The present case addresses the question of whether disputes between partners of a limited liability partnership (LLP) and the LLP can be covered by the arbitration clause contained in a LLP Agreement to which the LLP is not a signatory.
The dispute arose when a former partner of the LLP filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Bombay High Court for the appointment of an arbitrator. The application was directed against the LLP as well as its Managing Partner, with the grievance of the applicant pertaining to their expulsion from the LLP and the alleged misconduct by the Managing Partner in effecting the expulsion.
It was the Respondent’s case that the arbitration clause in the LLP agreement should only cover disputes between the partners of the LLP. Further, that the matter of expulsion is between the former partner and the LLP, and thus, is not covered by the arbitration clause.
However, the Bombay High Court rejected the argument that the arbitration clause in the LLP agreement only covers disputes between the partners and not the disputes between a partner and the LLP.
The court noted that Indian law governing privity of non-signatories to arbitration agreements is well settled in the Supreme court’s judgement in Cox and Kings Ltd. Vs. SAP India Pvt. Ltd. Further, the court observed that the LLP is not a “third party” to an LLP Agreement in the manner that the concept of “third parties” is conventionally understood. The court stated that it would be wrong to state that the LLP is a “third party” to the LLP Agreement as the very operation of the LLP during its existence is the common commercial objective of the parties to the LLP Agreement.
Therefore, the court held that there is no merit 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. Hence, it was held that the LLP is a necessary party to the arbitration proceedings relating to the operations and governance of LLP even if the LLP is not a signatory to the LLP agreement.
The court further observed that even if there had been no arbitration clause at all in the LLP Agreement, the First Schedule of LLP Act, 2008 would lead to an arbitration agreement existing in the eyes of law, for disputes among the partners. Consequently, the LLP would be a necessary party to such proceedings even in the absence of an arbitration clause in LLP agreement. However, the court left this question to the discretion of the tribunal that was to be formed.
The decision resonates with prior jurisprudence leaving detailed questions of party status to the arbitral tribunal, while affirming a prima facie arbitrability under Section 11 of the Arbitration and Conciliation Act, 1996. It also underscores the LLP Act’s pro-arbitration intent, potentially influencing future cases involving unincorporated entities.