Abstract

Resolution of Partnership

This project deals with the resolution of a dispute in a partnership organisation under the
Indian partnership act of 1932, this project will try to elucidate the effective ways and
methods of resolving a partnership dispute arising among the partners of a firm or company.

In this project following Judgements will be discussed:

1) Sunder Kukreja & Ors.Vs.Mohan Lal Kukreja & Anr.

 Introduction

The Indian Partnership Act, 1932 is an act to define and amend law relating to partnership.
The definition of partnership is given under section 4[1] of the Indian Partnership Act, 1932.
The section reads the definition of partnership as partnership is the relation between persons
who have agreed to share the profits of a business carried on by all or any of them acting for
all.

Another important section i.e. section 69 of The Indian Partnership Act, 1932[2] also holds
the importance in this research. The section reads as the provisions of sub-sections (1) and (2)
shall apply also to claim of set-off or other proceeding to enforce a right arising from
contract, but shall not affect-

1. the enforcement of any right to sue for the dissolution of a firm or for accounts of a
dissolved firm, or any right or power to realise the property of a dissolved firm, or
2. the powers of an official assignee, receiver or Court under the Presidency-towns
Insolvency Act, 1909, (2 of 1909). or the Provincial Insolvency Act, 1920, (5 of
1920). to realise the property of an insolvent partner.

Since there is a contract or a partnership agreement between the two partners or among more
than two partners, the partnership dispute may arise at some point of time because of any
reasons.

There are various ways for resolution of a partnership firm, the latest one being the ADR

(Alternate Dispute Resolution) which includes Mediation, Conciliation, Negotiation.

And the traditional way to settle a despite is by initiating civil proceedings and fighting your
case in a court of law.
Causes of a Partnership Dispute in a partnership Firm

Partnership disputes can arise for many reasons as two partners own a business together and
work together. However, some of the most common causes of partnership disputes include:

 A breach of fiduciary duty- Partners have a duty to act in the best interests of

the business. They should not misappropriate company funds, they should not
take business that ought to belong to the company to benefit them personally,
and they should not otherwise do anything that would harm the interests of the
partnership. If a partner acts inappropriately and hurts the business, this is a
serious dispute that can sometimes result in litigation and that could sometimes
set the stage for the end of the partnership.
 Disputes over how resources should be used– Often, there is conflict
regarding whether financial resources should be used for a specific purpose
such as buying new equipment. Hopefully, a partnership agreement details who
will have authority over the particular decision or what process should be used
to make the decision. However, if authority is not clearly delegated and partners
have to decide together, it could be difficult to resolve the conflict when they
hold opposing positions on the issue of resource allocation.
 A failure to delineate authority– If there is not a clear separation of
responsibility among the partners, it is inevitable that conflict will arise
frequently as both partners try to work on overlapping issues. Using partnership
and employment agreements, all partners should make certain that they
understand both their rights and their obligations within company operations.
 A failure to fairly distribute workloads– In some partnerships, only some of
the partners work and others just provide the funds and are considered silent
partners who made only a financial investment. In other situations, partners will
divide up work that needs to be done and will all be involved in operating the
business. Unfortunately, if any of the partners believe that the workload is not
 being distributed fairly when they are operating a business together, this can
result in conflict arising.

Partnership Dispute Settlement

Having discussed what all can be the reasons for disputes in partnership disputes, now comes
the settlement of these kinds of disputes. A decent and well-balanced dispute resolution
process is essential for maintaining the smooth functioning of the partnership business. The
process commences right from choosing what kind of resort the parties are looking for; or
any technique explicitly mentioned in the Partnership Agreement. If the method resorted for
resolving the dispute is mediation, then the appointment with the mediator or the place of
mediation would be considered as a part of the dispute resolution process.
…………………………..
There are various options available to all the parties for resolving partnership dispute. The
parties can either negotiate by settling down at an agreement by the process of Alternative
Dispute Resolution (ADR), or can go to the Court for settlement.

Arbitration

A faster and cheaper alternative to going to court to settle a partnership dispute is arbitration.
In arbitration, the procedure is agreed between all parties, including the arbitrator, and usually
involves an analysis of the evidence presented by the people involved in the dispute.

The Arbitration Agreement will confirm which arbitration rules the arbitrator will adopt.
Most give discretion to the arbitrator to secure evidence and invite submissions on the facts
and law at their discretion to enable them to fairly make a decision.

Mediation

Mediation aims to get parties to agree to terms that are mutually beneficial, rather than
fighting a battle over who has the law on their side. After successful mediation, the parties
will most likely enter into a legally binding agreement.
Rather than imposing a solution, a mediator acts as a facilitator, helping the parties involved
arrive at a satisfactory settlement. The mediator is a neutral third party who attempts to
encourage both sides of the dispute to consider what would be the best overall outcome for
everyone.

Negotiation

Negotiation is considered to be one of the easiest forms of dispute resolution process. It is

often seen that the parties to the dispute negotiate a resolution that is agreed to both without
the need for formal mediation.

Negotiation is a dialogue intended to resolve disputes, to produce an agreement upon courses

of action, to bargain for individual or collective advantage, or to craft outcomes to satisfy
various interests.

Litigation

The most familiar type of dispute resolution, civil litigation typically involves a defendant
facing off against a plaintiff before either a judge or a judge and jury. The judge or the jury is
responsible for weighing the evidence and making a ruling.

The information conveyed in hearings and trials usually enters, and stays on the public
record. Lawyers typically dominate litigation, which often ends in a settlement agreement
during the pretrial period of discovery and preparation.

Out of all the dispute settlement processes ADR (Alternative Dispute Resolution) is the best
method to settle the disputes in partnership disputes. The most frequent option to resolve
partnership disputes is ADR.
 Case Laws

Sunder Kukreja & Ors.Vs.Mohan Lal Kukreja & Anr.

FACTS

According to the Applicants/ Defendants 1 and 2, Mohan Lal Kukreja and Madan Lal
Kukreja, there was a decision taken among the family members to split up the family
business in the years 1989-90. Their case is that as a result of a family arrangement/
settlement the various properties and businesses were divided up between the sons. Sunder
Kukreja and his wife were given control of Mohan Overseas Pvt. Ltd. while Ram
Chander Kukreja was given control of M.M. Enterprise. The properties in Sant Nagar, the
business of Karan Exports and the foreign bank accounts were given to Raj Kumar Kukreja.
Madan Lal Kukreja was given control of Super Fashions and Mohan Lal was given control of
D.R. Kukreja & Co. Their case is that the family settlement which created the above „family
verticals‟ was acted upon by the parties and the partnership firm, M/s. D.R. Kukreja & Co.,
was dissolved on 16th August 1990 by a deed of retirement. They state that on 15th August
1990, the retiring partners, i.e., the Plaintiffs herein, Mr. Ram Chand Kukreja, Mr. Sunder
Kukreja and Mr. Raj Kumar Kukreja and Defendant No. 2, Mr. Madan Lal Kukreja were
each paid Rs. 50,000 in cash as settlement of their accounts. Defendants No. 1 and 2 state that
vouchers were signed by each of them in terms of the aforementioned family settlement. The
Plaintiffs, on the other hand, claim that there was no such retirement deed or dissolution of
the firm. The Plaintiffs have questioned the genuineness of the said retirement deed and the
payment vouchers by denying their signatures thereon.

The case of the Plaintiffs is that on 27th May 1992 an incident took place in the Sapna
Cinema Hall where one Ashok Chopra was beaten up by one Mr. Mangal Singh and his
associates. On 1st June 1992 Sunder Kukreja wrote to the Deputy Commissioner of Police
(„DCP‟) complaining against the Station House Officer („SHO‟) of Police Station Lajpat
Nagar for not taking instant action on the complaint given by Mr. Sunder Kukreja by phone
on the night of 27th May 1992. However, the version of the Defendants is that on the said
date, Plaintiffs 1 and 3, i.e., Mr. Sunder Kukreja and Mr. Raj Kumar Kukreja went with guns
to Sapna Cinema Hall with the intention to shoot Mohan Kukreja.

The Plaintiffs further state that an incident took place at Sapna Cinema on 3rd June 1992. In
relation to the said incident, an FIR (No. 428 of 1993) was lodged by the Plaintiffs with the
police station at Lajpat Nagar on 23rd November 1993. The complaint given by Mr. Sunder
Kukreja, on the basis of which the FIR was registered, stated that when he along with his
brothers Mr. Ram Chander Kukreja and Mr. Raj Kumar Kukreja and certain friends entered
the Sapna Cinema building on 3rd June 1992, they were shocked to see the cupboards
broken, files and other important documents removed. When they were enquiring from the
Manager about this damage and about the routine work and receipts/payments, Mr. Mohan
Lal Kukreja and Mr. Madan Lal Kukreja became furious and stated that "you have no right to
enquire these things because you have all executed deed of retirement dated 16th August
1990 in favour of Mohan Kukreja and you have signed document for which you all have been
paid Rs. 50,000 each from the firm in full and final settlement of your share/account in the
firm." In the complaint, Mr. Sunder Kukreja stated that he was "astonished to hear this
disclosure and flatly denied having executed any such deed of retirement." Enclosing a copy
of the allegedly forged deed of retirement, the complaint proceeded to state that "both Mohan
Kukreja with the connivance of Madan Kukreja have intentionally fabricated forged
document namely deed of retirement dated 16th August 1990 with the intention to deprive me
and my brothers Ram Chand Kukreja and Raj Kukreja from the benefits of the income from
M/s. D.R. Kukreja & co. running Sapna Cinema at East of Kailash and assets worth crores of
rupees of the firm." It was further stated that Mr. Mohan Kukreja, by fabricating the
retirement deed, has shown himself as sole proprietor of M/s. D.R. Kukreja & Co. by opening
a current account in the name of the said proprietary concern with Syndicate Bank, Nehru
Place. Legal action was sought against Mr. Mohan Kukreja and Mr. Madan Lal Kukreja for
the act of cheating and using forged documents with the intention of depriving the Plaintiffs
of their share of the income and assets of the firm, M/s. D.R. Kukreja & Co.

ISSUE

Arbitration Act (1940) S.20 - Appointment of arbitrator - Dispute about genuineness of

retirement deed of partners.
ARGUMENTS AND REASONING

Subsequently the petition under Section 20 of the Arbitration Act was filed by the appellants
seeking a direction for filing the arbitration agreement dated 10.7.1984 in the Court and for
reference of the dispute between the parties to arbitration in terms of Clause 11 thereof. It
was alleged in the petition under Section 20 that disputes relating to payment of profits
earned by the partnership firm and the interest on the said amount had arisen between the
parties which called for adjudication by the arbitrator under Clause 11. The petitioner further
alleged that the respondent had been mismanaging the affairs of the partnership by employing
undesirable elements and other dubious means, thereby disentitling himself to remain in
control of the partnership.

By an order dated 1.5.1996, the learned Single Judge hearing the arbitration petition referred
the disputed deed of retirement for examination and opinion to the Central Forensic Science
Laboratory (CFSL). The document in question was accordingly examined by the CFSL who
reported that the alleged signatures of the petitioners on the alleged retirement deed were not
genuine.

The learned Single Judge held that the plea that there was no dispute because of the alleged
retirement deed and receipts can be easily gone into by the arbitrator, and in view of the
report of the forensic expert between the parties it cannot be prima facie said that the dispute
does not subsist. The report of the forensic expert creates a substantial doubt in the stand
taken by the respondent of the alleged retirement of the appellant from the partnership.

JUDGMENT

The learned Single Judge relied on the decision of this Court in Erach F.D. Mehta Vs. Minoo
F.D. Mehta, AIR 1971 SC 1653 and held that the arbitration clause in the present case is wide
enough to include all the disputes sought to be referred. Hence the learned single Judge
allowed the petition under Section 20.

In appeal, however, the Division Bench of the High Court was of the view that in case there
is a dispute as to the very existence of an arbitration clause by reason of supersession of the
agreement in which the same is contained by another subsequent agreement arrived at
between the parties, the said dispute cannot be referred to arbitration. 

Finally set aside the decision of the Division Bench and court appoint Mr. Justice D.P.
Wadhwa, retired Judge of the Supreme Court as the sole Arbitrator to decide the dispute
between the parties, including the dispute whether the alleged retirement deed was genuine or
not. Hon'ble Mr. Justice D.P. Wadhwa can fix his own terms of emoluments and other
requirements.

The appeal is allowed.

Erach F. D. Mehta vs Minoo F. D. Mehta

FACTS

On December 22, 1966, the appellant and the respondent, who are brothers, entered into an
agreement to carry on in partnership three businesses (1) Messrs F. D. Mehta & Company;
(2) The Great Western Stores; and (3) Dr. Writer's Chocolates and Canning Company.

A partnership deed entered into between the partners contained a clause for reference "of all
disputes and questions whatsoever which may arise during partnership or afterwards between
the partners touching the partnership agreement including division of assets, debts or
liabilities", to arbitration.

Disputes arose between the two partners. The respondent claimed that on January 17, 1968
the partners reached an oral agreement stipulating that the appellant shall retire from the
partnership and shall assign and transfer to the respondent his right, title-and interest in the
partnership business against payment of the price fixed by Mr. Jal Desai, a Chartered
Accountant. The appellant denied the agreement set up by the respondent. On June 13, 1968
the respondent addressed a letter to the appellant setting out the terms of the oral agreement
dated January 17, 1968 and intimated that "having regard to the attitude adopted by" the
appellant "there was no alternative left but to have a legal arbitration", and that Mr. K. M.
Diwanji Solicitor of the High Court of Bombay was nominated an arbitrator by the
respondent, and the appellant was called upon to nominate his arbitrator "so that the disputes
and differences between the parties may be resolved" by the partnership deed. This request
was repeated in a letter dated June 14, 1968. By his reply dated June 26, 1968 the appellant
denied the agreement and without prejudice to his contention nominated Mr. J. B. Maneckji
as arbitrator. He simultaneously intimated that if the arbitrators seek to arbitrate on "the issue
of the alleged agreement of" the appellant "to go out of the firm", he "would contend that
they had no power to do so". The arbitrators were unable to make an award within the period
prescribed by the Arbitration Act.

ISSUE

For a declaration that even if the deed of partnership contained an arbitration agreement the
dispute before the umpire fell within or outside the scope of the arbitration clause.

ARGUMENTS AND REASONING

There is no dispute that an agreement of partnership at will may by mutual agreement be

dissolved and the rights and obligations of the parties settled under the terms thereof.

We are not concerned at this stage to determine whether the agreement set up by the
respondent was in fact reached between the partners on January 17, 1968 : that is a matter to
be decided by the arbitrators. A dispute whether the partnership was dissolved by mutual
agreement was clearly a dispute between the parties touching the partnership agreement. We
are unable to agree with counsel for the appellant that the agreement set up by the respondent
did not stipulate dissolution of the partnership. It is the case of the respondent which he had
set up in the corres- pondence, that it was agreed between him and the appellant that the latter
was to retire from the partnership. When the partnership consisted of only two partners and
one partner agreed to retire, there can be no doubt that the agreement that one of the partners
will retire amounts to dissolution of the partnership.

Primarily the dispute between the parties is as to the truth of 'the agreement set up by the
respondent relating to the dissolution of the partnership and the dispute with regard to that
agreement raised by the appellant can, in our judgment, be referred to the arbitrators under cl.
15 of the partnership agreement. No argument has been advanced before us on the last plea
raised before the High Court. We are not called upon to decide the extent of the power of the
arbitrators under an arbitration agreement that question does not strictly arise in a petition
under s. 33 of the Arbitration Act, 1940.

JUDGMENT

The clause "all disputes and questions whatsoever which may arise during the partnership or
afterwards between the partners touching the partnership agreement including division of
assets, debts and liabilities"

The appeal therefore fails and is dismissed.

M/S V.H. Patel & Company & Ors vs Hirubhai Himabhai Patel & Ors

FACTS

In this case, members of the Patel family came together to form a partnership firm which
manufactured, sold and marketed different varieties of tobacco. The said firm is engaged in
the business of manufacture, storage and sales of marketing of different variety of tobacco,
tobacco preparations, zarda and allied products. It has three registered trade marks:

(i) Surya Chhap Zarda, (ii) Surya Chhap Tobacco and (iii) Pan Chhap 12 Number
Zarda. Disputes having arisen relating to the business of the partnership firm, an
`Agreement of Mutual Understanding' was executed by stating that all the said
trade mark’s owned by the firm were to cease to be of one ownership but had to be
owned by all the partners thereof.

Their agreement said that any questions regarding the rights and obligations of the parties
and the use of the firm’s trademarks would be referred to the sole arbitration of a certain
retired Judge of the Bombay High Court. 

On 1st August 1987, a Deed of Retirement was executed between the partners, ordering the
retirement of the respondent H.H. Patel. The respondent filed a suit challenging this deed and
claimed that he was still a partner of the firm. A dispute also arose between the two parties
regarding the use of the firm’s three trademarks. In light of these disputes and the close
relation of the parties, the court suggested them to go for arbitration as provided by their
agreement.

The arbitrator held that the retirement deed was invalid and the respondent continues to be a
partner. However, he denied considering the respondent’s claim seeking dissolution of the
firm, saying that it was beyond the scope of his reference.

ISSUE

Whether it is permissible for an arbitrator to decide the question of dissolution of a firm?

ARGUMENT AND REASONING

 It was pointed out that mere strained relationship between the partners would not be enough
to dissolve a partnership. It is not necessary for us to examine this contention in this case
when the partners sought for dissolution of the partnership on various grounds enumerated
in Section 44(c) to (f) may also be sufficient and may not be necessary to invoke the inherent
jurisdiction of a court such as dissolution is just and equitable. If there has been breach of
agreement and conduct is destructive of mutual confidence certainly such conduct can give
rise to a ground for dissolution of the partnership. While mere disagreement or quarrel arising
from impropriety of partners is not sufficient ground for dissolution, interference should not
be refused where it is shown to the satisfaction of the adjudicating authority that the conduct
of a partner has been such that it is not reasonably practicable for other partners to carry on
the business in partnership. For instance, dissolution should be ordered if it is shown that the
conduct of a partner has resulted in destruction of mutual trust or confidence which is the
very basis for proper conduct of partnership.

So far as the power of the arbitrator to dissolve the partnership is concerned, the law is clear
that where there is a clause in the Articles of Partnership or agreement or order referring all
the matters in difference between the partners to arbitration, arbitrator has power to decide
whether or not the partnership shall be dissolved and to award its dissolution.
JUDGMENT

The Supreme Court held that where the partnership deed or agreement directs disputes and
differences to be referred to an arbitrator, the arbitrator has the power to examine these
issues, including dissolution. The power of the arbitrator depends upon the arbitration clause
in the partnership deed and the reference made by the court to it. If the reference states that
all disputes and differences between the parties have to be referred to arbitration, the
arbitrator will be able to deal with dissolution too. There is no provision of law that prohibits
an arbitrator to examine the dissolution of a partnership.

Clearly, an arbitrator can decide the dissolution of a firm. An arbitrator might award
dissolution on the grounds that it is “just and equitable” to do so. This can occur in various
different situations, like when the dispute between the partners is severe and beyond repair, or
when the business is not being carried on as per the provisions of the agreement between the
partners. However, don’t we always assume that the court will decide what is just and
equitable? The Partnership Act too, says in Section 44(g) that the court has the power to
dissolve a firm if it finds it “just and equitable” to do so.