Court’s decision
The Karnataka High Court allowed the petition seeking appointment of a sole arbitrator and held that disputes between partners of a Limited Liability Partnership must be referred to arbitration when the LLP agreement is silent, by virtue of the mandatory language contained in Section 23(4) of the LLP Act read with Entry 14 of the First Schedule. The Court observed that although the LLP agreement dated 15.10.2022 did not contain an arbitration clause, the statutory framework itself imposed arbitration as the default mechanism for dispute resolution in the absence of a contractual provision to the contrary. Further, the Court noted that the parties’ conduct—particularly the exchange of emails and reply notices—demonstrated consensus on referring the dispute to arbitration, with disagreement limited only to the nomination of arbitrators.
The Court concluded that the Respondent had unequivocally acknowledged the intention to arbitrate, and therefore the Court was required to exercise its powers under Section 11(5) and 11(6) of the Arbitration and Conciliation Act. Accordingly, it appointed a former Judge of the High Court as the sole arbitrator and directed that the arbitration proceed under the aegis of the Arbitration and Conciliation Centre attached to the Court. Directions were also issued to the Registry to forward the order to the Centre and for the parties to appear before it on a stipulated date. The Civil Miscellaneous Petition was accordingly allowed.
Facts
The Petitioner and the Respondent had entered into an LLP Agreement on 15.10.2022 governing their rights and obligations as partners of the Limited Liability Partnership. Disputes subsequently arose, prompting the Petitioner to indicate through an email dated 08.01.2024 that the matter could be referred to arbitration. The Respondent, by email dated 10.01.2024, agreed in principle but sought time to finalise the details.
The Petitioner then issued a legal notice dated 18.01.2024 invoking Section 23(4) of the LLP Act and Entry 14 of the First Schedule, asserting that disputes must be adjudicated by arbitration in the absence of a specific agreement. The Petitioner nominated an arbitrator. The Respondent, in a reply dated 05.06.2024, reiterated willingness to resolve disputes before an arbitral tribunal and nominated another arbitrator but did not concur with the Petitioner’s choice.
In view of the deadlock and absence of consensus on a sole arbitrator, the Petitioner approached the High Court under Section 11 seeking appointment of an arbitrator.
Issues
The Court examined the following key issues:
- Whether disputes between LLP partners must be referred to arbitration when the LLP agreement contains no arbitration clause.
- Whether Entry 14 of the First Schedule to the LLP Act imposes mandatory arbitration.
- Whether the conduct of the parties, including email correspondence, constituted an agreement to arbitrate.
- Whether the Court should intervene under Section 11 to appoint an arbitrator due to lack of consensus.
Petitioner’s arguments
The Petitioner argued that Section 23(4) of the LLP Act makes the First Schedule applicable whenever an LLP agreement is silent on specific matters. It was asserted that Entry 14 provides that all disputes between partners arising out of the LLP agreement shall be referred to arbitration. The Petitioner contended that this statutory direction overrides contractual silence, creating a compulsory arbitration mechanism.
The Petitioner submitted that the Respondent had, at every stage, acknowledged the appropriateness of arbitration and had even nominated an arbitrator. Since the only disagreement was regarding the choice of arbitrator, the Petitioner contended that the Court must exercise its statutory power to appoint a sole arbitrator to avoid further delay. It was further argued that the purpose of the LLP Act would be frustrated if disputes between partners were allowed to linger in the absence of consensus.
Respondent’s arguments
The Respondent did not appear before the Court despite service of notice but had earlier communicated through legal correspondence that the allegations raised by the Petitioner would be contested before an arbitral tribunal once constituted. The Respondent’s reply notice clearly stated a willingness to arbitrate, with objection only to the Petitioner’s nominated arbitrator.
Although the Respondent raised concerns about the choice of the Petitioner’s nominee earlier, it did not contest the applicability of arbitration under Section 23(4) or Entry 14. This conduct demonstrated acceptance of arbitration as the dispute resolution mechanism, though the Respondent insisted on nominating its own arbitrator.
Analysis of the law
The Court undertook a detailed analysis of Section 23 of the LLP Act, which outlines the relationship of partners and the rights and duties arising out of the LLP agreement. Subsection (4) assumes significance because it mandates that in the absence of any agreement on a particular matter, the provisions of the First Schedule shall apply. Entry 14 of the First Schedule specifically provides that all disputes between partners arising out of the LLP agreement must be referred for arbitration under the Arbitration and Conciliation Act.
The Court interpreted this as a form of statutory arbitration, where the legislature has predetermined arbitration as the mode of resolution when the LLP agreement is silent. This interpretation reinforces the objective of providing a predictable and efficient mechanism for internal dispute resolution. The Court recognised that while parties are free to contractually replace or override the First Schedule, silence in the agreement automatically triggers statutory arbitration. Thus, Section 23(4) read with Entry 14 operates as a default arbitration clause incorporated by law.
Precedent analysis
The judgment implicitly aligns with jurisprudence that emphasises minimal judicial interference at the Section 11 stage and encourages reference to arbitration wherever possible. The Supreme Court has repeatedly held that courts must give primacy to arbitration as a forum when parties have expressed willingness or when statutory frameworks mandate arbitration. Although the High Court’s order does not cite specific case names, it reflects the pro-arbitration philosophy embedded in modern commercial law and the statutory interpretation principles laid down in earlier judgments.
Court’s reasoning
The Court concluded that the LLP agreement’s silence on arbitration did not negate arbitration, because Section 23(4) statutorily incorporates the First Schedule. Therefore, Entry 14 creates a binding obligation on partners to arbitrate disputes arising from the LLP agreement. The Court observed that both parties had, through email and notice correspondence, confirmed willingness to arbitrate, with disagreement limited only to the choice of arbitrator.
In such circumstances, the Court held that it was appropriate to exercise powers under Section 11 to appoint a sole arbitrator to avoid procedural stagnation. The Respondent’s absence during the hearing was deemed immaterial, as the documentary record demonstrated prior acceptance of arbitration. The Court therefore appointed a former High Court Judge as the sole arbitrator and issued operative directions to the Arbitration Centre.
Conclusion
The High Court allowed the petition, appointed the nominated arbitrator, and directed the Arbitration Centre to take necessary steps for commencement of proceedings. The Court emphasised that disputes between LLP partners must be resolved swiftly and efficiently through arbitration when the LLP agreement is silent, in accordance with Section 23(4) read with Entry 14. The petition was disposed of with directions for the parties to appear before the Centre on the specified date.
Implications
This judgment clarifies that silence in an LLP agreement on dispute resolution does not create a vacuum; instead, statutory arbitration becomes compulsory. It strengthens the legal certainty surrounding internal governance of LLPs, ensuring that disputes do not escalate into prolonged litigation. The ruling will guide partners drafting LLP agreements and will influence future petitions under Section 11 involving LLP-related disputes. It also reaffirms the judiciary’s pro-arbitration stance, reducing room for procedural obstruction and ensuring timely adjudication of commercial conflicts.
