Arbitration Clause In Partnership Firm's Agreement Remains Valid If Assets And Liabilities Transferred To Private Limited Company: Punjab And Haryana High Court

The High Court held that this arrangement can be inferred from both the dissolution deed of the partnership firm and in the company's Memorandum of Association and Articles of Association.

Brief Facts:

Shanker Printing Mills (Applicant) initially operated as a partnership firm, which was subsequently converted into a private limited company. Both the Dissolution Deed executed among the partners of the firm and the Memorandum of Association and Articles of Association of the newly formed company explicitly stated that all assets and liabilities of the partnership firm would be assumed by the company.

The dispute arose when the Applicant, having obtained an insurance policy from the respondent, United Indian Insurance Company Limited (Respondent), experienced a fire at its premises. The Applicant submitted a claim to the insurance company which promoted the Respondent to appoint a surveyor who conducted an assessment and prepared a report. The Applicant then accepted a sum of ₹1,11,34,827/- as full and final settlement. Additionally, the Applicant sent a communication indicating that while the payment was accepted due to severe financial constraints, it was done so without prejudice to their rights.

The Respondent contended that since the partnership firm had been converted into a private limited company, the new company could not invoke the arbitration clause present in the original partnership agreement, as it was not a party to that agreement.

Feeling aggrieved, the Applicant approached the High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 for appointment of an arbitrator.

Observations by the High Court:

The issue before the High Court was whether the arbitration clause, included in an agreement executed with a partnership firm that has since been dissolved, could still be enforced by a new entity. The Respondent argued that since the original partnership firm no longer exists, the new entity cannot invoke the arbitration clause. However, the High Court found this argument to be unconvincing. It held that all assets and liabilities of the dissolved partnership firm were transferred to a private limited company, as documented in both the dissolution deed and the company's Memorandum and Articles of Association. Therefore, the High Court held that the arbitration clause remained valid and enforceable by the new entity.

The High Court also addressed the communication from the Applicant dated July 28, 2022. This communication indicated that while payment was accepted, it was done under protest, and the Applicant did not waive its right to dispute the matter. The High Court held that it could not adjudicate on whether the payment was accepted under protest or duress at this stage specially in the context of appointing an arbitrator. It held that if payment is accepted under coercion or duress, it cannot be considered a full and final settlement if the party claiming coercion can prima facie demonstrate a lack of free will.

Therefore, the High Court decided to appoint a sole arbitrator to resolve the dispute. Mr. Justice (Retd.) Harbans Lal was appointed as the arbitrator.

Case Title: Shanker Printing Mills vs United India Insurance Company Ltd. and others

Case Number: ARB-47-2023 (O&M)

Advocate for the Applicant: Mr. Chaitanya Mahajan, Advocate for the applicant

Advocate for the Respondent: Mr. Munish Goel, Advocate for the respondent

Date of Judgment: 06.08.2024

Click HereTo Read/Download Order or Judgment