Section 69 of Partnership Act does not bar arbitration between partners of an unregistered firm, Calcutta High Court holds

The parties were partners under a partnership deed dated 5 February 2004, and disputes arising between them were referred to arbitration.

During the arbitration, the parties entered into a Memorandum of Understanding dated 3 November 2014 concerning, inter alia, execution of a dealership agreement with a petroleum company, an expired dealership arrangement, a rented godown, and payments to a third party.

The appellant alleged that the Memorandum of Understanding had been procured by coercion and undue influence, whereas the respondent relied upon it as the basis of the arbitral award.

The respondent’s Statement of Claim sought permission to participate in the firm’s business, payment of his share of profits from April 2010, and rendition of accounts; it did not seek dissolution of the partnership.

The arbitrator nevertheless directed that one partner would exclusively continue the business for a specified period while paying a fixed monthly amount to the other, after which the other partner would take over the business for another specified period on similar terms.

The arbitrator did not grant the specific reliefs sought in the Statement of Claim and did not direct rendition of accounts.

The appellant’s challenge under Section 34 of the Arbitration and Conciliation Act, 1996 was dismissed by the learned Trial Judge on 30 June 2018 in Misc. Case No. 139 of 2015. The appellant preferred the present appeal under Section 37 of the 1996 Act.

1. Whether the arbitral tribunal exceeded the terms of the reference by imposing an arrangement that allocated exclusive management and operation of the partnership business between the partners, although no such relief had been sought?

2. Whether the arbitral award impermissibly rewrote or altered the parties’ partnership agreement and was consequently contrary to public policy?

3. Whether Section 69 of the Indian Partnership Act, 1932 prevented arbitration between partners of an unregistered partnership firm unless dissolution of the firm was sought?

4. Whether the Section 34 court had applied the correct parameters while reviewing the arbitral award?

The Court exercised appellate jurisdiction under Section 37 of the Arbitration and Conciliation Act, 1996 to examine whether the Section 34 court had applied the correct legal parameters in considering the challenge to the award.

An arbitral tribunal must remain within the scope of the reference and cannot grant relief beyond the claims or rewrite the parties’ underlying contract.

An award that effectively rewrites a partnership agreement and changes the contractual rights and obligations of the partners may be contrary to public policy.

The Court held that Section 69 of the Indian Partnership Act, 1932 regulates the maintainability of suits by or on behalf of an unregistered partnership firm and does not bar arbitration between partners merely because dissolution of the firm has not been sought.

The Court found that the respondent had sought participation in the firm’s business, payment of profits, and rendition of accounts, but had not sought dissolution or an arrangement dividing exclusive control of the business between the partners.

The award did not adjudicate those prayers; instead, it created a rotational management structure under which each partner would operate the business to the exclusion of the other for specified periods.

The Court held that the Memorandum of Understanding did not authorise or contemplate vesting management of the firm in one partner to the exclusion of the other for an indefinite or continuing arrangement, and the award also failed to address the sharing of losses.

Consequently, the arbitrator had travelled beyond the reference and effectively rewritten the partnership agreement, which rendered the award contrary to public policy.

The Court separately rejected the respondent’s interpretation of Section 69, holding that the provision did not make arbitration impermissible unless dissolution was claimed.

The Section 34 court therefore failed to apply the correct standards in reviewing the award.

The Court held that the arbitral award dated 4 December 2015 exceeded the scope of the reference, impermissibly rewrote the partnership arrangement, and was contrary to public policy.

The award was set aside, and the Trial Court’s order dated 30 June 2018 dismissing the Section 34 challenge was also set aside.

The appeal was allowed without any order as to costs.