India: Delhi High Court Rules On The Issue Of Two Indian Parties Choosing A Foreign Seat For Arbitration And The Arbitrability Of The Issue Of Alter Ego

On 14 November 2017, the Hon'ble Delhi High Court (Court), in the case of GMR Energy Limited v Doosan Power Systems India Private Limited and Ors.,¹ decided the issue regarding two Indian parties choosing a foreign seat of arbitration and the arbitrability of the principle of alter ego or piercing of the corporate veil.

Factual Background

The case involved four parties; namely (a) Doosan Power Systems India Private Limited (Doosan); (b) GMR Chhattisgarh Energy Limited (GCEL); (c) GMR Infrastructure Limited (GIL); and GMR Energy Limited (GMR Energy). Dossan and GCEL were parties to various EPC agreements and Dossan, GCEL and GIL were parties to a corporate guarantee agreement while Doosan and GMR Energy had entered into two MoUs (collectively referred to as Agreements).

The EPC agreements and the corporate guarantee, contained arbitration clauses under which the arbitration proceedings were to be conducted in accordance with the rules of Singapore International Arbitration Centre (SIAC Rules) and the place of arbitration was Singapore. The MOUs were also governed by the same agreements.

On 11 December 2016, Doosan sent a notice of arbitration under the Agreements to GIL, GMR Energy and GCEL, seeking enforcement of the liability of the three parties, jointly and severally towards Doosan. GMR Energy objected to the notice and sought its discharge as a party and termination of the reference against it by Doosan.

Since, the SIAC proceeded to appoint an arbitrator on behalf of GMR Energy without deciding its objections, the present suit was filed seeking a decree of permanent injunction, restraining Doosan from instituting or continuing or proceeding with the arbitration proceedings against GMR Energy before SIAC.

Main contentions of GMR Energy

1. The Agreements prescribed that - (a) law governing the contract shall be the domestic law of India; (b) The arbitration proceedings shall be conducted in Singapore; (c) The arbitration proceedings shall be as per the SIAC Rules; and (d) All the parties being Indian, Part-I of the Arbitration and Conciliation Act, 1996 (Act) will apply;
2. Since, the arbitration is between two Indian parties, it cannot be termed as an International Commercial Arbitration and the parties cannot contract out of the domestic law of India, including the Act;
3. GMR Energy not being a signatory to any of the arbitration agreements, cannot be roped into the international arbitration by applying the doctrine of alter ego or being a guarantor in the absence of a written guarantee; and
4. Doosan, in any event, cannot merely discharge its burden by establishing a prima facie case on the principle of alter ego.

Main contentions of Doosan

1. Since, the parties agreed to arbitration under the SIAC Rules with the seat of arbitration being at Singapore, Part-II of the Act will apply;
2. Even Indian parties can agree to choose a foreign seat. Reliance in this regard was placed on Sumitomo Heavy Industries Ltd. v ONGC Limited & Ors.², Atlas Exports Industries v Kotak & Co.³ and Sasan Power Limited v North American Coal Corporation (India) (P) Ltd.⁴ ; and
3. Arbitration against the alter ego by a signatory is a well-recognized principle in India as well as Singapore (which is the chosen seat of arbitration). Therefore, the Arbitral Tribunal is the appropriate forum to adjudicate the issue of alter ego and the Court should not proceed with the present suit to determine whether GMR Energy is liable to be proceeded with in the arbitration or not.

Decision of the court

Two Indian parties can choose a foreign seat for arbitration

The Court while relying on the decision of the Supreme Court in Yograj Infrastructure Limited v Ssangyong Engineering and Construction Co. Ltd.,⁵ held, that where the arbitration clause provides that the arbitration proceedings shall be in accordance with SIAC Rules, it means that Singapore shall be the seat of arbitration and the arbitration dispute will be governed by the Singapore International Arbitration Act.

The Court further held, that the Madhya Pradesh High Court in Sasan Power (Supra)⁶ has held that two India parties are free to arbitrate in a place outside India and an award rendered pursuant thereto, would be a foreign award falling under Part-II of the Act. The Court also placed reliance on the decision of the Hon'ble Supreme Court in Sasan Power v North American Coal Corporation India, and held that the choice of foreign seat by Indian party is not in derogation of the laws in India.

The Court distinguished the judgment of the Apex Court in TDM Infrastructure Private Limited v UE Development India Private Limited, wherein it was observed that the arbitration between two Indian parties having Indian nationalities cannot be said to be an International Commercial Arbitration, on the ground that such observation was only made for the purpose of Section 11 of the Act and cannot be relied on for any other purposes.

The Court therefore relying on the Atlas Exports case, held, that in the present case parties have expressly agreed to be governed by SIAC Rules for arbitration, leading to the conclusion that the seat of arbitration is Singapore and Part-II of the Act will be applicable in this case and not Part-I of the Act.

GMR Energy despite being a non-signatory can be subjected to International Commercial Arbitration based on the principle of alter ego

The Court also held that Doosan is invoking the principle of alter ego against GMR Energy inter alia on the following basis:

1. GMR Energy, GCEL and GIL have common directors, use same corporate signage and letterheads and there is no corporate formality maintained between the said companies;
2. At the relevant time, GMR Energy was the 100% holding company of GCEL; and
3. Under the MOUs entered into between Doosan, GMR Energy, GCEL, GMR Energy undertook to discharge the liability of GCEL towards Doosan and made part payment in discharge of GCEL's liability.

The Court commending on the above and the scope of lifting of the corporate veil held, that GMR Energy can be subjected to arbitration with GCEL and GIL.

Further, the Court while dealing with the aspect of arbitrability of the issue of alter ego, relied on the Supreme Court decisions in A. Ayyaswami (Supra)⁷ and National Insurance Company Limited v Boghara Polyfab (P) Limited,⁸ and held that the issue of alter ego will fall under the category of disputes which can be decided by the Courts as well as by the arbitral tribunal.

The Court also went on to hold, that there is a distinction between an arbitration by a Court and an arbitration without intervention of the courts. The present case fell under the latter and it would be sufficient for the Court to rely on the pleadings supported by affidavits of the parties, without undertaking a full-fledged trial. The Court concluded, by stating that it would be in the domain of the arbitral tribunal to decide the issue of alter ego.

Comment

The issue, whether two foreign parties can choose a foreign seat of arbitration or agree to be governed by laws of a country other than India, has always been a contentious one. The observation of the Supreme Court in the case of TDM Infrastructure had often been viewed as a red flag for two India parties agreeing to be governed by a foreign law or choosing a foreign seat of arbitration. This judgment, even though by a Single Judge, departs from that view and allows Indian parties to opt for a foreign seat. Additionally, this decision dispels the cloud of uncertainty created by the judgment of the Delhi High Court in Sudhir Gopi v Indira Gandhi International Open University,⁹ wherein the Court had held that the issue of lifting of corporate veil is beyond the jurisdiction of an arbitral tribunal.

Footnotes

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