The argument that an arbitration clause cannot be enforced because the agreement including the arbitration clause was novated is dismissed: Bombay High Court

The decision that an arbitration clause can be enforced even though the agreement including the arbitration clause was novated is upheld by the High Court of Bombay through the learned bench led by HONOURABLE MR. JUSTICE A.K. MENON in the case of Praful A. Mehta versus Nainesh M. Gandhi & 3 Ors. (COMMERCIAL ARBITRATION APPLICATION NO.483 OF 2019).

Brief facts of the case are that Praful A. Mehta, the applicant, formed a partnership with the Respondent no.1 , Nainesh M. Gandhi, and signed a partnership agreement that included an arbitration clause. Following that, the partnership firm was rebuilt, and the applicant, together with other parties, executed a second partnership deed having an arbitration clause, but without the respondent no. 1. The applicant planned to invoke the arbitration clause inherent in the 2nd partnership deed to recover the sum allegedly syphoned off by the respondent no. 1 from the partnership firm after a dispute occurred between the parties. In response to the applicant’s invocation of the arbitration agreement, respondent no. 1 claimed that he had not executed the partnership deed after the firm was reconstituted. Because the Respondent no. 1 had departed from the partnership firm and his accounts had been cleared, he could not be held accountable under the reconstructed firm’s partnership documents. Following that, the applicant filed an application with the Bombay High Court under Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of a Sole Arbitrator in accordance with the partnership deed’s arbitration clause.

The counsel for respondent, Dr. Birendra Saraf, claimed before the High Court that he had not signed the rebuilt firm’s second partnership deed. The first responder claimed his signatures on the first partnership deed were falsified. As a result, the respondent no. 1 claimed that the arbitration clause in the partnership documents did not bind the respondent number. 1. The first respondent noted that the partnership deed had been novated, and since the respondent had not signed the novated agreement, the arbitration clause incorporated in the reconstituted firm’s 2nd partnership deed was not binding on him.

The Court disregarded the argument that novation barred the adoption of an arbitration clause. In response to the applicant’s notice of invoking arbitration, respondent no. 1 made an unmistakable acknowledgement of having been participating in the partnership operation. The Court concluded that the charge of forgery had to be addressed by the Arbitrator during the trial stage. The Court dismissed the respondent no. 1’s claim that the Arbitration Application could not be heard since there had been a novation. The Court noted that on the same day that the remaining partners, excluding respondent no. 1, signed the 2nd partnership deed, respondent no. 1 also signed a Deed of Retirement, which he signed as a continuing partner. The Court noticed that the respondent no. 1 was described as one of the continuing partners in the Retirement Deed.

The court relied upon the judgement of Young Achievers versus IMS Learning Resources Private Limited (2013). It came to the conclusion that the Supreme Court’s decision in the case of Young Achievers (2013) would not apply because the signature of respondent no. 1 appeared on the Retirement Deed, where he was described as a continuing partner. The Court noticed that respondent no. 1 had omitted to specify which partnership deed he was entered into.

As a result, the Court determined that there was a prima facie case of an arbitration agreement and that the issue would have to be resolved through arbitration.

Thus, the petition was granted and a Sole Arbitrator was appointed.


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