Dispute settlement in a partnership dissension governed by The Partnership Act, 1932

Aditya Pratap is a lawyer practicing in the Bombay High Court. He can be reached at aditya@adityapratap.com

Introduction to Partnership Dispute Resolution

Dispute resolution is an indispensable process for making social
life peaceful. Dispute resolution process tries to resolve and check
conflicts, which enables persons and group to maintain co-operation.

Disputes involving a business could destroy your livelihood and cause disturbance within the corporation. This issue does not have to become a disturbance when attempting to conduct business and provide for yourself or your family. This situation should be handled quickly and delicately.

Causes of a Partnership Dispute in a partnership Firm

Partnership disputes can arise for many reasons as two partners own a business together and work together. However, some of the most common causes of partnership disputes include:

  • A breach of fiduciary duty- Partners have a duty to act in the best interests of the business. They should not misappropriate company funds, they should not take business that ought to belong to the company to benefit them personally, and they should not otherwise do anything that would harm the interests of the partnership. If a partner acts inappropriately and hurts the business, this is a serious dispute that can sometimes result in litigation and that could sometimes set the stage for the end of the partnership.
  • Disputes over how resources should be used– Often, there is conflict regarding whether financial resources should be used for a specific purpose such as buying new equipment. Hopefully, a partnership agreement details who will have authority over the particular decision or what process should be used to make the decision. However, if authority is not clearly delegated and partners have to decide together, it could be difficult to resolve the conflict when they hold opposing positions on the issue of resource allocation.
  • A failure to delineate authority– If there is not a clear separation of responsibility among the partners, it is inevitable that conflict will arise frequently as both partners try to work on overlapping issues. Using partnership and employment agreements, all partners should make certain that they understand both their rights and their obligations within company operations.
  • A failure to fairly distribute work loads– In some partnerships, only some of the partners work and others just provide the funds and are considered silent partners who made only a financial investment. In other situations, partners will divide up work that needs to be done and will all be involved in operating the business. Unfortunately, if any of the partners believe that the workload is not being distributed fairly when they are operating a business together, this can result in conflict arising.

Method to Process to the Resolve Disputes

A decent and well-balanced dispute resolution process is essential for maintaining the smooth functioning of the partnership business. The process commences right from choosing what kind of resort the parties are looking for; or any technique explicitly mentioned in the Partnership Agreement.

If the method resorted for resolving the dispute is mediation, then the appointment with the mediator or the place of mediation would be considered as a part of the dispute resolution process. There are various options available to all the parties for resolving partnership dispute. The parties can either negotiate by settling down at an agreement by the process of Alternative Dispute Resolution, or can go to the Court for settlement.

Basic Type of Partnership Dispute Resolution

Arbitration

A faster and cheaper alternative to going to court to settle a partnership dispute is arbitration. In arbitration, the procedure is agreed between all parties, including the arbitrator, and usually involves an analysis of the evidence presented by the people involved in the dispute.

The Arbitration Agreement will confirm which arbitration rules the arbitrator will adopt. Most give discretion to the arbitrator to secure evidence and invite submissions on the facts and law at their discretion to enable them to fairly make a decision.

Mediation

Mediation aims to get parties to agree to terms that are mutually beneficial, rather than fighting a battle over who has the law on their side. After successful mediation, the parties will most likely enter into a legally binding agreement.

Rather than imposing a solution, a mediator acts as a facilitator, helping the parties involved arrive at a satisfactory settlement. The mediator is a neutral third party who attempts to encourage both sides of the dispute to consider what would be the best overall outcome for everyone.

Litigation

The most familiar type of dispute resolution, civil litigation typically involves a defendant facing off against a plaintiff before either a judge or a judge and jury. The judge or the jury is responsible for weighing the evidence and making a ruling.

The information conveyed in hearings and trials usually enters, and stays on the public record. Lawyers typically dominate litigation, which often ends in a settlement agreement during the pretrial period of discovery and preparation.

Legal Cases related to Partnership Dispute Resolution

  • Mahendra Kumar Poddar v. Bansal Builders and Ors.

The case involved the issue of dissolution and winding up of the firm and the question rose that it be said that the dispute in respect of the partnership accounts can be resolved by the arbitrator but the dissolution of a firm can be done by a court of law alone?

The Calcutta High Court held that dissolution of a firm cannot be equated to winding up of a company. Partners of a firm are individuals who are responsible for the firm, and dissolution of the firm is a private action between them- unlike the winding up of a company. Since this makes it related to a right in person, the dispute of dissolution of partnership firm can also be raised before the arbitrator.

  • Gajendra Narain Singh v. Johrimal Prahlad Rai

The respondent-plaintiff sued the firm of Ms. Tirhut Umbrella Works in the Bombay City Civil Court for a decree for Rs. 20,320/. The summons in the suit was served on the appellant as a partner of the firm.

the Supreme court concludes that defended was not a partner in the firm on the material time and was not liable as a partner, then in such case the plaintiff is not precluded by the court from otherwise serving the summons on the firm and proceeding with the suit, however, in such a case the plaintiff shall be precluded from proceeding against the defendant found not the partner of the firm by the court.

About the Author – Aditya Pratap

Aditya Pratap is a lawyer practising in Mumbai. He argues cases in the Bombay High Court, Sessions and Magistrate Courts, along with appearances before RERA, NCLT and the Family Court. For further information one may visit his website adityapratap.in or view his YouTube Channel to see his interviews. Questions can be emailed to him at aditya@adityapratap.com.

Cases argued by Aditya Pratap can be viewed here.

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