Group Of Companies Doctrine Cannot Be Applied To Directors Of A Company To Make Them A Party To Arbitration: Delhi High Court

The bench of Justice Dinesh Kumar Sharma held that in terms of Section 230 of the Indian Contract Act, the agent cannot be made personally liable for acts carried out on behalf of the principal.

Facts

The petitioner and respondent no.1 entered into two Builder Buyer Agreements dated 18.11.2016 and 08.02.2017 in respect of the residential township project being developed by the respondent. The agreement, on behalf of respondent no.1, was signed by respondent no.2. Both respondent nos. 2&3 are the directors of respondent no. 1.

A dispute arose between the parties leading to invocation of arbitration by the petitioner. Upon the failure of the parties to mutually appoint the arbitrator, the petitioner approached the High Court under Section 11(6) of the A&C Act.

Contention of the Parties

The respondents objected to the maintainability of the petitioner against respondent nos. 2&3 on the following grounds:

• That respondent no.3 is not a signatory to the arbitration agreement, ergo, the petition against him is not maintainable.
• That respondent no.2 signed the agreement in his capacity as the director of respondent no.1, therefore, he was acting as an agent.
• That an agent cannot be held personally liable for the acts carried out on behalf of the principal, therefore, the petition is not maintainable against both respondent nos. 2&3.
• That the respondent nos.2&3 must be deleted from the array of parties before the dispute is referred to arbitration.

The petitioner made the following counter-submissions:

• That respondent no.2 is a signatory to the agreement, therefore, the objection is meritless.
• That respondent no.3 is a director of respondent no.1, therefore, despite being a non-signatory, he is a party to the arbitration agreement in terms of the judgment by Constitution Bench of Supreme Court in Cox & Kings wherein the Apex Court has given recognition to 'Group of Companies Doctrine'.

Analysis by the Court

The Court observed that the agreements were essentially between the petitioner and respondent no.1. It held that the agreements were signed by respondent no.2 on behalf of respondent no.1 in the capacity of a director.

The Court held that directors of a company cannot be made parties to arbitration through 'Group of Companies' doctrine. It held that the relationship between the company and its director(s) is that of the 'Principal' and 'Agent' as defined under Section 182 of the Indian Contract Act.

The Court held that in terms of Section 230 of the Indian Contract Act, the agent cannot be made personally liable for acts carried out on behalf of the principal. It held that the proviso to Section 230 requires an express agreement to the contrary to make the directors personally liable for any action. However, no such agreement exists between the parties making respondent nos. 2&3 personally liable for the acts of the respondent no. 1.

Accordingly, it held that dispute is liable to be referred to arbitration without respondent nos.2& 3 being a party to it.

Case Title: Vingro Developments Pvt Ltd v. Nitya Shree Developers Pvt Ltd

Citation: 2024 LiveLaw (Del) 107

Date: 24.01.2024

Counsel for the Petitioner: Mr. Mohit Potalia

Counsel for the Respondents: Mr. Nityanand Singh and Ms.Aachal Sah, Advs.

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