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 to bind other parties who have not agreed to arbitrate.
|Case name:||Sudhir Gopi V Indira Gandhi National Open University|
|Case number:||O.M.P. (C.O.M.M.) 22/2016|
|Court:||The High Court of Delhi|
|Bench:||Vibhu Bakhru, J.|
|Decided on:||May 16, 2017|
|Relevant Act/Sections:||Arbitration and Conciliation Act|
- BRIEF FACTS AND PROCEDURAL HISTORY:
- Sudhir Gopi, Chairman & MD of Universal Empire Institute of Technology (UEIT) filed the present petition under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the arbitral award dated 20.07.2015 delivered by the sole arbitrator.
- The limited controversy involved in the present petition is whether the impugned award to the extent that it makes Mr. Sudhir Gopi jointly and severally liable along with UEIT for the amount awarded in favour of IGNOU, is sustainable considering that Mr. Sudhir Gopi was not a signatory to the agreement in question. UEIT is a limited liability company and it is Gopi’s case that although he is the principal shareholder as well as the Chairman and Managing Director of UEIT, he is not personally liable for the contractual liability of UEIT. Further, that he is not a party to the arbitration agreement and, therefore, the impugned award since it holds him liable, is without jurisdiction.
- IGNOU is a statutory university and has developed educational programmes for distant learning, which are offered in over 35 countries across the globe. UEIT is company incorporated under the applicable laws in Dubai,(UAE). UEIT and IGNOU agreed to collaborate for a distant educational project in Dubai, UAE.
- Disputes arose between the parties in connection with the Agreement. It is IGNOU’s case that it was entitled to receive its share of fee within a period of four weeks of the same being collected, which UEIT failed and neglected to remit. The invoices raised by IGNOU for the initial years were paid but invoices raised for admissions, re-admission and re-registration of students after July 2008 remained outstanding and only certain ad hoc payments were made.
- UEIT, inter alia, claimed that IGNOU had enrolled students from other institutes that were operating illegally outside the trade free zone. It was contended that the expenditure incurred to run a centre in a trade free zone was higher than that required to operate such institutes outside the trade free zones. Thus, UEIT was adversely affected by IGNOU enrolling students from such illegal institutes.
- IGNOU terminated the Agreement with UEIT and encouraged the enrolled students to migrate to other PIs. IGNOU also invoked the arbitration clause. Before the arbitral tribunal, IGNOU filed its statement of claims inter alia claiming an aggregate sum of USD 14,48,046. Mr. Gopi and UEIT filed a reply to the statement of claims before the arbitral tribunal on 30.04.2012. Simultaneously, they also filed counter claims claiming a sum of USD 66,15,498.
- UEIT claimed that the statement of claims filed by IGNOU was bad for mis-joinder of parties as Mr. Sudhir Gopi was not a party to the Agreement/or the arbitration agreement (clause). UEIT also prayed that the issue of mis-joinder of parties be considered as a preliminary issue.
- Mr. Gopi also filed a separate application confirming the above and inter alia contending that the claim petition filed by IGNOU was not maintainable against him and the issue of mis-joinder of parties be considered as a preliminary issue.
- During the course of proceedings, the parties agreed that without prejudice to their respective contentions, the issue to mis-joinder of Mr. Sudhir Gopi be considered alongwith other issues framed by the arbitral tribunal.
- The arbitral tribunal awarded a sum of USD 664,070 in favour of IGNOU against Mr. Gopi and UEIT, jointly and severally. In addition, the arbitral tribunal also awarded interest at the rate of 12% per annum on the awarded amount from 03.01.2012 to the date of the award and from the date of the award till full realisation of the amount. The arbitral tribunal also awarded the cost of proceedings quantified at Rs. 1,00,000/-.
- ISSUE BEFORE THE COURT:
- Whether there existed any arbitration agreement between Mr. Sudhir Gopi and IGNOU.
- Whether the arbitration proceedings are bad for mis-joinder of Sudhir Gopi?
- RATIO OF THE COURT
- The court stated, “Like consummated romance, arbitration rests on consent” 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. 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.
- The Court observed that on the present case, admittedly, the Agreement is not signed by Mr. Sudhir Gopi in his personal capacity. None of the communications produced provides a record of an agreement between him and IGNOU to arbitrate. The arbitral tribunal has also not proceeded based on any such agreement.
- It was contended on behalf of IGNOU that since he had filed counter claims jointly with UEIT, his consent to arbitrate must be inferred. However, that is not the basis on which the arbitral tribunal has proceeded against Mr.Gopi The contention that Mr. Gopi’s consent to arbitrate must be inferred from his preferring counter claims, is also unmerited. This is so because, in compliance with the directions of the arbitral tribunal issued on 30.04.2015, both UEIT and Mr. Gopi had clarified that Mr. Gopi had preferred the counter claims on behalf of UEIT and not in his personal capacity. Further, both UEIT and Mr. Gopi had resisted the claims on the ground that there was mis-joinder of parties to the extent that Mr. Gopi had been arrayed as a respondent in the arbitral proceedings.
- The Curt mentioned that 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 to bind other parties who have not agreed to arbitrate.
- Further the court stated that there may be cases where courts can compel non signatory (ies) to arbitrate. These may be on grounds of (a) implied consent and/or (b) disregard of corporate personality. In cases of implied consent, the consent of non signatory (ies) to arbitrate is inferred from the conduct and intention of the parties.
- The Court then referred to the case of Chloro Controls India Private Limited v. Severn Trent Water Purifications Inc. ,the Supreme Court had explained the above principle in the following words:“Various legal basis may be applied to bind a non-signatory to an arbitration agreement. The first theory is that of implied consent, third party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights. This theory relies on the discernible intentions of the parties and, to a large extent, on good faith principle. They apply to private as well as public legal entities. The second theory includes the legal doctrines of agent-principal relations, apparent authority, piercing of veil (also called the “alter ego”), joint venture relations, succession and estoppel They do not rely on the parties’ intention but rather on the force of the applicable law.”
- The Court considered it necessary to emphasize that whether a court will compel any person to arbitrate would have to be examined in the context of the specific provisions of the applicable statute. The courts would, undoubtedly, have the power to determine whether in a given case the corporate veil should be pierced and the persons behind the corporate façade be held accountable for the obligations of the corporate entity. However as stated earlier, an arbitral tribunal, has no jurisdiction to lift the corporate veil; its jurisdiction is confined by the arbitration agreement – which includes the parties to arbitration – and it would not be permissible for the arbitral tribunal to expand or extend the same to other persons.
- The Court the referred to similar view was also expressed by the Bombay High Court in Oil and Natural Gas Corporation Ltd. v. Jindal Drilling and Industries Limited: in the following words: The petitioners had canvassed before the arbitral tribunal that the arbitral tribunal shall lift the corporate veil to find out that the said DEPL and the respondents herein were forming part of the said Jindal Group and were one and the same entity and thus the respondents were liable for the liabilities of the said DEPL. In my view, the arbitral tribunal has no power to lift the corporate veil. Only a Court can lift the corporate veil of a company if the strongest case is made out. In my view, the prayer of the petitioners for lifting the corporate veil of the said DEPL was itself not maintainable in the arbitration proceedings.”
- Furthermore the Court observed that the solitary reason for the arbitral tribunal to hold that Mr. Sudhir Gopi was a party to the Agreement is that he held almost entire shares of UEIT; thus, exercising absolute control over the affairs of UEIT. The entire business of UEIT was run by Mr. Sudhir Gopi. The arbitral tribunal held that Mr. Gopi was the “face and a cloak” of UEIT for running the business and, therefore, was a party to the arbitration agreement Consequently, the arbitral tribunal held that Mr. Gopi and UEIT were jointly and severally liable for the liabilities of UEIT.
- As stated above, arbitration is founded on consent between the parties to refer the disputes to arbitration. The fact that an individual or a few individuals hold controlling interest in a company and are in-charge of running its business does not ipso jure render them personally bound by all agreements entered into by the company.
- The Court listed out the circumstances where Arbitration agreement can be extended to non-signatories in limited circumstances; first, where the Court comes to the conclusion that there is an implied consent and second, where there are reasons to disregard the corporate personality of a party, thus, making the shareholder(s) answerable for the obligations of the company. In the present case, the arbitral tribunal has proceeded to disregard the corporate personality of UEIT. The arbitral tribunal has lifted the corporate veil only for the reason that UEIT’s business was being conducted by Mr. Sudhir Gopi who was also the beneficiary of its business being the absolute shareholder (barring a single share held by Mr. Fikri) of UEIT. This is clearly impermissible and militates against the law settled since the nineteenth century. Any party dealing with the limited liability company is fully aware of the limitations of corporate liability. Business are organised on the fundamental premise that a company is an independent juristic entity notwithstanding that its shareholders and directors exercise the ultimate control on the affairs of the company. In law, the corporate personality cannot be disregarded. Undisputedly, there are exceptions to this rule and the question is whether this case falls within the scope of any of the exceptions.
- A 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.
- As stated earlier, in the present case, there is no foundation that the corporate façade of UEIT was used by Mr. Gopi to perpetuate a fraud. Mere failure of a corporate entity to meet its contractual obligations is no ground for piercing the corporate veil. Although the arbitral tribunal has mentioned in the passing that UEIT was used for improper purpose, however, there is no foundation for such observation. It was never IGNOU’s case that UEIT was set up or used to perpetuate a fraud on IGNOU and at any rate, no particulars – that are required to be pleaded to set up a case of fraud – to indicate that a fraud had been perpetuated were pleaded by IGNOU. Thus, the decision of the arbitral tribunal to pierce the corporate veil is fundamentally flawed. It falls foul of the fundamental policy of Indian law that recognises that a company is an independent juristic person.
- DECISION HELD BY COURT:
- The petition was allowed and the impugned award to the extent that the petitioner was held liable for the awarded amounts, was set aside.
- The parties were left to bear their own costs.