Arbitration In IndiaDirectors cannot be made party to Arbitration Proceedings in Personal Capacity

The Delhi High Court in Vingrow Developers Pvt. Ltd. v. Nitya Shri Developers Pvt. Ltd.  (ARB P. No.667/2023 dated 24.01.2024)  held that directors of a company who are acting as signatories be made party to an arbitration proceeding in their personal capacity.

FACTS

Nitya Shree Developers Pvt. Ltd, (hereinafter referred to as “the Respondent 1”) along the Respondent 2 and the Respondent 3 who are the directors of the Respondent 1 company entered into two Builder Buyer Agreements dated 18.11.2016 and 08.02.2017 (hereinafter referred to as “Agreement or Agreements”)  with the Vingrow Developers (hereinafter referred to as “the Petitioner”) for construction and development of residential township project of “RLF City” situated in Alwar Rajasthan.

The Respondents failed to deliver the possession of the plots on the due date agreed between the parties in the Agreement.

The Petitioners sent a legal notice dated 12.10.2022  demanding for the refund of the amount along with interest. Another legal notice was sent on 10.12.2022 to which the Respondents have not replied till date.

The Petitioners also sent a notice under Section 21 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “A&C Act”) for invocation Arbitration  dated 16.01.2023, under Clause 47(c) of the Agreements .

Hence, due to non-receipt of any response on the Notice of Invocation by the Respondent, the Petitioner has filed the present petition under section 11 of the A&C Act seeking for appointment of an Arbitrator for adjudication of the dispute that has arisen between the parties out of agreements.

ISSUE BEFORE THE COURT

• Whether the present petition filed under Section 11 of Arbitration Act was maintainable against Respondent No. 2&3 who were not parties to the agreement?

CONTENTIONS OF THE PARTIES

The Petitioner contended that pursuant to the Agreements between the parties, the Petitioner had fulfilled the contractual obligation and done the advanced payment as agreed between the parties. However, the Respondents had failed to the fulfill their part of obligation of handling over the possession of the property in time bound manner.

The Petitioner relied upon Cox and Kings Limited v. SAP India Private Limited [2023 SCC OnLine SC 1634] and argued that the Respondents No.2&3 were necessary party to the present petition though they were non-signatories to the Agreements, were bound by “group of companies doctrine”.

It was also argued that Section 2(1) read with Section 7 of the A&C Act includes signatories as well as non-signatories as “parties”. Moreover, there were signatures of Respondent No.2&3 on the Agreements, and also a combined reply has been filed along with Respondent No.1 therefore, are inseparable from Respondent No.1.

The Respondents contended that as the Respondents No.2&3 are not parties to the Agreement and therefore the present petition was not maintainable. The Respondents further relied on Sundaram Finance Ltd. vs. T Thankam [(2015) 14 SCC 444] and argued that Arbitration cannot be referred, when the parties are not signatory to the Agreement.

It was also alleged that the Petitioner had failed to discharge the liability of balance amount of Rs.15,45,000/- which was due on 30.12.2016, and therefore, the possession was not handed over by the Respondents.  Furthermore, the Respondent No.2&3 were acting in capacity of directors of Respondent No.1 and therefore, were not personally liable.

DECISION AND FINDINGS

The Delhi High Court observed that the Courts had limited power and  scope under Section 11 of the A&C Act and shall only examine existence of prima facie Arbitration Agreement between the parties.

The Court observed that the relationship between Respondent No.1,2&3 was that of a principal and agent under Section 182 of the Indian Contract Act, 1872 (hereinafter referred to as the “Contract Act”) and therefore, no intention to bind a non-signatory.

The Court relied upon Vivek Automobiles Ltd. v. Indian Inc.,[ (2009) 17 SCC 657] and ACE Innovators (P) Ltd. v. Hewlett Packard India Sales (P) Ltd., [2013 SCC OnLine Del 4019]  and held that as per Section 230 of the Contract Act, in case of a contrary Contract, the agent cannot be held liable for the acts of the Principal. Hence, as per the present Agreements, Respondent No.2&3 could not be made parties to the present Arbitration Petition.

The High Court further appointed Mr. Siddharth Sharma as a sole Arbitrator for the adjudication of disputes between the Petitioner and Respondent No.1 and directed to conduct the Arbitral proceedings as per DIAC.

AMLEGALS REMARKS

The Delhi High Court in the present case has upheld the legislative intent of the A&C Act i.e. common intention of parties to refer the dispute to Arbitration. Furthermore, the “Doctrine of Group of Companies” cannot be made applicable where non signatories does not have a common intention to enter into an Arbitration Agreement. Therefore, the directors of a company cannot be made personally liable for the Arbitration Proceedings against the Company.

-Team AMLEGALS, assisted by Mr. Prakhar Gupta (Intern)

For any query or feedback, please feel free to get in touch with rohit.lalwani@amlegals.com or himanshi.patwa@amlegals.com