Bombay High Court: An application was filed under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) wherein respondent 1 raised two objections, claiming that if the two or any one of the objections is sustained, the application would have to be dismissed. Manish Pitale, J., dismissed the application in view of bar Section 19(2)(a) of the Partnership Act, 1932
The applicants and KrishnaArya Tech Corp LLP (respondent 2), collectively the Partners of R-Cube Energy Storage Systems LLP (R-Cube Energy), entered into an investment agreement dated 02-02-2018 with respondent 1 company. As per the agreement, respondent 1 was to invest a sum of Rs.16.5 crores towards the development of technology obtained by R-Cube Energy from the Fraunhofer Institute for Ceramic Technologies and Systems (Fraunhofer Institute). It is the case of the applicants that although the initial amount was invested by respondent 1 in terms of the agreement, subsequently, respondent 1 defaulted. Consequently, the applicants not only faced embarrassment in the market, but they also faced threats of legal action from the Fraunhofer Institute for non-payment of certain amounts. Clause 24 of the investment agreement provided for an initial procedure for resolution of disputes before two neutral persons to be appointed by the parties and if the disputes were not resolved, arbitration could be invoked at the request of any of the parties to the dispute, by issuing written notice.
The initial process of dispute resolution was put into motion by notice dated 20-05-2022. Thereafter, the applicants appointed a neutral person which was duly accepted by the other party as well. But, according to the applicants, on one pretext or the other, respondent 1 failed to take forward the aforesaid dispute resolution mechanism contemplated in the investment agreement. Thus, they had no option but to issue a notice invoking arbitration wherein the notice was issued on 20-08-2022. On 19-09-2022, the respondent 1 sent reply to the said notice and, inter alia, stated that since the notice invoking the arbitration was issued only on behalf of the applicants, to the exclusion of the other partner i.e. respondent 2, it could not be said that the dispute resolution mechanism had been properly activated, and that therefore, the process of arbitration could certainly not go ahead. It was specifically stated that the initial procedure of dispute resolution before neutral persons ought to have been properly activated before seeking to invoke arbitration. Thus, the applicants filed the present application under Section 11(6) of the Arbitration Act.
The first objection raised on behalf of respondent 1 was that the procedure under the dispute resolution mechanism agreed between the parties, as part of an investment agreement, was not properly followed, since the process of amicable resolution of disputes before neutral persons was not exhausted before applicants invoked arbitration. The second objection was on the ground that, although the applicants and respondent 2 formed a partnership to enter into the investment agreement with respondent 1, the notice invoking arbitration was issued only on behalf of the applicants and that respondent 2, despite being a partner, did not join in issuing the invocation notice.
The Court noted that the parties to the said agreement are R-Cube Energy, with the applicants and respondent 2 being its partners on the one hand, and respondent 1 on the other. A perusal of Clause 24 of the agreement pertaining to dispute resolution mechanism shows an elaborate procedure for resolution of disputes by first referring them to neutral persons, one each to be appointed by the parties and in case of failure of such procedure, arbitration could be invoked at the behest of any of the parties to the dispute upon a written notice being issued. Thus, there is a two-tier procedure prescribed under the aforesaid clause pertaining to dispute resolution.
The Court further noted that the applicants appointed a neutral person in terms of clause 24.2.3 and they had also called upon respondent 1 to appoint its neutral person. In response to the same, while stating that respondent 1 was presuming appointment of the neutral person on behalf of all the partners of RCube Energy, respondent 1 in turn did not appoint its own neutral person. In such a situation, respondent 1 cannot be permitted to claim that the requirement of the dispute resolution mechanism in clause 24, prior to invocation of arbitration, had not been exhausted. Nothing prevented respondent 1 from appointing its neutral person in terms of clause 24.2.3 of the investment agreement, as disputes had clearly arisen between the parties and a large number of communications had already been exchanged between them. Thus, the first objection raised on behalf of respondent 1 cannot be accepted.
The Court observed that as per Section 19(2)(a) of the Partnership Act, an implied authority of a partner in a partnership firm does not empower such a partner to submit a dispute relating to the business of the firm, to arbitration. In other words, one set of partners cannot submit a dispute relating to business of the partnership firm to arbitration, in the absence of the other partners joining them. The material on record demonstrated that applicant 1, only on behalf of the applicants (Ranka family) before the Court, raised the disputes, pursued the same and even appointed the neutral person, without the concurrence of the other partner i.e. respondent 2. In response to the appointment of the neutral person at the behest of the applicants, respondent 1 had specifically responded by stating that it was presumed that the neutral person was appointed on behalf of the applicants as well as the other partner.
The Court further observed that a perusal of the notice issued invoking arbitration showed that it was issued only on behalf of the applicants and that it was not issued on behalf of the other partner i.e. respondent 2. The disputes were raised clearly in respect of the business of the partnership firm and therefore, the bar under Section 19(2)(a) of the Partnership Act comes into operation in the facts of the present case.
[Shailesh Ranka v Windsor Machines Limited, 2023 SCC OnLine Bom 2704, decided on 19-12-2023]
Advocates who appeared in this case :
Ms. Rima Desai a/w. Mr. Rudra Deosthali i/b. Parinam Law Associates for Applicants.
Mr. Nausher Kohli a/w. Ms. Shruti Maniar, Ms. Sannaya Gandhy and Mr. Aniket Worlikar i/b. Solomon & Co. for Respondent No.1.
Mr. S. S. Panchpor for Respondent No.2
Buy Arbitration and Conciliation Act, 1996 HERE
