2025 (3) TMI 184 - HC - Indian Laws

Interpretation of statute - Section 11 of the Arbitration and Conciliation Act 1996 - 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 limited liability partnership agreement (LLP Agreement) to which the LLP is not a signatory? - HELD THAT - Under Item 1 of the First Schedule the mutual rights and duties of the LLP and its partners subject to the LLP Agreement is governed by the provisions of the First Schedule. Item 14 of the First Schedule provides that all disputes among partners arising out of the LLP Agreement that cannot be resolved in terms of the LLP Agreement shall be referred to arbitration under the Arbitration Act. This is another statutory indication that the subject matter of the LLP Agreement includes duties owed by partners to the LLP and also duties owed to the partners by the LLP. This would necessarily render the LLP a necessary party to the arbitration proceedings relating to the LLP s operations and governance despite the LLP not being a signatory to the LLP Agreement. Therefore even if there had been no arbitration clause at all in the LLP Agreement the First Schedule would lead to an arbitration agreement being in existence in the eyes of law for disputes among the partners. The dispute at hand relates to the expulsion of a partner from the LLP. Whether the Managing Partner alone was responsible for it and other partners acquiesced in or approved of that decision is a subject matter of merits of the dispute. Whether the expelled partner s conduct warranted expulsion is a question that would necessarily require examination of the injury if any occasioned to the LLP s interests by such partner s conduct for the drastic step of expulsion to be taken. Therefore it would be simply impossible for this Court to reject this Application under Section 11. The upshot of this contention is that the LLP is not a necessary party to the dispute. Even a plain reading of the invocation notice addressed to Kothari would show that it was issued to him in his capacity as the Managing Partner. Therefore to read it as a personal dispute of Radia with Kothari in his individual capacity is a misconceived contention. This argument has to be stated to be rejected. The dispute inter alia relates to expulsion of Radia. The expulsion is from the LLP. The cause for expulsion would necessarily have to relate to the injury allegedly occasioned to the LLP and to its partners by the alleged conduct of Radia that led to the expulsion. Conclusion - The objections raised by the Respondents to allowing this Section 11 Application are totally devoid of merit. Despite the existence of an arbitration clause in the LLP Agreement and in Item 14 of the First Schedule the contention that the LLP itself is extraneous to the very LLP Agreement governing the LLP in my opinion is untenable and frivolous. Such objections have been raised evidently to delay and frustrate the commencement of arbitration proceedings. Applocation disposed off.

Summary

The judgment addresses the issue of whether disputes between partners of a Limited Liability Partnership (LLP) and the LLP itself can be covered by an arbitration agreement contained in an LLP Agreement to which the LLP is not a signatory. The Court rejects the Respondents' proposition that an LLP can never be a party to arbitration proceedings initiated under such an agreement.

The Applicant, a former partner of BDO India LLP, seeks to initiate arbitration due to grievances related to his expulsion from the LLP and alleged misconduct by the Managing Partner. The Respondents object, arguing that the LLP is not a signatory to the LLP Agreement, and thus disputes with the LLP cannot be arbitrated under the agreement.

The Court examines Clause 23 of the LLP Agreement, which contains the arbitration agreement. The clause covers disputes between partners or their representatives, and matters relating to the business or affairs of the LLP. The Court interprets that the subject matter of arbitration includes any construction or application of the LLP Agreement, and any matter relating to the business and affairs of the LLP, thus making the LLP a necessary party in such disputes.

The Court refers to the statutory scheme under the LLP Act, noting that the law on privity of non-signatories to arbitration agreements is well developed. The LLP is not a "third party" to the LLP Agreement, as the running of the LLP is the subject matter of the agreement. The LLP Agreement is a mandatory statutory charter document governing the LLP, similar to a company's Articles of Association. The Court concludes that the LLP is not extraneous to the LLP Agreement.

The Court addresses the Respondents' reliance on Section 23 of the LLP Act, which governs the relationship of partners and the LLP. The Court finds the argument that the LLP is excluded from arbitration due to not being a signatory to be invalid. The LLP Agreement, the LLP Act, and the First Schedule provide that disputes among partners arising out of the LLP Agreement shall be referred to arbitration. This indicates that the LLP is a necessary party to arbitration proceedings despite not being a signatory.

The Court rejects the Respondents' objections, including the argument that the dispute is only with the Managing Partner and not the LLP, and that defamation claims are not arbitrable. The Court emphasizes that the Arbitral Tribunal has the power to rule on its own jurisdiction under Section 16 of the Arbitration Act, and such objections should not delay arbitration proceedings.

The Court appoints Justice (Retd.) Manoj Sanklecha as the nominee arbitrator for the Respondents, with Justice (Retd.) Gautam Patel as an alternative in case of conflict. The Presiding Arbitrator will be appointed by the two nominated arbitrators. The Court directs the parties to proceed with the arbitration process as outlined in the order.