06 二月 2024

Director of company cannot be ‘party’ to arbitration against the company

The Delhi High Court in its recent decision has held that Directors of a company cannot be made parties to the arbitration proceedings initiated against the company.

The Court for this purpose distinguished the Supreme Court’s decision in the case of Cox and Kings Limited, wherein the Constitution Bench of the Apex Court had 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 of the Arbitration and Conciliation Act, 1996 includes non-signatories as well as signatory parties.

The High Court observed that to bind a non-signatory to an arbitration agreement, there must exist a common intention between the parties to do so. According to the Court, it must examine the relationship of the parties and the circumstances of the same to competently impute to them the intended meaning behind them.

The Court noted that the relationship between Respondent No. 1 (the company) with Respondent 2 and 3, beings its directors, was that of Principal and Agent as specified under Section 182 of the Indian Contract Act, 1872, and hence, no intention to bind a non-signatory to the agreement between the parties could be discerned. 

Further, taking note of Section 230 of the Indian Contract Act, the Court observed that subject to a contract to the contrary, an agent cannot be held liable for the acts done of a known principal.

Directing the matter to be referred to arbitration, without the Directors, the Court in Vingro Developers Pvt. Ltd. v. Nitya Shree Developers Pvt. Ltd. rejected the contention that Respondent No.2 and 3 were not parties to the Arbitration Agreements and thus, the matter cannot be referred to arbitration.

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