Case Brief: If Dispute Is Arbitrable, Court Cannot Refuse To Refer Parties To Arbitration U/S 8 of Arbitration Act: Guwahati High Court
Case Name: Rampat Lal Verma v. Rahul Verma and 7 Ors
Court: Hon’ble Guwahati High Court
Judge: Hon’ble Justice Robin Phukan
Date of Decision: 22.10 2024
Prepared By: Aakanksha Bhatia
Facts:
This case involves a partnership dispute between Rampat Lal Verma (“Rampat,” the appellant) and the legal heirs of his deceased partner, Sampat Lal Verma (“Sampat,” respondents 1 to 4). The partnership firm, M/s Verma Market, was established on 1.04.1984, and operated under a partnership deed dated 01.04.1992. Rampat, Sampat, and Lalmati Devi Verma were partners with a 1/3rd share in the firm. The firm engaged in various businesses, including Hotel Maurya, and owned several properties. Lalmati Devi Verma passed away on 24.12.2022, and her legal heirs relinquished their share in the partnership. Sampat passed away on 21.11.2023, leading to the firm’s automatic dissolution.
Sampat’s legal heirs (respondents 1 to 4) declined to continue the firm or form a new partnership and requested Rampat to provide accounts and distribute their share of the assets. Rampat refused the request, leading to the respondents filing Commercial Suit No. 02/2024 against Rampat and other proforma respondents, seeking declaration of the partnership’s dissolution, their share in the assets, and appointment of a receiver.
Rampat, citing the arbitration clause (Clause 15) in the partnership deed, filed Petition No. 3608/2024 under Section 8 of the Arbitration and Conciliation Act, 1996 (“the Act”), seeking dismissal of the suit and referral to arbitration. The trial court dismissed the petition (Misc. (J) Case No. 206/2024) on August 9, 2024.
Issues:
The primary issue before the Guwahati High Court was whether the trial court was justified in dismissing Rampat’s petition under Section 8 of the Act, given the existence of an arbitration clause in the partnership deed.
Arguments Advanced:
- Rampat’s Arguments (Appellant):
○The trial court erred in dismissing the petition despite the clear arbitration clause (Clause 15) in the partnership deed.
○The trial court misapplied the Supreme Court’s decision in S.P. Misra and Ors. vs. Mohd. Laiquddin Khan and Anr. by concluding that the partnership automatically dissolved upon Sampat’s death and that his legal heirs were not bound by the arbitration clause.
○Section 42(c) of the Indian Partnership Act, which deals with dissolution upon a partner’s death, is subject to the contract between the partners, and Clause 2 of the partnership deed expressly states that the firm will continue with the surviving partners and the deceased partner’s legal heir.
○The partnership deed’s arbitration clause (Clause 15) covers disputes related to partnership affairs, dissolution, and discontinuation of the business, making the current dispute arbitrable.
○The legal heirs of a deceased partner inherit the right to sue for accounts of the partnership and can invoke the arbitration clause, as held in Ravi Prakash Goel vs. Chandra Prakash Goel and Anr. Section 40(1) of the Act binds the legal representatives to the partnership deed’s terms, including the arbitration clause.
○Courts should encourage arbitration for expeditious dispute resolution, as emphasized in P. Anand Gajapathi Raju & Ors vs P.V.G. Raju (Died) & Ors., and the mandatory language of Section 8 of the Act compels courts to refer disputes to arbitration when an arbitration agreement exists.
○The mere filing of a petition seeking time to file a written statement does not constitute submission to the court’s jurisdiction or waiver of the right to arbitration. The respondents’ allegation of fraud is unsupported and does not meet the tests established in Rashid Raza vs. Sadaf Akhtar to invalidate the arbitration clause.
- Respondents’ Arguments:
○The firm automatically dissolved upon Sampat’s death, and the partnership deed ceased to be binding on his legal heirs, as per S.P. Misra (supra).
○Rampat submitted to the trial court’s jurisdiction by seeking time to file a written statement and did not comply with Section 8(2) of the Act. The respondents are not bound by the arbitration clause because they were not parties to the partnership deed.
○The arbitrator lacks jurisdiction to decide the respondents’ allegation of fraud, as held in Atul Singh and Ors. vs. Sunil Kumar Singh and Ors.
Judgment:
The Guwahati High Court allowed the appeal, set aside the trial court’s order, and directed the matter to be referred to arbitration.
Legal Analysis:
- The High Court extensively analyzed the provisions of the Indian Partnership Act, 1932, and the Arbitration and Conciliation Act, 1996.
- It held that Section 42(c) of the Partnership Act, regarding dissolution upon a partner’s death, is subject to the agreement between the partners. The court emphasized the binding nature of the partnership deed, including the arbitration clause, on the legal heirs of a deceased partner.
- It clarified the scope of the Supreme Court’s decision in S.P. Misra (supra), distinguishing its applicability to the present case’s facts and issues.
- The court relied on several Supreme Court precedents to emphasize the mandatory nature of Section 8 of the Act and the courts’ duty to refer disputes to arbitration when a valid arbitration agreement exists.
- It rejected the respondents’ arguments regarding submission to jurisdiction, non-compliance with the Act, and the alleged fraud, finding them to be without merit.
Conclusion:
The Guwahati High Court’s judgment reinforces the principle of upholding arbitration agreements and prioritizing arbitration as a preferred dispute resolution mechanism. The court held that the legal heirs of a deceased partner are bound by the terms of the partnership deed, including the arbitration clause, and cannot circumvent it by filing a suit in court. The judgment clarifies the limited scope of the Supreme Court’s decision in S.P. Misra and emphasizes the courts’ duty to refer disputes to arbitration when a valid agreement exists.