Arbitration In IndiaArbitration Clause Contained in a Partnership Deed Dissolves with Dissolution of the Partnership Firm

The Gujarat High Court, in the case of Yashang Navinbhai Patel vs Dilipbhai Prabhubhai Patel [Arbitration Petition No.116-117 of 2021 decided on 21.04.2023] held that the Arbitration Clause contained in a Partnership Deed dissolves with the dissolution of the Partnership Firm.

FACTS

A Partnership Deed was formed on 13.07.1999, between the Petitioner and Respondent engaging in business dealing with the manufacturing, purchasing, and sale of pumps, motors and their spare parts. The Partnership deed was reconstituted in 01.04.2002.

The dispute between the parties was that the Respondents even though holding majority of 51% of share, the Respondents from year 2010-11, started taking unilateral manner of conducting business.

The Petitioner filed an application under Section 9 of the Arbitration and Conciliation act, 1996 (hereinafter referred to as “the A&C Act”) was filed before the Ld. City Civil Court vide Civil Miscellaneous Application No 489 of 2012.

The Petitioner further served Arbitration Notice dated 21.09.2012, for invocation of Arbitration, which was disagreed by the Respondent. Further proceedings under Section 11 of A&C Act were initiated vide Arbitration Petition No.88 and 89 of 2019. Subsequently, the partnership firm was dissolved by a notice of dissolution.

The Petitioner has further invoked arbitration pursuant to the notice dated 24.02.2021 which is disputed by the Respondents.

ISSUE BEFORE THE GUJARAT HIGH COURT

1. Whether the parties can invoke the arbitration clause envisaged in a  partnership deed after the dissolution of the partnership firm?

CONTENTIONS OF THE PARTIES

The Petitioner contended that the disputes arising between the partners were subject to arbitration as per Clause 24 of the Partnership Deed.

It was submitted that arbitration clause being independent, during dissolution or termination of the partnership firm, arbitration clause will not lose its significance.

The Respondents argued that the firm had been inoperative since 2006. Furthermore, after the dissolution of partnership firm, arbitration cannot be invoked and hence, arbitrator cannot be appointed.

DECISION AND FINDINGS

The Gujarat High Court observed that the Clause 24 of the Partnership Deed referred only the disputes regarding “dealing of firm” to Arbitration. The High Court further relied on Mohanlal Sajandas vs. Hareshkumar Narandas & Ors., [2001 (3) GLH 532] and Manibhai Shankerbhai Patel vs. Swashray Construction Co. & Ors [(1982) 1 GLR 312] and held that arbitration clause under Partnership Deed cannot be invoked post dissolution of the partnership firm.

It was held that the disputes referred to arbitration were directly related to the termination of Partnership Deed and has consequently resulted into termination of the partnership deed. Therefore, the Arbitration Clause itself will not remain independent and hence, dismissed the present Petition.

AMLEGALS REMARKS

Arbitration clauses are inserted in partnership contracts for easy resolution of disputes. This is subject to the existence of the contract itself. No Clause in a contract can exist independent of the contract itself. If the purpose for which the contract was signed ceases to exist, the dispute of the contract also ceases to exist.

An Arbitration Clause cannot be independent of the contract under which Arbitration has been envisaged. As the contract is terminated, the disputes arising pursuant to the contract cannot be referred to Arbitration.

– Team AMLEGALS, assisted by Ms. Khanak Sharma (Intern)