LLP Can Be Bound By Arbitration Clause Despite Not Being Signatory To LLP Agreement: Bombay High Court

The Bombay High Court bench of Justice Somasekhar Sundaresan has held that the mere fact that an LLP is not a signatory to an LLP Agreement does not, by itself, preclude it from being a party to arbitration proceedings initiated between Partners under the arbitration clause of such an agreement. The Court observed that an LLP is not a “third party” to its LLP Agreement but an entity with rights and obligations vis-à-vis its partners as per the statutory scheme of the LLP Act. The Arbitral Tribunal, and not the Section 11 Court, has the jurisdiction to determine whether a party is a necessary or proper party to the arbitration. Brief Facts Mr. Kartik Radia (Applicant) was a former partner of BDO India LLP (Respondent No. 1). Mr. Milind Kothari (Respondent No. 2) is the Managing Partner of the LLP. The Respondents objected to arbitration initiated under the LLP Agreement dated August 1, 2014, on the premise that BDO was not a signatory to the LLP Agreement Mr. Radia had been expelled from the LLP. He alleged misconduct by Kothari, the Managing Partner of BDO, in effecting the expulsion. Radia sought to initiate arbitration, which was repelled by the Respondents. Hence, the Application under section 11 of the Arbitration and Conciliation Act, 1996 was filed. Issue Whether disputes between partners of a limited liability partnership (LLP) and the LLP can at all be covered by the arbitration agreement contained in a LLP Agreement to which the LLP is not a signatory? Contention Mr. Gaurav Joshi, Senior Counsel on behalf of Respondent No. 1 contended that arbitration proceedings cannot be initiated against BDO as it was not a party to the arbitration agreement. According to Mr. Joshi, the Arbitration Clause only covered disputes between partners. He submitted that the disputes between Radia and BDO cannot be a dispute among partners of BDO. Therefore, he submitted that the Section 11 Application was not maintainable since disputes between Radia and BDO are not arbitrable. Observations The court rejected the absolute proposition canvassed by the Respondents – that because an LLP is not a signatory to the LLP Agreement, it can never be a party to proceedings initiated under the arbitration clause in such agreement. On Statutory Scheme of LLP Act The court observed that an LLP is not a 'third party' to an LLP Agreement. It noted that an LLP is an entity that enjoys rights against, and owes obligations to its partners, which is expressly set out in Paragraph 4(ii) of the Statement of Objects and Reasons to the LLP Act. The LLP Act makes it clear that an LLP Agreement governs the mutual rights and duties of the partners The court observed that: “It is trite law that whether a party is a necessary party or a proper party is really for the Arbitral Tribunal to decide while the scope of jurisdiction of the Section 11 Court is to examine the prima facie existence of the arbitration agreement.” The court noted that under Section 26 of the LLP Act, every partner is an agent of the LLP and under Section 27(2), the LLP is liable for the acts of its partners. The court held that even if there had been no arbitration clause in the LLP Agreement, the First Schedule would still lead to an arbitration agreement being deemed to exist in the eyes of the law for disputes among the partners as per section 23(4). The court dismissed the objection that disputes raised by a former partner cannot be amenable to arbitration, calling it “facetious”. The court held that the objection raised by the Respondents to the Section 11 Application was devoid of merit and frivolous. The court appointed Justice (Retd.) Manoj Sanklecha, a former judge of the Court and failing him (due to any conflict) Justice (Retd.) Gautam Patel, also a former judge of the Court, as the nominee arbitrator of the Respondents. Mr. Amrut Joshi a/w. Mr. Prashant Trivedi and Petal Chandok i/b Khushboo Jain, appeared for Applicant. Mr. Gaurav Joshi, Senior Advocate a/w. Mr. Jatin Pore, Sreeram VG, Karan Jain i/b DSK Legal, appeared for Respondent No. 1; Mr. Mayur Khandeparkar a/w.Mr. Jatin Pore, Sreeram VG, Karan Jain i/b DSK Legal, appeared for Respondent No. 2. Case Title: Kartik Radia vs. M/s. BDO India LLP and Anr.COMM. ARBITRATION APPLICATION NO. 31 OF 2022 Citation: 2025 LiveLaw (Bom) 85 Click Here To Read/Download The Order

LLP Can Be Bound By Arbitration Clause Despite Not Being Signatory To LLP Agreement: Bombay High Court

Tazeen Ahmed

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