Sunday, June 11, 2017

Arbitration Agreement and Piercing the Corporate Veil

When a company is a party to an agreement that is subject to arbitration, can the arbitration award be passed against a significant shareholder of such company? That would generally be possible only if either the shareholder has expressly or impliedly consented to be bound by the arbitration agreement, or if the corporate veil of the company can be pierced to impose liability on the shareholder. In the absence of either of these circumstances, the arbitration award cannot be passed against such shareholder who is not a party to the arbitration agreement. This position of law was reiterated and applied last month by the Delhi High Court in Sudhir Gopi v. Indira Gandhi National Open University.

The dispute in this case related to an agreement entered into between Universal Empire Institute of Technology (UEIT), a company incorporated under the laws of the United Arab Emirates (UAE), and the Indira Gandhi National Open University (IGNOU) for the purpose of carrying out distance education in the UAE. Mr. Sudhir Gopi was a substantial shareholder of UEIT, holding 99% shares, and was also the company’s Chairman and Managing Director. Arising from certain disputes regarding the implementation of contract, IGNOU initiated arbitration against UEIT and Mr. Gopi. Desipite Mr. Gopi’s objections regarding the lack of jurisdiction of the arbitral tribunal over him, the tribunal nevertheless passed an award holding UEIT and Mr. Gopi jointly and severally liable for a sum of USD 664,070. Mr. Gopi then challenged the award of the arbitral tribunal on the ground that it is not maintainable in his capacity as a shareholder of UIET, which he was able to do so successfully before the Delhi High Court.

The High Court began the discussion containing the reasons as conclusion as follows:

11. “Like consummated romance, arbitration rests on consent”1. The agreement between parties to resolve their disputes by arbitration is the cornerstone of arbitration. The arbitral tribunal derives its jurisdiction from the consent of parties (other than statutory arbitrations). In absence of such consent, the arbitral tribunal would have no jurisdiction to make an award and the award so rendered would, plainly, be of no value. Thus, the first and foremost question to be addressed is whether there existed any arbitration agreement between Mr Sudhir Gopi and IGNOU.

1. “NON-SIGNATORIES AND INTERNATIONAL CONTRACTS: AN ARBITRATOR’S DILEMMA” By Prof. William W. Park.

15. The jurisdiction of the arbitrator is circumscribed by the agreement between the parties and it is obvious that such limited jurisdiction cannot be used to bring within its ambit, persons that are outside the circle of consent. The arbitral tribunal, being a creature of limited jurisdiction, has no power to extend the scope of the arbitral proceedings to include persons who have not consented to arbitrate. Thus, an arbitrator would not have the power to pierce the corporate veil so as to bind other parties who have not agreed to arbitrate.

The Court went on to state that in this case there was no express or implied consent from Mr. Gopi to be party to the arbitration agreement. In these circumstances, the tribunal did not possess jurisdiction to pass an award against him. When it came to piercing the corporate veil, the Court found that none of the grounds (such as “where the corporate form is used to perpetuate a fraud, to circumvent a statute or for other misdeeds”) essential for doing so existed in the present case. For the latter point, the court relied on several precedents that laid doubt on the ability of an arbitral tribunal to pierce the corporate veil.

One issue that the Court dealt with in detail relates to whether it can interfere with the arbitral tribunal’s award keeping in mind the provisions of section 34 of the Arbitration and Conciliation Act, 1996. Here, it made a distinction between matters relating to the jurisdiction of the tribunal and those that touch upon the merits of the award. In the present case, the court found that the question of whether the award can extend to Mr. Gopi who was not a party to the arbitration agreement pertained to the jurisdiction of the tribunal.

Although it was not necessary to do so in view of the above finding, the Court nevertheless examined the question of whether the corporate veil could be pierced in the case. It was found that merely because an individual controls significant interest in the company and oversees running the company’s business, it does not thereby render such individual personally bound by all agreements entered into between the company. Since the “corporate veil can be pierced only in rare cases where the Court comes to the conclusion that the conduct of the shareholder is abusive and the corporate façade is used for an improper purpose, for perpetuating a fraud, or for circumventing a statute”, none of which existed in the present case, the Court refused to pierce the veil. The mere failure of a corporate entity to fulfil its contractual obligation is not a ground to pin liability on its substantial shareholder, and this remains a fundamental policy of Indian law.

This judgment reemphasizes the principle to be applied to impose liability on a shareholder under an arbitration award that the company is a party to. Unless the shareholder is expressly or impliedly bound by the arbitration agreement, an arbitrator has no jurisdiction over such shareholder. Moreover, the alternative route of invoking the principle of piercing the corporate veil would be available only when the grounds to do so exist.


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