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Dispute settlement in partnership disputes: A Judicial Approach

The Indian Partnership Act, 1932 is an act to define and amend law relating to partnership. The definition of partnership is given under section 4[1] of the Indian Partnership Act, 1932. The section reads the definition of partnership as partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Furthermore the section also reads as persons who have entered into partnership with one another are called individually partners and collectively a ‘firm, and the name under which their business is carried on is called the firm name.

Under section 5 of The Indian Partnership Act,1932 the relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family business as such, or a Burnese Buddhist husband and wife carrying business as such, are not partners in such business.

Another important section i.e. section 69 of The Indian Partnership Act, 1932[2] also holds the importance in this research. The section reads as The provisions of sub-sections (1) and (2) shall apply also to claim of set-off or other proceeding to enforce a right arising from contract, but shall not affect-
  1. the enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm, or any right or power to realise the property of a dissolved firm, or
  2. the powers of an official assignee, receiver or Court under the Presidency-towns Insolvency Act, 1909, (2 of 1909).or the Provincial Insolvency Act, 1920, (5 of 1920). to realise the property of an insolvent partner.
Since there is a contract or a partnership agreement between the two partners or among more than two partners, the partnership dispute may arise at some point of time because of any reasons. In this paper the author would deal with how the disputes arise in a partnership firm and how can the disputes be settled by using different case laws. The author would also deal with the methods by which the partnership disputes can be settled and also how can people now avoid partnership disputes.

Partnership Disputes

A partnership dispute may arise due to following reasons:
Underperformance of a Partner: Every partner is assigned with a specific role while forming a partnership. If a partner is unable to carry out his/her duties well, then a dissent may arise among the other partners.

Secret profits: All the profits incurred in the partnership must be clearly declared before all the partners. Any secret profit taken by any partner without the knowledge of other partners may raise a conflict in the partnership.

Conflicting interests: It is imperative that all partners within a partnership have common interests in businesses. If two partners have a different vision and the rest of the partners do not agree to the same, a conflict may arise.

Management/personality conflicts: In this situation the most sensible course of action may be to dissolve the partnership altogether. In some cases you may need to involve the Courts to ensure that all loose ends are tied up so that the company’s assets are divided fairly.

Partner Disputes Settlement

Having discussed what all can be the reasons for disputes in partnership disputes, now comes the settlement of these kinds of disputes. A decent and well-balanced dispute resolution process is essential for maintaining the smooth functioning of the partnership business. The process commences right from choosing what kind of resort the parties are looking for; or any technique explicitly mentioned in the Partnership Agreement. If the method resorted for resolving the dispute is mediation, then the appointment with the mediator or the place of mediation would be considered as a part of the dispute resolution process.

There are various options available to all the parties for resolving partnership dispute. The parties can either negotiate by settling down at an agreement by the process of Alternative Dispute Resolution (ADR), or can go to the Court for settlement.

In the event of any disputes arising from a partnership, a person has three most efficacious options to resolve the disputes which are outlined below:
Arbitration: It involves an arbitrator either appointed by the parties or by a Court. The decisions made by the arbitrator are legally binding on the parties. It is considered to be cost effective, simpler and a faster way of resolving disputes than the Courts.

Mediation: It is the process where an independent mediator is appointed to resolve the dispute. The mediator does not decide the dispute, but attempts to make a fair discussion. It is a very cost effective way of resolving a dispute, while giving an option to the parties to provide inputs for resolution of matters. The mediator does not impose a decision. In mediation, the outcome is entirely within the control of the parties, and not on a third person such as a judge.

Negotiation: Negotiation is considered to be one of the easiest forms of dispute resolution process. It is often seen that the parties to the dispute negotiate a resolution that is agreed to both without the need for formal mediation.

Out of all the three dispute settlement processes ADR (Alternative Dispute Resolution) is the best method to settle the disputes in partnership disputes. The most frequent option to resolve partnership disputes is ADR.

There are many benefits to ADR, including:

Time and cost saving: Any technique used under ADR process can be more cost and time effective.

Flexibility of processes and outcomes: It allows the parties in dispute to adopt a flexible way while following ADR. The process can be adjusted according to the needs of the parties.
Control: Parties to a dispute may choose the most appropriate neutral person to negotiate their dispute. They also have the right to choose the time, place, and the date according to their convenience.

Confidentiality: Any of the technique mentioned under ADR and used by the parties to dispute, will always remain strictly confidential.

Arbitration

It is not unusual to find a clause in a partnership agreement to the effect that all disputes between partners shall be decided by arbitration. Section 34 of the Arbitration Act 1940 laid down the rules for stay of legal proceedings where there was an agreement to refer to arbitration. Section 8 of the Arbitration and Conciliation Act 1996 speaks of the power of the Court to refer the parties to arbitration when there is an arbitration agreement, unlike section 34 of the Arbitration Act of 1940, which conferred upon the court, the power to stay legal proceedings, this section empowers the court to which an application has been made, to enforce a valid arbitration agreement and refer the parties to agreement.

Recent Judgement
Recently Supreme Court pronounced its judgment in the case of M/s. Umesh Goel Vs. Himachal Pradesh Cooperative Group Housing Society Limited.[3] The judgment clearly held that under Section 69(3) of the Partnership Act, the phrase ‘other expression’ doesn’t include ‘Arbitral Proceedings’. Furthermore, the ban imposed under the said section will not apply to Arbitral proceedings and the Arbitration Award. According to the Division Bench of the Apex Court, Sec.35 and Sec.36 of the Arbitration and Conciliation Act, 1996 is exclusively restricted to consider the Arbitration Award as a decree of a Court and the arbitration proceedings is not equivalent to the Court Proceedings.

Why the appeal was filed against the Delhi High Court Judgment?

The appeal was filed U/s 37 of the Act, 1996 at Delhi High Court by the Appellant, wherein, the court held that the award of the counterclaim in Arbitral proceedings was reversed as it is not reasonable in consideration to the specific provision under Partnership Act, due to the Court’s understanding, that Arbitral Proceedings is covered by the expression ‘other proceedings’ as under Section 69(3) of the Partnership Act. Consequently, the ban was imposed by the said section of Partnership Act on the appellant, which was also an unregistered firm at that point in time. The judgment of the high court was challenged by the appellant before the honourable Supreme Court of India.

What is included in Sec.69 (3), Partnership Act?

According to Section 69(1), any person, being the partner of an unregistered firm is banned to file a suit in the court against the firm or any of its partners. Wherein, Section 69(2) allows the ban in same forms of court suits against any third party at the instance of such an unregistered firm. Section 69(3) states that provisions of Sec.69 (1) and Sec.69 (2) will apply to a claim of set-off or other proceedings to enforce a right arising from a contract.

But, the High court interpreted the section differently, in order to invoke sub-section (3) of Section 69 and for the ban to operate either the firm should be an unregistered one or the person who wants to sue should be a partner of an unregistered firm, that its / his endeavor should be to file a suit in a Court, in which event even if it pertains to a claim of set-off or in respect of ‘other proceedings’ connected with any right arising from a contract or conferred by the Partnership Act which is sought to be enforced through a Court by way of a suit then and then alone the said sub-section can operate to its full extent.

Arbitration Proceedings Do Not Equate With Civil Court Proceedings

In consideration to the filed appeal suit with Supreme Court, the Apex court clearly said that an Award of Arbitration is a settled proposition and it must not be treated as a decree of the court, especially for the purpose of execution.

The honourable court also said that …. a statutory provision will have to be construed from the words that are expressly used and it is not for the Court to add or substitute any word to it. Therefore, going by Section 35 and 36 it cannot be held that the entire Arbitral Proceedings is a Civil Court Proceedings for the applicability of Section 69(3) of the Partnership Act.

With reference to the interpretation made by High Court under the Limitation Act while reading its Section 14, where under, Arbitral Proceedings on par with Civil Proceedings cannot be applied in this case.

Matter of Discretion
The principle has been well established that the parties having chosen their own forum a prima facie duty is cast upon the court to act upon such agreements.[4] The burden of showing that there is sufficient reason why the matter should not be referred to arbitration in accordance with the agreement of the parties lies on the party opposing the application for stay of the proceedings.[5]

In Anderson wright Ltd v Moran & Co[6] the Supreme Court observed that where an issue is raised as to the formation, existence or validity of the contract containing the Arbitration clause that the Court should not refuse the stay but decide the issue itself.

After the repeal of the Arbitration Act of 1940, and with the coming into force of the Arbitration and Conciliation Act 1996 however, as mentioned above, though the court cannot stay the suit, s 8 of the new act empowers the court to direct the parties to enforce the arbitration agreement. The effect of the provision is to enforce a valid arbitration clause.

Stay of Suits Refused
Apart from cases of this nature courts have refused to stay suits in the exercise of their discretion discretion where the arbitration clause does not cover all the matters in respect of which the suit has been instituted for that would be splitting up a suit into two parts, one to be tried by the arbitrator and the other to be tried by the court.[7] Where there is a suggestion of a fraudulent exercise of the power of the expulsion the court will in general refuse to send the dispute to arbitration[8] or also where it appears to the court that there is a good reason to believe that the arbitrator will not act fairly in the matter.[9]

A court will also refuse to stay proceedings where it appears that question substantially in dispute between the parties are a question of law.[10]
As to dissolution having been inter alia sought on the ground that it was just and equitable it may be observed that such plea is quite unusual in most of the plaints in which dissolution of a firm is sought from the court and should not by itself be a ground for refusing stay of the suit. The proposition that a question of dissolution is not suitable one to be left to arbitrators to decide has been found particularly persuasive in some cases.

Importance of Valid Arbitration Agreement To Settle The Dispute Through Arbitration

For a dispute to be referred to arbitration, it is obvious that a valid arbitration agreement must exist. Where a clause in deed of partnership stated that in case of disputes touching the partnership, such issues must be mutually resolved or may be referred to arbitration, if the parties so desire, has been interpreted as not being a valid arbitration agreement. In such circumstances, the appointment of an arbitral tribunal was refused.[11] An arbitration agreement must be clear and unambiguous in order that a dispute may be referred to arbitration.

When Dispute Arise Between Three Or More Partners

All disputes which shall arise between the partners or any of them or between any partner or partners and representatives of any other partner or between their legal representatives and whether during or after the determination of the partnership and whether in relation to the interpretation of these present of these presents or to any act or omissions of any party to the dispute or as to any act which ought to be done by the parties in dispute of any of them or in relation to any other matter whatsoever touching the partnership affairs shall be referred to a single arbitrator in case the parties agree upon one, otherwise to two arbitrators one be appointed by each party to the difference in accordance with and subject to the provisions of the Indian Arbitration Act or any statutory modification thereof.

An arbitration clause so worded came up for consideration in an application for stay proceedings under s 34 of the Arbitration Act in Subal Chandra v Mahomed Ibrahim,[12] Das J observed at p 486 of the Report:
The arbitration clause is extremely wide in its terms. It is also rather peculiar having regard to the fact that there are three parties to the deed of partnership. If the parties do not agree to a single arbitrator then the alternative provision for appointment of two arbitrators one by each of the parties to the difference would obviously be inappropriate and unworkable. Reference to a single arbitrator is conditional on all the parties agreeing to do so and there is an alternative mode of appointment of two arbitrators.

To construe this arbitration agreement as an unconditional agreement to refer to one arbitrator is to cancel the alternative provision altogether and will amount to making a new contract for the parties, which is obviously not permissible.

It is not altogether uncommon to have a submission providing for reference to more than two arbitrators. Sections 8 and 10 of the Act envisage such cases. There was a lacuna on the point in the earlier legislation on the subject. In Re Babaldas Khemchand[13] a ‘submission’ provided for reference to three arbitrators to be named by the three partners. One of the partners in contravention of the agreement filed a suit and an application was made to the court for stay of the suit, on the ground that there was an agreement providing for reference of disputes between the partners to arbitration. It was held that the suit should be stayed.

Joining of All The Partners In Submission To Settle A Dispute

It is obvious that disputes relating to partnership accounts cannot be settled by arbitration unless all the parties interested in the accounts join in the submission because the disputes would involve the interest of all the partners and cannot be settled piecemeal by some of the partners without the consent of the others.

Where thereof such a dispute between partners was referred to arbitration out of court on the assumption that all the partners had joined in the reference but it subsequently transpired that there was no valid reference on behalf of the partners, it was held that the award was not binding on any of the partners.[14]

On the same principle if disputes with regard to a dissolved partnership are referred to arbitration a minor who is admitted to the benefits of the partnership is much a necessary party to the submission and the arbitration as the partners themselves.[15]

Role of The Arbitrator In Settling The Disputes

Under a general submission by partners of all manners in difference between them, an arbitrator has very wide powers. He can dissolve partnership and can order a party to make discovery of documents and answer interrogations[16] and decide on the existence of a custom affecting the rights of the parties,[17] and order one party to pay or give security for the payment of a certain sum to the other,[18] and apportion the assets between them[19] and put a value on the goodwill,[20] and order conveyances to be made,[21] and direct one partner to sue in the name of himself and others, and give them a bond of indemnity[22] and restrain one partner from carrying on business with certain limits[23] and direct mutual release to be executed.[24]

In Erach Mehta v Minoo Mehta,[25] the arbitration clause stated that ‘all disputes touching the partnership agreement including divisions of assets, debts or liabilities shall be referred to arbitrators’ and it was held by the Supreme Court that the clause covered a dispute whether the partners had agreed that the partnership is dissolved.

In Pannalal Paul v Padmabati,[26] it was held by the Calcutta High Court that on refrence of disputes in a suit for dissolution of a firm the arbitrator has power to make an allotment of the assets and properties of the dissolved firm to one of the partners at a valuation fixed by the arbitrator. When an award of an arbitrator is in conformity with the provisions of s. 48, merely because it is a non-speaking award, it cannot be said that it was in contravention of the section.[27]

Award Made In The Dispute Settlement

A valid award[28] made upon a reference to an arbitrator stands on the same footing as a final adjudication between the parties in respect of all matters referred to him.[29] In matters covered by the submission it binds the rights of the parties both as to facts and law.[30] A valid award operates to merge and extinguish all claims embraced in the submission, and after it has been made, the submission and the award furnish the only basis by which the rights of the parties can be determined and constitutes a bar to any action on the original demand. It is binding though no steps have been taken to enforce it by proceedings in court.[31] It is not a mere agreement but it is equivalent to judgement.[32]

Conclusion
The dispute in partnership dispute can be solved by the various methods like arbitration, mediation and negotiation. Court proceeding and awards are also the ways in which a dispute can be settled. Out of all the settlements methods arbitration is the best method and evidences to support this statement are already provided by the author in the project with the help of various case laws where arbitration settled the disputes arising in partnership.

Bibliography
Books:
  1. Satyajeet Desai, The Law of Partnership in India,7th Edition Reprint 2009, Published by Lexis Nexis.
  2. PC Markanda, The law of Partnership, 10th Edition Reprint 2010, Published by Lexis Nexis.

Databases:
  1. SCC Online
  2. Hein Online
  3. Legitquest

End-Notes:
  1. Section 4 of Indian Partnership Act, 1932 reads as ’’Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually partners and collectively a firm, and the name under which their business is carried on is called the firm name.
  2. Section 69, Indian Partnership Act, 1932
  3. 2016 SCC OnLine SC 624.
  4. Willesford v Watson [1873] 8 ch 473, p 480; Bristol Corporation v John Aird & Co [1913] AC 241, p 256.
  5. Dinabandhu v Durgaprasad (1919) 46 Cal 1041; Ganesh Das v Durga (1921) 2 Lah 19; Vawdrey v Simpson [1896] 1 Ch 166.
  6. AIR 1955 SC 53.
  7. Turnook v Sartoris (1890) 43 Ch D 150.
  8. Barnes v Youngs [1898]1 Ch 414.
  9. Ives & Barker v Williams [1894] 2 Ch 478, p 488.
  10. Rowe Brothers & Co Ltd v Crossley Brothers Ltd (1912) 108 LT 11 (CA).
  11. Jagdish Chandra v Ramesh Chander 2007 (5) SCC 719, 2007(6) JT (SC) 375.
  12. AIR 1943 Cal 484.
  13. (1921) 45 Bom 1.
  14. Abdul Ghani v Sirajuddin AIR 1939 Lah 154.
  15. Satya Narain v Jugal Kishore AIR 1958 All 512.
  16. Kursell v Timber Operations, Ltd (1932) 2 KB 302.
  17. Produce Workers Co v Olympia Oil Co [1916] AC 314.
  18. Simmonds v Swaine (1809) 1 Taunt 549.
  19. Lingood v Eade 2 Ark 505.
  20. Re David v Mathews [1899] 1 Ch 378.
  21. Wood v Wilson 2 Cr M & R 241.
  22. Burton v Wigley 1 Bing NC 665.
  23. Morley v Newmann 5 D & R 317.
  24. Lingood v Eade 2 Ark 505.
  25. AIR 971 SC 1653.
  26. AIR 1960 Cal 693.
  27. Asandas Mitharam Narsinghani v Tekchand Mitharam Sevakramani (1999) 3 SCC 110.
  28. An award may be set aside by the court on the grounds mentioned in s 30 of the Arbitration Act 1940.
  29. Sheo Narain v Beni Madho (1901) 23 All 285.
  30. Re Keighley, etc [1893] 1 QB 405, P 409.
  31. Krishna Panda v Balaram (1896) 19 Mad 290.
  32. La lDas v Bai Lala (1909) 11 Bom LR 20.

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