Doctrine Of Group Of Companies, Can't Implead Third Party To Arbitration: Delhi High Court

The Delhi High Court has ruled that the Doctrine of Group of Companies cannot be applied to implead a non-signatory third party to arbitration, in a dispute arising between partners relating to the partnership business. The Court held that partnership in its very nature cannot be equated with a company to invoke the Doctrine of Group of Companies. The Single Bench of Justice V. Kameswar Rao held that if allegations raised against a party contain a criminal aspect of fraud, forgery or fabrication, which would result in penal consequences and criminal sanctions, the same cannot be referred to arbitration. The Court added that the same would be adjudicated by a Court of law, since it may result in conviction which is in the realm of public law. The petitioner- Sandeep Singh, and the respondent no. 1- Simran Sodhi, are partners in the partnership Firm- S.S. Manufacturing (respondent no. 2). After certain disputes arose between the partners, both the partners invoked the arbitration clause contained in the Partnership Deed and filed a petition seeking appointment of an arbitrator before the Delhi High Court. The petitioner- Sandeep Singh, submitted before the High Court that the 1st respondent misappropriated funds and goods belonging to the partnership firm for his personal use. The petitioner further contended that the relatives of respondent no. 1 were the directors of respondent no. 3- M/s Rugs Enterprise Private Limited, which was a shell company. The petitioner averred that the respondent no. 1, in connivance with respondent no.3, committed fraud. It added that a false and forged rent agreement was executed by respondent no.3 relating to the property of the partnership firm. Further, the petitioner argued that through the forged rent agreement, the respondent no.3 obtained a GST Number at the factory belonging to the partnership firm and siphoned off goods worth crores of rupees belonging to the firm. It contended that false invoices were raised in the name of respondent no. 3, and thus, the monies that should have flowed to the respondent no. 2/ partnership firm were misappropriated. Accordingly, an FIR was registered by the petitioner against respondent no.1 and 3. The petitioner submitted that it subsequently invoked the arbitration clause, seeking commencement of arbitral proceedings for the claims raised against the respondent no. 1 and 3. The respondent no. 3 - M/s Rugs Enterprise Private Limited, contended that the Partnership Deed was executed between the petitioner and respondent no. 1 and thus, the arbitration clause contained in the Deed cannot be invoked against it. It added that it had no role in the negotiations, operations and management of the partnership firm or in the dispute between the partners, i.e., the petitioner and the respondent no. 1. The 3rd respondent argued that it did not come within the Doctrine of Group of Companies. Thus, it contented that since it was a non-signatory to the arbitration agreement, it could not be impleaded as a party in the arbitration proceedings. Further, the respondent no. 3 averred that the allegations of fraud and misrepresentation raised by the petitioner against it, do not come under the purview of arbitration, especially in view of the fact that an FIR was lodged against it. The High Court held that the Doctrine of Group of Companies cannot be applied to implead respondent no. 3. The bench added that partnership in its very nature cannot be equated with a company to invoke the Doctrine of Group of Companies. The Court ruled that the Doctrine of Group of Companies is applicable in cases where the arbitration agreement is entered into by one of the companies in a group. It held that when the facts indicate the mutual intension of all the parties to bind the non-signatory affiliate to the arbitration agreement, the non-signatory affiliate, or the sister or parent company, can be held to be bound by the arbitration agreement. "Having noted the position of law, I must state that the Doctrine of Group of Companies shall not be applicable to the facts of this case. The doctrine can be invoked in certain circumstances, to bind non-signatory affiliates to an arbitration agreement. However, here the petitioner was a partner in a partnership firm and is trying to bind a company, i.e., respondent No.3 to the arbitration agreement between him and respondent No.1, which is clearly impermissible as a partnership in its very nature cannot be equated with a company to invoke the Doctrine." Noting that the respondent no.3 was not engaged in any negotiations or performance of commercial obligations, indicating its intention to bind itself to the arbitration agreement, the Court ruled that respondent no.3 could not be referred to arbitration along with the petitioner and the 1st respondent. The bench observed that in the case of Avital Post Studioz Limited and...

Doctrine Of Group Of Companies, Can't Implead Third Party To Arbitration: Delhi High Court

Parina Katyal

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