Order Terminating Arbitration Proceedings U/S 32(2)(c) A&C Act Can't Be Treated As Arbitral Award: Madras High Court
The Court cited Justice Krishna Iyer’s poignant words that "litigants are legal patients suffering from injustices seeking healing for their wounds", while setting aside dismissal founded on arbitrator's erroneous limitation finding.
Justice N. Anand Venkatesh, Justice K. K. Ramakrishnan, Madras High Court
The Madras High Court, Madurai Bench has clarified that a termination order passed under Section 32(2)(c) of the Arbitration and Conciliation Act, 1996, does not constitute an arbitral award on merits. The Court held that citing limitation to terminate proceedings does not transform such an order into a final adjudication, meaning any incidental findings cannot trigger res judicata to bar a subsequent civil suit based on a distinct cause of action.
Allowing the commercial appeal of a 70-year-old woman partner whose suit was dismissed, the High Court held that the Arbitrator’s finding that the dispute required judicial trial conflicted directly with his conclusion that it was time-barred, making the termination order incapable of barring her suit.
Setting aside the Commercial Court's judgment, the Bench cited Justice V.R. Krishna Iyer to emphasize that courts exist to resolve grievances rather than defeat them on technicalities. It noted that the appellant, after a decade of multi-forum litigation without an adjudication on merits, could not be non-suited by a procedural order never meant to settle her rights.
A Division Bench comprising Justice N. Anand Venkatesh and Justice K.K. Ramakrishnan observed, “…An order terminating arbitral proceedings under Section 32(2)(c) cannot be treated as an arbitral award merely because the Arbitrator has assigned limitation as the reason for such termination. Upon considering the Judgement of the Hon'ble Supreme Court in 2025 INSC 1400 and other judgments it is clear that the statutory scheme of Section 32(2)(c) is materially distinct from the making of an arbitral award on the merits of the disputes referred to arbitration…”.
“…Consequently, where the order under Section 32(2)(c) is not an arbitral award within the meaning of the Act, the remedy contemplated under Section 34 cannot mechanically be treated as the only means by which its legality can be examined. To insist upon a Section 34 proceeding against an order which, in law, is not an arbitral award would result in applying a statutory remedy to a proceeding which does not fall within its statutory field. This Court is conscious of the general principle that an arbitral award must ordinarily be challenged in accordance with the procedure prescribed under Section 34 of the Act and that the statutory scheme governing arbitral proceedings cannot ordinarily be circumvented. However, the present case stands on a different footing. There was no finding that the substantive claim of the claimant, relating to dissolution and rendition of accounts and partition of the partnership properties, was itself barred by limitation. Such termination therefore cannot be permitted to operate as an impediment to the adjudication of the substantive rights of the parties”, the Bench further noted.
Senior Advocate V. Raghavachari appeared for the appellant and Senior Advocate S. Meenakshi Sundaram appeared for the respondent.
The appellant and the respondent had entered into a registered partnership deed in 2012 to carry on real estate development under the name "PRV Properties," with the appellant contributing capital and lands being purchased in the firm's name. Alleging that the respondent began selling partnership plots without her knowledge or consent, the appellant first filed a suit for injunction in 2016, which was ultimately directed to arbitration on account of an arbitration clause in the partnership deed.
She then issued a notice of dissolution in March 2017 and, before the arbitration reference was even resolved, instituted the present suit in April 2017 seeking declaration of dissolution, rendition of accounts, and partition of her share in the partnership assets.
The Arbitrator, appointed in 2019 at the respondent's instance, terminated proceedings under Section 32(2)(c) in 2020. Though noting the dispute involved "complicated questions of fact and law" requiring judicial trial, the Arbitrator held the reference time-barred under Article 137 of the Limitation Act. The respondent's Section 34 challenge against this order was subsequently withdrawn. Relying on this termination, the Trial Court dismissed the appellant’s civil suit in December 2024 on grounds of res judicata, Order II Rule 2 CPC, improper court-fee valuation, and failure to prove capital contribution.
On appeal, the High Court held that the Arbitrator erred in fixing 2015 as the starting point for limitation without properly applying Section 21 of the Arbitration Act, which marks commencement from the notice invoking arbitration. Furthermore, since the Arbitrator deemed the dispute unsuitable for arbitral adjudication, his incidental observation on limitation failed the "necessity and essentiality" test laid down in Jamia Masjid v. K.V. Rudrappa (2022) 9 SCC 225 to operate as res judicata.
On merits, the Court found overwhelming documentary evidence, including registered sale deeds, bank records, and tax filings, establishing the appellant as a genuine partner. It held that the respondent failed to rebut the Section 14 presumption under the Indian Partnership Act that properties acquired in the firm's name belong to the firm.
Consequently, the Court ruled that neither res judicata nor Order II Rule 2 CPC barred the suit, and rejecting the court-fee objection, further held that a partner in constructive possession through a co-partner cannot be treated as a stranger out of possession needing a separate declaratory relief.
“…the judicial process is intended not merely to identify the existence of a wound but also to provide the legally permissible remedy for its redressal. The order of termination, therefore, cannot be permitted to defeat the claimant's substantive rights on such an erroneous premise. This Court must, therefore, bear in mind the human dimension of the litigation and ensure that procedural law does not become an instrument by which substantive justice is postponed, diluted, or ultimately denied. Courts exist to render substantive justice, and procedural complexities cannot be permitted to defeat lawful rights. Therefore,to deny relief on technical grounds would amount to perpetuating the injustice already suffered by the appellant”, the Bench further said.
The Commercial Appeal was allowed with costs; the judgment and decree of the Trial Court were set aside, and the suit stood decreed as prayed for.
Cause Title: P. Muthulakshmi v. P. Raju, Appeal (CAD)(MD) No. 3 of 2025
Appearances:
Appellant: V. Raghavachari, Senior Counsel for R. Suriya Narayanan.
Respondent: S. Meenakshi Sundaram, Senior Counsel for P. Ganapathi Subramanian.