Enforcement of arbitration clause against unregistered firm

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Question asked on: 02/02/2017

How to enforce the arbitration clause bearing in the agreement?

Advised by: Shivendra Pratap Singh,

If partnership firm is unregistered, its partner cannot file any suit against the firm for the enforcement of any right. As well as an unregistered firm cannot file any suit against third party for the enforcement of any right of the firm. Section 69 of the Indian Partnership Act, envisaged that

No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.

Section 69 put a bar on filing of a suit where an unregistered firm or its partner is filing such suit in their respective capacity. If a cause of action arises from an act of an unregistered firm and it affects right and liability of a third party, such third party can sue the firm irrespective of the fact that firm is unregistered.

Section 69 is not exhaustive; a partner of an unregistered partnership firm can sue the firm for settlement of accounts of the firm or dissolution of the firm. Hence, exception is available only for two purposes like a) for the dissolution of the firm b) for the settlement of accounts of a dissolved firm. No suit shall be filed for any other purpose. Therefore, you cannot sue your firm for the enforcement of contract and sending of disputes for its settlement, to an arbitrator.

In Jagdish Chandra Gupta v. Kajaria Traders (India) Ltd. [AIR 1964 SC 1882]Since the right to resort to arbitration flows from the contract between the parties contained in the partnership deed, a suit or any other proceeding by a partner to enforce this term in the contract against the other partners would, therefore, normally be barred under the first part of sub-section (3) of Section 69.

Prem Lata v. Ishar Dass Chaman Lal [(1995) 2 SCC 145] an arbitration clause in a partnership deed of an unregistered partnership can be enforced for the purpose of securing, inter alia, a dissolution and accounts of the partnership or for enforcing any right or power for obtaining the property of a dissolved firm.

If dispute thereof is to settlement of accounts of the firm by an arbitrator, you can enforce it because exception of section 69 provides that an unregistered firm can be sued for dissolution of firm and settlement of accounts of a dissolved firm. Therefore, accounts will be settled by an arbitrator but only in the case where firm has dissolved. If firm has not dissolved and an ongoing partner wants to settle its accounts, no such suit, as a partner, can be filed by him.

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