Directors Not Personally Bound by Principal's Arbitration Agreement Under Section 11 Arbitration Act: Delhi HC

New Delhi: In a significant ruling concerning the scope of arbitration agreements and the liability of company directors, the Delhi High Court has held that directors acting solely in their capacity as agents for a disclosed principal (the company) cannot be personally bound by an arbitration agreement signed by the company, even under the 'Group of Companies' doctrine, at the stage of referring disputes under Section 11 of the Arbitration and Conciliation Act, 1996.

The judgment, delivered by Justice Dinesh KumarSharma on January 24, 2024 (judgment reserved on December 21, 2023), arose from a petition filed by Vingro Developers Pvt. Ltd. seeking the appointment of an arbitrator to resolve disputes with Nitya Shree Developers Pvt. Ltd. and its directors (Respondent Nos. 2 & 3) concerning non-delivery of plots in a real estate project.

Case Background

Vingro Developers Pvt. Ltd. (Petitioner) entered into multiple Builder Buyer Agreements with Nitya Shree Developers Pvt. Ltd. (Respondent No. 1) in 2016 and 2017 for the purchase of 12 plots in a project in Rajasthan. Respondent No. 2, a director, signed the agreements on behalf of Respondent No. 1. The agreements contained clauses stipulating project completion timelines and providing for arbitration of disputes.

The Petitioner claimed to have paid a total of Rs. 1,39,05,000/- and alleged that Respondent No. 1 failed to deliver possession of the plots by the promised date (December 30, 2016, subject to a 60-day grace period for force majeure). Following non-delivery and unsuccessful attempts to secure a refund, the Petitioner invoked arbitration as per the agreement's clause 47(c), seeking a refund of the paid amount along with interest. The arbitration notice went unacknowledged, leading to the Section 11 petition.

Arguments Presented

The Petitioner contended that having paid a substantial amount and fulfilled its contractual duties, the Respondents failed to deliver possession. Relying on the Supreme Court's judgment in Cox and Kings Limited v. SAP India Private Limited (2023 SCC OnLine SC 1634) , which upheld the 'Group of Companies' doctrine, the Petitioner argued that Respondent Nos. 2 & 3, being directors and authorized representatives (with R2 being a signatory on agreements and statements), were integral to the transaction and could be bound by the arbitration agreement as non-signatories or parties under Section 2(1)(h) read with Section 7 of the Act.

The Respondents countered that Respondent Nos. 2 & 3 were not parties to the Builder Buyer Agreements and thus could not be referred to arbitration, citing Sundaram Finance Ltd. v. T. Thankam (2015) 14 SCC 444 . They also argued that the Petitioner had not made the full payment due for the plots (alleging a balance of Rs. 15,45,000/- outstanding) and therefore could not demand possession. They further submitted that Respondent No. 1 had completed the project for other buyers and had offered possession to the Petitioner in 2017, which was not taken due to non-payment of the balance. Regarding the directors, the Respondents asserted that R2 & R3 acted solely in their capacity as directors of R1 and could not be held personally liable, referencing judgments like Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar (2011) 11 SCC 375 .

Court's Analysis

Justice Sharma first examined the scope of the court's power under Section 11, noting it is primarily limited to examining the existence of an arbitration agreement and a prima facie arbitrable dispute, as clarified in Emmar MGF Land Ltd. v. Aftab Singh (2019) 12 SCC 751 and DLF Home Developers Ltd. v. Rajapura Homes (P) Ltd. (2021) 16 SCC 743) . The court acknowledged that while the existence of an arbitration agreement between the Petitioner and Respondent No. 1 and an arbitrable dispute were undisputed, the core issue was whether Respondent Nos. 2 & 3 could be included as parties to the arbitration.

The court then delved into the Petitioner's reliance on the 'Group of Companies' doctrine and the Cox and Kings judgment. While recognizing that the doctrine can bind non-signatories, the court emphasized that its application is contingent on a "common intention of the parties to bind the non-signatories," as held in Cheran Properties Ltd. v. Kasturi & Sons Ltd. (2018) 16 SCC 413) and reiterated in Cox and Kings .

Crucially, the court analyzed the relationship between Respondent No. 1 and Respondent Nos. 2 & 3. It found that the directors acted as agents for the company (principal) under Section 182 of the Indian Contract Act, 1872. The court then applied the principle laid down in Section 230 of the Contract Act, which states that, in the absence of a contract to the contrary, an agent is not personally bound by contracts entered into on behalf of a disclosed principal.

Referring to precedents like Vivek Automobiles Ltd. v. Indian Inc. (2009) 17 SCC 657) , ACE Innovators (P) Ltd. v. Hewlett Packard India Sales (P) Ltd. (2013 SCC OnLine Del 4019) , and Tristar Consultants , the court affirmed that directors' liability is generally limited to their capacity as agents, unless they have personally bound themselves (e.g., via guarantee) or committed tortious acts.

The court concluded that there was no discernible common intention or contractual provision demonstrated by the Petitioner to personally bind Respondent Nos. 2 & 3 to the arbitration agreement signed by the company. Their role as directors acting on behalf of the disclosed principal did not, by itself, make them parties to the arbitration agreement.

The Judgment

The court held: > "In light of the relationship of principal, agent existing between the respondent no.1 and respondent 2, 3 respectively as under Section 182 and Section 230 and the jurisprudence stemming from the same, it is abundantly clear that in absence of the conditions under the proviso being fulfilled, the agent cannot be held liable for or be bound by contracts entered into on behalf of the principal. Hence, Respondent no. 2 and 3 cannot be made parties to the arbitration."

Decision and Implications

Consequently, the Delhi High Court allowed the petition for the appointment of an arbitrator but only for the disputes between Vingro Developers Pvt. Ltd. and Nitya Shree Developers Pvt. Ltd. (Respondent No. 1). The petition was effectively dismissed against Respondent Nos. 2 & 3, the directors, who were excluded from the arbitration proceedings.

Mr. Siddharth Sharma , Advocate, was appointed as the sole arbitrator to adjudicate the disputes between the Petitioner and Respondent No. 1 under the aegis of the Delhi International Arbitration Centre (DIAC). The order clarified that preliminary objections regarding jurisdiction/arbitrability could still be raised before the arbitrator.

This judgment reinforces the principle that directors acting within the scope of their authority for a disclosed company are generally not personally liable or bound by the company's contracts, including arbitration clauses, unless specific circumstances under Section 230 of the Contract Act apply or there is clear evidence of intent to bind them personally. It provides clarity on the application of the 'Group of Companies' doctrine in cases involving corporate agents at the Section 11 referral stage.