The Kerala High Court examined whether a single partner of a partnership firm could validly initiate arbitration proceedings on behalf of the firm without obtaining express consent or authorization from the remaining partners. The question arose in the context of a dispute where one partner had unilaterally invoked an arbitration clause contained in the partnership deed, prompting the other partner to challenge the action as invalid. The Court analyzed the nature of a partner’s implied authority under partnership law and the extent to which such authority extends to actions that bind the firm in matters beyond the ordinary course of business.
The Court reiterated that while a partner is ordinarily considered an agent of the firm and possesses implied authority to act for the firm in activities related to day-to-day business operations, this default authority does not extend to significant legal commitments, such as invoking an arbitration clause. Referring a dispute to arbitration constitutes a submission of the firm’s rights and liabilities to an adjudicatory process outside the regular civil court system, and such a step materially affects the firm as a whole. Consequently, the Court held that arbitration cannot be considered an act falling within the ordinary course of business or within the implied authority of a single partner acting alone.
The Court emphasized that actions that limit or determine the legal rights of the firm, such as initiating arbitration proceedings, require explicit authorization. This authorization may either be provided in the partnership deed itself or granted through a subsequent agreement or consent by all partners. In the absence of express authorization, a unilateral invocation of arbitration by one partner cannot bind the firm or the other partners, as it would undermine the principle of collective decision-making inherent in partnership structures. Partnerships are founded on mutual trust and shared responsibility, and decisions that significantly affect the firm must reflect the collective assent of its constituents.
In this case, the Court found no evidence of any clause in the partnership deed granting a partner unilateral authority to refer disputes to arbitration. Nor was there any indication that the remaining partner had agreed to such a referral. Because arbitration had been initiated without a valid basis of authority, the Court concluded that the proceedings were legally unsustainable. The arbitral process triggered by the unilateral act was therefore set aside.
The judgment underscores the importance of adhering to the terms of partnership agreements and respecting the need for joint decision-making when engaging in actions with substantial legal implications. The Court clarified that acts involving the submission of disputes to arbitration must be distinguished from routine business operations, as they have long-term and binding effects on all partners. For these reasons, such decisions must be taken collectively or supported by clear provisions within the governing partnership deed. The ruling reaffirms the legal position that one partner cannot, by acting alone, subject the entire firm to arbitration without unmistakable authorization from all partners.
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