Introduction
Agreement to arbitrate – through a clause in a master or a separate agreement – forms the crux of arbitration. Processes like arbitration depend entirely on parties’ written consent to arbitration agreements. Great importance is attached to party autonomy – autonomie de la volonté.[1] This age-old principle continues to be at the centre of any arbitration agreement; however, ascertaining the consent of a party, more specifically a non-signatory party, to an arbitration agreement has been up for debate.
Putting to rest this debate, a Five-Judge Constitution Bench of the Supreme Court in December 2023 upheld the validity of the Group of Companies (“GoC”) Doctrine in the jurisprudence of Indian Arbitration.[2] The GoC Doctrine, developed by Courts and tribunals in the international context, binds a non-signatory affiliate or sister concern within the same corporate group as the signatory party to an arbitration agreement, provided all parties had a mutual intention.[3]
In a recent judgment,[4] the Delhi High Court had the opportunity to interpret the scope of the GoC doctrine in an arbitration agreement, where the Petitioners attempted to make directors of the company party to the arbitration.
Dissecting the Delhi High Court Judgment
In this case, Respondent No. 1, a company involved in the business of development and construction of real estate, entered into two (2) builder-buyer agreements with the Petitioner in relation to the Respondent’s residential township project. Respondents No. 2 and 3 are the directors and authorised representatives of Respondent No. 1. Respondent No. 2 had signed these agreements, which also had an arbitration clause.
Although expected to hand over the possession of the plot to the Petitioner whose primary activity was related to real estate and renting, Respondent No. 1 could not do it within the stipulated time. After demanding refund of the amount paid along with interest through legal notices, the Petitioner invoked the arbitration clause and filed the present petition under Section 11 of the Arbitration and Conciliation Act, 1996, before the Delhi High Court for the appointment of an arbitrator.[5]
As no dispute was raised about the existence of the arbitration agreement, the arbitrability of dispute, and the territorial jurisdiction of the Delhi High Court, the main issue became about whether as directors of Respondent No. 1, Respondents No. 2 and 3 could be made party to the arbitration.[6] The Petitioner put forth the following arguments:[7]
- Respondents No. 2 and 3 were necessary parties to the proceedings as directors of Respondent No. 1.
- Even non-signatories can be bound by an arbitration agreement in light of the Supreme Court judgment in Cox & Kings.
- Respondent No. 2 was a signatory on all the agreements; the Petitioner’s statement of account maintained with the Respondents also had Respondent No. 2’s signature.
- Respondents No. 2 and 3 were inseparable from Respondent No. 1 as the Respondents filed a combined reply rather than individual responses.
On the other hand, the Respondents’ contentions were as follows:[8]
- Respondents No. 2 and 3 were not parties to the arbitration agreement; therefore, the present petition was liable to be dismissed.
- Matters could not be referred to arbitration against such parties not covered under the arbitration agreement and those not party to the arbitration agreement, in light of the Supreme Court judgment in Sundaram Finance Limited v. T. Thankam.[9]
- Respondents No. 2 and 3 only acted in their capacity as directors of Respondent No. 1 and could not be held personally liable.
- Since the arbitration agreement was between the Petitioner and Respondent No. 1, no arbitration agreement exists with the other two Respondents as parties.
The High Court noted that Respondent No. 1 (Company) was the principal and that the other Respondents (Directors) were its agents. Referring to the Cox & Kings judgment, the Court stated that the application of the GoC Doctrine was subject to the common intention of the parties to bind the non-signatories to the arbitration agreement. The Court also relied on the Cheran Properties Limited v. Kasturi & Sons Limited[10] judgment to state that common intention between the parties was necessary to bind a non-signatory to an arbitration agreement. Furthermore, the Court asserted the need to examine the parties’ relationship and circumstances to impute competently the intended meaning behind them.[11]
The Court also observed that the relationship between Respondent No. 1 and the other Respondents appeared to be that of principal and agent; hence, it could not cull out any intention to bind a non-signatory to the agreement between the parties.[12]
Referring to the Supreme Court judgment in Vivek Automobiles Ltd. v. Indian Inc.[13] and its own decision in ACE Innovators (P) Ltd. v. Hewlett Packard India Sales (P) Ltd.,[14] the Delhi High Court stated that in the absence of any contract to the contrary, an agent could not be made liable for the actions of a known principal.[15] The Court concluded that as the conditions under the proviso remained unfulfilled, it could not hold the agent liable for the acts of the principal; therefore, Respondents No. 2 and 3 could not be made parties to the arbitration.[16]
Conclusion
The Delhi High Court did not allow the impleadment of Respondents No. 2 and 3 as parties to the arbitration stating that as the directors of the company, they were merely agents and were not liable for the acts of the company in the absence of a contract to the contrary. Even though a signatory to the agreement with full awareness of the arbitration clause contained within it, Respondent No. 2 had signed the agreement in the capacity of authorised signatory and not independent party to a contract.
On this specific proposition, some other High Courts have also held that a director cannot be bound personally to third parties dealing with the company through a contract despite having signed the document on behalf of the company.
In Amravati Peoples’ Co-operative Bank Ltd. v. Giltedege Management Services Ltd.,[17] the Bombay High Court reiterated the findings of the Delhi High Court[18] that the directors of a company would be liable for misappropriation of the company’s funds and other misfeasance but not for the ordinary contractual liability of the company. The Court also held that even if the directors signed the communications on behalf of the company, only the company and not the persons signing the same could sue or be sued on the contract.[19]
In Paschim Gujarat Vij Co. Ltd. v. Manibhadra Ispat Ltd.,[20] the Gujarat High Court observed that the directors of a company owed no fiduciary or contractual duties or any duty of care to third parties dealing with the company.[21] Hence, merely signing the document on behalf of the company did not bind a director personally to the third parties dealing with the company through a contract, unless the contract or the law applicable stipulated otherwise.
This is precisely the principle the Delhi High Court applied in the present case. Although an authorised signatory to the builder-buyer agreement, Respondent No. 2 could not be held liable for the contractual liabilities of the company.
Moreover, the Cox & Kings judgment had held that to apply the GoC Doctrine, the Courts would have to consider all the cumulative factors as laid down in ONGC Ltd. v. Discovery Enterprises Private Limited[22]: (i) the mutual intent of parties, (ii) the relationship of a non-signatory to a signatory, (iii) the commonality of the subject matter, (iv) the composite nature of the transaction, and (v) the performance of the contract.[23]
In the instant case, the Petitioner referred to the GoC Doctrine to make Respondents No. 2 and 3 party to the arbitration. However, the Court disagreed to instead state that the directors of company could not be made party to the arbitration even though one of them was a signatory, as no common intention was evident between the parties to bind directors to the builder-buyer agreement in their personal capacity. This line of reasoning, along with the principal–agent relationship between the company and the directors allowed the Court not to apply the GoC Doctrine in the present case.
Nevertheless, only time will indicate the practical implementation of the GoC Doctrine in the arbitration space following the Supreme Court judgement in Cox & Kings.
For further information, please contact:
Vikash Kumar Jha, Partner, Cyril Amarchand Mangaldas
vikashkumar.jha@cyrilshroff.com
[1] Redfern and Hunter on International Arbitration (6th edn, Oxford University Press, 2023) para 2.01.
[2] Cox & Kings Ltd. v. SAP India (P) Ltd., 2023 SCC OnLine SC 1634 (Cox & Kings).
[3] Id at para 28.
[4] Vingro Developers (P) Ltd. v. Nitya Shree Developers (P) Ltd., 2024 SCC OnLine Del 486 (Vingro Developers).
[5] Id at para 5.
[6] Id at para 17.
[7] Id at para 11 and 12.
[8] Id at para 13 and 16.
[9]Sundaram Finance Limited v. T. Thankam (2015) 14 SCC 444.
[10] Cheran Properties Limited v. Kasturi & Sons Limited (2018) 16 SCC 413.
[11] Vingro Developers, para 23.
[12] Id atpara 24.
[13] Vivek Automobiles Ltd. v. Indian Inc. (2009) 17 SCC 657.
[14] ACE Innovators (P) Ltd. v. Hewlett Packard India Sales (P) Ltd., 2013, SCC OnLine Del 4019.
[15] Vingro Developers, para 25.
[16] Id at para 26.
[17] Amravati Peoples’ Co-operative Bank Ltd. v. Giltedege Management Services Ltd., 2021, SCC OnLine Bom 542 (Amravati Bank).
[18] Sangeeta Jewels (P) Ltd. v. Ajay Kumar Jain, 2008, SCC OnLine Del 181.
[19] Amravati Bank at para 43.
[20] Paschim Gujarat Vij Co. Ltd. v. Manibhadra Ispat Ltd., 2019, SCC OnLine Guj 6933.
[21] Id at para 46.
[22] ONGC Ltd. v. Discovery Enterprises (P) Ltd. (2022) 8 SCC 42.
[23] Cox & Kings at para 115.
