Arbitration Clause Extinguishes After Dissolution of Partnership; Gujarat High Court Rejects S.11 Petition

The bench of Justice Biren Vaishnav was dealing with an arbitration clause which provided for reference of the dispute between the partners with regard to the “dealing of the firm” to arbitration. The court held that the term “dealing” would mean engaging in business and thus, for the dispute to fall within the ambit of the arbitration clause, the firm must be subsisting.

While dismissing the petition under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act), seeking referral of the dispute between the partners of a dissolved partnership firm to arbitration, the court remarked that the relationship between the partners was severed pursuant to dissolution, which resulted in the extinguishment of the arbitration clause itself.

The petitioners, including Yashang Navinbhai Patel, held majority shares in a partnership firm. The petitioner alleged that the respondent, Dilipbhai Prabhubhai Patel, despite holding a minority share in the partnership, started conducting the affairs of the business without the consent and knowledge of the petitioners, and started running the business in a unilateral manner. The firm was subsequently dissolved pursuant to a notice of dissolution issued by the petitioner.

The petitioner thereafter invoked the arbitration clause contained in the partnership deed and filed a petition under Section 11 of the A&C Act before the Gujarat High Court seeking appointment of arbitrator.

The respondent, however, contended that once the partnership has been dissolved, it was not open for the court to appoint an arbitrator.

The court reckoned that the parties executed a partnership deed to enter into a partnership at will.

Perusing the arbitration clause contained in the partnership deed, the bench observed that the same contemplated referral of the dispute amongst the partners with regard to the “dealing of the firm”.

The court accepted the contention advanced by the respondent that the term “dealing” would mean engaging in business and thus, the firm must be subsisting for the dispute to fall within the purview of the arbitration clause.

The bench referred to its decision in Mohanlal Sajandas vs Hareshkumar Narandas & Ors., 2001 (3) GLH 532, where the court, while considering the facts and circumstances of the case, had held that if any issue had arisen between the parties after the partnership at will was dissolved, the same cannot be said to have arisen during or in the course of the partnership business. Thus, the court had held that the said dispute cannot be dealt with, settled, or decided in accordance with the arbitration clause as after the dissolution of partnership, the said clause would not operate and cannot be invoked by the parties.

The petitioner, Yashang Navinbhai Patel, relied on a catena of judgments in support of its plea that the arbitration clause itself was an independent clause and, therefore, merely because of the termination and/or dissolution of the partnership, the arbitration clause would not lose its significance.

While dealing with the petitioner’s contention, and distinguishing the judgments relied by it, the court remarked, “As far as judgements relied upon by the learned counsel for the petitioners is concerned, the disputes that were to be referred to arbitration were directly in connection with the termination of the agreements and the cause of action was directly consequential to such termination. Here is a case where the relationship which itself was severed pursuant to dissolution would give rise to the extinguishment of the clause of arbitration itself.”

The court thus dismissed the petition.

Case Title: Yashang Navinbhai Patel vs Dilipbhai Prabhubhai Patel

Case Citation: 2023 Livelaw (Guj) 81

Dated: 21.04.2023

Counsel for the Petitioner: Mr. Kunal Vyas, Advocate for Gandhi Law Associates

Counsel for the Respondents: Anand R Patel, Shashvata U Shukla, with Heet Jhaveri

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