Court holds that arbitration award confined to payment claim by partner as guarantor is valid and arbitrable under partnership deed; sets aside District Judge's order nullifying award for non-adjudication of other claims
In a significant decision delivered on October 5, 2026, the Delhi High Court (Division Bench comprising Justices Anil Kshetarpal and Bharat Parashar) restored an arbitral award in favour of Shri Krishan Baldev Bansal, a partner in a dissolved partnership firm, and set aside the order of the District Judge which had annulled the award. The award related to the reimbursement claim arising from the payment made by the partner towards discharge of the firm's outstanding bank liability.
The dispute arose from a partnership formed in 2004 between Shri Balbir Singh Tyagi and Shri Yogesh Bansal (son of Shri Krishan Baldev Bansal), carrying on the business of retailing electronic goods under the firm M/s Nova Electro World. The partnership firm had availed a cash-credit facility of Rs. 25 lakh from Union Bank of India, for which Shri Krishan Baldev Bansal had stood as a guarantor and paid Rs. 23.9 lakh towards settlement of the outstanding dues from his own funds. The key question was whether the amount paid by Shri Bansal towards the partnership firm's bank liability could be recovered from the other partners.
Before the Sole Arbitrator, the parties agreed on record on December 11, 2023, that the arbitral award may be passed only on the claim made by Shri Bansal relating to the bank payment, thereby narrowing the scope of adjudication from the multiple claims and counterclaims originally raised, including dissolution of partnership and rendition of accounts.
The Sole Arbitrator passed the award on December 23, 2023, directing the other partners to reimburse Shri Bansal Rs. 21.51 lakh (after deducting his own 10% share), along with 18% interest from the date of payment. However, Respondent Nos. 1 and 2 challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, before the District Judge. The District Judge set aside the award on the grounds that the Arbitrator failed to decide all claims originally pleaded and that the claim relating to the bank payment was a personal claim outside the arbitration agreement.
On appeal, the Delhi High Court thoroughly analyzed the arbitration proceedings and the nature of the claim. The Court held that:
1. The parties themselves had confined the arbitral adjudication to the claim concerning the bank payment made by Shri Bansal as a partner and guarantor. The contemporaneous order-sheet of December 11, 2023, and the arbitral award's explicit recital supported this understanding. Therefore, the failure of the Arbitrator to adjudicate other claims did not amount to jurisdictional error.
2. The claim was not a personal claim arising solely from the guarantee given to the bank but an inter se partnership dispute regarding discharge of the firm's liability and adjustment of respective shares. The Settlement Certificate from the bank clearly described the payment as being made towards the dues of the partnership firm.
3. The arbitration clause in Clause 15 of the Partnership Deed expressly covered disputes relating to the deed and books of accounts, which included such financial adjustments between partners.
4. The District Judge erred in substituting his own appreciation of facts and ignoring the admissions and evidence before the Sole Arbitrator, including cross-examination admissions by the partners and documentary evidence.
5. The objection on arbitrability was considered and rejected by the Sole Arbitrator based on the pleadings and applicable Supreme Court precedent, distinguishing the facts from other cases cited by the respondents.
The Court emphasized that the capacity in which Shri Bansal was pursued by the bank (as a guarantor) does not determine the nature of the claim he raised against his co-partners. The dispute adjudicated was an internal partnership dispute arbitrable under the partnership deed.
Consequently, the Delhi High Court allowed the appeal, restored the arbitral award dated December 23, 2023, and dismissed the challenge against it.
This judgment affirms the principle that arbitration awards can be confined to specific claims agreed by the parties and that inter-partner disputes relating to financial liabilities discharged by one partner are arbitrable under partnership agreements, even if the payment was made in the capacity of a guarantor.
Bottom Line:
Arbitration and Conciliation Act, 1996 - Arbitral award cannot be set aside on ground that Arbitrator failed to decide all original claims, where parties later agreed that award may be passed only on one specific claim - Amount paid by partner/guarantor towards discharge of partnership firm's bank liability is an inter se partnership dispute and is arbitrable under partnership deed.
Statutory provision(s):
Arbitration and Conciliation Act, 1996 Section 34, Section 16; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Section 13(2)
Shri Krishan Baldev Bansal v. Balbir Singh Tyagi, (Delhi)(DB) : Law Finder Doc Id # 2990676
