The High Court of Madhya Pradesh has dismissed an arbitration appeal challenging a District Court’s refusal to set aside an arbitral award. The Court held that a partner cannot claim a one-third share in profits, particularly from an award won by the firm against a third party, if they fail to plead and prove their specific capital investment in the partnership.
The Single Bench of Justice Vivek Jain observed that even if the entire amount received by a firm is treated as profit, an arbitrator can only award a share in the ratio of the capital invested. In the absence of such proof, the rejection of the claim by the arbitrator was deemed justified.
Background of the Case
The dispute arose out of a partnership deed dated July 26, 1985, between the appellants and respondents No. 1 and 2 (who are father and son). The appellant is the brother-in-law of respondent No. 1. The partnership, named M/s. Godhra Brick Enterprises, was formed to manufacture bricks.
A key issue was a contract awarded to the firm by the National Thermal Power Corporation (NTPC) on March 25, 1985—prior to the formal induction of the appellant into the partnership. Following a dispute with NTPC, an arbitral award was passed in favor of the firm on May 25, 2004, by sole arbitrator Shri N. S. Choudhary. The respondent No. 1 received the entire payment in his personal account. The appellant subsequently raised claims for a one-third share of this amount, leading to a second arbitration before Shri S.L. Gupta.
The sole arbitrator, Shri S.L. Gupta, rejected the appellant’s claims. This rejection was upheld by the District Court on May 13, 2015, under Section 34 of the Arbitration and Conciliation Act, 1996. The current appeal was filed under Section 37 of the Act.
Arguments of the Parties
The counsel for the appellant argued that Clause 6 of the partnership deed stipulated equal investment and a one-third share in profits or losses for each partner. It was further contended that the District Court erred by not calling for the arbitrator’s records before rejecting the Section 34 application. The appellant claimed to have made investments in 1979 and 1981, asserting that his tractor was part of the firm’s capital.
Conversely, the respondents argued that the appellant was not part of the firm when the NTPC contract was awarded. They contended that the firm had been dissolved shortly after constitution and that the appellant had not invested any capital. They characterized the appellant’s demand as a “golden opportunity” to claim money from an award for work performed before his induction.
Court’s Analysis
The Court noted that the tender for the NTPC work was issued on August 2, 1984, and the letter of award was issued on March 25, 1985, whereas the appellant joined the firm only on July 26, 1985. The Court observed:
“On the date of execution of agreement and award of agreement by NTPC to the firm, the appellant was not part of the firm and he became partner of the firm on 26.07.1985 only.”
Regarding the investment, the Court found that the appellant’s claims of investment dated back to 1979 and 1981, yet these were not mentioned in the 1985 partnership deed. The Court emphasized that the burden of proof lay with the appellant to establish what investment was made after joining the partnership.
The Court highlighted the arbitrator’s findings:
“The arbitrator has categorically held in his award that the appellant not having pleaded and proved his investment in the partnership firm, the arbitrator cannot award 1/3 of the amount received by the firm… even if the entire amount received from the NTPC is treated to be profit of the firm, even then the arbitrator could only award the share in the ratio of the capital invested by the appellant.”
Decision of the Court
The High Court affirmed that the scope of jurisdiction under Section 34 and Section 37 of the Act of 1996 is “very limited.” It concluded that the District Court correctly found no grounds to interfere with the award passed by Shri S. L. Gupta.
Finding no merit in the appeal, the Court dismissed the same.
Case Details
Case Description: Court: Madhya Pradesh High Court, Jabalpur
Case Name: Bhagwanti and Others vs. Major (Retd.) S.R. Godra and Others
Case Number: Arbitration Appeal No. 56 of 2015
Bench: Justice Vivek Jain
