Dissolution of a partnership is one way a partner can withdraw from a partnership. Article 85 of China’s Partnership Enterprise Law sets forth specific reasons for causing a partnership to be dissolved.
Currently, PRC laws only require a court to file a lawsuit regarding the dissolution of a company where it is domiciled; but there are no provisions regarding the competent authority or jurisdiction over such disputes.
In commercial arbitration practice, quite a few partnership agreements contain an arbitration clause.
But given the current absence of relevant laws and the analogous application of provisions regarding jurisdiction over disputes involving dissolution of a company, there are inevitably doubts over whether a partner is entitled to apply to a commercial arbitration institution for a dissolution of partnership based on the arbitration clause contained in the partnership agreement.
In this article, the author explores the difficulties in arbitrating disputes involving the dissolution of a partnership.
Legal basis, judicial practice
First of all, the Arbitration Law does not explicitly prohibit filing arbitration for disputes involving the dissolution of a partnership.
Article 3 of the Arbitration Law clearly enumerates the matters that cannot be submitted for arbitration and the types of disputes: (1) marital, adoption, guardianship, support and succession disputes; and (2) administrative disputes that shall be handled by administrative organs as prescribed by law.
Notably, disputes arising from the dissolution of a partnership shall not be included. Secondly, article 2 of the Arbitration Law provides that contractual disputes and other disputes over rights and interests in property between citizens, legal persons and other organisations that are equal subjects may be arbitrated.
Similar to where disputes arise from the dissolution of a company, the inherent “combination of persons” of a partnership is one of the reasons why arbitrators are cautious to intervene in such disputes, to avoid improper intrusion of public power into private areas.
First, from the perspective of limited partners (LPs), especially those in partnership-based private equity funds, the “combination of capital” is particularly prominent. It is unjustifiable to completely deny the LP to seek an exit through contractual arbitration on the grounds of the “combination of persons”.
Second, the “combination of persons” does not necessarily mean that the dispute is not a contract dispute or a dispute over property rights and interests.
China’s Civil Code reserves a special chapter entitled Partnership Contracts. The partnership agreement itself is a special type of nominated contract, so any disputes relating to the partnership agreement inherently shall be deemed as contractual disputes.
Even though the purpose of the claimant initiating arbitration may include commercial management or other considerations, it often also includes the intention of stopping loss in a timely manner so as to maximise the return on investment. In essence, such disputes cannot be divorced from the scope of the battle over property rights and interests.
Third, partners’ unlimited joint and several liability for the partnership’s debts dictates that negative externalities of the partnership dissolution are relatively controllable, and thus more arbitrable.
For a partnership’s creditors, the dissolution of the partnership is important because the liability of a partnership’s shareholders is limited to the debts of the partnership. But dissolution of the partnership cannot release partners from their liability for the partnership debts since partners are jointly and severally liable, to an unlimited extent, for the debts of the partnership.
In general, the negative externalities of the dissolution of a partnership are somewhat lower than the negative externalities of the dissolution of a corporation, which is more consistent with the relative nature of arbitration.
Finally, in judicial practice, the courts have recognised the arbitrability of such disputes to a certain extent. For example, in Jing Min Shen Case No. 6759 (2021), the High People’s Court of Beijing Municipality held that the plaintiff’s claim for dissolution of the partnership did not fall within the scope of civil actions accepted by the people’s court, on the grounds that the partnership agreement contained a valid arbitration clause.
Therefore, in the author’s opinion, disputes arising from dissolution of partnership enterprises have the possibility of arbitration. However, there are practical challenges.
Arbitration difficulties
Unlike the Company Law and relevant judicial interpretations setting clear limits on the plaintiff and defendant in a company dissolution action, the law is silent on the litigant of disputes arising from partnership dissolution.
As a result, in arbitration cases initiated on the basis of a partnership agreement that contains an arbitration clause, it becomes a major difficulty to identify an arbitration litigant.
If only other partners who have signed the partnership agreement are listed as respondents, the risk of jurisdictional disagreements would be low. However, since the claim to dissolve the partnership is mainly filed against the partnership itself, some judgments hold that it is difficult to incur the legal consequence of dissolution if the partnership is not also a respondent.
To avoid this risk, some parties may resort to technical means, such as requesting in their arbitration claims another partner(s) to assist the claimant in dissolving and cancelling the registration of the partnership. The risk of such methods is that even if the claim is upheld, the award may be difficult to enforce in practice.
However, if the partnership acts individually or jointly as the respondent, due to the fact that in practice in many partnership agreements the partnership is not a party to the agreement, it would be impossible to ascertain whether the partnership has the intention to arbitrate. Therefore, there are risks in jurisdiction.
Some judgments adhere to the relativity of an arbitration agreement, which means the partnership shall not be bound by the arbitration clause in the partnership agreement.
However, if the partnership agreement is signed by all partners – although the partnership is not itself a signee – there are judgments holding that the expression of intention of all partners represents the expression of intention of the partnership, so the partnership may, too, be bound by the arbitration agreement, such as in Hebei Bohai Investment Group v Blackstone (China) Equity Investment Management and Shanghai Blackstone Equity Investment Partnership (2021).
Conclusion
To sum up, there is a certain legal and practical basis for the arbitrability of disputes arising from the dissolution of a partnership. However, subject to the absence of relevant legal provisions, whatever strategy that the parties adopt may still face different types and degrees of risk.
It should be noted that arbitration has the unique characteristic of expert judgment, and there is a considerable probability that a resolution acceptable to all parties will be reached through conciliation of such disputes. Therefore, arbitration may yet be a desirable path to breaking the “partnership deadlock”.
Liang Enze is a case manager at Beijing Arbitration Commission/Beijing International Arbitration Centre
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