Safiya Malik

The Bombay High Court adjudicated on a dispute concerning the applicability of an arbitration clause in a limited liability partnership (LLP) agreement when the LLP itself is not a signatory to the agreement. The court examined whether an arbitration proceeding could be initiated against the LLP based on an agreement between its partners. The case was heard by Justice Somasekhar Sundaresan, who addressed the objections raised by the respondents regarding the arbitrability of disputes involving the LLP and its expelled partner.

The court, after considering the statutory framework of the Limited Liability Partnership Act, 2008, and the Arbitration and Conciliation Act, 1996, rejected the argument that the LLP was not bound by the arbitration agreement merely because it was not a signatory. The court held that the LLP’s operations were governed by the LLP agreement, making it an essential party to disputes arising from the agreement. Consequently, the court directed the constitution of an arbitral tribunal to adjudicate the matter.

The applicant, a former partner of the respondent LLP, had been expelled from the partnership. The dispute arose from the applicant’s claim that his expulsion was carried out in an unfair manner and involved alleged misconduct by the managing partner of the LLP. The applicant sought to invoke the arbitration clause contained in the LLP agreement dated August 1, 2014.

The respondents opposed the initiation of arbitration, asserting that the LLP was not a signatory to the LLP agreement and, therefore, could not be subjected to arbitration proceedings under the agreement’s terms. The managing partner of the LLP, who was named as a respondent, also contended that the allegations were of a personal nature and did not warrant arbitration.

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The applicant argued that the LLP agreement governed the rights, duties, and liabilities of the partners and that disputes arising from it were covered under the arbitration clause. The agreement included provisions relating to partner expulsion and governance, which, according to the applicant, made the LLP a necessary party to the dispute.

The court examined Clause 23 of the LLP agreement, which contained the arbitration clause. It noted that the clause covered disputes “between the Partners” as well as disputes “relating to the business or affairs of the LLP or the rights, duties, or liabilities of any of the Parties under this Agreement.” The court observed:

"Even a plain reading of the arbitration agreement would show that the subject matter of arbitration would include any construction or application of the LLP Agreement. It would also include any matter in any way relating to the business and affairs of BDO. It also includes interpretation of any rights, duties or liabilities of any partner of BDO. This would necessarily entail BDO being a necessary party in a dispute such as the one involved in the matter at hand."

The court further addressed the broader statutory framework of the Limited Liability Partnership Act, 2008. It observed that an LLP is not an external entity to the LLP agreement but rather the entity whose governance is structured through the agreement itself. The court stated:

"An LLP is a body corporate. To incorporate an LLP, partners need to execute an incorporation document. It is a charter document akin to the Memorandum of Association in the case of companies. For an LLP to operate, its partners need to execute an LLP Agreement, which is what gives agency to the partners to operate the LLP."

The court also referred to the statutory provisions that govern LLPs, noting that the LLP agreement is an essential document regulating the mutual rights and duties of the partners and the LLP. It observed that excluding the LLP from arbitration proceedings would be akin to excluding a company from disputes concerning its own Articles of Association.

Further, the court cited previous decisions on arbitration agreements involving non-signatories, stating:

"Whether a non-signatory has accorded implicit consent to the arbitration agreement is a matter to be inferred through the acts, conduct and circumstances including relationship between the contracting parties, the commonality of subject matter and the involvement of such party in the performance of the very contract containing the arbitration clause."

The court also noted that under the First Schedule of the LLP Act, disputes arising among partners concerning the LLP agreement were deemed arbitrable under the Arbitration and Conciliation Act, 1996, even if an explicit arbitration clause was absent. This reinforced the view that arbitration was the appropriate mechanism for resolving the present dispute.

The court rejected the objections raised by the respondents and held that the arbitration agreement extended to disputes concerning the LLP, even if the LLP was not a direct signatory. It directed the appointment of an arbitral tribunal to adjudicate the dispute.

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It appointed Justice (Retd.) Manoj Sanklecha, a former judge of the Bombay High Court, as the nominee arbitrator for the respondents. In case of any conflict, Justice (Retd.) Gautam Patel was designated as an alternative nominee arbitrator. The presiding arbitrator would be appointed by the two nominated arbitrators.

The court instructed that a copy of the order be communicated to the nominee arbitrator by the applicant’s advocates within one week. The nominee arbitrator was required to submit the statutory statement of disclosure under Section 11(8) read with Section 12(1) of the Arbitration and Conciliation Act, 1996, within two weeks of receiving the order. The arbitral tribunal was directed to issue further procedural directions upon constitution.

The court also clarified that the costs of the present application would be decided by the arbitral tribunal during the arbitration proceedings. It held that all actions pursuant to the order could proceed based on a downloaded copy available on the court’s website.

Case Title: Kartik Radia vs. M/s. BDO India LLP and Anr.
Neutral Citation: 2025:BHC-OS:3441
Case Number: COMM. Arbitration Application No. 31 of 2022
Bench: Justice Somasekhar Sundaresan

[Read/Download order]