Doctrine Of Group Of Companies, Can't Implead Third Party To Arbitration: Delhi High Court

The Single Bench of Justice V. Kameswar Rao held that if allegations raised against a party contain a criminal aspect of fraud, forgery or fabrication, which would result in penal consequences and criminal sanctions, the same cannot be referred to arbitration. The Court added that the same would be adjudicated by a Court of law, since it may result in conviction which is in the realm of public law.

The petitioner- Sandeep Singh, and the respondent no. 1- Simran Sodhi, are partners in the partnership Firm- S.S. Manufacturing (respondent no. 2). After certain disputes arose between the partners, both the partners invoked the arbitration clause contained in the Partnership Deed and filed a petition seeking appointment of an arbitrator before the Delhi High Court.

The petitioner- Sandeep Singh, submitted before the High Court that the 1^st respondent misappropriated funds and goods belonging to the partnership firm for his personal use. The petitioner further contended that the relatives of respondent no. 1 were the directors of respondent no. 3- M/s Rugs Enterprise Private Limited, which was a shell company. The petitioner averred that the respondent no. 1, in connivance with respondent no.3, committed fraud. It added that a false and forged rent agreement was executed by respondent no.3 relating to the property of the partnership firm.

Further, the petitioner argued that through the forged rent agreement, the respondent no.3 obtained a GST Number at the factory belonging to the partnership firm and siphoned off goods worth crores of rupees belonging to the firm. It contended that false invoices were raised in the name of respondent no. 3, and thus, the monies that should have flowed to the respondent no. 2/ partnership firm were misappropriated. Accordingly, an FIR was registered by the petitioner against respondent no.1 and 3.

The petitioner submitted that it subsequently invoked the arbitration clause, seeking commencement of arbitral proceedings for the claims raised against the respondent no. 1 and 3.

The respondent no. 3 - M/s Rugs Enterprise Private Limited, contended that the Partnership Deed was executed between the petitioner and respondent no. 1 and thus, the arbitration clause contained in the Deed cannot be invoked against it. It added that it had no role in the negotiations, operations and management of the partnership firm or in the dispute between the partners, i.e., the petitioner and the respondent no. 1.

The 3^rd respondent argued that it did not come within the Doctrine of Group of Companies. Thus, it contented that since it was a non-signatory to the arbitration agreement, it could not be impleaded as a party in the arbitration proceedings.

Further, the respondent no. 3 averred that the allegations of fraud and misrepresentation raised by the petitioner against it, do not come under the purview of arbitration, especially in view of the fact that an FIR was lodged against it.

The High Court held that the Doctrine of Group of Companies cannot be applied to implead respondent no. 3. The bench added that partnership in its very nature cannot be equated with a company to invoke the Doctrine of Group of Companies.

The Court ruled that the Doctrine of Group of Companies is applicable in cases where the arbitration agreement is entered into by one of the companies in a group. It held that when the facts indicate the mutual intension of all the parties to bind the non-signatory affiliate to the arbitration agreement, the non-signatory affiliate, or the sister or parent company, can be held to be bound by the arbitration agreement.

"Having noted the position of law, I must state that the Doctrine of Group of Companies shall not be applicable to the facts of this case. The doctrine can be invoked in certain circumstances, to bind non-signatory affiliates to an arbitration agreement. However, here the petitioner was a partner in a partnership firm and is trying to bind a company, i.e., respondent No.3 to the arbitration agreement between him and respondent No.1, which is clearly impermissible as a partnership in its very nature cannot be equated with a company to invoke the Doctrine."

Noting that the respondent no.3 was not engaged in any negotiations or performance of commercial obligations, indicating its intention to bind itself to the arbitration agreement, the Court ruled that respondent no.3 could not be referred to arbitration along with the petitioner and the 1^st respondent.

The bench observed that in the case of Avital Post Studioz Limited and Ors. v.ersus HSBC Pi (Mauritius) Limited (2020), the Supreme Court had ruled that where a civil dispute involves questions of fraud or misrepresentation, which can be the subject matter of a proceeding under Section 17 of the Indian Contract Act, 1872, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter would not make a dispute which is otherwise arbitrable, non -arbitrable.

Therefore, the High Court laid down that all civil or commercial disputes which are capable of being decided by a Civil Court are capable of being adjudicated through arbitration, unless the same are excluded by statute or by necessary implication. Further, the bench reiterated that disputes relating to rights in personam are amenable to arbitration, while disputes relating to rights in rem are required to be adjudicated by Courts and statutory tribunals.

Ruling that mere allegations of fraud would not be a ground to nullify the effect of the arbitration agreement between the parties, the Court added that even complicated allegations of fraud that would require appreciation of voluminous and extensive evidence can be adjudicated in arbitration. Thus, it held that mere institution of criminal proceedings in respect of a subject matter which is otherwise arbitrable, would not make the matter non-arbitrable.

However, the Court held that if the allegations raised against a party contain a criminal aspect of fraud, forgery or fabrication, which would result in penal consequences and criminal sanctions, the same would be adjudicated by a Court of law, since it may result in conviction which is in the realm of public law.

The bench laid down two tests, which serious allegations of fraud need to be subjected to. Firstly, whether the allegations permeate the entire contract, including the arbitration clause, thus rendering it void; secondly, whether the allegations touch upon the internal affairs of the parties inter se, having no implications on public domain.

Dealing with the claims raised by the petitioner against the 1^st respondent relating to siphoning off of funds and goods, the Court held that the said allegations touch upon the internal affairs of the parties inter se, and have no implications on public domain. The Court observed that though the said allegations were the subject matter of an FIR lodged against the 1^st respondent, which may even give rise to criminal proceedings; however, they essentially arose out of the civil or contractual relationship between the partners. Thus, while holding that the claims were lis in personam, the bench held that they were amenable to the jurisdiction of the arbitral tribunal.

With respect to the claim raised by the petitioner that the respondent no. 1 had allegedly misappropriated funds, through respondent no. 3, which should have been credited to the partnership firm, the Court observed that any relief granted towards the said claim would impact the rights of a third party, i.e., respondent no. 3, who cannot be referred to arbitration. Therefore, it held that the said claim could not be referred to arbitration.

The bench added that any decision which may result in criminal proceedings or sanction, which affects the rights of a third party, cannot be rendered by a private forum chosen by the parties to the arbitration agreement, in the absence of such third party. The Court laid down that when the subject matter of a dispute affects third party rights and has erga omnes effect, the same would require adjudication by Courts and statutory tribunals.

Dealing with the allegations of fraud and forgery raised against the 1^st respondent, the Court observed that a false and forged rent agreement was allegedly executed by respondent no. 3 for the property of the partnership firm, pursuant to which an FIR was registered against respondent no. 3 and respondent no. 1. The Court noted that the signature on the said agreement was allegedly forged, which was investigated by the police. Accordingly, Sections 467, 468 and 477 of the Indian Penal Code (IPC), 1860, relating to fraud and forgery, were added to the FIR.

While ruling that the allegations raised by the petitioner against respondent no. 1 and 3 were not that of fraud simplicitor, the Court held that the allegations raised in the FIR were of a serious nature, which may even constitute criminal offences. It added that if proved, penal consequences and criminal sanctions would be imposed upon respondents 1 and 3. Thus, the bench held that any investigation into the allegations of fraud and forgery would lie in the realm of public law. It concluded that the said allegations of fraud or forgery would not be lis in personam and thus, they cannot be referred to arbitration.

Appointing an arbitrator, the Court referred the claims raised by the partners, i.e., the petitioner and the 1^st respondent, insofar as they related to the relationship of the parties as partners, to arbitration.

Case Title: Sandeep Singh versus Simran Sodhi & Ors.

Citation: 2022 LiveLaw (Del) 1083

Counsel for the Petitioner: Mr. Samrat Nigam, Mr. Abhimanyu A. Walia, Mr. Rishabh Gupa, Mr. Amit Punj and Mr. Karambir Singh, Advs.

Counsel for the Respondents: Mr. Vikas Arora and Mr. Mohit Dagar, Advs.

Click Here To Read/Download Order