Applicability of arbitration proceedings arising out of the deed of an unregistered partnership firm

  • Setindiabiz Team
  • February 29, 2024
unregistered partnership firm

This blog delves into the intricacies of arbitration proceedings within unregistered partnership firms, shedding light on the applicability and significance of such proceedings amidst legal constraints outlined in Section 69 of the Indian Partnership Act, 1932. Exploring recent judicial interpretations and legal precedents, it elucidates how arbitration clauses in partnership deeds serve as powerful tools for dispute resolution, offering parties a flexible and efficient alternative to traditional litigation.

BRIEF SUMMARY
On Friday, the 30th September 2022, the Calcutta High Court heard an application filed under Section 11 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) for the appointment of an arbitrator to assist the parties in resolving their conflict and held that the bars for establishing a suit or any other proceeding under Section 69 of the Indian Partnership Act, 1932 (‘Partnership Act’) should not apply to arbitration proceedings under Section 11 of the Arbitration Act.
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The case was that the partnership deed though has an arbitration clause, but the firm was not registered with the Registrar of Firms (ROF); the question of law that was to be decided was whether a partner of an unregistered firm can invoke arbitration and if the section 69 of the Partnership Act bars it.
Respondents opposed the appointment of an arbitrator because the partnership firm was ‘unregistered’; the dispute could not be submitted to an arbitrator because of the application of the bar imposed by Section 69 of the Partnership Act. Their argument was that because sub-sections (1) and (2) of Section 69 of the Partnership Act restrict the filing of the suit by any person as a partner of an unregistered firm, including by a claim under ‘other proceedings,’ the applicants could not seek the appointment of an arbitrator because the partnership deed in their case was unregistered.
Hon’ble Chief Justice of the Calcutta High Court, Shri Prakash Shrivastava, rooted his judgment on the Supreme Court decision in Umesh Goel v. Himachal Pradesh Cooperative Group Housing Society Limited, (2016) 11 SCC 313 and the Madras High Court decision in M/s. Jayamurugan Granite Exports v. M/s. SQNY Granites, 2015 4 LW 385, both of which held that arbitral proceedings do not fall under the definition of “other proceedings” in Section 69(3) of the Partnership Act and that, under Section 11 of the Arbitration Act, the restrictions placed under Section 69 does not apply to arbitration proceedings or arbitral awards.
As a result, the Calcutta High Court ruled that the non-registration of the partnership firm would not trigger the bar under Section 69 of the Partnership Act in terms of beginning proceedings under Section 11 of the Arbitration Act.

Arbitration proceedings offer a viable alternative for dispute resolution within unregistered partnership firms, providing a flexible and efficient means to address conflicts while circumventing the limitations imposed by Section 69 of the Indian Partnership Act, 1932. As evidenced by legal precedents and judicial interpretations, such as the decisions referenced in this blog, the applicability of arbitration clauses in partnership deeds remains robust even in the absence of registration with the Registrar of Firms.

Conclusion

FAQs

Q1: Can an unregistered partnership firm include an arbitration clause in its partnership deed?

Yes, an unregistered partnership firm can include an arbitration clause in its partnership deed. The presence of such a clause allows disputes arising between partners or with third parties to be resolved through arbitration rather than litigation.

Q2: Are arbitration proceedings enforceable for disputes involving unregistered partnership firms?

Yes, arbitration proceedings are enforceable for disputes involving unregistered partnership firms. The Arbitration and Conciliation Act, 1996 provides a legal framework for arbitration proceedings, irrespective of the registration status of the partnership firm.

Q3: What happens if a dispute arises in an unregistered partnership firm without an arbitration clause?

In the absence of an arbitration clause, disputes in an unregistered partnership firm may need to be resolved through traditional legal channels, such as filing a suit in a court of law. However, parties may still choose to opt for arbitration if they mutually agree to do so.

Q4: Can partners of an unregistered partnership firm compel arbitration if there is a dispute?

Yes, partners of an unregistered partnership firm can compel arbitration if there is a dispute, provided that both parties agree to arbitration as the method of dispute resolution. Arbitration can be initiated by mutual consent or through specific arbitration clauses included in partnership agreements.

Q5: Is the enforcement of arbitral awards affected by registration of partnership firm?

No, the enforcement of arbitral awards is not typically affected by the registration status of a partnership firm. Once an arbitral award is issued, it can be enforced in accordance with the provisions of the Arbitration and Conciliation Act, 1996, regardless of whether the partnership firm is registered or unregistered.

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