Arbitration Clause Continues To Operate Even After Dissolution Of Partnership: Delhi High Court

The bench of Justice Chandra Dhari Singh held that the Court has the power to conduct a procedural review of its order passed under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act). It further remarked that the Courts’ competence to review Section 11 orders is unaffected by substantive concerns like a Tribunal’s jurisdiction or the authenticity of evidence.

Under an agreement executed between the parties, the petitioner, M/s Shyamjee Prepaid Services, was appointed as the agent of the respondent firm- M/s Top Steels. After certain disputes arose between the parties, the petitioner firm invoked the arbitration clause and filed a petition under Section 11 of the A&C Act before the Delhi High Court. The Court allowed the petition and appointed a Sole Arbitrator.

Against this order, the respondent firm, M/s Top Steels, filed a review application before the High Court. It argued that both the firms that were parties to the ‘Agency Agreement’ containing the arbitration clause, had already been dissolved. Since the petitioner firm consisted of only two partners, the petitioner firm dissolved automatically with the demise of one of its partners, it argued.

It added that on dissolution of the petitioner firm, the surviving partner constituted a new partnership firm in the same name by inducting a new partner, and invoked the arbitration clause. Thus, the respondent pleaded that the petition filed by the reconstituted petitioner firm under Section 11, was prima facie not maintainable.

The petitioner, M/s Shyamjee Prepaid Services, argued that the arbitration petition was filed in the name of the same firm which had entered into the ‘Agency Agreement’. It added that a dissolved partnership firm is not barred from filing a petition under Section 11(6) for appointment of the arbitrator for resolution of disputes that had arisen between the partnership firm and the 3^rd party.

Referring to Section 47 of the Indian Partnership Act, 1932 the bench observed that even after the dissolution of a Partnership firm, the partner’s rights and responsibilities continue to accrue in order to complete the uncompleted transactions at the time of the dissolution.

Dealing with the ‘Doctrine of Severability’ of an arbitration clause, the Court said: “Conceptually and practically, arbitration law relies heavily on the idea of severability. This implies that the arbitration provision will remain in effect notwithstanding the contract's termination, breach, or invalidity, since it is treated as a stand-alone agreement.”

Perusing the relevant provisions of the A&C Act, the Court took note that Section 16(1)(a) of the A&C Act provides that, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. Further, as per Section 40(1) of the A&C Act, an arbitration agreement shall not be discharged by the death of any party.

“A combined interpretation of Section 16(1)(a) and Section 40(1) of the Act, 1996 demonstrates unequivocally that the arbitration provision will continue in effect even after the death of a partner causes the dissolution of the partnership,” the Court ruled.

“Consequently, the arbitration agreement between the petitioner firm and the respondent survives the dissolution of the petitioner firm, as claimed by the Respondent,” the Court concluded.

The Court added: “…for the purposes of winding up or dissolution, it is necessary to complete the entire transaction pending between the firm and third party. Consequently, the said firm shall not be barred from invoking the arbitration clause.”

While holding that the power of substantive review must be bestowed on the court by a statute, in the absence of which the court cannot engage in substantive review, the bench held that every court and tribunal is obligated to conduct a procedural review of its judgement, and if a procedural error is discovered, it must reverse its decision.

The Court added: “A matter of process would include not serving the opposing party, proceeding ex parte, and pronouncing a verdict. An application bringing to the notice of the Court that the party was not served and the Court proceeded ex-parte erroneously, would be an instance of the Court exercising procedural review jurisdiction. Similarly, a case being adjourned on a date notified to the parties, but erroneously noted by the Registry of the Court to be listed on an earlier date and as a result being shown in the cause list on a wrong date and the matter being dismissed in default, on an application filed to correct the error, would be a case of procedural review for the reason the error relates to one of procedure.”

The bench concluded that the Court has the power to review an order passed under Section 11 of the A&C Act and examine the orders containing procedural irregularities. Further, the Courts’ competence to review Section 11 orders is unaffected by substantive concerns like a Tribunal’s jurisdiction or the authenticity of evidence, the Court said.

“Nothing would prevent the Court from correcting the error if it is determined that the error raised in the review petition was the consequence of an error and that the earlier decision would not have been rendered but for an incorrect assumption that in fact did not exist,” the bench added. However, the Court ruled that review is not a covert appeal and a court cannot act as an appellate court for its own judgements. It added that only errors that are apparent on the record may be reviewed. Errors which are required to be discovered through a process of reasoning cannot be reviewed, the bench said.

Referring to the facts of the case, the Court reckoned, “…the respondent / applicant in this case did not contest the presence of the arbitration clause or the section 21 notice dated 12th December, 2019 that was served upon the respondent by the petitioner. In addition to this, despite the factum of death of the former partner Mr. Vinod Kumar Goel was mentioned in the petition by the petitioner, the respondent chose to keep silent with respect to the dissolution of the partnership on said account, and the respondent is presenting the said basis for the first time in the current review petitions. In light of the case laws cited above, the respondent / applicant has failed to point out any mistake that is obvious on the face of the record, which is required for a cause of review.”

The Court thus dismissed the review application.

Case Title: M/s Shyamjee Prepaid Services versus M/s Top Steels & Mrs. Renu Devi & Anr.

Citation: 2023 LiveLaw (Del) 86

Counsel for the Petitioner: Mr. Surender Gupta and Mr. Gaurav Saini, Advocates

Counsel for the Respondent/Applicant: Mr. Sunil K. Jain, Advocate for R1/Applicant Mr. Vivek K. Tandon, Mr. Anil K. Aggarwal, Ms. Nitu Yadav and Ms. Prerna Tandon, Advocates

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