Arbitration Clause and Partnership Disputes: Supreme Court’s Verdict
The Supreme Court of India, in the case of Ananthesh Bhakta Represented by Mother Usha A. Bhakta & Ors. vs. Nayana S. Bhakta & Ors., examined whether a dispute related to an unregistered partnership firm could be referred to arbitration under the Arbitration and Conciliation Act, 1996. The appeal was filed against the Karnataka High Court’s decision affirming the Trial Court’s order referring the dispute to arbitration.
The case revolved around a family-run beedi business where disputes arose concerning retirement and partnership agreements. The appellants challenged the arbitration clause on multiple grounds, including procedural lapses and the involvement of a non-signatory party.
Background of the Case
The dispute originated in a family-owned partnership firm engaged in the manufacture and sale of beedis under the name M/s Neo Subhash Beedi Works. After the demise of the founder, Ramabhakta, his six sons took over the business. Over time, several partners retired or passed away, leading to the execution of a retirement deed in 2005 and a new partnership deed in 2006.
The appellants, claiming a stake in the partnership, filed a civil suit seeking a permanent prohibitory injunction to prevent the defendants from transferring or alienating the firm’s assets. In response, the defendants invoked the arbitration clause in both the retirement and partnership deeds and moved an application under Section 8(1) of the Arbitration Act, 1996, requesting the matter to be referred to arbitration.
Legal Issues
The appeal before the Supreme Court raised the following key questions:
- Whether failure to file the original arbitration agreement along with the application under Section 8(1) warranted dismissal under Section 8(2) of the Arbitration Act.
- Whether the arbitration agreement could be enforced when all parties to the dispute were not signatories to the arbitration clause.
- Whether disputes related to an unregistered partnership firm could be referred to arbitration.
Petitioner’s Arguments
The petitioners argued:
- The defendants had not filed the original retirement and partnership deeds at the time of moving the application under Section 8(1), violating Section 8(2), which mandates filing the original or a certified copy of the arbitration agreement.
- Not all parties to the dispute were parties to the arbitration agreement, making it inapplicable.
- Since the partnership firm was unregistered, disputes concerning it could not be referred to arbitration.
Respondent’s Arguments
The respondents contended:
- The retirement and partnership deeds were produced before the Trial Court before the matter was adjudicated, fulfilling the requirement of Section 8(2).
- The petitioners themselves had admitted to the existence of these deeds in their pleadings, so the delay in filing originals was inconsequential.
- The arbitration agreement was binding on all parties, including those claiming rights through deceased partners.
- There was no statutory bar on referring disputes related to unregistered partnership firms to arbitration.
Supreme Court’s Observations
The Supreme Court examined each contention meticulously and provided the following findings:
1. Compliance with Section 8(2) of the Arbitration Act
The Court noted that while the application under Section 8(1) was initially filed without attaching the original deeds, the defendants submitted them three days later before the Trial Court entertained the matter. Relying on precedent, the Court held that:
“Section 8(2) has to be interpreted to mean that the court shall not consider any application filed under Section 8(1) unless it is accompanied by the original arbitration agreement or a duly certified copy thereof. However, bringing the original agreement on record at the time of consideration is sufficient compliance.”
2. Inclusion of Non-Signatory Party
The Court found that except for one defendant, all parties to the dispute were either signatories to the arbitration agreement or claimed rights through deceased partners who were signatories. The Court ruled that:
“The plaintiffs, being signatories to the arbitration agreement, cannot object to the reference merely because one of the defendants was not a party to it.”
3. Arbitration and Unregistered Partnership Firms
The Court rejected the argument that disputes related to unregistered partnerships could not be referred to arbitration. It stated that there was no statutory provision barring such disputes from arbitration and upheld the validity of the arbitration clause.
Final Judgment
The Supreme Court upheld the Karnataka High Court’s order and dismissed the appeal. The Court concluded that:
- The defendants had complied with Section 8(2) of the Arbitration Act.
- The arbitration agreement was enforceable against the parties to the dispute.
- There was no legal impediment to referring disputes related to an unregistered partnership firm to arbitration.
Judgment Outcome: Appeal dismissed.
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Download Judgment: Ananthesh Bhakta Rep vs Nayana S. Bhakta & O Supreme Court of India Judgment Dated 15-11-2016.pdf
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