Can Directors Be Made a Party in Arbitral Proceedings?

The fundamental principle of arbitration is party autonomy, meaning thereby that the mutual consent of the parties to refer their disputes to arbitration is an essential ingredient of an arbitration agreement.

To bind a non-signatory to an arbitration agreement would run counter to this basic principle of party autonomy.

In light of the recent decision of a Constitution Bench of the Supreme Court of India in the matter of Cox and Kings Ltd. vs SAP India Pvt. Ltd. [MANU/SC/1310/2023], the application of the Group of Companies doctrine was upheld in the context of the Indian arbitration jurisprudence. The question that arises is whether directors of a company can be made party in the arbitration proceedings.

Group of Companies Doctrine

First and foremost, it is essential to understand the purpose and ambit of the Group of Companies doctrine.
The doctrine was first developed by international arbitral tribunals, specifically in the context of arbitration to determine whether a person who has not signed an arbitration agreement can be made a party to it.

The doctrine is used in relation to companies which are related to each other by virtue of being part of the same corporate structure. Generally, every company in a group has a separate legal entity and, hence, is not liable for the agreements entered into by another. However, the Group of Companies doctrine is used to bind a non-signatory company to an arbitration agreement entered into by the other group company with a third party.

This becomes necessary when, for instance, a group company, A, though not a party to a commercial project between another group company B, and a third party, is actively involved in the facilitation and performance of the said commercial project.

A question may then arise – if the fundamental principle of arbitration is party autonomy – can a party who has not signed the arbitration agreement be made a party to the arbitration proceedings?

The answer to that is in the affirmative. A non-signatory to an arbitration agreement can be bound by the same by virtue of the group of companies doctrine. In determining that, the following factors should be considered:

a.    The mutual intent of the parties.

b.    The relationship of a non-signatory with the party, which is a signatory to the agreement.

c.    The commonality of the subject matter.

d.    The composite nature of the transaction.

e.    The performance of the contract.

(See. ONGC vs. Discovery Enterprises Pvt. Ltd- MANU/SC/0554/2022)

Can Directors be made a Party to the Arbitration Proceedings?

On the basis of the above discussion, it may seem that if a non-signatory to the arbitration agreement can be held to be bound by it, a Director of the company, even though not a signatory to the arbitration agreement may be bound by it and hence be made a party to the arbitration proceeding. However, that is not so.

This issue came up recently before the Delhi High Court in the matter of Vingro Developers Pvt. Ltd vs Nitya Shree Developers Pvt. Ltd. [MANU/DE/0504/2024] where an application under Section 11 of the Arbitration and Conciliation Act, 1996 was filed before the Delhi High Court for appointment of an Arbitrator to adjudicate the disputes which had arisen between the parties therein.

The Petitioner had arraigned the Company and two of its directors as party Respondents in the case. Further, one of the directors was also a signatory of the agreement which contained the arbitration clause. However, the other director had not signed the agreement. The Petitioner, on the strength of the judgment of the Supreme Court in the matter of Cox & Kings, wanted to implead the directors of the Company in the arbitration proceedings.

However, the main opposition by the Directors against their impleadment was on the ground that since they were not parties to the arbitration agreement, they could not be held to be bound by the same and the matter could not be referred to arbitration.

The Delhi High Court, though allowed the appointment of an arbitrator and referred the dispute to arbitration, however the directors of the Company were not made a party to the arbitration proceedings. The following reasons weighed with the Court for arriving at such a conclusion:

a.    To bind a non-signatory to an arbitration agreement, a common intention between the parties must exist.

b.    One of the directors had signed the agreement containing the arbitration clause only in his capacity as an authorized signatory of the company. The other director was not even a signatory to the agreement.

c.    The relationship between the Company and its two directors was that of a Principal and Agent.

d.    An Agent cannot be held liable for the acts done by the Principal, subject to a contract to the contrary.

e.    From a reading of the agreement, no intention to bind a non-signatory was discernable.

Conclusion

On a perusal of the reasoning of the Delhi High Court in the above judgment of Vingro Developers, it is clear that directors of a company cannot be made a party to the arbitration proceedings unless a clear intention to bind them to the arbitration agreement is discernable.

In the above case, though one of the directors had in fact signed the agreement, the Delhi High Court refused to implead him in the arbitration inter alia on the ground that the said director merely acted as an agent of the Company and had signed the agreement as the authorized signatory of the company.

To reiterate, to bind non-signatories to an arbitration agreement by virtue of the Group of Companies doctrine, the Courts would have to be satisfied that the conditions as mentioned above in the judgment of Discovery Enterprises are fulfilled.

The above also reiterates the well-established principle of law that a director owes no fiduciary or contractual duties or any duty of care to third parties who deal with the company.


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