Introduction 

• This is a landmark judgment which lays down that 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.  
• This judgment was delivered by a single judge bench of Bombay High Court comprising of Justice Manish Pitale. 

Facts 

• The Applicants and Respondent no 2 are partners of R- Cube Energy Storage Systems LLP. 
• They entered into an investment agreement with respondent no 1 company. 
• As per the agreement the Respondent no 1 was to invest an amount towards the development of technology obtained by R Cube Fraunhofer Institute. 
• Clause 24 of the agreement provided for dispute Resolution clause. This clause laid down an elaborate procedure for resolution of dispute. 
  • The dispute shall be first referred to neutral persons one each to be appointed by the parties. 
  • In case of failure of such procedure arbitration could be invoked at the behest of any of the parties upon written notice being issued. 
  • Thus, there was a two tier procedure prescribed.  
• The dispute arose between the parties as the Respondent no 1 initially invested but later on failed to abide by the obligations under the investment agreement. 
• There were several communications made between applicant no 1 and one of the directors of Respondent no 1. 
• It is to be noted that on 21st June 2022 a neutral person was appointed by the Applicant no 1. 
• In response to the communication appointing the above the executive director of Respondent no 1 suggesting a neutral location.   
• The Respondent no 1 said in this e-mail that the respondent was presuming that neutral person was appointed on behalf of both the partners of R-Cube Energy. 
• However, the applicant in a communication had made it clear that the neutral person was appointed only on behalf of the applicants and the other partner had not joined. 
• On 20th August 2022 a notice was issued to Respondent no 1 to invoke arbitration and this notice was issued only on behalf of the Applicants. 
• Consequently, an application was filed under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) for appointment of arbitrator by the applicant.  
• Respondent no 1 sent a response to the invocation of the arbitration clause and took the following pleas: 
  • The notice of arbitration was issued only on behalf of applicants to the exclusion of Respondent no 2. 
  • Also, the appointment of neutral person was also defective due to the above fact.

Issue Involved  

• Whether the notice of arbitration invoked in this case is valid in view of Section 19 (2) (a) of the Indian Partnership Act, 1932 (IPA) ? 

Observations 

• The Court specifically relied on Section 19 (2) (a) of IPA.  
• This provision shows that 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 Court held that disputes were raised clearly in respect of the business of the partnership firm and therefore, the bar under Section 19(2)(a) of IPA comes into operation in the facts of the present case. 
• The Court observed that it is not as if the applicants on the one hand and respondent No.2 on the other, as also respondent No.1 could be said to be distinct parties to the investment agreement. 
• Thus, by applying the provision under Section 19 (2) (a) of IPA and the law laid down in Maharashtra State Electricity Distribution Company Limited (MSEDCL) v. Godrej and Boyce Manufacturing Company Limited (2019) the Court held that the notice invoking arbitration was defective and such a notice could not give rise to a cause of action for filing an application under Section 11 of A & C Act  

Conclusion 

• Section 19 (2) (a) of the IPA limits the implied authority of the partner and provides that the implied authority of the partner does not empower him to submit a dispute relating to the business of the partnership firm to arbitration. 
• Thus, it is a very important provision that on the grounds of public policy limits the implied authority of the partner as agent of the firm.