In a recent ruling, the Gujarat High Court has held that once a partnership at will is dissolved, the arbitration clause contained in the partnership deed cannot be invoked to refer the dispute between the partners to arbitration. The decision was given by Justice Biren Vaishnav in a petition filed under Section 11 of the Arbitration and Conciliation Act, 1996 seeking referral of the dispute between the partners of a dissolved partnership firm to arbitration.
The case involved a partnership firm wherein the petitioner held the majority shares and the respondent held a minority share. The respondent started conducting the business affairs unilaterally, without the knowledge or consent of the petitioners, which led to the firm’s dissolution. The petitioner invoked the arbitration clause contained in the partnership deed and filed a petition seeking appointment of an arbitrator.
The court held that the term “dealing” used in the arbitration clause would mean engaging in business, and for the dispute to fall within the ambit of the clause, the firm must be subsisting. It was observed that the relationship between the partners was severed pursuant to dissolution, which resulted in the extinguishment of the arbitration clause itself.
The court referred to its previous decision in Mohanlal Sajandas vs Hareshkumar Narandas & Ors., 2001 (3) GLH 532, where it had held that any dispute arising between the parties after the partnership at will was dissolved cannot be said to have arisen during or in the course of the partnership business. Thus, the dispute cannot be 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 relied on various judgments in support of their plea that the arbitration clause was an independent clause and, therefore, would not lose its significance merely because of the dissolution of the partnership. However, the court distinguished these judgments and held that the disputes referred to arbitration in those cases were directly consequential to the termination of the agreements, unlike the present case where the relationship itself was severed pursuant to dissolution, leading to the extinguishment of the clause of arbitration itself.
In conclusion, the Gujarat High Court’s ruling lays down the legal principle that once the partnership at will is dissolved, the arbitration clause contained in the partnership deed cannot be invoked to refer the dispute between the partners to arbitration.