Director Not Party To Company's Articles of Association Cannot Invoke Arbitration Under the Articles: Delhi HC

The Delhi High Court has held that a director who has neither signed nor is a party to a company's Articles of Association cannot invoke an arbitration clause contained in those articles.

A single judge bench of Justice Purushaindra Kumar Kaurav said that arbitration requires clear and demonstrable consent.

The court observed that "Thus, the mere existence of a document, despite it containing an arbitration clause, and persons, even if they are party to it, would not qualify as an ―arbitration agreement‖ unless it is signed by the parties, including the party seeking to invoke the clause as also the party against whom enforcement is sought."

The document referred to by the court was the company's Articles of Association.

The case was filed by Natasha Oberoi one of the managing directors of Oberoi Hotels Pvt. Ltd., who sought an interim stay on a board resolution authorizing a senior company official to handle legal matters relating to the estate of the late P.R.S. Oberoi. She contended that disputes within the company were required to be resolved through arbitration under a clause contained in the Articles of Association.

The petitioner argued that the arbitration clause in the articles constituted a binding arbitration agreement between the company and its directors. She further submitted that any defect in the arbitral mechanism, including the reference to the company's auditors and lawyers, was severable from the underlying intent to arbitrate.

The respondents opposed the plea, submitting that the managing director was neither a shareholder nor a signatory to the Articles and that the clause relied upon did not set up a binding arbitration process.

The High Court accepted these objections. It noted that the Articles of Association were admittedly not signed by the her.

“The document which contains the purported written arbitration clause, on the strength of which interim reliefs are prayed for by the petitioner, therefore, falls foul of Section 7(4) of the Arbitration Act,” the court held.

It concluded that no arbitration agreement existed in the manner required by law.

The court also clarified that the Articles of Association operate as a contract only between the company and its members. “It is only the members and the company itself who can be considered parties to the AoA, by virtue of a deemed signature,” the judge observed.

A director who is not a member, the court held, cannot rely on the Articles to invoke arbitration.

The court further found that the clause itself did not demonstrate a clear intention to arbitrate. It noted that the clause appeared under the heading “Indemnity” and contemplated disputes being referred to the company's auditors and lawyers.

“The naming of an interested party as an adjudicator between the parties,” the court said, “may be an indication of the clause not intending to be a binding process to decide their substantive rights and liabilities, but an in-house, pre-escalation, resolution-oriented mechanism.”

On these findings, the High Court dismissed the petition, holding that there was no valid arbitration agreement and that interim relief under the Arbitration and Conciliation Act was not available.