Principal-agent relationships are not covered by the ‘group of companies’ doctrine and establishing common intention is crucial to binding non-signatories to an arbitration agreement

By its landmark decision in Cox and Kings Ltd. v SAP India Pvt. Ltd. & Anr.[1] the Supreme Court (“SC”) upheld the applicability of the ‘group of companies’ doctrine to arbitration. The SC held that where intention to be bound by an arbitration agreement can be established through conduct, the ‘group of companies’ doctrine would apply to bind non-signatories to an arbitration agreement. The SC’s decision in Cox and Kings (supra) has since been considered by the Delhi High Court (“HC”) in the recent cases of Vingro Developers Pvt. Ltd. v Nitya Shree Developers Pvt. Ltd. through its Principal Officer and Ors.[2] and Opuskart Enterprises and Ors. v Kaushal Kishore Tyagi[3]. The issue of intention of the non-signatory parties is discussed in both. In Vingro Developers (supra), the HC distinguished the principal-agent relationship from the ‘group of companies’ doctrine to hold that the non-signatories are not bound by the arbitration agreement. In Opuskart Enterprises (supra), the HC examined the broad scope of the arbitration clause to conclude that it was the parties’ intention that disputes concerning the non-signatory would also be covered by the arbitration clause.

Vingro Developers (supra):

• The Petitioner entered into Builder Buyer Agreements with Respondent No.1 for the development of a residential township project. The said Agreements contained arbitration clauses.
• Respondent Nos. 2 and 3 are directors of Respondent No.1. Respondent No.2 signed the Builder Buyer Agreements with the Petitioner in the capacity of authorised representative of Respondent No.1.
• Disputes arose between the parties when Respondent No.1 failed to handover possession of the plots to the Petitioner as per the terms of the Agreement. The Petitioner sought return of monies.
• The Petitioner accordingly filed a petition under Section 11 of the Arbitration & Conciliation Act, 1996 (“the Arbitration Act”) against Respondent Nos.1, 2 and 3. The Respondents filed a combined reply to the petition.

The main issue before the HC was whether Respondent Nos.2 and 3 could be considered parties to the arbitration agreement.

Opuskart Enterprises (supra):

• 5 individuals, including Mr. Kaushal Kishore Tyagi (i.e. the Respondent), entered into a partnership deed for carrying on the business of trading books in the name of M/s. Opuskart Enterprises. The partnership deed contained an arbitration clause.
• The partners to the partnership deed were also directors in the company M/s. Opuskart India Pvt. Ltd. The said company was doing the common business as that of the partnership firm.
• Disputes arose when the Petitioner alleged that the Respondent had misappropriated funds of the firm. The Petitioner invoked arbitration and thereafter filed a petition under Section 11 of the Arbitration Act.
• The Respondent’s main objection was that claims relating to the firm and/or the company could not be arbitrated as neither the firm nor the company were parties to the arbitration agreement.

The HC examined the scope of the arbitration clause to assess whether the disputes were arbitrable.

In Vingro Developers (supra), the HC rejected the applicability of the ‘group of companies’ doctrine to Respondent Nos.2 and 3. It observed that the relationship between Respondent No.1 and Respondent Nos.2 and 3 was that of principal-agent as specified under Section 182 of the Indian Contract Act, 1872 (“Contract Act”). Accordingly, the HC relied on Section 230 of the Contract Act which specifies that an agent cannot be personally bound by contracts entered into on behalf of its principal. Therefore, while the HC noted the SC’s emphasis in Cox and Kings (supra) on establishing the common intention of the parties to bind non-signatories by an arbitration agreement, it concluded that (i) no intention to bind the directors to the arbitration agreement can be discerned and (ii) the directors cannot be bound by an arbitration agreement executed on behalf of Respondent No.1. Accordingly, the disputes arising out of the Builder Buyer Agreements between the Petitioner and Respondent No.1 were referred to arbitration without Respondent Nos.2 and 3 being made party to it.

In Opuskart Enterprises (supra), the HC observed that the language of the arbitration clause suggested that it covered a broad range of disputes including disputes relating to the “accounts, profits or losses of the business or the right and the liabilities of the partners”. The HC again referred to the decision in Cox and Kings (supra) to highlight the importance of establishing the parties’ mutual/ common intention. The HC observed that it was the parties’ intention to carry on the business of trading books, and in line with this intention, the partners had started the company which was doing the common business as that of the firm. Due to the commonality of the business of the firm and the company and the broad scope of the arbitration clause, the HC held that the disputes between the parties were arbitrable.

In Cox and Kings (supra), while upholding the ‘group of companies’ doctrine, the SC has carefully laid down the circumstances that may warrant its applicability and the inclusion of non-signatories to an arbitration. The SC warned against inclusion of non-veritable parties. It emphasized that the essence of the ‘group of companies’ doctrine is to maintain the corporate separateness of the signatory and the non-signatory, while establishing the common intention of the parties to bind a non-signatory to an arbitration agreement. In laying out these key principles, Cox and Kings (supra) deals with issues concerning group companies and not company-director relationships which fall under the category of principal-agent relationships that are governed by the provisions of the Contract Act.

In Vingro Developers (supra), the HC has made it clear that the ‘group of companies’ doctrine cannot extend to directors of a company.  In Opuskart Enterprises (supra), the HC once again leaned into the concept of ‘common intention’ as laid out in Cox and Kings (supra) to hold that the intention of the parties to carry on a common business through the firm and the company, along with the broad scope of the arbitration clause, was enough to establish that the disputes between the parties were arbitrable.

The clarification provided by the HC in the decision of Vingro Developers (supra) not only reassures agents acting on behalf of their principals, but also acts as a safeguard against the creative use of the judgment in Cox and Kings (supra) to array unconnected parties to arbitration agreements. The HC’s decisions also show that the concepts of ‘common intention’ and ‘corporate separateness’ and its relationship to the ‘group of companies’ doctrine as laid out in Cox and Kings (supra), must be viewed in the facts and circumstances of each case.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Ashna Contractor, Senior Associate – Email –  ashnacontractor@elp-in.com
Tvisha Desai, Senior Associate – Email – tvishadesai@elp-in.com 

[1] 2023 SCC OnLine SC 1634
[2] ARBP. P. 667/2023; decided on 24 January 2024
[3] 2024 SCC OnLine Del 266