LLP Bound by Arbitration Clause in Partnership Agreement Even as Non-signatory: Bombay High Court

SN Thyagarajan (Bar and Bench) 11 March 2025

Investor Interest

The Bombay High Court recently ruled that a Limited Liability Partnership (LLP) can be bound by an arbitration clause in its partnership agreement, even if the LLP itself is not a signatory to the agreement.

The Court held that an LLP, as the central entity governed by the partnership agreement, cannot claim to be a "third party" to the agreement.

The ruling paves the way for arbitration in a dispute between former partner Kartik Radia and BDO India LLP. The Court has rejected the LLP’s argument that it was not a signatory to the arbitration clause for it to be made a party to arbitration.

Justice Somasekhar Sundaresan ruled, "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."

The central issue before the Court was whether disputes between partners of an LLP and the LLP itself could be subject to arbitration under the LLP agreement, even if the LLP was not a signatory to the agreement.

The Court answered this question in the affirmative, holding that the LLP agreement governs the relationship between the partners and the LLP, making the LLP a necessary party to any arbitration arising from the agreement.

Justice Sundaresan emphasised that the LLP agreement is a statutory document akin to a company’s Articles of Association, binding the LLP and its partners. The Court also referred to the Limited Liability Partnership Act, 2008, which mandates that disputes among partners arising out of the LLP agreement shall be referred to arbitration.

The dispute arose after Kartik Radia, a former partner of BDO India LLP, was expelled from the partnership in 2019. Radia alleged that his expulsion was carried out in a high-handed manner by Milind Kothari, the Managing Partner of BDO.

Radia sought to initiate arbitration under the LLP agreement, but BDO and Kothari (respondents) objected, arguing that the LLP was not a signatory to the agreement and, therefore, could not be compelled to arbitrate.

The Court rejected the respondents' arguments, stating that the LLP agreement explicitly covers disputes relating to the business and affairs of the LLP, including the rights and duties of partners.

Justice Sundaresan noted that the LLP is not a "third party" to the agreement but rather, the very subject matter of the agreement. The judge further observed that the LLP agreement is a mandatory statutory document that binds the LLP and its partners.

The Court also referred to the First Schedule of the LLP Act, which provides for a statutory arbitration agreement in the absence of an explicit clause in the LLP Agreement. This, the Court held, reinforces the arbitrability of disputes between partners and the LLP.

The Court appointed retired Justice Manoj Sanklecha as the nominee arbitrator for the respondents, with retired Justice Gautam Patel as an alternate.

The presiding arbitrator will be selected by the two nominated arbitrators. The arbitral tribunal has been directed to proceed with the matter and address the merits of the dispute.

Courtesy: Bar & Bench

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