ABSTRACT
This paper examines the mutual relationship between partners in Indian partnership firms as per the Partnership Act 1932. It analyzes provisions governing partner duties, rights, and responsibilities. The impact of strained partner relationships on conflicts is discussed. The paper evaluates remedies like arbitration, mediation, negotiation, and dissolution for resolving partner disputes. It assesses the effectiveness of these mechanisms in promoting collaboration among partners. The paper concludes that using an appropriate approach promptly based on the conflict’s nature is crucial for fostering a healthy partnership.
INTRODUCTION
It is a well-known fact that Laws and regulations are made for the smooth functioning of any country. The law can be said as the base of everything and anything; starting from an elementary activity to the most powerful functions of a government, the law plays a significant role. But while drafting a law concerning any present or future actions, lawmakers emphasise the basic needs, wants and advantages of the law to the commoner without compromising the fundamental structures of law. The Indian partnership act of 1932 was one of the laws for the ease of business in the country, especially regarding partnership firms. The Partnership Act has a number of provisions that govern how partners interact with one another. However, this research paper focuses on one of the essential elements of a partnership business: Mutual Relationship between Partners. A partnership is created when two or more individuals join forces with the goal of operating a business and splitting the profits. A partnership is described in section 4 of the Indian Partnership Act, 1932[1] as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” The importance of a mutual relationship between partners and its impact on the partnership has been analysed in this project.
STATEMENT OF PROBLEM
The partners must conduct the firm’s business to maximise their mutual benefit, act justly and faithfully towards one another, and provide any partner or his legal representative with a valid account and all relevant information. Therefore, the need for more clarity of provisions regarding the mutual relationship between partners must be addressed.
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Partnerships may suffer from disputes between partners, including financial and brand damage. Thus, the dispute resolution procedures outlined in the Indian Partnership Act of 1932[2] should be analysed thoroughly and assess how well they encourage cooperation and collaboration among partners in partnership firms. The objective of the problem statement is to specify problems and offer suggestions for encouraging healthy relationships between partners in a contract.
LITERATURE REVIEW
Essential articles and research papers which imply the partner’s relationship and the impact of it on partnership has been referred in this project. The article titled ” Key Components of Business Partnership Agreements by Jennifer B. Duffey[3] discusses the legal implications of a verbal partnership agreement in the context of businesses. A literature review on this topic could explore the legal requirements for forming a business partnership, the types of partnership agreements, and the benefits and drawbacks of verbal agreements. According to the Uniform Partnership Act, a partnership is formed when two or more individuals agree to carry on a business for profit. This agreement can be verbal or written, but a written agreement is recommended to avoid disputes and misunderstandings. In the absence of a written agreement, the partnership is subject to default rules under state law, which may not reflect the partners’ intentions.
The article titled “The Indian Partnership Act, 1932: An Overview” by Mayank choudhary[4] provides an overview of the Indian Partnership Act, 1932this topic could explore the historical background and evolution of partnership law in India, the key provisions of the Partnership Act, and its impact on business and entrepreneurship in India. This article provides rules for forming, operating, and dissolving partnerships in India. Some of the Act’s key provisions include rules for the registration of partnerships, the liability of partners for the partnership’s debts, rights and duties of partners, and dissolution of partnerships.
The article “How to Word a Business Partnership Legal Document” by Kevin Doran,[5] published in Small Business Chronicle, provides guidance on how to draft a partnership agreement that clearly outlines the terms and conditions of a business partnership. The article discusses the importance of having a partnership agreement in place and highlights the key sections that should be included in the document, such as the purpose of the partnership, the financial contributions and responsibilities of each partner, the division of profits and losses, and the procedures for resolving disputes and dissolving the partnership. This article Act provides rules for forming, operating, and dissolving partnerships in India. Some of the Act’s key provisions include rules for the registration of partnerships, the liability of partners for the debts of the partnership, rights and duties of partners, and dissolution of partnerships. The Act also provides for the appointment of a receiver in the event of a partnership’s dissolution.
RESEARCH QUESTIONS
- How does the Indian Partnership Act 1932 regulate the mutual relationship between partners in a business partnership, and what key provisions govern their interactions and responsibilities towards each other?
- What mechanisms are available under the Indian Partnership Act 1932[6] for resolving disputes between partners arising out of restraining mutual relationships, and how effective are these in promoting cooperation and collaboration among partners in partnership firms?
ANALYSIS & CASES
The primary question regarding the mutual relationship between should be addressed by analysing the existing clauses in the Indian Partnership act 1932[7]. Each partner is entitled to participate in the management of the business. Each partner is responsible for performing their tasks with meticulous attention during business operations. Every partner has the right to voice his opinion before disagreements over routine business matters are resolved, and most of the partners may decide on any disagreements.[8] Every partner has a right to have access to and to inspect and copy any of the books of the firm The respective sections that talk about the partners relationship range from sections 9 to 17. Apart from this, section 4,5,7 also talks about the importance of a partnership agreement, the requirements for its formation, and the concept of partnership at will. In the civil law system, a partnership is a nominate contract between individual who, in the spirit of corporation, agree to carry on an enterprise, contributing it by combining property, knowledge and sharing the profit[9]
According to section 9,[10] – Partners are obligated to conduct the firm’s business to maximise their mutual benefit, act justly and faithfully towards one another, and provide any partner or his legal representative with accurate accounts and information about everything that affects the business. This section is crucial, and the sections that follow, which deal with the relationships between partners, are merely clarifications and examples of the ideas in section 9[11]. Mutual confidence and trust are the foundation of a partnership. No partner should, therefore, pursue any personal gain at the expense of the other partners. S9 states that one of the partners’ responsibilities is to run the company to their greatest mutual benefit. This clause must be read in conjunction with Section 16(a) of the Act[12], which states that if a partner derives any profits for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm;
S9 states that one of the partners’ responsibilities is to run the company to their greatest mutual benefit. This clause should be read in conjunction with S. 16(a) of the Act[13], which states that any profit a partner receives from a transaction involving the firm, from using the firm’s assets or connections to other businesses, or from using the name of the firm, must be reported and paid to the firm. In the case of Bentley v. Craven[14], a firm with four partners had been established for the purpose of refining sugar. One of the partners, regarded as an expert in the field, was given permission to buy sugar for the company’s refining. He made a sizeable profit by providing his own sugar, which he had purchased earlier at a much lower price, rather than buying it from the market. He didn’t let the other partners know that he was profitable in this particular deal. It was decided that the company had the right to recoup the profit made by this partner in this manner. In the case of Gardener v. McCutcheon[15], several people were the joint owners of a ship to be used for their mutual benefit. The ship’s master, one of them, engaged in trading on his own account and realised sizable profits. It was determined that the defendant had no right to use partnership assets for his own benefit and was therefore required to share any profits with his fellow partners.
The partners also need to be fair and devoted to one another, which is another obligation mentioned in this section. As was already mentioned, there is mutual agency between partners, and each partner acts as the agent of every other partner and has unlimited power to bind them. Therefore, it is expected of each partner to treat his co-partners justly and faithfully. As a result, Section 33 stipulates that even if the partners’ partnership agreement authorised the expulsion of a partner, the remaining partners must act in good faith when exercising this authority. Agreement of partnership need not be express, but can be inferred from the course of conduct of the parties to the agreement[16].
Partnership Act requires each partner to maintain accurate records of all partnership funds entrusted to them. The other partners must also have access to these accounts, and each partner must use the funds properly for business purposes and maintain proper receipts for all expenses. Each partner acts as the firm’s representative. S 9[17] requires that each partner inform his other fellow partners in full of all matters affecting the firm. It is not subject to contract between the partners, and its contents are unalterable.
The partnership is responsible for any wrongdoing committed by a partner while acting in the ordinary course of the partnership’s business, in addition to any contract entered into by one of them on behalf of another. A third party may hold the firm accountable if a partner defrauds them while acting within the scope of the firm’s regular business operations. According to S. 10,[18] the business is allowed to seek compensation from the partner who committed the fraud that resulted in the loss. The duty mentioned in this section is not covered by the partnership agreement, in contrast to the provisions of Sections 12 to 17. As a result, a partner cannot reduce his responsibility to the company for damages brought on by his fraud. This clause expressly states that each partner is responsible for covering the firm’s losses resulting from any fraud committed by that partner while conducting the firm’s business. The offending partner cannot contract himself out of this obligation under any circumstances.
The Partnership Act’s rules must be followed when a partner wishes to make a contract that governs their shared obligations and rights. Ss. 9 and 10 contain a number of partner obligations that must be upheld by all partners and are not subject to agreement among partners. As a result, every partnership must abide by the restrictions placed on partners of unregistered firms by Section 69[19], and partners cannot agree to do otherwise. Similar to that, every firm must abide by the clause in section 41 regarding the forced dissolution of a firm upon the occurrence of certain events. A contract between the partners is not a bar to the partners’ ability to file a lawsuit under Section 44[20] for the dissolution of a firm. S. 11,[21] which allows partners to make any contract to govern their shared relationships, is subject to the Act’s provisions, one of which is S. 44[22]. As a result, a partner may always request that the court exercise its S 44 jurisdictional authority to dissolve the firm. These are the section that governs the mutual relationship between partners.
IMPACT OF MUTUAL RELATIONSHIP IN A CASE OF CONFLICT
Partner disputes in a partnership firm are common and can occur for a number of different reasons. On matters such as the type of business to pursue, expansion plans, resource allocation, and pricing strategies, partners may have different perspectives on the management and operation of the company. Different points of view on business matters, money matters, disagreements over profit-sharing percentages, breaking of partnership agreements, betrayal of trust, fraud, and personal conflicts are a few of the frequent causes of disagreements among partners. To keep the partnership business running smoothly, a decent and fair dispute resolution procedure is necessary. The process starts with the parties deciding on the type of resort they want or with any method specifically mentioned in the Partnership Agreement. Several options for resolving a partnership dispute are open to all parties. The parties have two options for resolving their differences: either through negotiation and alternative dispute resolution (ADR), or by going to court.
REMEDIES TO SOLVE A DISPUTE ARISING OUT OF A PARTNERSHIP
ARBITRATION: The Indian Partnership Act of 1932 also provides for arbitration to resolve partner disputes. The parties to an arbitration agreement consent to having their dispute decided by an arbitrator or panel of arbitrators, whose decision is final and binding on the parties. Disputes involving the violation of partnership agreements or disagreements over their interpretation may be successfully settled through arbitration. The ability and experience of the arbitrator, as well as the willingness of the parties to abide by the arbitrator’s decision, determine how well arbitration promotes cooperation and collaboration among partners in partnership firms.
Section 34 of the Arbitration Act 1940[23] laid down the rules for stay of legal proceedings where there was an agreement to refer to arbitration. Repealing the said act, Section 8 of the Arbitration and Conciliation Act 1996[24] speaks of the power of the Court to refer the parties to arbitration when there is an arbitration agreement[25]
In the recent case of M/s. Umesh Goel v. Himachal Pradesh Cooperative Group Housing Society Limited[26], the Supreme Court recently issued its ruling. According to the judgement, “Arbitral Proceedings” does not qualify as a “other expression” under Section 69(3) of the Partnership Act[27]. Additionally, the Arbitral proceedings and the Arbitration Award are exempt from the ban imposed under the aforementioned section.
MEDIATION: One of the most popular methods for resolving partner disputes is mediation. The dispute is resolved through communication and negotiation facilitated by a neutral third party during the mediation process. Conflicts over the division of profits, the acceptance of new partners, or the retirement of current partners are frequently settled through mediation. Due to the fact that it enables partners in partnership firms to speak openly and safely with one another, mediation can be very effective in fostering cooperation and collaboration. The mediator encourages the parties to cooperate and removes obstacles to communication so that a win-win outcome can be reached. A decision is not imposed by the mediator. The parties have complete control over the outcome of the mediation, not a neutral third party like a judge.
NEGOTIATION: Negotiation is one of the simplest ways to resolve a disagreement. Without the need for formal mediation, it is common to see the disputing parties negotiate an amicable resolution. The term negotiation refers to a strategic discussion that resolves an issue in a way that both parties find acceptable. In a negotiation, each party tries to persuade the other to agree with their point of view[28]. The best method to resolve disputes in partnership is ADR (Alternative Dispute Resolution), one of the most popular options for resolving disputes.
DISSOLUTION: The Indian Partnership Act of 1932[29] provides for dissolution as the sole means of resolving partner disputes. The partners may decide to dissolve the partnership if the disagreement is too severe for them to continue working together. Businesses run by partnerships sometimes experience the withdrawal of partners who are moving on to new projects or the admission of new members bringing in fresh capital. Dissolution can be useful in resolving disagreements over partners’ irreconcilable differences or disagreements over the course of the partnership. Dissolution, however, can have serious repercussions for the partners and the company, including monetary losses and reputational damage.
CONCLUSION
In conclusion, provided that they are used appropriately and promptly, the dispute resolution procedures established by the Indian Partnership Act of 1932[30] can be useful in fostering cooperation and collaboration among partners in partnership firms. The nature of the dispute, the partners’ willingness to participate in the process, and the qualifications and experience of the neutral third party are just a few of the variables that affect how effective these mechanisms are (if applicable). To encourage cooperation and collaboration among partners in partnership firms, it is crucial to carefully consider the nature of the dispute and the most suitable mechanism for resolving it. Adjudication and dissolution should only be used as a last resort; mediation and arbitration are frequently effective mechanisms for resolving disputes between partners. In conclusion, This paper expresses the valid importance of the mutual relationship of partners as supreme in any course of business.
Author : Razi Shahudeen, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at IIPRD
REFERENCES
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https://www.thebalancesmb.com/key-components-of-business-partnership-agreements-397594
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https://doi.org/10.5465/amj.2013.0483
- Mukherjee, D., Renn, R. W., & Mukherjee, S. (2022). Factors affecting mutual trust between partners in strategic alliances: The role of governance mechanisms. Journal of Business Research, 139, 73-85.
https://doi.org/10.1016/j.jbusres.2021.09.042
- Daspit, J. J., Holt, D. T., Chrisman, J. J., & Long, R. G. (2016). Examining family firm succession from a theory of planned behavior perspective. Family Business Review, 29(2), 167-187.
https://doi.org/10.1177/0894486516656276
[1] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932, § 4 (India).
[2] ibid
[3] Kevin Doran, How to Word a Business Partnership Legal Document, Small Bus. Chron., https://smallbusiness.chron.com/word-business-partnership-legal-document-69969.html (last visited Mar. 12, 2024)
[4] Mayank Choudhary, The Indian Partnership Act, 1932: An Overview, Medium (Nov. 27, 2019), https://medium.com/@rashimehta1124/an-overview-of-the-indian-partnership-act-1932-theomnibuzz-af840d578f26.
[5] Kevin Doran, How to Word a Business Partnership Legal Document, Small Bus. Chron., https://smallbusiness.chron.com/word-business-partnership-legal-document-69969.html (last visited Mar. 12, 2024)
[6] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932 (India)
[7] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932 (India)
[8] Rights and Duties of Partners in a Partnership Firm and LLP, Laws. Club India, https://www.lawyersclubindia.com/articles/RIGHTS-AND-DUTIES-OF-PARTNERS-IN-A-PARNERSHIP-FIRM-LLP–1426.asp (last visited Mar. 12, 2024).
[9] Team, L. (n.d.). rights and duties of partners in a parnership firm and llp. Lawyersclubindia. https://www.lawyersclubindia.com/articles/RIGHTS-AND-DUTIES-OF-PARTNERS-IN-A-PARNERSHIP-FIRM-LLP–1426.asp
[10] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932, § 9 (India)
[11] ibid
[12] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932, § 16(a) (India)
[13] ibid
[14] Bentley v. Craven, (1853) 18 Beav. 75 (Eng.)
[15]Gardener v. McCutcheon, (1842) 4 Beav. 543 (Eng.)
[16] Deepthi, M., & Dhinesh, M. (2019). Public opinion on partnership under the indian partnership ACT 1932. International Journal of Innovative Technology and Exploring Engineering, 9(1), 1247-1251. doi:10.35940/ijitee.L3380.119119
[17] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932, § 9 (India)
[18] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932, § 10 (India)
[19] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932, § 69 (India)
[20] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932, § 44 (India)
[21] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932, § 11 (India)
[22] ibid
[23] Arbitration Act, No. 10 of 1940, § 34 (India), repealed by The Arbitration and Conciliation Act, No. 26 of 1996
[24] The Arbitration and Conciliation Act, No. 26 of 1996, § 8 (India)
[25] Dhannjay Singh Pundir, Section 34 of the Arbitration Act, LexForti Legal News Network, https://lexforti.com/legal-news/section-34-arbitration-act/ (accessed March 12, 2024).
[26] M/s. Umesh Goel v. Himachal Pradesh Housing Society, (2016) 11 SCC 313
[27] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932, § 69(3) (India)
[28] Dhir, R. (2021, February 22). Negotiation: Definition, How It Works, and Why It’s Important. Investopedia. https://www.investopedia.com/terms/n/negotiation.asp
[29] The Indian Partnership Act, 1932, No. 16, Acts of Parliament, 1932 (India)
[30] ibid
