An LLP Not A Third Party To LLP Agreement, Is Bound By Arbitration Clause: Bombay High Court
The Bombay High Court held that the operation of the LLP was not extraneous to the LLP Agreement but was, in fact, its core subject matter.
The Bombay High Court clarified that when there is a dispute between a partner and an LLP, and the LLP itself is not a signatory to the arbitration agreement, the LLP cannot claim to be extraneous to arbitration proceedings when the dispute concerns its governance.
An application under Section 11 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) had been filed, wherein the issue to be decided was 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.
A Single Bench of Justice Somasekhar Sundaresan held, “Arguing that the LLP is a “third party” to the LLP Agreement is much like arguing that a company is a third party to its own Articles of Association. A company is duty-bound to act in accordance with the Articles of Association. So is an LLP duty-bound to act in accordance with the LLP Agreement. The body corporate is the very cause for the existence of such an agreement. To argue that there is no privity to the very document governing the body corporate, and that too in a Section 11 Court, is hardly a sustainable argument.”
Advocate Amrut Joshi appeared for the Applicant, one of the partners of the LLP, while Senior Advocate Gaurav Joshi represented LLP, Respondent No. 1, and Advocate Mayur Khandeparkar represented the other partner, Respondent No. 2.
Brief Facts
The Applicant was expelled from the LLP and has raised grievances regarding his treatment by the Respondents—specifically, his expulsion from the LLP and the alleged high-handed behaviour and misconduct of the Managing Partner in carrying out the expulsion. The Applicant seeks to initiate arbitration, which the Respondents have objected to, leading to the filing of this application.
The Respondents contended that the LLP, not being a signatory to the LLP Agreement, could not be subjected to arbitration. It was argued by Respondent no.1 that the jurisdiction of the arbitral tribunal created by the arbitration clause contained in the LLP Agreement would not ever extend to disputes that a partner may have with the LLP.
Reasoning
Referring to the arbitration agreement, the Bench stated, “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 explained that an LLP was duty bound to act in accordance with the LLP Agreement, as the body corporate is the very cause for the existence of such an agreement, further to decide the issue of privity to the very document governing the body corporate in a Section 11 Court, was not sustainable.
The Court referred to Section 2(1) (o) of the Limited Liability Partnership Act (‘LLP Act’) which defines “limited liability partnership agreement” and makes it clear that the subject matter of the LLP Agreement is the determination of the mutual rights and duties of the partners, and their rights and duties in relation to the LLP.
“The very operation of the LLP during its existence is the common commercial objective of the parties to the LLP Agreement. Therefore, I have no hesitation in holding that there is no merit at all in the argument that despite the LLP being the very subject matter of the LLP Agreement, the LLP itself is extraneous to the LLP Agreement. This issue ought not to have been a matter that detained my attention when exercising jurisdiction under Section 11 of the Arbitration Act, since the consideration of such an issue would normally fall in the domain of the Arbitral Tribunal,” the Bench observed.
Consequently, the court disposed of the application and appointed an arbitrator to adjudicate the disputes between the parties, with directions to take procedural steps accordingly.
Cause Title: Kartik Radia v. M/s. BDO India LLP & Anr. (Comm. Arbitration Application No. 31 of 2022)
Appearance:
Applicant: Advocates Amrut Joshi, Prashant Trivedi, Petal Chandok, Khushboo Jain
Respondents: Senior Advocate Gaurav Joshi; Advocates Jatin Pore, Sreeram VG, Karan Jain, Mayur Khandeparkar
