Novation Of Partnership Deed, Arbitration Clause Contained In The Deed Can Be Invoked: Bombay High Court

The Single Bench of Justice A. K. Menon dismissed the contention that an arbitration clause cannot be invoked as a result of novation of the agreement containing the arbitration clause. The Court added that even though there had been a novation of the partnership deed containing an arbitration clause, an Arbitrator could be appointed for adjudication of disputes against the partner with respect to the partnership firm.

The applicant Praful A. Mehta entered into a partnership deed with the 1^st respondent Nainesh M. Gandhi and executed a partnership deed that contained an arbitration clause. Thereafter, the partnership firm was reconstituted and a second partnership deed containing an arbitration clause was executed by the applicant with other parties, without the respondent no. 1. After a dispute arose between the parties, the applicant intended to recover the amount allegedly siphoned off by the respondent no. 1 from the partnership firm by invoking the arbitration clause embodied in the 2^nd partnership deed.

In response to the invocation of the arbitration agreement by the applicant, the respondent no. 1 contended that he had not executed the partnership deed after the reconstitution of the firm. The respondent no. 1 averred that he had retired from the partnership firm and that his accounts had been settled, therefore he could not be made liable under the partnership deeds of the reconstituted firm.

Thereafter, the applicant filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 before the Bombay High Court seeking appointment of a Sole Arbitrator as per the arbitration agreement embodied in the partnership deed.

The respondent no. 1 Nainesh M. Gandhi contended before the High Court that he had not executed the 2^nd partnership deed of the reconstituted firm. The respondent no. 1 submitted that his signatures to the 1^st partnership deed were forged. Thus, the respondent no. 1 averred that the arbitration clause contained in the partnership deeds were not binding on the respondent no. 1.

The respondent no. 1 added that there was a novation of the partnership deed, and since the respondent had not signed such a novated agreement the arbitration clause embodied in the 2^nd partnership deed of the reconstituted firm was not binding on him.

The Bombay High Court dismissed the contention that an arbitration clause cannot be invoked as a result of novation. The Court noted that there was an unequivocal admission on the part of respondent no. 1 of having been involved in the partnership business, in view of its reply to the notice issued by the applicant for invoking arbitration.

The Court held that the allegation of forgery was required to be dealt with by the Arbitrator at the stage of trial. The Court refuted the averments made by the respondent no. 1 that the Arbitration Application could not lie before the Court since there had been a novation.

The Court observed that when the 2^nd partnership deed was executed by the remaining partners sans respondent no. 1, on the same day a Deed of Retirement was also executed by respondent no. 1, which was signed by him as a continuing partner. The Court thus noted that as per the Retirement Deed, the respondent no. 1 had been described as one of the continuing partners.

The Court held that the decision of the Supreme Court in the case of Young Achievers versus IMS Learning Resources Private Limited (2013) that an arbitration clause in an agreement cannot survive if the agreement containing the arbitration clause has been superseded or novated by a later agreement, would not be attracted. The Court ruled that since the signature of the respondent no. 1 appeared on the Retirement Deed, wherein he had been described as a continuing partner, the decision of the Supreme Court in the case of Young Achievers (2013) would not apply. The Court noted that the respondent no. 1 had failed to explain under which partnership deed he was inducted into the partnership.

The Court thus ruled that it was prima facie satisfied that there was an arbitration agreement and that the dispute would have to be referred to arbitration.

The Court thus allowed the petition and appointed a Sole Arbitrator.

Case Title: Praful A. Mehta versus Nainesh M. Gandhi

Citation: 2022 LiveLaw (Bom) 193

Dated: 21.02.2022 (Bombay High Court)

Counsel for the Applicant: Mr. Simil Purohit a/w. Mr. Faran Khan and Mr. Virti Shah i/b. M/s. Vimadalal & Co.

Counsel for the Respondent no. 1: Dr. Birendra Saraf i/b. Mr. Vijay Sharma

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