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.
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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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