Business PlanPartnership Firm

What Is the Novation of Partnership Deed?

Novation is used when another third party plans on entering an agreement for replacing the departing party within a contract. Read on to know more about novation of partnership deed.

A partnership deed is a mutual agreement signed by the firm’s owners, highlighting the terms and conditions, distribution of profits and losses, and roles of an individual in a business. It promotes better understanding and smooth functioning of the business between partners. 

It can either be a written document or a verbal commitment. A partnership deed is any agreement document on which terms and conditions are shared. In well-established business firms, an oral partnership deed is of little use. Maintaining a written record is essential in today’s world. You can also register your partnership deed. 

Important Characteristics of a Partnership Deed Include

  1. Name of the firm (official name) 
  2. Name of the partners. (Full name) 
  3. Type of business.
  4. Business commencement date.
  5. Duration and terms of partnership tenure. 
  6. Amount of capital invested by each partner.
  7. Legal rights of both partners.
  8. Duties and power of both partners in the business.
  9. Method of calculating the efficiency of work done. 
  10. Profit and loss sharing ratio. 
  11. The procedure of account settlement if there is the dissolution of the firm. 

What Are the Documents Required for the Partnership Deed? 

If you want to register your partnership deed, the following documents are required. 

  • Certified registry of the original agreement signed by both the parties that mention all the terms and conditions specified above to qualify as a partnership deed
  • Personal identification documents (Pan card, Aadhar card, Driving licence) of both the partners, signed by the respective partners
  • Address proof of the firm ( Rent agreement, utility bills, for example, electricity bill, water bills, gas bills) 
  • GST registration document: https://reg.gst.gov.in/registration/
  • An affidavit stating all the above information is correct and legally verified documents. 
  • Form number 1 (Application form for partnership deed registration)

What Is the Novation of Partnership Deed?

A Novation of partnership deed agreement is introduced when a third party is introduced by one of the members who transfer their rights and roles as a partner to the third party. The transferor, transferee and the counterparty must agree to this Novation of partnership deed. It is better than deleting the contract completely and helps save the project and the financial losses. There are three types of Novation of partnership deeds.

Simple Novation

This includes simple changes in the agreement between both partners. These generally do not require the involvement of a third party and are done to include and solve issues related to debts and loans. 

Expromissio

In this type of Novation, a third party is included, which agrees upon the original partnership deed signed by both original parties. 

Delegation

In this type of agreement, one of the debt partners is replaced by a third party who lends the money and replaces the original contract of the partnership deed with new obligations. Recently, the Bombay high court has made changes such as Arbitration Clause Contained In The Deed can be invoked. 

Case Study- The Applicant Praful A. Mehta vs Respondent Nainesh M. Gandhi. 

In this study, applicant Praful A. Mehta had entered a partnership deed with the first respondent Nainesh M Gandhi which contained an Arbitration clause. Soon, a second partnership deed was signed and executed by the Applicant, Praful A. Mehta and other parties without the respondent. 

A dispute arose between the partners, the Applicant Praful A. Mehta and Nainesh M Gandhi’s first respondent. The Applicant tried to recover his losses from the first respondent in the partnership deed by invoking the arbitration clause added in the second partnership deed. 

The first respondent claims he had retired from the business before the reconstitution of the firm and had not participated in the amendment of the second partnership deed. It also stated that the Applicant had forged his signatures on the second partnership agreement. 

The Applicant Praful A. Mehta filed a case against the first respondent Nainesh M Gandhi under section 11 of the arbitration and conciliation act, 1996 in the Bombay high court, demanding a sole arbitrator right as per the arbitration contract signed by both parties. 

In response to this, the first respondent Nainesh M Gandhi claimed that the second partnership deed did not bind him and that his signatures were being forged after his retirement. Bombay High Court refused the first respondent’s statement. It stated that the forgery allegations required to be held by the arbitrator on trial and that an arbitration clause can be invoked as a result of innovation.

The Applicant also proved the involvement of the respondent in business deals. The court also observed that the second partnership deed was executed on the same day as the retirement of the first respondent, which is described as a continuing partner. 

Bombay High court ruled that since the first respondent’s signature on the retirement deed confirmed him as one of the continuing partners. The first respondent failed to explain under which partnership deed he was continuing with the partners. 

Justice A. K. Me also quoted, ‘even though there had been a novation of the partnership deed containing an arbitrary clause, An arbitrator could be appointed who can solve the disputes within the partners in a business firm. 

Arbitration is a type of ADR, alternative dispute resolution, which solves internal disputes between partners. Both the parties submit their arguments to the arbitrator, who will listen and judge both parties and reach a final, binding decision. The court ruled in favour of the Applicant Praful A. Mehta, allowing the petition and appointing a sole arbitrator.

Conclusion

By registering your partnership deed, you get several legal advantages. You can regulate the responsibilities, liabilities, shares and other important parameters. It also helps avoid any disputes due to misunderstandings related to the expectations from each other. The document specifies all things clearly and is mutually agreed upon by both parties. 

For more information on the Novation of partnership deed, visit Vakilsearch. The experts at Vakilsearch carry deep expertise in all aspects of the law. Therefore, get in touch with the experts if you require any assistance and information on anything related to law.

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