Group of Companies doctrine cannot be invoked to implead non-signatory directors of a company in an arbitration proceeding

In the matter of Vingro Developers Private Limited vs. Nitya Shree Developers Private Limited through its Principal Officer & Ors., (ARB. P. 667 of 2023) decided by the Hon’ble Delhi High Court on 24.01.2024. 

FACTS: The Respondent no. 1 company was engaged in the business of real estate development. The Petitioner had executed twelve builder buyer agreements with the Respondent no. 1 for purchase of various plots of land. However, the possession of the said plots was not given to the Petitioner as per the timeline set out in the builder buyer agreements thus giving rise to a dispute between the parties. Accordingly, the Petitioner filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 for appointment of an arbitrator to adjudicate the disputes between the parties.

The Petitioner had also arrayed the two directors of the Respondent no. 1 company as Respondent nos. 2 and 3 and sought initiation of arbitration against them as well.

The Petitioner contended that the Respondent nos. 2 and 3 were necessary parties to the arbitration proceedings as they were the directors and authorised representatives of Respondent No.1 and thereby, in this capacity, Respondent No.2 had signed the builder buyer Agreements on behalf of Respondent no.1. Reliance was placed on the recent judgment of the Hon’ble Supreme Court in the matter of “Cox and Kings Limited v. SAP India Private Limited” 2023 SCC OnLine SC 1634 whereby the “Group of Companies Doctrine” and its application to bind non-signatories to an arbitration agreement, was upheld. It was further emphasized by the Petitioner that the said judgment held that there exists a difference between non-signatories and third-parties as non-signatories are those who express consent through means other than signatures. It was also submitted that since the Respondents had filed a combined reply rather than individual replies, it shows that the Respondent No. 2 and 3 cannot be separated from Respondent No.1.

On the other hand, it was contended on behalf of the Respondent No. 2 and 3 that they are not parties to the arbitration agreements and therefore, the present petition is liable to be dismissed. Reliance was placed on the judgment of Sundaram Finance Ltd. v. T. Thankam, (2015) 14 SCC 444, whereby the Apex court held that in the case of more than one party to a petition, if there are those 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. In addition, it was also contended that Respondent No. 2 and 3 have only acted in their capacity as directors of Respondent No.1 and cannot be held personally liable.

ISSUE: Whether the group of companies’ doctrine can be applied to initiate arbitration against non-signatory directors of a company.

OBSERVATIONS: While appreciating the ratio of Cox and Kings Limited (supra), the Delhi High Court noted that as per the said judgment the application of this doctrine was contingent upon the common intention of the parties to bind the non-signatories by the arbitration agreement. Moreover, the court must examine the relationship of the parties and the circumstances of the same to competently impute to them the intended meaning behind them.

In the above backdrop, the Court observed that in the present case that the Respondent No. 2 was a signatory to the agreement in his capacity as the authorised signatory of Respondent no.1 being its director, similarly, whilst Respondent no. 3 is a non-signatory to the agreement. The Court opined that the relationship between Respondent No. 1 with Respondent 2 and 3, beings its directors, is that of principal and agent within the meaning of Section 182 of the Indian Contract Act, 1872. It was held that no intention to bind a non-signatory to the agreement between the parties can be discerned and the reliance placed on Cox and Kings Limited (supra) was distinguished. Thus, the plea of application of group of companies’ doctrine was rejected by the Court.

The Court also rejected the plea of impleadment of Respondent nos. 2 and 3, on the ground that as per Section 230 of the Indian Contract Act, 1872, subject to a contract to the contrary, an agent cannot be held liable for the acts done of a known principal.

On the above reasoning, the Court allowed the Section 11 petition albeit, only against the Respondent no. 1.

(DG-01-2024)