Directors of a Company Cannot Be Included in Arbitration Proceedings under Group of Companies Doctrine

In a recent ruling, the Delhi High Court addressed an important aspect of arbitration law pertaining to the inclusion of Directors as parties to arbitration proceedings under the 'Group of Companies' doctrine. The judgment, rendered in the case of Vingro Developers Private Limited v. Nitya Shree Developers Private Limited, clarifies the scope of the doctrine and its applicability to Directors. This article provides an overview of the case and the Court's key observations.

Background:

The case was initiated through a petition filed under Section 11 of the Arbitration Act. The Petitioner, Vingro Developers Private Limited, had entered into twelve Builder Buyer Agreements (BBAs) with the Respondent, Nitya Shree Developers Private Limited, for the purchase of plots in the 'RLF City' project. Due to the Respondent's failure to deliver possession of the plots as per the agreed terms, the Petitioner invoked arbitration under Section 21 of the Arbitration Act.

 

Arguments:

The Petitioner contended that the Directors of the Respondent company, who were non-signatories to the arbitration agreement, should be made parties to the arbitration proceedings based on the application of the 'Group of Companies' doctrine. Citing the Cox and Kings judgment, the Petitioner asserted that the doctrine should bind non-signatories to the arbitration agreement. The Petitioner also highlighted that the Directors had signed the BBAs on behalf of the Respondent, and their collective response indicated their inseparability from the Respondent.

The Respondents, on the other hand, argued that the Directors were not party to the BBAs and therefore should not be encompassed by the arbitration clause. They relied on the Supreme Court's decision in Sundaram Finance Ltd. v. T. Thankam, which stated that arbitration cannot be invoked against parties who are not covered by or are not party to the arbitration agreement.

 

Court's Observations:

The Delhi High Court carefully examined the central issue of whether the Directors, as non-signatories to the arbitration agreement, could be bound by the agreement based on the Group of Companies doctrine. The Court acknowledged its limited power under Section 11 of the Arbitration Act to determine the existence of an arbitration agreement.

Referring to precedent cases such as Cox and Kings and Cheran Properties Ltd. v. Kasturi & Sons Ltd., the Court emphasized that the application of the Group of Companies doctrine requires a common intention among the parties to bind non-signatories to the arbitration agreement. The Court further noted that the Directors, as agents of the Respondent company, were only representatives and could not be held personally liable.

Relying on the Indian Contract Act, the Court clarified that in the absence of an intention to bind a non-signatory to the agreement, the Directors could not be made parties to the arbitration proceedings. The Court emphasized that an agent cannot be held liable for acts performed on behalf of a known principal unless specific conditions are fulfilled.

 

Conclusion:

The Delhi High Court concluded that, considering the relationship between the Respondent company and its Directors as that of a principal and agent, the Directors could not be included as parties to the arbitration proceedings under the Group of Companies doctrine. Accordingly, the Court appointed an arbitrator to adjudicate the dispute between the Petitioner and the Respondent company.

 

This ruling provides clarity on the scope and applicability of the Group of Companies doctrine in arbitration cases involving Directors. It reinforces the principle that unless there is a specific intention to bind non-signatories, Directors should not be made parties to arbitration proceedings.

 

JUDGMENT