Section 69 Partnership Act Does Not Bar Arbitration Without Dissolution Plea: Calcutta High Court

The Calcutta High Court on 20 August observed that Section 69 of the Indian Partnership Act, 1932, which restricts suits by unregistered partnership firms to enforce contractual rights, does not bar arbitration between partners merely because dissolution of the partnership has not been sought.

A Division Bench of Justices Debangsu Basak and Aryak Dutt set aside the arbitral award in the dispute between Sandip Singla and Jagdeb Chand Gupta, holding that the arbitrator had travelled beyond the scope of reference by creating a rotational management arrangement that gave each partner exclusive control of the partnership business for alternating periods, rendering the award contrary to public policy. It held:

“In our view, Section 69 of the Act of 1932, regulates the filing of suits by an unregistered partnership firm. It does not speak on the issue as sought to be contended on behalf of the respondent before us. One of the contentions of the respondent is that, since, the respondent did not pray for dissolution of the partnership firm, the arbitration proceeding itself is not maintainable and, therefore, the award passed in such arbitration proceedings needs to be set aside.”

The dispute arose from a partnership deed dated 5 February 2004 between Singla and Gupta.

After differences arose over the running of the partnership business, the matter was referred to arbitration. Gupta sought to participate in the firm's business, claimed his share of profits from April 2010 and sought rendition of accounts.

During the arbitration, the parties entered into a Memorandum of Understanding (MoU) on 3 November 2014. The MoU required them to approach the petroleum company for signing a dealership agreement after the earlier agreement had expired on 27 October 2014. It also dealt with arrangements concerning a rented godown and payment to a third party. The arbitrator did not grant any of the three reliefs sought by Gupta.

Instead, by an award dated 4 December 2015, the arbitrator devised a rotational management arrangement under which one partner would run the business exclusively for a specified period while paying a fixed monthly amount to the other partner. After that period, the other partner would take over the business on similar terms, with the arrangement continuing by rotation.

Singla challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, which provides for setting aside an arbitral award on specified grounds. He contended that the MoU had been obtained through coercion and undue influence and that the arbitrator had travelled beyond the reference by restructuring the manner in which the partnership business was to be run.

The Trial Judge dismissed the challenge on 30 June 2018, prompting Singla to approach the High Court under Section 37 of the Arbitration and Conciliation Act, 1996.

Before the High Court, Gupta argued that the award reflected the MoU. He also contended that, in view of Section 69 of the Partnership Act, arbitration between partners of an unregistered firm could proceed only where dissolution of the firm was sought.

It rejected this contention, clarifying that Section 69 regulates suits involving unregistered partnership firms and does not make a prayer for dissolution a pre-condition for arbitration between partners.

However, the Bench found that the arbitrator had not granted the reliefs actually claimed by Gupta and had instead created an entirely different management structure. It noted that the MoU did not contemplate vesting control of the business in one partner to the exclusion of the other for alternating periods.

It further noted that the award made no provision for sharing the losses of the partnership. It held that the arbitrator had therefore gone beyond the terms of reference and effectively rewritten the partnership agreement.

Accordingly, the High Court set aside the arbitral award dated 4 December 2015 and the Trial Judge's order dated 30 June 2018 upholding it, finding the award contrary to public policy. It made no order as to costs.

Appearances for appellant (Sandip Singla): Advocates Anjan Ray, Subhajit Choudhury and Swagatalaxmi Nalui.

Appearances for respondent (Jagdeb Chand Gupta): Advocates Swatarup Banerjee, Ratul Biswas, Kaushik Chowdhury, Durlav De and Bipasha Bhattacharyya.