The Bombay High Court has ruled that a partner cannot refer a dispute relating to the business of a firm to arbitration in the absence of other partners. Justice Manish Pitale's bench held that partners do not have the implicit authority to refer disputes to arbitration, in view of the restriction under Section 19(2)(a) of the Partnership Act, 1932. The court also ruled that an arbitration notice issued by one partner without the approval of the remaining partners is invalid, rendering the application for the appointment of an arbitrator also invalid.

An investment agreement was executed on 02.02.2018 between the applicants and respondent No.2, who together form the partners of R-Cube Energy Storage Systems LLP (R-Cube Energy), and respondent No.1 company. The deal required respondent No.1 to invest Rs.16.5 crore in technology developed by R-Cube Energy from Fraunhofer Institute for Ceramic Technologies and Systems (Fraunhofer Institute).

A dispute arose later on when respondent No.1 failed to fulfill its obligations, resulting in market embarrassment and legal action threats from Fraunhofer Institute. The applicants initiated the dispute resolution process outlined in clause 24 of the investment agreement, involving neutral persons and arbitration.

The respondent raised two objections to the petition's validity: first, that the pre-arbitration steps, which included referring the dispute to neutral persons for amicable settlement, were not completed, and second, that the notice of arbitration and the Section 11 petition have been filed without the approval of Respondent No.2, who is also a partner in the firm, thus rendering Section 19(2)(a) of the Partnership Act applicable.

The court considered the first objection regarding the exhaustion of the dispute resolution mechanism and recognized the applicants' efforts in appointing a neutral person and communicating with respondent No.1. The court concluded that respondent No.1's failure to appoint its neutral person prevented it from claiming non-exhaustion of the prescribed process. The Court held that a party that did not follow the pre-arbitration mechanisms cannot subsequently object to the appointment of arbitrators.

The court then turned to the second objection and noted that the notice of arbitration was issued by Applicant No.1 on behalf of the firm but did not receive the approval of the second respondent, who is also a partner in the firm. The court held that a partner cannot refer a dispute relating to the business of the firm to arbitration without the presence of other partners and that partners do not have the implicit authority to refer disputes to arbitration under Section 19(2)(a) of the Partnership Act, 1932.

The court also held that an arbitration notice issued by one partner without the approval of the remaining partners is invalid and thus renders the application for the appointment of an arbitrator invalid as well. As a result, the court dismissed the application under Section 11 of the Arbitration Act, stating that a faulty notice cannot create a cause of action.