Dispute Can't Be Referred To Arbitration By One Partner Of The Firm In Absence Of The Others: Bombay High Court

The bench of Justice Manish Pitale held that the implied authority granted to a partner does not extend to referring the dispute to arbitration in view of the bar under Section 19(2)(a) of the Partnership Act, 1932.

The Court also held that an arbitration notice issued by one of the partners without the consent of the remaining partners is invalid which renders the petition for the appointment of the arbitrator also invalid.

Facts

The parties entered into an investment agreement on 02.02.2018. The agreement involved the applicants and respondent No.2, collectively forming the partners of R-Cube Energy Storage Systems LLP (R-Cube Energy), and respondent No.1 company. The agreement stipulated that respondent No.1 would invest Rs.16.5 crores for the development of technology obtained by R-Cube Energy from Fraunhofer Institute for Ceramic Technologies and Systems (Fraunhofer Institute).

Subsequently, a dispute arose as respondent No.1 defaulted on its obligations, leading to market embarrassment and threats of legal action from Fraunhofer Institute. The applicants initiated the dispute resolution process outlined in clause 24 of the investment agreement, involving neutral persons and arbitration.

Submission by the Parties

The respondent raised the following objections to the maintainability of the petition:

• That the pre-arbitration steps have which included reference of dispute to neutral persons for amicable settlement have not been fulfilled.
• That the dispute cannot be referred to arbitration as the notice of arbitration as well as the petition under Section 11 has been filed without the consent of the Respondent No.2 who is also a part of the firm, therefore, the bar under Section 19(2)(a) of the Partnership Act would apply.

Analysis by the Court

The court considered the first objection regarding the exhaustion of the dispute resolution mechanism. It acknowledged the efforts of the applicants in appointing a neutral person and communicating with respondent No.1. The court concluded that respondent No.1's failure to appoint its neutral person prevented it from claiming non-exhaustion of the prescribed process.

The Court held that a party that itself did not follow the pre-arbitration mechanisms cannot later object to the appointment of arbitrators.

The court then focused on the second objection. It observed that the notice of arbitration was issued by the Applicant No. 1 on behalf of the firm, however, the consent of the 2^nd respondent was not obtained who is also a partner to the firm.

The Court held that a dispute related to the business of the firm cannot be referred to arbitration by a partner in absence of other partners. It held that the implied authority granted to a partner does not extend to referring the dispute to arbitration in view of the bar under Section 19(2)(a) of the Partnership Act, 1932.

The Court also held that an arbitration notice issued by one of the partners without the consent of the remaining partners is invalid which renders the petition for the appointment of the arbitrator also invalid.

Consequently, the court dismissed the application under Section 11 of the Arbitration Act, stating that the defective notice could not give rise to a cause of action.

Case Title: Shailesh Ranka and Ors v. Windsor Machines Limited, Commercial Arbitration Application (L) No. 38198 of 2022

Date: 19.12.2023

Counsel for the Applicants: Ms. Rima Desai a/w. Mr. Rudra Deosthali i/b. Parinam Law Associates

Counsel for the Respondents: Mr. Nausher Kohli a/w. Ms. Shruti Maniar, Ms. Sannaya Gandhy and Mr. Aniket Worlikar i/b. Solomon & Co. for Respondent No.1. Mr. S. S. Panchpor for Respondent No.2.

Click Here To Read/ Download Order