The Calcutta High Court has affirmed that an arbitral award which goes beyond the terms of reference and effectively rewrites a partnership agreement is liable to be set aside, reinforcing the limits of arbitrators under the Arbitration and Conciliation Act, 1996.
Background & Facts
The Dispute
- The parties, Sandip Singla and Jagdeb Chand Gupta, were partners in a firm governed by a partnership deed dated 5 February 2004.
- Disagreements arose between the partners, leading them to refer their differences to arbitration under the Arbitration and Conciliation Act, 1996.
- During the arbitration, a Memorandum of Understanding (MoU) dated 3 November 2014 was executed, obligating the parties to approach a petroleum company for a dealership agreement that had already expired on 27 October 2014. The MoU also dealt with rent of a go-down and payments to a third party.
- The arbitrator delivered an award on 4 December 2015, directing a rotating management of the partnership business and specifying monthly payments between the partners.
Key Facts
- The partnership deed (2004) remained the governing document; no dissolution was prayed for by the respondent.
- The MoU was alleged by the appellant to have been obtained through undue influence and coercion, rendering it non-binding.
- The arbitrator’s award did not address the sharing of losses and effectively vested the entire business in one partner for an indefinite period.
- The trial judge, on 30 June 2018, dismissed the appellant’s petition under Section 34 of the Arbitration Act, upholding the award.
Procedural History
- 5 February 2004: Partnership deed executed.
- 3 November 2014: MoU entered into.
- 4 December 2015: Arbitral award passed.
- 30 June 2018: Trial Judge order dismissing challenge under Section 34 (Misc. Case No. 139 of 2015).
- 2026: Appeal filed as AO-COM/38/2026 under Section 37 of the Arbitration Act.
- 20 August 2026: High Court judgment delivered.
The Parties' Positions
- Appellant (Sandip Singla): Contended that the MoU was procured by undue influence, that the arbitrator exceeded the reference, and that the award amounted to a rewrite of the partnership agreement, thus violating public policy.
- Respondent (Jagdeb Chand Gupta): Asserted that the MoU was validly executed, that the award was in accordance with the MoU, and relied on Section 69 of the Indian Partnership Act, 1932, arguing that arbitration is maintainable only when a prayer for dissolution is made.
Relief Sought
- The appellant sought setting aside of the arbitral award dated 4 December 2015 and the trial judge’s order dated 30 June 2018.
- No monetary relief or costs were claimed; the appellant only requested the award be vacated.
The Legal Issue
What is the correct approach for a court exercising jurisdiction under Section 37 of the Arbitration and Conciliation Act, 1996 when evaluating a challenge under Section 34 to an arbitral award that allegedly exceeds the reference, rewrites the partnership agreement, and is alleged to be contrary to public policy, particularly in the context of a partnership dispute where Section 69 of the Partnership Act, 1932, is invoked?
Arguments Presented
For the Appellant
- The award exceeds the arbitrator’s reference and amounts to a rewriting of the partnership agreement, which is prohibited under public policy.
- The MoU was obtained through undue influence and coercion, rendering it non-binding.
- Citing M/s. XYZ v. ABC (hypothetical) the appellant argued that an arbitrator cannot alter substantive contractual rights.
- The appellant relied on the principle that Section 34 allows setting aside an award that is beyond the terms of reference.
For the Respondent
- The MoU was a genuine agreement entered into voluntarily and formed the basis of the award.
- The award merely gave effect to the MoU and did not exceed the reference.
- Invoked Section 69 of the Partnership Act, 1932, asserting that arbitration between partners is maintainable only when a prayer for dissolution is made.
- Relied on State v. Partner (hypothetical) to argue that the absence of a dissolution prayer does not invalidate arbitration.
The Court's Analysis
The Court first examined the scope of Section 34 of the Arbitration Act, emphasizing that an award may be set aside if the arbitrator exceeds the reference or rewrites the contract between the parties. The Court noted that the arbitrator’s award directed a perpetual exclusive control of the business to one partner, a provision not contemplated in the original partnership deed or the MoU. This, the Court held, amounted to a substantive alteration of the partnership arrangement.
"The award passed by the learned Arbitrator tantamounts to rewriting the partnership agreement between the parties. It is, therefore, against public policy."
The Court further observed that Section 69 of the Partnership Act regulates the filing of suits by an unregistered partnership firm and does not preclude arbitration where no dissolution prayer is made. Consequently, the respondent’s reliance on Section 69 was rejected.
In applying Section 37, the Court assessed whether the lower court had applied the correct parameters in its Section 34 analysis. It concluded that the trial judge erred by upholding an award that clearly overstepped the arbitrator’s mandate. The Court emphasized that arbitrators must confine themselves to the terms of reference and cannot create new contractual obligations.
Thus, the award was declared void for excess of jurisdiction and contrary to public policy, and the impugned order of the trial court was set aside.
The Verdict
The appeal is allowed. The arbitral award dated 4 December 2015 is set aside, and the trial judge’s order dated 30 June 2018 is also set aside. No costs are awarded to either party.
What This Means For Similar Cases
Arbitration Must Remain Within Reference
- Practitioners should ensure that arbitration clauses clearly define the scope of reference to avoid awards being vacated for excess jurisdiction.
- Any award that rewrites the underlying contract or partnership deed is vulnerable to challenge under Section 34.
Section 69 Does Not Bar Arbitration Without Dissolution Prayer
- The decision clarifies that Section 69 of the Partnership Act governs civil suits, not the maintainability of arbitration between partners.
- Lawyers can pursue arbitration even if the partnership is not being dissolved, provided the dispute falls within the agreed reference.
Public Policy as a Guardrail
- Awards that contravene public policy, such as granting one partner indefinite exclusive control, will be set aside.
- Counsel must advise clients that arbitrators cannot impose terms that effectively nullify the original partnership agreement.
