Mohit Saraf V. Rajiv K Luthra

“One partner acts as an agent of the other(s). Together they constitute a firm. The partnership per se is not a distinct legal entity

Case name:Mohit Saraf V. Rajiv K Luthra
Case number:O.M.P. (I) (COMM) 339/2020
Decided on:January 18, 2021
Relevant Act/Sections:
  • The present petition has been filed by the petitioner under Section 9 of the Arbitration and Conciliation Act, 1996. On March 31, 1999 petitioner and respondent executed a partnership deed (“Deed‟, for short) and founded the partnership firm L&L Partners, New Delhi (formerly Luthra & Luthra Law Offices, New Delhi) (“Delhi Corporate Firm‟, for short) having its office at Ashoka Estate, Barakhamba Road, New Delhi. It is undisputed and noted from the Deed that the partnership was not at will.
  • On April 01, 2002, petitioner, respondent and three other lawyers entered into another partnership with one another for carrying on litigation related legal services and executed the written partnership deed and founded the partnership firm L&L Partners Litigation (formerly Luthra & Luthra Law Offices, Litigation) with office in New Delhi („Delhi Litigation Firm‟, for short). This firm is a partnership at will.
  • On March 03, 2003, petitioner and the respondent executed the written partnership deed and founded the partnership firm L&L Partners Mumbai (formerly Luthra & Luthra Law Offices, Mumbai) („Mumbai Corporate Firm‟, for short). The firm is also a partnership at will.
  • On April 04, 2004, petitioner and the respondent varied and altered the profit (and loss) share in the partnership firms, Delhi Corporate Firm and Mumbai Corporate Firm to 33.33% and 66.67%, respectively.
  • As a step towards professionalization and transparency in decision making, petitioner with the concurrence of the respondent, set up an Executive Committee („EC‟, for short) in September 2012, comprising of certain senior members of the Delhi Corporate Firm and the Mumbai Corporate Firm. After due deliberation and discussion, on July 24, 2019, the guiding principles and frame work for decision-making by the EC was agreed to, by the members of the EC, including the petitioner and the respondent.
  • Between July and December 2019, primarily due to frustration amongst the senior members of the Delhi Corporate Firm and the Mumbai Corporate Firm at the lack of opening up of equity, there was a spate of high-profile exits.
  • It is stated that on January 06, 2020 respondent issued a notice to the petitioner for termination of the Delhi Corporate Firm and for dissolving the Mumbai Corporate Firm (180-days‟ notice).
  • In his communications between January 06, 2020 and January 09, 2020, the petitioner also pointed out to the respondent, that in terms of the Deed, the respondent could not unilaterally terminate the partnership except by withdrawing from it and that the petitioner was agreeable to the respondent withdrawing from the Delhi Corporate Firm.
  • On September 13, 2020, the respondent made a proposal for dilution of 20% of equity and warned of some structural “rejig‟ in the Delhi Corporate Firm. The respondent unequivocally conveyed that the “for negotiation is over‟, and issued an ultimatum that if the aforesaid proposal were not acceptable, then the persons disagreeing are free to leave.
  • On October 12, 2020, (before expiry of the period of one month stipulated in the respondent‟s communication of September 13, 2020), the petitioner issued a notice / letter by email to the respondent acknowledging and accepting the respondent‟s decision to leave and withdraw/retire from the Delhi Corporate Firm.
  • It is the case of the petitioner that on October 12, 2020, at 22:34, the respondent sent an email to all retainers and employees of the L&L Firms, denying that he had retired from the Delhi Corporate Firm. The respondent sent an email to the petitioner on October 13, 2020, purportedly terminating the petitioner’s partnership in the Delhi Corporate Firm with immediate effect.
  • Scope Of Petition Under Section 9 Of The Act Of 1996
  • Termination Of The Partnership Of The Petitioner
  • Status Of Equity Partners Inducted By The Parties:
  • Whether Grant Of Relief As Per Prayed For Is Barred In View Of The Provisions Of Special Relief Act?
  • The court referred to the judgement in Kesavji Ravji and Co. & Ors. and submitted that partners in a firm stand on equal footing. One partner acts as an agent of the other(s). Together they constitute a firm. The partnership per se is not a distinct legal entity. The partnership property vests in all partners and in that sense every partner has an interest in the assets, however, the extent of interest held by a partner is irrelevant as he continues to be the owner of his interest in the firm.
  • Also central to an understanding of the law of partnership is the dual capacity in which a partner acts i.e. both as a principal and an agent. Lord Lindley explained: “As a principal [a member of an ordinary partnership] is bound by what he does himself and by what has co-partners do on behalf of the firm, provided they keep within the limits of their authority: as an agent, he binds them by what he does for the firm, provided he keeps within the limits of his authority.”
  • It later added that it is settled position of law that in the matter of sharing the profits, the partners can agree to share the profits in any manner they like but still they continue to be partners working as agents for each other, which in no way confer a dominant legal status on the partner drawing a higher interest. No partner has a dominant status even if one partner has extra rights and/or higher financial stake.
  • The court by referring to clause 7A and 10B of the partnership deed inferred that when the later part of Clause 7A contemplates approval of respondent/RKL and petitioner/MS in the decision-making process, then earlier part of Clause 7A cannot be construed to mean the power of the respondent/RKL to terminate petitioner/MS. As per Clause 10B, power vests with both the petitioner and the respondent to take decision with regard amalgamation, merger, collaboration and buy-out of the firm by third parties. This clause appears to be at variance with the initial limb of Clause 7A. Be that as it may, when a vital decision with regard to buy-out of firm requires the concurrence of both the petitioner and the respondent, it cannot be construed that „termination‟ under Clause 7A would mean the grant of power on respondent to terminate the petitioner from partnership which has come into existence on the execution of the Deed by both the petitioner and the respondent.
  • The court opined that the submission of the Counsels for respondent to relate the power of performance review of partners by respondent in Clause 7A to mean the power to terminate the petitioner is not appealing as Clause 7C separately provides for performance appraisal of petitioner/MS by respondent/RKL. If the performance of petitioner/MS, is found wanting, after expiry of ten years of firm, then it can only entail imposition of penalty on petitioner/MS.
  • The judgement in Leigh v. Crescent Square Limited was referred wherein it was held that “Generally relations between partners are governed by the terms of the partnership agreement, provided such terms are not in conflict with the statute” to which the court added that the termination of partner not being contemplated, the termination in Clause 7A cannot be that of the petitioner
  • The court submitted that the plea of the Counsels for the respondent that even if there is no explicit power, there is an implied power to terminate the partnership of the petitioner is also not appealing, the petitioner and respondent are the only two partners with management rights i.e. to take decisions (though no right to terminate the partnership of the petitioner exists under Clause 7A) and an implied power (even an express power) cannot be read into the Deed consisting of two partners as such a power is susceptible for an illegal use / use for extraneous reasons to obviate dissolution / termination of Deed.
  • It later added that the very exercise of power by the respondent by invoking Clauses 7A and 8 together is unsustainable. By exercising power under Clause 7A the respondent has terminated the partnership of the petitioner in the Delhi Corporate Firm. Whereas power under Clause 8 is for termination of the Deed / dissolution.
  • The court observed that the issue of non-joinder of the partners alleged to have been inducted by the respondent is liable to be rejected. Further, the agreement in terms of the Deed which incorporates the arbitration clause is between the parties herein and not with the alleged inducted partners.
  • The court referred to the case Intercontinental Hotels Group-India Private Limited and Ors. v. Shiva Satya Hotels Private Limited and observed that Section 14(d) and for that matter Section 41(e) of the SRA have no applicability. It is also settled position of law that a contract if not determinable, the Court is within its power to enforce the same
  • The court held that the termination of the partnership of the petitioner being illegal and in violation of the Deed, without there being any power on the respondent to take such an action, the legal consequence thereof that the partner needs to be reinstated must follow.
  • There shall be a stay of the operation of the email dated October 13, 2020 issued by the respondent terminating the petitioner from the partnership till the conclusion of the prospective arbitration proceedings.
  • The petition was disposed of with no costs.

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