By: Ramesh Vaidyanathan and Sayeli Mehra
The Delhi High Court answered this question recently with an emphatic ‘No’ in the case of Sudhir Gopi vs. Indira Gandhi National Open University & Ors. (“IGNOU”) and clarified that an arbitral tribunal does not have the power to lift the corporate veil to bind a non-signatory to an arbitration proceeding, except where a corporate form has been used for an unlawful purpose or to perpetuate a fraud.
IGNOU, a statutory university, develops educational programs for distant learning that are offered globally. Universal Empire Institute of Technology (“UEIT”) is a Dubai based company. All affairs of UEIT are managed by Mr. Sudhir Gopi (“SG”), who is the Chairman & Managing Director as also the majority shareholder of UEIT. IGNOU and UEIT entered into an agreement (“Agreement”) under which UEIT, in the capacity of a partner institute (“PI”), was to run a centre in Dubai for the distant educational programs (“DEP”) offered by IGNOU.
Under the Agreement, IGNOU and UEIT agreed to share the fees collected from the students enrolling for DEP at Dubai. When payment disputes arose between the parties, IGNOU terminated the Agreement and invoked arbitration against UEIT and SG. An arbitral award (“award”) of USD 664,070 along with interest of 12% per annum was rendered in favor of IGNOU and against SG and UEIT.
SG and UEIT challenged the award before the Delhi High Court. One of the important issues before the Court was whether the arbitral tribunal had the jurisdiction to render an award against SG, who is not a signatory to the agreement.
SG contended that the arbitral tribunal did not have the power to proceed against anyone who is not a signatory to the arbitration agreement. IGNOU insisted that SG is a majority shareholder of UEIT and has complete control over its business. It also argued that SG was running his business under the facade of UEIT, and essentially there was no difference between SG and UEIT. Accordingly, it contended that the award should apply to both.
The High Court noted that a fundamental requirement under the provisions of the Arbitration and Conciliation Act, 1996 for an arbitration agreement is the written consent of all the parties to the agreement to refer the dispute to arbitration. In the absence of consent, the arbitral tribunal does not have the right to make an award in favor of or against non-signatories, irrespective of whether such third party is a company or an individual as both have their own distinct identities. The jurisdiction of the arbitral tribunal is restricted to the signatories to the arbitration agreement. The arbitrator does not have the power to pierce the corporate veil of the company in order to join non-signatories even if they are majority shareholders in the company, except in cases such as fraud, misuse of statute, etc.
In this case, there was no evidence of SG using the corporate façade of UEIT to commit a fraud on IGNOU and the failure of the company to meet its contractual obligations is not enough to pierce the corporate veil. Therefore, SG’s challenge was allowed and the liability of SG towards IGNOU in his personal capacity was dismissed by the Court.
This is a welcome judgment that underscores the importance of distinguishing between corporate liability and shareholder liability. Unless the shareholder is explicitly bound by the arbitration agreement, an arbitrator has no jurisdiction over such shareholder. It has also rightly clarified that the arbitral tribunal being a creation of the contract cannot be vested with power to pierce the corporate veil, unless there is satisfactory evidence that the corporate entity has been used to perpetuate a fraud.