Director of a Company Cannot Be Made a Party to Arbitration under the ‘Group of Companies’ Doctrine

Subsequent to the Supreme Court’s judgment in the case of Cox & Kings Ltd. v. SAP India Pvt. Ltd (discussed here) pertaining to the ‘Group of Companies’ doctrine, the Delhi High Court (“Court“), in the case of Vingro Developers Pvt. Ltd. v. Nitya Shree Developers Pvt. Ltd.(“Vingro Case), has opined on the applicability of the group of companies doctrine to the directors of a company and adding directors as a party to arbitration. 

In the Vingro Case, Nitya Shree Developers Private Limited (“Respondent“) had entered into 2 (two) Builder Buyer Agreements with Vingro Developers Private Limited (“Petitioner“) with respect to the Respondent’s Resident Township Project named “RLF City” situated in Rajasthan. Director 1 and Director 2 (together referred to as the “Directors“) were the directors and authorised representatives of the Respondent; and Director 1 had signed the Builder Buyer Agreements on behalf of the Respondent. Pursuant to the Respondent’s failure to hand over the possession of the plots to the Petitioner and the unsatisfactory reply to its notices, the Petitioner invoked arbitration under Section 21 of the Arbitration & Conciliation Act, 1966 (“Arbitration Act“) and as stipulated in the arbitration clauses of the agreements.

Relying on the Supreme Court’s position on the group of companies doctrine and its application to bind non-signatories to an arbitration agreement in the case of Cox & Kings Ltd., the Petitioner contended that the Directors were necessary parties to the suit, in their capacity as directors of the Respondent. The Petitioner referred to the following observations made by the Supreme Court: (i) under Section 2(1) read with Section 7 of the Arbitration Act, ‘parties’ include both signatories and non-signatories; and (ii) there exists a difference between non-signatories and third parties as non-signatories are those who expressly consent through means other than signatures. It was further submitted by the Petitioner that Director 1 was a signatory to the agreements executed between the parties and since the respondents had filed a combined reply to the petition rather than individual replies, the Directors could not be separated from the Respondent.

The Respondent mainly contended that the Directors were not parties to the agreements and relied on the Supreme Court’s decision in the case of Sundaram Finance Ltd. v. T. Thankam2, wherein it was held that in case of there being 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. The Respondent, also relying on Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar3, further contended that the Directors had only acted in their capacity as directors of the Respondent and could not be held personally liable. The Respondent prayed that the names of the Directors be deleted from the array of parties before referring the matter to arbitration, since the arbitration agreement was only executed between the Petitioner and the Respondent, and no arbitration agreement existed wherein the directors were the parties.

While examining the Court’s scope of power under Section 11, the Court observed that the scope of exercising jurisdiction of the High Court as under Section 11 is limited to looking into the aspect of the existence of the arbitration agreement which requires the examination as to whether the agreement contains a clause providing for arbitration pertaining to any disputes having been arisen between the parties out of the said agreement. The Court referred to Emmar MGF Land Ltd. v. Aftab Singh4, wherein it was clarified that “upon arbitration being invoked, the only valid reasoning for a court’s refusal to refer the matter to arbitration is the non-existence of an arbitration agreement“. The Court opined that its jurisdiction was very limited and confined to only examining the existence of a prima facie arbitration agreement and no other issues.

While scrutinising the Respondent’s contention, the Court observed that the Respondent was the principal and the Directors, being directors, were only agents of the former. The Court further opined that “to bind a non-signatory to an arbitration agreement, there must exist a common intention between the parties to do so. 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.

The Court noted that Director 1 was a signatory to the agreements in his capacity as the authorised signatory of the Respondent being its director, similarly, Director 2 was a non-signatory to the agreements and the Directors were made party to the petition in their capacity as the directors of the Respondent. The Court observed that the relationship between the Respondent with the Directors was that of principal and agent as specified under Section 182 of the Indian Contract Act, 1872 (“Contract Act“) and therefore, no intention to bind a non-signatory to the agreement between the parties could be found and the reliance placed on Cox and Kings Limited (supra) was thereby distinguished.

The Court referred to Section 230 of the Contract Act which provides as follows:

S.230 Agent cannot personally enforce, nor be bound by, contracts on behalf of principal- In the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them. 

Presumption of contract to contrary—Such a contract shall be presumed to exist in the following cases:

  • where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad;
  • where the agent does not disclose the name of his principal;
  • where the principal, though disclosed, cannot be sued. 

While relying on the view taken in Vivek Automobiles Ltd. v. Indian Inc.5, wherein it was held that the agent could not be sued when the principal had been disclosed, the Court held that subject to a contract to the contrary, an agent cannot be held liable for the acts done of a known principal and in light of the relationship of principal – agent existing between the Respondent and Director 1 and Director 2 respectively as under Section 182 and Section 230 of the Contract Act, the Directors could not be made parties to the arbitration.

1 Arb.P. 667/2023

2 (2015) 14 SCC 444

3 (2011) 11 SCC 375

4 (2019) 12 SCC 751

5 (2009) 17 SCC 657