Rahul Verma v. Rampat Lal Verma
Background
A three-partner partnership firm lost two of its partners to death within about a year of each other. When a dispute arose over the firm's affairs, the surviving side (defendants in a commercial suit) applied under Section 8 of the Arbitration and Conciliation Act, 1996 to have the dispute referred to arbitration under the partnership deed's arbitration clause; the trial court dismissed that application, but the Gauhati High Court reversed it and sent the matter to arbitration. The legal heirs of the deceased partner then approached the Supreme Court, arguing they were non-signatories to the partnership deed and had never explicitly consented to be bound by its arbitration clause.
Decision Breakdown
The Supreme Court held that an arbitration agreement does not die with a party, under Section 40 of the Arbitration and Conciliation Act, 1996 it remains enforceable by and against the "legal representatives" of a deceased partner, a term defined broadly enough to cover heirs who step into the deceased's shoes. Relying on its own precedent in Ravi Prakash Goel v. Chandra Prakash Goel and a Delhi High Court ruling in Jyoti Gupta v. Kewalsons, the Court reasoned that the word "partners" in an arbitration clause implicitly extends to legal heirs and representatives, and that the right to sue for rendition of accounts of a partnership also survives to them. Since the partnership deed's clauses (on continuation despite a partner's death, and on referring disputes to arbitration) bound both sides once the heirs stepped into the deceased partner's position, the High Court committed no error in referring the dispute to arbitration, and the special leave petition was dismissed.
Lesson Learnt
An arbitration clause in a partnership deed does not become unenforceable merely because a partner has died: the deceased partner's legal heirs both inherit the obligation to arbitrate and gain the right to invoke that same arbitration clause to pursue the firm's affairs.