Director of a company cannot be “party” to arbitration against the company under the ‘Group of Companies’ doctrine

The Delhi High Court, in its verdict on 24 January 2024, 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.

Facts of the case:
The petition has been filed under section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of an arbitrator for adjudication of the disputes between the parties arising out of agreements dated 18 November 2016 and 08 February 2017 with respect to the purchase of plots in the Respondent’s project.

The Respondent No.1 is a residential real estate developer of a residential township project named ‘RLF City’ in the district of Alwar in Rajasthan. The parties executed 8 Builder Buyer Agreements (BBA) on 18 November 2016 for 8 plots of land admeasuring 125 sq. yds each, and subsequently 4 additional BBAs on 8 February 2017 for 4 plots of land measuring 125sq. yds each. In total, agreements were executed with respect to 12 plots of land in the project.  The two BBAs hold that Respondent No.1 shall complete the development of the plot/project latest by 30 December 2016, except for any delay of not more than 60 days due to force majeure conditions as set out in the BBA. The two BBAs further held that the Respondent shall not be held responsible or liable for not performing any of its obligations or undertaking provided for in this Agreement if such performance is prevented, delayed or hindered by an act of God, Fire, Flood, Explosion, War, Riot, Terrorist acts, Sabotage. The Developer shall not be held liable for any delay in delivery or possession of the said plot to the Buyer if the delay is caused due to carrying out any alternate/ additional work demanded by the Buyer in the said plot at any point of time during development of the said plot.  If for Force Majeure reasons, the whole or part of the project is abandoned or delayed beyond 60 days, no other claim will be preferred except that Buyer will be refunded all amounts paid by him on demand along with interest @ 10% p.a. (calculated on monthly basis).

The Respondents no. 2 and 3 are the directors and authorised representatives of Respondent No.1 and thereby, in this capacity, Respondent No.2 signed the BBAs on behalf of Respondent no.1. However, the Respondent No.1 failed to handover the possession of the plots to the Petitioner as per the terms of the BBAs and eventually the Petitioner invoked arbitration vide notice dated 16 January 2023 under Section 21 of the Arbitration & Conciliation Act, 1966 and as stipulated in the arbitration clause of the agreements dated 18 November 2016 and 8 February 2017.

The Issue:
The main challenge raised by the respondent is that Respondent No.2 and 3 are not parties to the Arbitration Agreements and thus, the matter cannot be referred to arbitration. It is pertinent that the existence of an arbitration agreement, arbitrable dispute and territorial jurisdiction of this court have not been disputed.

Submissions made by the Petitioner:
The petitioner has made a total payment of amount Rs.1,39,05,000 (Rupees one crore thirty nine lakhs and five thousand only) to the Respondent no.1 and thereby completely fulfilled their contractual duty whereas the Respondents have failed to do so in terms of clauses 29 and 30 of the BBAs.

The Petitioner submitted that Respondent Nos. 2 and 3, who are the directors of the Respondent No. 1 company, 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 Respondent No. 2 is a signatory on all the 12 BBAs executed between the parties and the Petitioner’s statement of account maintained with the Respondents also bears the signatures of Respondent no. 2. It is further submitted that since the respondents have filed a combined reply rather than individual replies, it goes to show that the Respondent No. 2 and 3 cannot be separated from Respondent No.1.

Submissions made by the Respondents:
The Respondents submitted that Respondents No 2 and 3 were not parties to the agreements and therefore, the present petition is liable to be dismissed. It is submitted that in Sundaram Finance Ltd. v. T. Thankam, (2015) 14 SCC 444, 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.

The Petitioner only paid Rs. 1,39,05,000/- out of a total of Rs.1,54,50,000/- due for the 12 plots and thus, cannot expect to be given possession for the same without full payment. Reliance is placed upon clause 19 of the BBAs wherein the necessity of timely instalments is emphasised upon. It was further submitted that the Respondent No.1 has completed the project and handed over the possession to many other bona-fide purchasers who paid up the complete cost of the plots. Moreover, it is submitted that Respondent no.1 offered possession of the plots in question to the petitioner in 2017 within the promised time period and requested for a full payment however, the petitioner did not pay the balance amount of Rs.15,45,000/- which was due on 30 December 2016. Further, it is submitted that the Respondents only received the notice dated 12 October 2022 to which they duly replied.

Respondents No. 2 and 3 have only acted in their capacity as directors of Respondent No.1 and cannot be held personally liable. Reliance was placed on 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. It was submitted that since Arbitration Agreement was only executed between the Petitioner and Respondent No. 1, there exists no arbitration agreement wherein Respondent No. 2 and 3 are parties, therefore, the name of Respondent No. 2 and 3 may be deleted from the array of parties before referring the matter for arbitration.

Observations of the Court:
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.

The court also relied upon DLF Home Developers Ltd. v. Rajapura Homes (P) Ltd., (2021) 16 SCC 743 where it was held that the jurisdiction of this court under Section 11 is primarily to find out whether there exists a written agreement between the parties for resolution of disputes through arbitration and whether the aggrieved party has made out a prima facie arbitrable case. The limited jurisdiction, however, does not denude this court of its judicial function to look beyond the bare existence of an arbitration clause to cut the deadwood. A three-Judge Bench in Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, has eloquently clarified that this Court, with a view to prevent wastage of public and private resources, may conduct “prima facie review” at the stage of reference to weed out any frivolous or vexatious claims.”

The court observed that the jurisdiction of this court at this stage is very limited and confined to only examining the existence of a prima facie arbitration agreement and not other issues.  It further observed that there is an arbitrable dispute between the parties, which makes it apparent that the current dispute may be referred to arbitration. However, as the main contention of the Respondents is with respect to the Respondent no.2 and 3 being made party to the arbitration, the court delved into scrutiny in that regard.

It was evident that Respondent No.1 is the principal and Respondent No. 2 and 3, being directors, are only agents of the former. In order to make the latter, parties of the arbitration, the petitioner has relied on Cox and Kings Limited wherein the Constitution Bench made the “group of companies doctrine” applicable to the Indian jurisprudence and held that “parties‟ as defined under Section 2(1)(h) read with Section 7 includes non-signatories as well as signatory parties. Further, the judgment stipulates that the underlying application of this doctrine is contingent to the common intention of the parties to bind the non-signatories by the arbitration agreement as held in para 172(e). The same view has also been taken in Cheran Properties Ltd. v. Kasturi & Sons Ltd., (2018) 16 SCC 413.

The group of companies doctrine has been applied to pierce the corporate veil to locate the “true” party in interest, and more significantly, to target the creditworthy member of a group of companies.  To bind a non-signatory to an arbitration agreement, there must exist a common intention between the parties to do so, and an examination of the relationship of the parties and the circumstances of the same to competently impute to them the intended meaning behind them. Here the respondent no.2 is 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. They have been made a party to the present petition in their capacity as the director of Respondent no.1. At the outset, it seems that the relationship between Respondent No. 1 with Respondent 2 and 3, beings it directors, is that of Principal and Agent as specified under Section 182 of the Indian Contract Act, 1872. Hence, 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 is respectfully distinguished.

Section 230 of the Indian Contract Act, 1872 holds that 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.

The legislature categorically prescribes that subject to a contract to the contrary, an agent cannot be held liable for the acts done of a known Principal. A similar view was taken in Vivek Automobiles Ltd. v. Indian Inc., (2009) 17 SCC 657 wherein it was held that the agent could not be sued when the Principal had been disclosed. Further, the co-ordinate bench of this court in ACE Innovators (P) Ltd. v. Hewlett Packard India Sales (P) Ltd., 2013 SCC OnLine Del 4019 held that it was thus evident that in terms of Section 230 of the Contract Act, 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 him. Further there is no presumption to the contrary as the name of the Principal is known to the Plaintiff. In the present case, the agent, that is Defendant No. 3 has not entered into the contract with the Plaintiff and thus cannot be sued for the damages for breach of contract by Defendant No.1.

In Prem Nath Motors Limited the Hon’ble Supreme Court held that Section 230 of the Contract Act categorically makes it clear that an agent is not liable for the acts of a disclosed Principal subject to a contract of the contrary. No such contract to the contrary has been pleaded. An identical issue was considered by this Court in the case of Marine Container Services South (P) Ltd. v. Go Go Garments, where a similar order passed under the Consumer Protection Act was set aside by this Court. It was held that by virtue of Section 230 the agent could not be sued when the principal had been disclosed.

A similar view has been expressed by a three judge Bench of this Court in Civil Appeal 6653/2005 arising out of S.L.P. (C) No. 19562/2004.

In Tristar Consultants it was held that  Section 230 of the Indian Contract Act, 1872 shows that unless an agent personally binds himself, an agent is not personally liable for contracts entered into by him on behalf of his principal.

Conclusion:
 In light of the relationship of Principal-Agent existing between the respondent no.1 and respondent 2, 3 respectively as under Section 182 and Section 230 and the jurisprudence stemming from the same, it is abundantly clear that in the absence of the conditions under the proviso being fulfilled, the agent cannot be held liable for or be bound by contracts entered into on behalf of the Principal. Hence, Respondents no.2 and 3 cannot be made parties to the arbitration.  The dispute arising out of Builder Buyer Agreements dated 18 November 2016 and 8 February 2017 between the Petitioner and Respondent No.1 is referred to Arbitration without Respondents no.2 and 3 being made party to it.  Accordingly, an arbitrator was appointed for adjudication of the dispute between the Petitioner and Respondent No.1.