ARTICLE
15 April 2024

Delhi HC: Directors Of A Company Cannot Be Made Party To An Arbitration Under The 'Group Of Companies' Doctrine

AP
Argus Partners

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Argus Partners is a leading Indian law firm with offices in Mumbai, Delhi, Bengaluru and Kolkata. Innovative thought leadership and ability to build lasting relationships with all stakeholders are the key drivers of the Firm. The Firm has advised on some of the largest transactions in India across various industry sectors. The Firm also, regularly advises the boards of some of the biggest Indian corporations on governance matters. The lawyers of the Firm have been consistently regarded as the trusted advisors to its clients with a deep understanding of the relevant business domain, their business needs and regulatory nuances which enables them to clearly identify the risks involved and advise mitigation measures to protect their interests.
The Delhi High Court recently in the case of, Vingro Developers Private Limited v. Nitya Shree Developers Private Limited, (Arb. P. 667/2023), has held that directors of a company cannot be made party...
India Litigation, Mediation & Arbitration
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The Delhi High Court recently in the case of, Vingro Developers Private Limited v. Nitya Shree Developers Private Limited, (Arb. P. 667/2023), has held that directors of a company cannot be made party to an arbitration under the 'Group of Companies' doctrine.

Brief facts:

This judgment was passed in a petition filed under Section 11 of the Arbitration Act. The brief facts of the case are set out hereunder:

  1. The Respondent No. 1 is a residential real estate developer, which was constructing a project named 'RLF City'. The Petitioner, being desirous of purchasing 12 plots, had executed twelve Builder Buyer Agreements ('BBA') in favour of the Respondent No. 1. The BBA specifically stated that Respondent No. 1 ought to complete the project by December 30, 2016, subject to force majeure conditions as set out in the BBA.
  1. However, the Respondent No. 1 company failed to handover the possession of the plots to the Petitioner as per the terms of the BBA and eventually the Petitioner invoked arbitration vide notice dated January 16, 2023 under Section 21 of the Arbitration Act. The arbitration clause in the BBA is set out hereunder:

    "47. (c) All or any disputes arising out of or touching upon or in relations to the term of this Letter of Allotment including the interpretations and validity of the terms thereof and the respective rights and obligations of the parties shall be settled amicably by mutual discussions failing which the same shall be settled through Arbitrations. The arbitrations proceeding shall be governed by the Arbitration & Conciliations Act, 1996 and/or any statutory amendments/ modifications thereof for the time being in force. The arbitrations proceedings shall be held at an appropriate location in Gurgaon/Delhi. The courts at Delhi or Rajasthan only shall have jurisdiction in all the matters arising out of/ or touching upon and/ or in connections with this Allotment."
  2. As the notice issued under Section 21 of the Arbitration Act was not replied by the respondent, the instant petition was filed under Section 11 of the Arbitration Act.

Submissions made by the Petitioner:

The Petitioner submitted that Respondent Nos. 2 and 3, who are the directors of the Respondent No. 1company, were necessary parties to the suit in view of Cox and Kings judgement which upheld the application of the Group of Companies doctrine to bind non-signatories to arbitration agreement. The Petitioner further submitted that the signature of theRespondent No. 2is affixed as the signatory ofRespondent No. 1on all the 12 BBAs, and further the fact that the respondents have filed a combined reply rather than individual replies, suffice to show that Respondent Nos. 2 and 3are not separate from Respondent No. 1.

Submissions made by the Respondents:

The Respondents submitted that the Respondent Nos. 2 and 3 were not parties to the BBAs and therefore they ought not to be brought within the ambit of the arbitration clause contained therein. In view of the same, the counsel submitted that the instant petition ought to be dismissed, since the Hon'ble Supreme Court of India, in the case of Sundaram Finance Ltd. v. T. Thankam, (2015) 14 SCC 444, held that when there are more than one party to a petition, if there are those who are not covered under the arbitration agreement or those not party to the arbitration agreement, then such matter cannot be referred to arbitration against such parties.

It was also submitted that the Respondent Nos. 2 and 3 have acted in their capacity as directors of Respondent No. 1 and therefore they cannot be held personally liable. The respondent relied upon the case of Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar, (2011) 11 SCC 375 wherein reference was made to Jagdish Chander v. Ramesh Chander 2007 (5) SCC 719, Yogi Agarwal v. Inspiration Clothes & U 2009 (1) SCC 372 and S.N. Prasad v. Monnet Finance Ltd. (2011) 1 SCC 320.

Issue:

Whether the Respondent Nos. 2 and 3, being directors of the Respondent No. 1 company and also non-signatories to the arbitration agreement, would be bound by the arbitration agreement executed between the Petitioner and the Respondent No. 1 company, applying the Group of Companies doctrine.

Observations of the Court:

The court observed that the main issue in the instant case was the fact that the Respondent Nos. 2 and 3 were not parties to the arbitration agreement and therefore the matter could not be referred to arbitration. The court observed that under section 11 of the Arbitration Act, it has the limited power of looking into the aspect of the existence of an arbitration agreement.

The court relied upon Emmar MGF Land Limited v. Aftab Singh (2019) 12 SCC 751 to observe that once arbitration is invoked, the only valid reason for a court's refusal to refer the matter to arbitration would be non-existence of an arbitration agreement.

However, the Court observed that Respondent Nos. 2 and 3, being the director of the Respondent No. 1 company, are only agents of the company. The court referred to paragraph no. 172(e) of the Cox and Kings judgment and noted that the apex court stipulates that the underlying application of the Group of Companies doctrine is contingent to common intention of the parties to bind the non-signatories by the arbitration agreement. The court also relied upon the case of Cheran Properties Ltd. v. Kasturi & Sons Ltd., (2018) 16 SCC 413 in that regard.

Since Respondent No. 2 and Respondent No. 3 have been impleaded as directors of Respondent No. 1 company, the relationship between the Respondent No. 1 and the Respondent Nos. 2 and 3 being its directors, is that of a Principal and Agent as specified under Section 182 of the Indian Contract Act, 1872. Therefore, in the absence of an intention to bind a non-signatory to the agreement between the parties, reliance upon the case of Cox and Kings is misplaced.

The court relied upon Vivek Automobiles Ltd. v. Indian Inc., (2009) 17 SCC 657, ACE Innovators (P) Ltd. v. Hewlett Packard India Sales (P) Ltd., 2013 SCC OnLine Del 4019to further reiterate that the legislative Intent behind section 230 of the Indian Contract Act, 1872 is clear. It prescribes that that subject to a contract to the contrary, an agent cannot be held liable for the acts done of a known principal.

Conclusion:

The court held that in view of the relationship of a principal and an agent existing between the Respondent No. 1 and Respondent Nos. 2 and 3, respectively under Section 182 and Section 230 of the Indian Contract Act, 1872 it is evident that unless the conditions under the proviso are fulfilled, an agent cannot be held liable for or be bound by the contracts, entered into on behalf of the principal. Accordingly, in the instant case, it was held that the Respondent Nos. 2 and 3, being non-signatories to the arbitration agreement, cannot be made parties to the arbitration, applying the Group of Companies doctrine. Accordingly, the Court appointed an arbitrator for adjudication of the dispute between the Petitioner and Respondent No. 1 Company.

Please find attached acopy of the judgement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
15 April 2024

Delhi HC: Directors Of A Company Cannot Be Made Party To An Arbitration Under The 'Group Of Companies' Doctrine

India Litigation, Mediation & Arbitration

Contributor

Argus Partners is a leading Indian law firm with offices in Mumbai, Delhi, Bengaluru and Kolkata. Innovative thought leadership and ability to build lasting relationships with all stakeholders are the key drivers of the Firm. The Firm has advised on some of the largest transactions in India across various industry sectors. The Firm also, regularly advises the boards of some of the biggest Indian corporations on governance matters. The lawyers of the Firm have been consistently regarded as the trusted advisors to its clients with a deep understanding of the relevant business domain, their business needs and regulatory nuances which enables them to clearly identify the risks involved and advise mitigation measures to protect their interests.
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