Arbitration Proceedings in LLPs: Bombay High Court Clarifies the Binding Nature of LLP Agreements

 

Arbitration Proceedings in LLPs: Bombay High Court Clarifies the Binding Nature of LLP Agreements

By Abhishek Jat, Advocate

The Bombay High Court recently delivered a significant judgment addressing the applicability of arbitration clauses in Limited Liability Partnership (LLP) agreements, particularly in cases where the LLP itself is not a signatory to the agreement. The ruling, delivered by Justice Somasekhar Sundaresan, underscores the intrinsic relationship between an LLP and its governing agreement, emphasizing that the LLP cannot be treated as a "third party" to its own foundational document.

Background of the Case

The dispute arose from an application filed under Section 11 of the Arbitration and Conciliation Act, 1996, by a former partner of BDO India LLP. The applicant had been expelled from the LLP and alleged misconduct and high-handed behavior by the managing partner during the expulsion process. Seeking redress, the applicant initiated arbitration proceedings, which were contested by the respondents on the grounds that the LLP was not a signatory to the LLP agreement and, therefore, could not be bound by its arbitration clause.

The respondents argued that Clause 23.1 of the LLP agreement explicitly limited arbitration to disputes between partners and did not extend to disputes involving the LLP itself. They contended that since the expulsion was carried out by the LLP, the dispute was between the applicant and the LLP, rendering the arbitration clause inapplicable.

Court’s Analysis and Findings

The Bombay High Court rejected the respondents' arguments, holding that the LLP agreement inherently governs the rights, duties, and liabilities of both the partners and the LLP. The Court observed that the subject matter of the LLP agreement includes the operational and governance aspects of the LLP, making it a necessary party to any arbitration proceedings arising from disputes related to its affairs.

Justice Sundaresan drew a parallel between an LLP and a company, stating that an LLP cannot be considered a "third party" to its own agreement, just as a company cannot be treated as extraneous to its Articles of Association. The Court emphasized that the LLP agreement is the foundational document that dictates the functioning of the LLP, and the LLP is duty-bound to act in accordance with its provisions.

The Court further relied on the judgment in Cox and Kings Ltd. v. SAP India Pvt. Ltd., (2024) 4 SCC 1, to reinforce its position that the LLP agreement is central to the relationship between the partners and the LLP. It held that the arbitration clause in the LLP agreement, along with Item 14 of the First Schedule of the Limited Liability Partnership Act, 2008, creates a statutory obligation to refer disputes to arbitration, even if the LLP is not a signatory to the agreement.

Key Legal Principles Established

1. Necessary Party Doctrine: The Court affirmed that the LLP is a necessary party to arbitration proceedings involving disputes related to its operations and governance, even if it is not a signatory to the LLP agreement.
2. Statutory Arbitration Clause: Item 14 of the First Schedule of the LLP Act, 2008, mandates arbitration for disputes arising out of the LLP agreement, effectively creating a statutory arbitration framework.
3. Agency Principle: The Court reiterated that under Sections 26 and 27(2) of the LLP Act, every partner acts as an agent of the LLP, and the LLP is liable for the acts of its partners. This principle further strengthens the LLP’s involvement in arbitration proceedings.

Appointment of Arbitrator

In light of its findings, the Court appointed Justice (Retd.) Manoj Sanklecha as the nominee arbitrator for the respondents, with Justice (Retd.) Gautam Patel as an alternative in case of any conflict. The Court also expressed its view that such issues should ideally be resolved by the arbitral tribunal rather than detaining the Court’s attention during the appointment process.

Implications of the Judgment

This ruling has far-reaching implications for LLPs and their partners, as it clarifies the binding nature of arbitration clauses in LLP agreements. It reinforces the principle that the LLP agreement is not merely a contract between the partners but a governing document that regulates the LLP’s operations and governance. By treating the LLP as a necessary party to arbitration proceedings, the judgment ensures that disputes involving the LLP’s affairs are resolved through arbitration, promoting efficiency and consistency in dispute resolution.

Conclusion

The Bombay High Court’s decision in Kartik Radia v. BDO India LLP is a landmark ruling that provides much-needed clarity on the applicability of arbitration clauses in LLP agreements. It underscores the importance of the LLP agreement as the cornerstone of the LLP’s governance structure and reaffirms the LLP’s role as a central party in arbitration proceedings. This judgment will serve as a guiding precedent for future disputes involving LLPs and their partners, ensuring that arbitration remains an effective mechanism for resolving conflicts in the realm of limited liability partnerships.