done by the partner on behalf of the firm binds the firm, until and unless the third party is aware of the restrictions that have been imposed and does not know or believe that the person is not a partner.
  • Sec.20[4] suggests that the implied authority granted to the partners can be either be restricted or extended by virtue of a contract between the partners themselves. However, even with such a restriction in place, an act done by the partner on behalf of the firm binds the firm unless the person with whom the partner was dealing with is aware of the restriction of implied authority granted to the partner. 
  • Article 136 of the Indian constitution[5] deals with the discretionary power of the Supreme Court to grant “special leave to appeal” from “any judgment, decree, determination, sentence or order in any cause or matter passed or made by any court or tribunal in the territory of India. Though the said article does not apply to any decision or order made by any court or tribunal under any law relating to the Armed Forces [Article 136(2)], the said article confers upon the Supreme Court the widest possible jurisdiction to entertain any order passed in any matter by any Court or Tribunal, at any stage of its proceeding. Being the focal point of this piece, the next part of this article will examine Article 136 and the concept of special leave.

JUDGEMENT

The Hon’ble Supreme Court held that Satya Narain has implied power to conduct business on behalf of the partnership firm and the implied authority 545 binds all the partners. Sec. 18 of the Partnership Act postulates that “subject to the provisions of the Act a partner is the agent of the firm for the purposes of the business of the firm”. Sec. 19(1) adumbrates that “subject to the provisions of Sec. 22 the act of the partners which is done to carry on in the usual way the business of the kind carried on by the firm, binds the firm”.

Thus, Satya Narain has implied authority to enter into the contract with the corporation to supply the Dal of 1000 quintals at the contracted rate which is the usual course of the business of the appellant. But it is settled law that the operation of Sees. 18 & 19(1) is subject to the exceptions engrafted in sub-sec. (2) of Sec. 19.

Sec. 19(2)(a) provides that in the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to submit a dispute relating to the business of the firm to arbitration. Satya Narain has power to do business on behalf of the firm and in exercise thereof he entered into the contract with the corporation during the usual control of business to supply the Dal.

Then crucial question is whether a valid contract which was not repudiated as per law, binds the other partners? The Supreme Court answer is yes. It is not in dispute that the contract engrafts an arbitration clause and in terms thereof the dispute is to be referred to the arbitration. Therefore, the reference made by the Addi. District Judge under Sec. 20 of the Arbitration Act is perfectly within the jurisdiction and in terms of the contract.

It is not the case of the partners that the firm is not carrying on the business of the supply of Dal and that Satya Narain, as found by the Trial Court, was authorised to do business on behalf of the firm. Under those circumstances, the reference is clearly valid. The Hon’ble Court did not find any illegality to interfere with the order of the High Court.  

In this view, the decisions in Gopal Das v. Bail Nath & Ors., AIR 1926 Allahabad 238; Finn Radhakishan Chunnilal v. Finn Ashamal lshardas, AIR 1926 Lahore 91; Rajendra Prasad v. Pannalal Champalal & Ors. AIR 1932 Calcutta 343; Mansab- dar Khan v.M.T. Allah Devi & Ors., AIR 1934 Lahore 48S; Sohanlal v. Finn Madhoram Banwarilal, AIR 19S2 Punjab 240; and M/s Alazappa Cotton Mills v. Indo Bunna Trading Corpora- tion, AIR 1976 Madras 79; cited by learned counsel are of little assistance to the appellant.

In M/s Alazappa Cotton Mills case the original contract does not contain arbitration clause. In a separate letter with a rubber stamp (facsimile) of the firm one of the partners agreed for reference to arbitration. On those facts it was held that the reference does not bind the other partners. The appeal is accordingly dismissed. Since the court did not call upon the respondents to argue, there will be no order as to costs. V.P.R.  

CONCLUSION

In the case of K.D. Kamath v C.I.T[6], the Supreme Court laid down 2 essential elements required to constitute a partnership:

(a) there must be an agreement to share the profits and the losses and

(b) the business was to be carried on by all partners or any one of them acting in the interests of all. This is an essential element in determining mutual agency which is said to be one of the most important tests in determining partnership in addition to that of sharing of profits and losses. The principle of agency is not coupled with the right to reasonable remuneration for the work done since it is done on behalf of the firm. 

The prudent partner’s not having knowledge or disapproval of the same does not absolve them of their personal liability or from holding the firm liable. However, the firm will not be bound if the acts done by the partner under his implied authority was “outside the usual course of business of the firm”, even if it were to be a prudent decision ratified by all the partners of the firm. In short, the partner has the authority to do the usual but does not have it extended enough to do the unusual. And for the determination as to what is usual and what is unusual, the question is answered by the nature or kind of businesses carried on by the firm. 

This is case of extension and restriction of implied authority. Section 19 of the Indian Partnership Act defines ‘implied authority’ as the authority of a partner to bind the firm to his actions. While the first part of S.19 uses an affirmative rule in determining the implied authority of a partner, the latter provides a negative rule listing out all the functions that a partner is not permitted to do, and thereby draws a demarcation as to where the implied authority is extended and restricted.

In order to determine implied authority, the act ought to be done in such a manner so as to imply an intention to bind the firm. The confirmation of whether it is an act in the usual course of business, the nature of the business and the practice of the persons engaged in it ought to be checked and analysed. Moreover, what constitutes the definition of “usual course of business” shall vary from time to time and hence to affix a straight-jacket definition to the same is not always viable for the purposes of this section. 

REFERENCES

[1] The Partnership Act, 1932, Sec 19 (2)(a)

[2] The Indian Partnership Act, 1932, Sec. 18

[3] The Indian Partnership Act, 1932, Sec 19

[4] The Indian Partnership Act, 1932, Sec 20

[5] Constitution of India, 1950, Article 136

[6] K.D. Kamath vs C.I.T, 1971 2 SCC 873

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