Vingro Developers Pvt. Ltd. v. Nitya Shree Developers Pvt. Ltd. & Ors.

Facts of the case

Respondent 1 (Nitya Shree Developers Pvt. Ltd.) was engaged in business of construction of real estate. The Petitioner (Vingro Developers Pvt. Ltd.) and Respondent 1 entered into twelve builder buyer agreements for the sale of twelve plots of land. The Respondent 2 and 3 are directors of the Respondent 1 and Respondent 2 signed the agreements.

The case of petitioner is that they had made all the requisite advance payments to the Respondent and had executed all the twelve Builder Buyer agreements, thereby fulfilling their contractual duty but were not handed over possession of the plots by the Respondent 1 in the stipulated amount of time and further, false reassurance of refund was given by the Respondent.

Whereas the case of Respondents is that Petitioner had not made full payment and a part of it was due and hence the possession of the land could not be given. Further, the project was complete and possession was given to all bona-fide purchasers.

Henceforth, Petitioners invoked arbitration vide notice under section 21 of the Arbitration and Conciliation Act, 1996 (hereinafter ‘the Act’). No reply was received by Respondents and hence the present petition under section 11 of the Act is filed by Petitioner for the appointment of the Arbitrator.

Issue involved in the case

Whether the directors of the company would be bound by the arbitration agreement between the Petitioner and the Company, and can they be made party to arbitration?

Arguments Advanced

From Petitioner Side

The petitioner argued that Respondent 2 and Respondent 3 are necessary parties to the suit. They brought attention to the fact that Respondent 2 is a signatory to all the agreements and the Group of Companies Doctrine applies to bind both signatories and non-signatories to an arbitration agreement. Hence, Respondent 1 and Respondent 2 must be a party to arbitration. (Cox and Kings Ltd. v. SAP India Pvt. Ltd.)

Respondents have filed a combined reply instead of individual replies. This shows that Respondent 2 and 3 can’t be separated from Respondent 1.

From Respondent Side

The Respondents argued that Respondents 2 and 3 are not parties to the agreement and relied on Sundaram Finance Ltd. v T. Thankam to argue that matter cannot be referred to arbitration against parties, not party to the arbitration agreement.

Respondents 2 and 3 have only acted in the capacity of Directors of Respondent 1 and cannot be made personally liable. (Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar)

Since Respondents 2 and 3 are not a party to the existing arbitration agreement, their names should be deleted as parties before the matter is referred to arbitration.

Judgement and Reasoning

The court noted that the key issue to be decided was whether Respondent 2 and 3 who are directors of the Respondent 1 can be made a party to the matter which is to be referred to arbitration.

In Cox and Kings Limited, ‘group of companies doctrine’ was elucidated upon by the Constitution bench states that a conjoint reading of section 2(1)(h) and section 7 suggests that ‘parties’ includes both signatory as well as the non-signatory parties. A sine qua non for this doctrine to apply is that there must be a common intention of the parties to bind the non-signatories by the arbitration agreement. The court also relied on Cheran Properties Ltd. v. Kasturi & Sons Ltd. to emphasize that there should exist a common intention between the parties to bind a non-signatory to the arbitration agreement.

In the present case, the Respondent 2 is a signatory to the agreement authorised by the Respondent 1 whereas Respondent 3 is the non-signatory party. The relationship between Respondent 1 and Respondents 2 and 3 who are directors is that of a Principal and Agent as under Section 182 of Indian Contract Act, 1872. Hence, there is no intention to bind non-signatory to the arbitration agreement in the facts of the present case and hence the Cox and Kings Limited judgement stands distinguished.

Relying on the Section 230 of the Indian Contract Act which states that subject to an agreement to the contrary, an agent cannot be held liable for the acts of a known principal, the court referred to the cases of Vivek Automobiles Ltd. v. Indian Inc and ACE Innovators (P) Ltd. v. Hewlett Packard India Sales (P) Ltd., wherein it was held that an agent cannot be made personally liable for the contracts entered into by him on behalf of his principal.

In the light of the above Principal- Agent relation between the Respondent 1 and Respondent 2 and 3, under section 182 and Section 230 of the Indian Contract Act, highlighting that an agent cannot be made bound by the contracts entered into by him for the principal, the court held that Respondent 2 and 3 cannot be made parties to the arbitration.

Author(s)

Saumya Tripathi

Student at RMLNLU, Lucknow