[Sathvik Chandrasekhar and Ashwin Murthy are 3rd students at NALSAR University of Law]
The decision of the Delhi High Court in GMR Energy v. Doosan (November 2017) is significant on several fronts. One aspect of the judgment that has garnered attention is where the Court, following the position taken in Sasan Power, placed a foreign-seated arbitration between two Indian parties under Part II of the Arbitration and Conciliation Act, 1996 (“Act”). However, the focus of this post will be on the Court’s determination as to whether arbitration proceedings could be commenced against a non-signatory to the arbitration agreement. The party invoking the arbitration clause used the “alter ego doctrine” to bind the non-signatory to arbitration. The Court refused to examine the merits of such a claim, confining itself to whether there was a prima facie case made for arbitration. By taking such an approach, the Court has ruled in favour of the competence of the tribunal to decide its own jurisdiction rather than taking upon itself to decide the extent of the tribunal’s jurisdiction.
While the Court’s pro-arbitration approach is to be appreciated, there are fatal flaws in the judgment. First, the Court’s interpretation of a material contractual clause relied on by one of the parties is manifestly erroneous. Second, the Court’s refusal to move into merits seems to be misplaced, as the Court has made no determination even on jurisdictional issues, where it ought to have. Third, it is argued that the Court has incorrectly pierced the corporate veil to determine whether a prima facie case for arbitration has been made.
Factual matrix and background
GMR Chhattisgarh (“GCEL”) and Doosan India (“Doosan”) entered into three Agreements for Engineering, Procurement and Construction (“EPC”) containing an arbitration clause, providing for Singapore International Arbitration Centre (“SIAC”) administered arbitrations. As GCEL could not discharge its liability in 2013, GMR Infrastructure Ltd. (“GIL”), furnished a Corporate Guarantee on behalf of GCEL, which also contained an arbitration clause providing for SIAC-administered arbitration.
In addition to the above Corporate Guarantee, two Memoranda of Understanding (“MOUs”) were executed in 2015 between GMR Energy (“GMR Energy”) and Doosan, wherein GMR Energy agreed to discharge the liability of GCEL in accordance with the EPC Agreements. These MOUs, unlike the other transaction documents, did not contain an arbitration clause.
After repeated defaults in payment, Doosan commenced arbitration proceedings against GCEL and GIL on the basis of the arbitration clauses in the EPC Agreements and the Corporate Guarantee respectively. In addition, Doosan sought to join GMR Energy to the proceeding even though they were not a party to the above agreements. Doosan’s claim against GMR Energy was based on two grounds. First, it was argued that there existed a valid arbitration clause between Doosan and GMR Energy. The arbitration clause contained in the EPC Agreements and the Corporate Guarantee was extended to the MOU, premised on the understanding that the MOUs were governed by the EPC Agreements and the Corporate Guarantee. The second ground put forth by Doosan was that GMR Energy was an alter ego of GCEL, based on several factors including 100 percent stakes in GCEL held by GMR Energy , a common board of directors, co-mingling of corporate funds and lack of corporate formality.
In response, GMR Energy filed an application in the Delhi High Court, claiming that it cannot be compelled to participate in the arbitration proceedings and sought a permanent injunction on the proceedings. Furthermore, it relied on a clause in the EPC Agreement which stated that the agreement was strictly between GCEL and Doosan, and neither party could proceed against the shareholders by invoking the doctrine of piercing the corporate veil.
Erroneous construction of a material clause in the parent agreement
GMR Energy heavily relied on clause 23.12 in one of the EPC Agreements, which stated as follows
23.12 Parties Obligation Non-Recourse
The Parties have entered into this Agreement entirely on their own behalf, and in no manner for or on behalf of any shareholder of either Party, or any partner, shareholder, officer, director, employee or agent of either Party and neither Party shall have any recourse against such persons for any act, omission, obligation or liability of the other Party or for any other matter pertaining in any way to this Agreement or the Other Contracts, whether based upon a piercing of the Party’s corporate veil or any other legal theory based upon exercise of control over the party or otherwise.
As the parties had entered into the agreement on “their own behalf”, GMR Energy argued that it was clear that the intention of the parties was to bind only each other. Furthermore, the clause expressly excluded associated persons such as partners, directors, shareholders, etc. On a plain reading of the clause, recourse in the form of arbitration could not be taken against GMR Energy on both of these fronts— firstly, that GMR Energy was not a party to the EPC Agreements and secondly, that GMR Energy was a shareholder of GCEL and therefore expressly accorded protection by the clause against recourse taken by Doosan.
The Court rejected this contention using an inexplicable interpretation of the clause. It held that “the agreement did not bar other corporate entity to be made subject to arbitration based on the principle of piercing of the corporate veil or any such legal theory.” (emphasis added). Therefore, in essence, the Court’s holding was based on the view that a corporate entity could not be included within the ambit of any of the associated persons (specifically shareholders) mentioned in the clause.
It is argued that the Court’s interpretation is incompatible with one of the basic tenets of company law; that a company possesses a separate personality from that of the members. Since a company is considered to be a juristic person, it is fully competent to hold shares and qualify as a shareholder. Therefore, the ordinary meaning of the term “shareholder” must also include a corporate entity. The Court has deviated from this ordinary meaning and most importantly the intention of the parties without any material in support, either in law or in fact. The peculiar interpretation given by the Court is offered as a bald statement in the judgment without providing any justification or ground whatsoever. Therefore, we argue that this determination by the Court is not good in law and ought to be disregarded.
Inconsistent position on what constitutes merits determination
Apart from using the doctrine of alter ego, Doosan sought to extend the arbitration clause in the EPC Agreements and the Corporate Guarantee to the MOUs in order to proceed against GMR Energy. GMR Energy, in response to this contention, argued that the MOUs were novated by a letter issued by Doosan dated November 3, 2016.
The Court refused to go into whether the letter issued by Doosan actually resulted in the novation of the MOU as this, according to the Court, was a question to be decided solely on merits by the arbitral tribunal. By virtue of section 45 of the Act, the court is mandated to refer the parties to arbitration unless the agreement is null and void, inoperative or incapable of being performed, which go into the jurisdiction of the tribunal. Since the extension of the arbitration clause was premised on the existence of the MOUs, it is argued that the novation of the MOUs also entailed the determination of jurisdiction. In other words, the arbitral tribunal’s jurisdiction was contingent on the existence of an arbitration agreement, which would be determined by the novation of the MOUs.
The Court’s failure to determine the above issue of jurisdiction stands inconsistent with its own position on another question of jurisdiction – whether GMR Energy is an alter ego of GCEL. Similar to the question of novation, this question takes us into the existence of an arbitration agreement as far as GMR Energy is concerned and therefore involves jurisdiction. The Court however has failed to provide any reason for making a prima facie determination on jurisdiction with respect to the question of alter ego and not novation.
Incorrect Piercing of the Corporate Veil
The Court relied on Chloro Controls and Balwant Rai Saluja to hold that in order to subject GMR Energy to arbitration, the corporate veil was to be pierced. However, despite doing so, the Court did not correctly apply the grounds established in Balwant Rai Saluja for piercing the corporate veil (for which an analysis may be found here). Balwant Rai Saluja clearly laid down the requirement for the company in question to be a “mere camouflage or sham” for the purpose of avoiding liability. It further clarified that ownership and control was not sufficient to pierce the veil. The control and impropriety must lead to a deprivation of legal rights. It must also be noted that the presumption is against piercing the corporate veil – it is only to be exercised rarely.
Doosan’s arguments for piercing the veil however relied specifically on the structure of the company and its shares as well as its fund-sharing. The question of impropriety and avoidance of liability were not addressed by Doosan, nor was the issue of how the company was a sham.
Interestingly, the Court in holding its prima facie determination appeared to agree with these contentions, focussing solely on the structure and the MoUs. This verdict bypasses the requirements of the very case the Court cited. The question of actual or apparent impropriety and avoidance of liability was seemingly ignored. The Court’s deviation from the settled position of law, like other parts of the judgment, is inexplicable as there seems to be no justification provided for the same.
In conclusion, it may be noted while the judgment is certainly in the right direction with regards to improving the arbitration regime, its failure to apply sound judicial reasoning and inexplicable deviations has only added to the confusion on several other questions of law.
– Sathvik Chandrasekhar & Ashwin Murthy