Arbitral Tribunal Doesn’t Have Jurisdiction To Lift Corporate Veil As It’s Confined By Arbitration Agreement: Madras High Court

The Madras High Court held that the Arbitral Tribunal does not have the jurisdiction to lift the Corporate Veil since its jurisdiction is confined by the Arbitration Agreement.

The Court held thus in a Petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act), challenging the award passed by the Arbitrator.

A Single Bench of Justice N. Anand Venkatesh observed, “The Arbitral Tribunal certainly does not have the jurisdiction to lift the corporate veil since its jurisdiction is confined by the arbitration agreement. Even in a case of determining as to whether one entity is the alter ego of the other, this is conceptually the same like lifting the corporate veil. This exercise can never be done by the Arbitral Tribunal, which is a creature under an agreement with a limited jurisdiction to decide the dispute between the parties to the agreement as per the terms and conditions of the agreement.”

The Bench said that a mere breach of the contract will not automatically result in the payment of damages unless a party is able to show that such loss or damage had arisen naturally in the usual course of things from such breach and that the breach must necessarily be coupled with some loss or damage, which resulted in an actionable claim for damages and thus, a breach without injury or loss is not actionable per se.

Advocate Nithyaesh Natraj represented the Petitioner, while Advocate J. Ravikumar represented the Respondent.

Factual Background

The Petitioner company entered into a Memorandum of Understanding (MoU) with the Respondent company for providing financial assistance of Rs. 2.50 crores to be utilised by it to meet the obligations for providing a performance bank guarantee of Rs. 3.52 Crores in respect of a work order issued by the Kolkata Port Trust (KOPT). This money was agreed to be utilised as a margin money and the same would have to be returned to the Petitioner within 30 days, but not later than 89 days at any cost from the date of the MoU. A promissory note was executed and a post-dated cheque was given as a security towards the financial assistance that was extended to the Respondent.

The Petitioner’s grievance was that the said amount was not repaid by the Respondent and the cheque deposited was also dishonoured. Hence, the Petitioner initiated arbitration proceedings against the Respondent. The Arbitrator passed an award by partly allowing the claim. The Petitioner was aggrieved by the non-award of the interest component and the award towards damages. The Respondent was aggrieved with that portion of the award directing it to pay Rs. 2.50 crores to the Petitioner. Hence, the Respondent filed a Petition before the High Court but the same was dismissed as not pressed. Therefore, the arbitral award was challenged by the Petitioner before the High Court.

Reasoning

The High Court after hearing the contentions of the counsel, noted, “The jurisdiction that was exercised by the learned Arbitrator was circumscribed by the agreement between the parties and as a consequence, an Arbitrator will not have the power to extend the scope of the arbitral proceedings and include persons, who have not consented to arbitrate. Ex consequenti, an Arbitrator will not have the power to pierce the corporate veil so as to bind another entity, which was not a party to the agreement. The Courts undoubtedly have the power to determine in a given case as to whether the corporate veil should be pierced and the persons behind the corporate facade must be held accountable.”

The Court remarked that the Arbitrator went wrong in applying the doctrine of lifting the corporate veil/determining another entity as the alter ego and fastening the liability on the Petitioner and such a finding will fall foul of Section 34(2)(b)(ii) of the A&C Act.

“… the fact remains that the finding of the learned Arbitrator was circumscribed by the finding of the NCLAT that the loan was a separate transaction and that was further confirmed by the Hon’ble Apex Court. In view of the same, this Court has to reiterate the finding that the MoU dated 11.12.2015 constituted an independent financial arrangement between the parties de hors the other terms of the MoU”, it said.

The Court held that the Petitioner cannot be mulcted with breach of the MoU, since it did not contemplate the supply of equipment by the Petitioner and as a consequence, whatever amount was paid by the Petitioner to the Respondent has to be repaid with interest.

“On carefully going through the statement of defence and the counter claim made by the respondent, it is seen that there is a total lack of pleadings to substantiate the counter claim made by the respondent”, it further said.

The Court observed that the performance bank guarantee, which was encashed by the KOPT, was fixed as damages payable by the Petitioner to the Respondent for the breach of agreement and this amount was directed to be paid along with interest at the rate of 18% per annum.

“In so far as Section 74 of the Indian Contract Act is concerned, there must be a stipulation in the contract naming the amounts to be paid in case of breach. That contingency does not arise in the facts of the present case since the MoU entered into between the parties does not stipulate any sum to be paid in case of breach. Therefore, this Court must only decide the case in the touchstone of Section 73 of the Indian Contract Act”, it also noted.

The Court was of the view that the finding rendered by the Arbitral Tribunal by applying the principle of alter ego against the Petitioner and holding the Petitioner as having committed breach of the agreement, is unsustainable.

“This finding itself would disentitle the respondent from claiming any damages. Apart from that, the respondent, not having pleaded and proved the actual loss or damages suffered by them, cannot be granted any sum towards damages as a windfall”, it added.

Conclusion

Furthermore, the Court emphasised that the Arbitral Tribunal cannot award an amount, which it may think just to a party in the interest of justice and there must be a basis for fixing the quantum of damages subject to the party properly pleading and proving the claim.

“The upshot of the above discussions leads to the only conclusion that the petitioner is entitled to payment of a sum of Rs.2.50 Crores along with interest at the rate of 12% per annum. But, the finding rendered and the award made in favour of the respondent towards damages along with interest will have to be interfered. This would mean that the award passed by the learned Arbitrator has to be modified”, it concluded.

The Court, therefore, held that the invalid portion of counter claim awarded along with interest is severable from the valid portion of the award directing the Respondent to pay a sum of Rs. 2.50 Crores along with interest and hence, the award can be modified.

Accordingly, the High Court partly allowed the Petition, partly set aside the arbitral award by modifying the same, and directed the Respondent to pay Rs. 2.5 Crores to the Petitioner.

Cause Title- M/S. Sugesan Transport Pvt. Ltd. v. M/S. E.C. Bose & Company Pvt. Ltd. (Neutral Citation: 2025:MHC:2699)

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