Dispute Arising From Sale Deeds Executed Between Partners As Part Of Business Arrangement Is Arbitrable: Kerala High Court

A bench comprising Chief Justice Nitin Jamdar and Justice Syam Kumar V.M. observed: “Since the sale deeds thus stand as auxiliary to the partnership agreement and devoid of the character of conveyance transferring title, they do not alter the legal relationship inter se the partners or create any independent or enforceable rights in rem. It follows therefrom that the contentions put forth by the appellants regarding the sale deeds being documents affecting rights in rem and the question of claim being barred by limitation do not arise.”

Background:

The dispute arose from a partnership formed in 1993 to run Hotel Alakananda, a hotel-cum-bar (“Hotel Alakananda”) at Kollam. The claimant owned the land and held an FL-3 liquor licence in his name. Owing to financial distress, the claimant entered into a partnership arrangement in 1993 with several respondents.

Subsequently, certain registered sale deeds were executed by the claimant in favor of other partners in respect of immovable properties connected with the business. According to the claimant, these deeds were executed only as security arrangements to facilitate partnership business and discharge liabilities and not as genuine conveyances transferring titles.

The dispute arose after nearly 18 years of business operations. An arbitration clause was invoked. The claimant alleged coercion, fraud and lack of consideration seeking dissolution of the partnership and declaration that the registered sale deeds were void and did not affect his title.

The arbitral tribunal dissolved the partnership and declared the sale deeds void. The award was thereafter challenged before the Commercial Court under section 34 which dismissed the petition, prompting the partners to file the present appeal before the High Court under section 37.

The appellants argued that the dispute was non-arbitrable as it involved rights in rem and registered sale deeds and that only civil courts could invalidate the registered sale deeds under section 31 of the Specific Relief Act, 1963. It was further argued that the arbitral tribunal erred in declaring the partnership void for fraud while simultaneously dissolving it.

Opposing the plea, the claimant contended that the dispute was purely inter partes arising out of partnership arrangements and the sale deeds were internal security arrangement, not genuine conveyances.

Findings:

Rejecting the plea of non-arbitrability, the court held that once the arbitrator concluded that the dispute arose out of contractual arrangements, the question of arbitrability on the ground that it involved rights in rem did not arise. The court further observed that the arbitrator had found the sale deeds merely supplementary to the partnership agreement, creating no independent rights in rem.

“Once the Arbitrator after considering the documentary evidence placed on record, as well as the depositions, concludes that the dispute between the parties arises exclusively from the contractual arrangement which includes the partnership agreement and the sale deeds executed inter se, the question of arbitrability on the premise that in rem rights are involved thus taking the matter out of the ambit of the Arbitrator does not arise.”, the court held.

Affirming the findings of the arbitrator that the sale deeds were merely shadow documents to augment the partnership arrangement, the court held that “Exhibits A6 and A7 were nothing but shadow agreements to augment the partnership arrangement… unsupported by any consideration.”

Based on the above, it held that since the deeds never intended to transfer the title, challenges based on limitation and statutory presumption attached to registered documents stood effaced.

On limitation, the court held that once the arbitrator concluded that the bar of limitation is not attracted, this question cannot be scrutinised or reopened either by the commercial court under section 34 or this court under section 37 of the Arbitration Act.

It held: “Once the Arbitrator, after due consideration of the contentions put forth by both sides, concluded that the bar of limitation is not attracted in the facts and circumstances of the case at hand, then the said question cannot be open to further scrutiny by the Commercial Court under Section 34 of the Act nor by this Court in an Appeal under Section 37.”

Even though the arbitrator used the term fraud while dissolving the partnership, the court ruled that it is insignificant considering the conclusive findings arrived at by the arbitrator that the relationship was not valid.

It held that “Once the Arbitrator appointed by the parties after appreciation of evidence concludes that the arrangement is vitiated and set aside the same, the terminology used in that respect is insignificant, and the said conclusion of the Arbitrator cannot be contested under Section 34 or Section 37 of the Act of 1996.”

While agreeing with findings of the arbitrator and consequently the Commercial Court, the court observed that “No contrary evidence had been adduced by any of the Respondents to prove that a valid consideration had passed, when it was paid or to whom the same was paid. Similarly, there is no evidence to show that, other than the so-called investment made before execution of Exhibit A5, any of the Respondents have parted with any amount for the acquisition of property as per Exhibit A6 and Exhibit A7.”

The court dismissed the present appeal holding that given the admitted irretrievable breakdown of the partnership, dissolution and settlement of accounts was found to be the most practical course.

Case Title: Lazar Chakkola And Ors. Vs. Sudarsanan Pillai.G And Ors.

Case Number: Arb.A No.2 Of 2023

Judgment Date: 17/12/2025

For Appellants: Advs. Smt.Shilpa Sathish Sri.A.Sudhi Vasudevan (Sr.) Sri.Jose Jones Joseph Sri.Adith Kiran R.S. Marteena Milan

For Respondents: Advs. Sri.Millu Dandapani Sri.Mathew Kuriakose Smt.Sumathi Dandapani

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