Parties Can't Be Forced To Arbitration If Arbitration Clause Unambiguously Requires Discretion Of Parties: Madhya Pradesh High Court

Brief Facts:

Late Yeshwant Boolani (“Deceased”) was a partner in M/s. Dhameja Home Industries, a partnership firm in which Sunil Dhameja (“Respondent No. 1”) and Pitamberdas Oolani (“Respondent No. 2”) also held partnership positions. The Deceased passed away on 18th September 2023. Subsequently, his son (“Applicant”) expressed his desire to become a partner in the firm, issuing a notice to this effect on 1st December 2023. On 10th January 2024, a notice invoking the arbitration clause of the partnership firm was sent to both the Respondents. Subsequently, the Applicant approached the Madhya Pradesh High Court (“High Court”) under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), seeking the appointment of an arbitrator.

Being the legal heir of the Deceased, the Applicant considered himself entitled to be inducted as a partner in the firm and inherit his father's share. The partnership deed contained an arbitration clause. While acknowledging the clause's optional language, he argued that its interpretation in conjunction with other parts of the deed mandated arbitration in case of disputes. He relied on Section 40 of the Arbitration Act, which stipulates the enforceability of arbitration agreements against the legal representatives of deceased parties.

In opposition, Respondent No. 2 argued that the Applicant, not being a current partner, lacked standing to invoke the arbitration clause. The said clause was discretionary and could not be compelled upon the Respondents. Further, Clause 21 of the partnership deed granted discretion to the existing partners regarding the induction of legal heirs of deceased partners.

Observations by the High Court:

The High Court observed that clauses 21 and 23 of the partnership deed were central to the case. Clause 21 stated that the death, insolvency, or retirement of any partner would not dissolve the firm, and the firm would continue with or without the successors of the deceased or outgoing partner, as decided by the remaining partners. Clause 23 stated that any dispute or difference arising during the partnership or after the retirement of any partner would be referred to arbitration. However, arbitration was optional and required mutual consent from the partners to appoint an arbitrator.

The High Court noted that the arbitration clause clearly indicated that arbitration was optional and could only proceed with mutual consent. The Respondents challenged the Applicant's contentions, arguing that the Applicant was not yet a partner in the firm. The Applicant, being the son of the Deceased partner, claimed his right to be inducted as a partner based on Clause 21. However, the High Court pointed out that the induction of a legal heir was at the discretion of the remaining partners.

Referring to Section 40 of the Arbitration Act, the High Court opined that an arbitration agreement remains enforceable against the legal representatives of the Deceased. The High Court cited the Supreme Court case of Ravi Prakash Goel vs. Chandra Prakash Goel [(2008) 13 SCC 667], which supported the enforceability of arbitration clauses by or against legal heirs. Consequently, the High Court rejected the Respondent's contention that the applicant could not invoke the arbitration clause.

The High Court then addressed whether arbitration, being optional, was binding on the parties. The Applicant relied on the Supreme Court's decision in Zhejiang Bonly Elevator Guide Rail Manufacture Company Limited Vs. Jade Elevator Components [(2018) 9 SCC 774], where the arbitration clause, though ambiguously worded, was interpreted as binding due to the intention of the parties. However, the High Court found this case distinguishable as the present arbitration clause explicitly stated that arbitration was optional and required mutual consent.

The High Court also referred to its decision in Trbex Impex Pvt. Ltd. Vs. M/s Ashok Fine Spun [A.C. No.106/2023], which involved a similar arbitration clause. The High Court held that the Respondents could not be compelled to opt for arbitration when the agreement clearly left it to the discretion of the parties. Thus, the High Court concluded that the optional nature of the arbitration clause meant that the parties could not be forced into arbitration without mutual consent.

Conclusively, the High Court dismissed the application and held that the arbitration clause was not binding without mutual consent from the parties. The Applicant was granted the liberty to pursue other legal remedies.

Case Title: Yeshwant Boolani (Dead) through Lrs. Tarun Dhameja vs Sunil Dhameja and Anr.

Case No.: Arbitration Case No. 19 of 2024

Citation: 2024 LiveLaw (MP) 133

Advocate for the Applicant: Rajat Lohia

Advocate for the Respondent No. 2: Vaibhav Bhagwat

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