Survival of Arbitration Clauses Post-Dissolution

A Legal Perspective from the Delhi High Court

In a significant ruling reinforcing the doctrine of severability in arbitration law, the Hon'ble Delhi High Court, in Arb.P. No. 253/2024, has reaffirmed that an arbitration clause embedded in a partnership deed continues to hold validity even after the dissolution of the partnership firm.

Case Background

The petition was filed under Section 11 of the Arbitration and Conciliation Act, 1996, by the petitioner represented by Advocate Rajal Rai Dua. The dispute arose between the petitioner and respondent, who were partners in M/s Applied Communication and Controls. The firm, constituted through a partnership deed dated 01.06.2022, was later dissolved by an agreement dated 03.07.2023. Despite the dissolution, disputes remained unresolved, leading the petitioner to invoke the arbitration clause as per Clause 19 of the partnership deed.

Clause 19 of the agreement stated:

"That in case of any dispute between the parties hereto with regard to the matters relating to the partnership firm, the same shall be referred to a sole arbitrator mutually agreed upon by the parties hereto, at that time according to and subject to the provisions of the Indian Arbitrator Act 1940 with the modification therein from time to time."

Legal Arguments and Judicial Interpretation

Advocate Rajal Rai Dua contended that even though the partnership deed was dissolved, the arbitration clause contained in the agreement survived due to the principle of severability. This doctrine establishes that an arbitration agreement is autonomous and remains unaffected by the termination, rescission, or dissolution of the underlying contract.

The Hon'ble Court, presided over by Justice Jasmeet Singh, concurred with this view, relying on the precedent set in M/s. Shyamjee Prepaid Services vs. M/s. Top Steels and Mrs. Renu Devi & Anr., Arb. P. 137/2019, which held that arbitration clauses persist beyond the main contract's dissolution. The Court emphasized that since the disputes arose from the dissolution deed, which itself was a derivative of the partnership deed, they remained arbitrable.

Judgment and Appointment of Arbitrator

Given the lack of objection from the respondent, the Court allowed the petition and appointed Mr. K.K. Bhuchar (Advocate) as the sole arbitrator. The arbitration was directed to proceed under the aegis of the Delhi International Arbitration Centre (DIAC), in accordance with the DIAC (Administrative Cost and Arbitrators' Fees) Rules, 2018.

Furthermore, the Court clarified that all legal contentions of the parties, including questions of arbitrability and merits, were left open for adjudication by the arbitrator. The parties were instructed to approach the learned arbitrator within two weeks from the date of the order.

Case Conclusion

This ruling strengthens the enforceability of arbitration clauses and upholds the principle that arbitration agreements remain independent and binding even if the principal contract ceases to exist. It reiterates the Delhi High Court's commitment to fostering arbitration as an effective dispute resolution mechanism.

For a detailed copy of the judgment, visit: https://delhihighcourt.nic.in/court/judegment_orders?pno=1194526

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A recent ruling by the Delhi High Court reaffirmed that arbitration agreements remain valid and enforceable even if the main contract becomes void. The judgment strengthens the autonomy of arbitration clauses, ensuring their binding nature. This decision reinforces arbitration as a preferred dispute resolution method. It highlights the court's commitment to promoting efficient legal recourse.

This release was published on openPR.