Calcutta High Court Sets Aside Arbitral Award Against Company Officials Without Impleading Companies

The Calcutta High Court has set aside an arbitral award after finding that it was passed against two officials of state-owned power companies instead of the companies that were parties to the arbitration agreement.

A Division Bench of Justices Debangsu Basak and Md. Shabbar Rashidi held that the award, which fastened liability on the managing director of Bihar State Power Generation Company Limited and the chairman of Bihar State Power Holding Company Limited, could not be sustained since the arbitration agreement admittedly existed only with the two companies.

“In such circumstances, as the award passed are against two individuals, who are separate and distinct from the persons with whom the claimant in the arbitration proceedings entered into the arbitration agreement, the award cannot be sustained,” the court said.

The dispute arose from a tender process in which R S Construction emerged as the successful bidder. The contractual arrangement, including the arbitration clause, was entered into between R S Construction on one side and Bihar State Power Generation Company Limited and Bihar State Power Holding Company Limited on the other.

When disputes arose and arbitration was invoked, however, the statement of claim impleaded only the managing director and the chairman, without making the two companies party respondents. Despite this, the arbitral tribunal proceeded with the reference and, on September 17, 2023, passed an award against the two officials.

The award was later upheld by a single judge of the High Court while dismissing a challenge under Section 34 of the Arbitration and Conciliation Act, 1996, prompting the present appeal.

Allowing the appeal, the Division Bench held that the managing director and the chairman had acted only as agents of disclosed principals and could not be sued for alleged contractual defaults of the companies.

Relying on Section 230 of the Indian Contract Act, the court observed that an agent acting for a disclosed principal is not bound by contracts entered into on behalf of such principal in the absence of an agreement to the contrary.

"In the facts and circumstances of the present case, the Managing Director of Bihar State Power Generation Company Limited as also the Chairman, Bihar State Power Holding Company Limited are agents of disclosed principals. They cannot be sued, therefore, for the defaults, if any, allegedly committed by the disclosed principals to the respondent No. 1 under the provisions of Section 230 of the Indian Contract Act, 1872, in respect of the contract in question,” the court said.

Holding that the Section 34 court had erred in exercising jurisdiction vested in it under law, the High Court set aside both the order dismissing the challenge and the arbitral award dated September 17, 2023