The Delhi High Court ruled on Friday that the Group of Companies Doctrine cannot be used to compel a non-signatory third party to arbitrate a dispute between partners relating to the partnership business. The Court determined that a partnership cannot be equated with a company in order to invoke the Group of Companies Doctrine.

The Court ruled that the Group of Companies Doctrine applies when an arbitration agreement is entered into by one of the companies in a group. It held that when the facts show that all parties intend to bind the non-signatory affiliate to the arbitration agreement, the non-signatory affiliate, or 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."

The bench noted that in Avital Post Studioz Limited and Ors. v. HSBC Pi (Mauritius) Limited (2020), the Supreme Court ruled that where a civil dispute involves questions of fraud or misrepresentation, which can be the subject of a proceeding under Section 17 of the Indian Contract Act, 1872, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter does not make a dispute that is otherwise a civil dispute. The bench established two tests that serious allegations of fraud must pass. First, whether the allegations pervade the entire contract, including the arbitration clause, rendering it void; second, whether the allegations concern the parties' internal affairs with no implications for the public domain.

In the absence of such a third party, the bench added, any decision that may result in criminal proceedings or sanctions and affect the rights of a third party cannot be rendered by a private forum chosen by the parties to the arbitration agreement. The Court stated that when the subject matter of a dispute affects third party rights and has an erga omnes effect, it must be resolved by courts and statutory tribunals.

Sandeep Singh, the petitioner, and Simran Sodhi, the respondent no. 1, are partners in the partnership firm S.S. Manufacturing (respondent no. 2). After certain disagreements arose between the partners, both partners invoked the arbitration clause in the partnership deed and petitioned the Delhi High Court for the appointment of an arbitrator.

Sandeep Singh, the petitioner, claimed before the High Court that the first respondent misappropriated funds and goods belonging to the partnership firm for his own use. The petitioner also claimed that respondent no. 1's relatives were directors of respondent no. 3, M/s Rugs Enterprise Private Limited, a shell company. The petitioner claimed that respondent no. 1 committed fraud in collusion with respondent no. 3. Respondent no. 3 also executed a false and forged rent agreement relating to the partnership firm's property.

Case Title: Sandeep Singh versus Simran Sodhi & Ors.