Madhya Pradesh High Court Rules Parties Cannot Be Forced If Arbitration Clause Explicitly Requires Their Discretion

Madhya Pradesh High Court Rules Parties Cannot Be Forced If Arbitration Clause Explicitly Requires Their Discretion

Grants the applicant the liberty to pursue other legal remedies

The Madhya Pradesh High Court has held that parties cannot be compelled to opt for arbitration when the agreement requires the discretion of the parties.

The bench of Justice Subodh Abhyankar stated that a discretionary arbitration clause would require the mutual consent of all parties for the dispute to be referred to arbitration.

The case:

Yeshwant Boolani (deceased) was a partner in the Dhameja Home Industries, a partnership firm, in which Sunil Dhameja (respondent No.1) and Pitamberdas Oolani (respondent No.2) also held partnership positions.

The deceased passed away on 18 September 2023. Subsequently, his son (applicant), desired to become a partner in the firm, issuing a notice on 01 December 2023. On 10 January 2024, a notice invoking the arbitration clause of the partnership firm was sent to the respondents.

Thereafter, the applicant approached the court under Section 11(6) of the Arbitration and Conciliation (A&C) Act, 1996, seeking the appointment of an arbitrator.

Being the legal heir of the deceased, the applicant considered himself entitled to be inducted as a partner in the firm and inherit his father's share. The partnership deed contained an arbitration clause.

While acknowledging the clause's optional language, he argued that its interpretation with other sections mandated arbitration in case of dispute. He relied on Section 40, which stipulates the enforceability of arbitration agreements against the legal representatives of the deceased person.

While opposing this, respondent No.2 argued that the applicant, not being a current partner, could not invoke the arbitration clause. The clause was discretionary and could not be compelled upon the respondents. Clause 21 of the partnership deed granted discretion to the existing partners regarding the induction of legal heirs of the deceased partners.

The bench noted that Clauses 21 and 23 of the partnership deed were central to the case.

Clause 21 stated that the death, insolvency, or retirement of any partner would not dissolve the firm, and it would continue with or without the successors of the deceased or outgoing partner, as decided by the remaining partners.

Clause 23 stipulated that any dispute or difference during the partnership or after the retirement of any partner would be referred to arbitration. However, arbitration was optional and required mutual consent of the partners to appoint an arbitrator.

The court clarified that arbitration was optional and could only proceed with mutual consent.

The respondents challenged the applicant's contentions, arguing that he was not yet a partner in the firm. Being the son of the deceased partner, he claimed his right to be inducted as a partner based on Clause 21.

However, the court pointed out that the induction of a legal heir was at the discretion of the remaining partners. Referring to Section 40 of the A&C Act, it ruled that an arbitration agreement remained enforceable against the legal representatives of the deceased.

The judge cited the decision of the Supreme Court in the Ravi Prakash Goel vs. Chandra Prakash Goel (2008) 13 SCC 667 case, which supported the enforceability of arbitration clause by or against the legal heirs. Thus, he rejected the contention of the respondent that the applicant could not invoke the arbitration clause.

The bench clarified whether arbitration being optional, was binding on the parties.

The applicant relied on the ruling of the top court in the Zhejiang Bonly Elevator Guide Rail Manufacture Company Ltd Vs. Jade Elevator Components [(2018) 9 SCC 774 case, wherein the arbitration clause, though ambiguously worded, was interpreted as binding due to the intention of the parties.

However, the court observed that the case was distinct, as in the present matter, the arbitration clause stated that arbitration was optional and required mutual consent.

The bench referred to its decision in the Trbex Impex Pvt. Ltd. Vs. Ashok Fine Spun A.C. No.106/2023 case, which involved a similar arbitration clause. It held that the respondents could not be compelled to opt for arbitration when the agreement left it to the discretion of the parties. It meant that the parties could not be forced into arbitration without mutual consent.

Thus, the bench dismissed the application, and the applicant was granted the liberty to pursue other legal remedies.