By Shivang Monga and Varun Pathak, Third-Year Students at MNLU, Mumbai

I. Introduction 

The Delhi High Court(‘DHC’)on 24 January 2024, in the case of Vingro Developers Pvt Ltd v Nitya Shree Developers(‘Vingro Developers’), delivered an important ruling on the aspect of impleading directors of a company to the arbitration agreement. The court, in this case, excluded directors from the ambit of the group of companies’ doctrine, which the Supreme Court(‘SC’) upheld in the case of Cox and Kings Limited vSAP India Private Limited(‘Cox and Kings’).

According to this doctrine, an arbitration agreement entered into by one company binds non-signatory group entities under certain circumstances. This doctrine applies only when the circumstances demonstrate the mutual intention of the parties to include both signatories and non-signatories. Consequently, the non-signatory gets impleaded despite not formally consenting to it.

The DHC judgement brings certain clarity to the doctrine by excluding directors from being impleaded. The exclusion in this case stems from the application of the principal-agent relationship.

This article seeks to analyse the high court’s verdict in the context of the Cox and Kings judgement, and sheds light on why ‘group of companies’ doctrine should not apply to such scenarios. Furthermore, we broaden our analysis by examining how different international jurisdictions have addressed issues of binding directors and employees within a company to the arbitration agreement.

II. Binding Directors to Arbitration: Applicability of Cox and Kings

The Respondent in the above case signed two Builder Buyer Agreements with the Petitioner concerning the Rajasthani Resident Township Project of the Respondent. The Respondent company’s directors were authorised representatives. Director 1 had signed the BuilderBuyer Agreements on the Respondent’s behalf, while Director 2 was a non-signatory. Pursuant to the non-delivery of the possession of flats, the Petitioner invoked arbitration against the Respondent.

The Petitioner also sought to enforce the arbitration agreement against the company’s directors by invoking the Cox and Kings judgment. It was argued that in light of the said judgement, non-signatories could be impleaded and that the directors cannot be separated from the company. Petitioner argued that as per the said judgement, a joint reading of section 2(1)(h) and section 7 of the Arbitration and Conciliation Act, 1996 would mean that ‘parties’ included signatories and non-signatories. The contention was that one director (signatory) and other director (non-signatory) were not ‘third parties’, but rather ‘non-signatories.’

However, the DHC underscored that the application of the ‘group of companies’ doctrine, as per the Cox and Kings judgment, hinges upon the common intention of the parties to bind non-signatories to the arbitration agreement. To accurately ascertain this intention, the court emphasized the need to consider the relationship between the parties and the surrounding circumstances.

In light of the fact that the arbitration agreement was not signed by Respondent 2 in personal capacity but only in representative capacity and the fact that Respondent 3 was not a signatory to the arbitration agreement, the court held there was no intention to bind the directors to the arbitration agreement.The High Court therefore, did not apply the group of companies’ doctrine and allowed arbitration proceedings only against the company and not its directors.

III.Authors’ Analysis: Deciphering the Common Intention and Corporate Separateness

In Dow Chemical v. Isover Saint Gobain, the ICC tribunal emphasized that non-signatories could be made a party to arbitration agreement based on the mutual intent of the signatory and the non-signatories. Similarly, in Cox and Kings, the Supreme Court clarified that the group of companies’ doctrine applies only when there is clear corporate separateness among the entities within the group. 

Applying these principles to such cases, it becomes evident that the directors cannot be bound by the arbitration agreement for two key reasons. Firstly, due to the absence of corporate separateness between the director and the company. Secondly, the crucial element of common intention necessary for enforcing the arbitration agreement is lacking. 

To establish corporate separateness, there needs to be the involvement of two separate entities, such as a holding company and its subsidiary, each with its own legal identity. However, in such a case, the director’s role as an agent of the company cannot fall within that definition. Consequently, with only one corporate entity at play and the director acting on its behalf to execute the arbitration agreement, the prerequisite of common intention also remains unfulfilled.

Due to the absence of corporate separateness between a director and the company, the lines between the intentions of the individual director and those of the company becomes blurred. Directors, as agents of the company, are generally seen as integral parts of the company rather than distinct entities. When a director signs an arbitration agreement, it’s typically assumed as an action on behalf of the company, with the intention assumed to be that of the company. Without clear corporate separateness, it becomes difficult to ascertain the intentions of the director and of the company as a whole. This lack of distinction makes it challenging to establish the necessary common intention required for enforcing arbitration agreements. The enforcement of arbitration agreements involving directors also becomes uncertain, as it remains unclear whether the director’s actions truly represent the collective intention of the company or if they’re acting in their personal capacity.

Therefore, DHC noted in the absence of corporate separateness and common intention the directors cannot be bound by the arbitration agreement in the present circumstances as they were also not acting in their personal capacity.

IV. Understanding Directorial Exemption: The Role of Agency Principle 

In addition to addressing the absence of a common intention to bind directors, the court also relied on the agency principle to discern the relationship between the company and its directors. Notably, it was observed that directors acted on the company’s behalf, as specified under Section 182 of the Contract Act. Similarly, Section 230 of the Contract Act clarifies that an agent does not assume liability for principal’s actions unless the agent personally commits to such responsibility. 

The court’s perspective for not relying on the group of companies’ doctrine in favour of the agency principle is commendable. By emphasizing the fiduciary duties and roles of directors as company agents, the court elucidates a more nuanced understanding of corporate relationships and individual responsibilities within corporate structures.

V. International Position 

In light of the High Court’s oversight in considering international jurisdictions, it becomes imperative to delve into global legal perspectives on this issue. International jurisdictions have a mixed view regarding binding non-signatory directors and employees of companies to arbitration agreement. In the USA, in DK Joint Venture 1 v. Weyand it was held that because of the principles of contract and agency law, non-signatory corporate officers and agents of a corporation cannot be bound by the arbitration agreement entered on behalf of the company. The court in Covington v. Aban Offshore Ltd took the same view. Once, an arbitral tribunal in Geneva also held that the arbitration clause should not extend to the directors who have acted under employment.

Due to the lack of uniformity on this issue in the international jurisdiction, it has also been held in certain cases that employees could be subject to arbitral jurisdiction as per the arbitration agreement signed by the company. This approach is based on the principle of ‘third party beneficiary’. According to this principle, employees could be subject to arbitral jurisdiction based on arbitration agreements signed by the company when they are intended beneficiary to the contract. However, this position is different and does not hinge on the group of companies’ doctrine, as argued before the Delhi High Court.

It has been held in the case of In re Vesta Ins. Group Inc by Supreme Court of Texas that arbitration clauses apply only to contractual signatories, and the agents or officers of corporates can only be made a party to the dispute if they are enlisted as a third party beneficiary.

Thus, even in cases where arbitration agreements bind employees, it is not based on the group of companies’ doctrine. The argument that the arbitration agreement must bind the directors by relying on Cox and Kings judgment does not stand as the group of companies’ doctrine in the present case cannot be applied in light of non-existence of separate companies.

Therefore, the High Court’s decision aligns with the prevailing international stance, affirming that the impleadment of non-signatories to arbitration agreements, as per the Cox and Kings judgment, is contingent upon the common intention and the existence of separate entities within a group of companies.

VI. Conclusion and Way Forward

The judgment in Vingro Developers brings some clarity to the application of the Group of Companies Doctrine. By excluding directors from arbitration agreements, it underscores the defined fiduciary relationship within corporate structures. This decision emphasizes the need to consider agency principles and the absence of distinct entities within a group, to ensure a nuanced understanding and application of this doctrine in India. Moving forward, a comprehensive approach is needed to ensure consistency and fairness in resolving disputes involving directors and other employees of the company to ensure trust and efficiency in corporate arbitration proceedings.