I. Introduction

To understand the depth of the power of an Arbitration tribunal to pierce the corporate veil in domestic and international scenario it is important to introduce some key issues which form the basis of this concept. The primary issue that needs to be stated is the idea of corporate having separate legal personality. This concept has evolved from the middle of the 19^th century, from the incorporation of companies by registration[2] in 1844 to the landmark judgment of Saloman vs Saloman[3] , which gave the concept of “veil of incorporation”[4]. This theory of corporate veil was predicated on the idea of developing mercantilism[5]; it prompted the idea of companies taking more risk as it limited the liability of the owners of these companies. This explanation of protecting the owner also plays a seminal role in deciding whether the corporate veil of a company could be piercing or not. To further simplify things and to keep in concord with the objective for which corporate veil was created, the paper seeks to explain the concept of veil piercing as jurisdictional piercing[6] and liability piercing[7], which means to attach jurisdiction over the parent company and not any liability or vice-versa.

The next major concept that needs to be discussed is the power of the arbitration tribunal. There are certain concepts of arbitration that will be discussed in the paper; however, an exhaustive discussion on arbitration and its working is beyond the scope of this paper. Firstly, it is to be made clear that arbitration, unlike the traditional form of dispute resolution, works on the basis of consent.[8] This means that for an arbitration proceeding to start, an arbitration agreement has to be duly agreed by the parties prior to the arising of the dispute., In India, §8 of Arbitration and Conciliation Act 1996[9] talks about the privity of contract, which is based on UNCITRAL model law that indirectly recognizes privity.[10] However, when piercing of corporate veil takes place, non-signatories (who have certain ownership of the company or as may be decided on a case to case basis) can also be made a party to the arbitration proceedings; this is also called the doctrine of alter ego.[11] There are other methods that can also be used to bind non-signatories such as actual authority, implied consent, third-party beneficiary, guarantor, ratification, assumption, estoppels, apparent authority and succession.[12] However, discussion on these topics is beyond the scope of this paper.

In Part II of the paper, I shall focus on the arbitrability of disputes in domestic jurisprudence. Part III would entail decisions of domestic courts regarding the power of the arbitral tribunal to pierce the corporate veil. In Part IV of the paper, I seek to engage in comparative analysis wherein I shall focus on international investment arbitration and international commercial arbitration, although both of the areas have similar roots with respect to the power of an Arbitral Tribunal to Pierce the Corporate Veil. However, they have evolved very differently[13]—Part V conclusion.

II. Piercing of corporate veil and arbitrability of disputes in Indian scenario

The power to pierce the corporate veil in India has been exercised by Indian Supreme Court since Life Insurance Corporation of India vs Escort Ltd. & others.[14] The court also laid down certain condition for lifting the corporate veil such fraud, illegal conduct, tax evasion, sham or associate company in reality forms one concern. However, while deciding this case law, the Supreme Court took a very restrictive approach on lifting the corporate veil. Since then the jurisprudence has evolved and a more expansive definition has been adopted by the Supreme Court such as in the case of New Horizons Ltd. v. Union of India.[15] In this case the court included convenience or interest of revenue to be conditions for lifting the corporate veil. Thus implicitly bending the law to commercially more suited trends.

However, arbitral tribunals vary from the traditional form of dispute resolution method (courts) because of the hindrance caused by non-arbitrability of certain disputes in private forums such as arbitration tribunals. The Indian Arbitration and Conciliation Act, 1996[16] does not mention any such non-arbitrable claims, the concept however could be implicitly read while reading  §8[17] together with §34[18].   This concept takes it origin from the doctrine of right in rem and right in persona. The seminal Supreme Court case which discusses non-abitrability of certain disputes is Booz Allen and Hamilton Inc. v. SBI Home Finance Limited and Ors.[19] In this case, the Apex court was concerned with the scope of §8[20] of the Arbitration and Conciliation Act 1996 while dealing with a mortgage suit. The court while defining the scope of § 8[21] also notes that it is the duty of the judicial authority to “decide whether reliefs sought in a suit are those that can be adjudicated upon and granted in arbitration”[22]. The court then talks about the distinction between public forums and private forums, and how certain disputes can be explicitly or implicitly barred from private forum. Explicit bar would include suit being barred by a statue or under public policy considerations from arbitration, while explaining implicit bar the court laid down the distinction between right in rem and right in persona. Referring to the Black’s Law Dictionary[23], the court defined right in rem as the a right exercisable against the world at large and right in persona right protecting against specific individuals. The court also noted that all suits related to right in rem have to be adjudicated before a public forum (courts and public tribunals) and the suit under right in personam can be adjudicated in a private forum.

The court also bought forward a non-exhaustive list of claims that are non-arbitrable. The list was further expanded in the case of A. Ayyasamy v. A Paramasivam[24] and Ors and imalKishor Shah v. Jayesh Dinesh Shah[25], the Supreme Court in both these cases followed the same reasoning as Booz Allen. The important thing to be noted here is none of the lists restricted the claim of piercing the corporate veil directly, the court did mention fraud and corruption to be non-arbitrable which are a precondition to piercing the corporate veil . However, this position was later changed in the case of Swiss Timing Limited v. Organising Committee, Commonwealth Games 2010,[26] wherein fraud was included within the ambit of arbitration. It was based on the principle of severability of arbitration agreement from the under lying contract and § 16[27] of the Arbitration and Conciliation Act .Thus Supreme Court setting a very pro arbitration precedent.[28]

III. India’s stance on inclusion of non-signatories to arbitration.

(A) Restrictive interpretation of privity of contract doctrine in arbitration agreements

Balmer Lawrie and Company Ltd. v. Saraswathi Chemicals Proprietors Saraswathi Leather Chemicals (P) Ltd.[29] (“BalmerLawrie”) was the  primary cases to bar arbitral tribunal from piercing the corporate veil. The court in the said case limited the power of the  tribunal on the basis of privity of contract as mentioned in arbitration act, between the parties that have agreed to the arbitration agreement. The court while addressing the issue refers to the seminal case of Chloro Controls India Private Limited v. Severn Trent Water Purification Inc& Others[30] (“Chloro Controls”), which addresses the issue of non-signatories being bound by the arbitration agreement. The court while refereeing to international jurisprudence said that there are various methods of binding non-signatories to the arbitration agreement; one such method used in Chloro Controls was based on the idea of implied consent of the non-signatory (group of companies doctrine) or the claim of the non-signatory coming through a signatory. Therefore, in this regard it was different from BalmerLawrie, in which the Decree Holder (DH) had initiated claims against the controlling family behind Saraswathi Chemicals who had not consent to the arbitration agreement. There were other arguments given by the court in this regard  as well such as the most basic condition for lifting the veil were not satisfied, however they do not deal with the power of the tribunal.

The Bombay High Court further in NOD Bearings Pvt Ltd vs Bhairav bearing Corporation[31], clarified any confusion if there ever was it implied that even if the conditions are met for lifting the corporate veil still an arbitral tribunal cannot do so.

(B) Extending the scope of the arbitration agreement

The Bombay high court has taken a completely different stance in Integrated Sales Servicesvs Shri. Arun Dev S/O. Govindvishnu,[32] the contention relevant to the paper is whether the enforcement of a foreign arbitral award which pierces the corporate veil is in violation to the fundamental policies of Indian law. It was regarded that it does not violates the fundamental polices as “principle of lifting the corporate veil as an exception to the existence of a distinct corporate personality of a Company or its shareholders is well recognized in India.” [33]Further it was also said by the court, that the Supreme Court while explaining the scope of § 45[34] of Arbitration and Conciliation Act in Chloro Control also iterated “in clear terms that reference of non-signatory parties to arbitration is neither unknown to arbitration jurisprudence nor is the same impermissible.”[35]The judgment thinks that arbitral tribunal piercing the corporate veil is not a violation of fundamental principles of law.

The Supreme Court has been silent on domestic tribunal piercing the corporate veil, although it has laid down the doctrine of group of companies in Chloro Control (also used in Mahanagar Telephone Nigam v. Canara Bank [36]) which according to an international school of thought could be considered veil piercing through arbitration.[37] However, in the judgment the court distinguishes between implied consent theory (which is the basis for group of companies doctrine) and veil piercing.

The subsequent application with regard to this principle was held in the case of GMR Energy Ltd. v. Doosan Power Systems India Pvt. Ltd in this case in particular the court referred to Chloro Control and propounded that the power of the arbitral tribunal can be extended to included within its ambit the power to pierce the corporate veil. This was land mark judgment as it was for the very first time the court allowed the arbitral tribunal to pierce the corporate veil which was completely based on the reasoning given in Chloro Control.

Looking at the domestic front from an international angle Chloro Control has set a very pro arbitrational precedence, as very many international arbitration academicians believe that the doctrine of group of companies is intrinsically inked to the issue of veil pierce and alter ego doctrine. This conclusion in this regard has been reached on the basis of severability of the arbitration agreement from the primary contract, therefore binding parties that are not privy to the arbitration agreement, from a very holistic perspective can be seen to be binding the non-signatories to the consequence of non-performance of the underlying contract, which would in turn be decided in the arbitral proceeding thus indirectly piercing the corporate veil. This debate also becomes extremely important from a international perceptive as would be discussed in the later part of the project.

IV. Alter ego doctrine in International Jurisprudence

(A) International Commercial Arbitration (ICA)

The idea behind veil piercing in ICA is to hold the non-signatories which may be parent company or shareholders of a company, liable for the action of the legal entity they control. The development of piercing law in ICA takes place from Thomson-CSF, S.A. v. American Arbitration Association,[38] where the court laid down that a corporate veil can be pierced if the third party is closely related to the signatory of the arbitration agreement. Further the tribunal laid down three principle condition for veil piercing:

• “A close relationship between both corporations.
• Control of one corporation over the other.
• A recognition of both companies as separate entities would lead to fraudulent or inequitable results.”[39]

 The argument of actual control or domination is given precedence over formal control. The US courts in certain cases have disregarded fraud to be condition; however that has been pointed out to be problematic by many scholars as it disregards the exclusivity of separate legal personality.[40]Another concept that creates a major hindrance in piercing the corporate veil is the privity of contracts doctrine. Article II(i) of the New York Convention[41] also recognize this doctrine. This restricts non-signatories to be bound by arbitration agreement thus protecting the concept of separate legal personality. However, this argument of legal personality can be circumvented in ICA by severability of arbitration agreements, even if a non-signatory is considered bound by the arbitration agreement, it is not necessarily bound by the contract between the parties  and may not be liable for the signatory’s obligations ,thus still protecting the under lying intent of the veil.[42] Similarly, a non-signatory may be found liable for the signatory’s obligations but still not bound by the arbitration agreement. These concepts are called jurisdictional piercing and liability piercing respectively. These are extremely vital in expanding the power of the arbitral tribunal to achieve the objective behind piercing the corporate veil.  The Indian jurisprudence can incorporate these methods created by the US courts and tribunals for achieving similar result while not completely destroying the separate legal identity argument.

The next concept that is of at most importance is deciding the power of the tribunal is the problem regarding choice of law[43]. In ICA there is no specific domestic law governing the arbitration proceeding, it is upon the parties or in certain cases the arbitrator to decide which law they want to apply to the arbitration proceedings.  This raises the problem as the tests for piercing the corporate veil differ in different jurisdictions so selection of law becomes of supreme importance. Scholars and tribunals have proposed various justifications for which law should be applicable. However for the scope of this paper only two approaches need to be mentioned:(1)International Principles or General Principles of Law[44] as this is the most commonly accepted  and just norm for application as it does not favor any one domestic law in particular.(2) The Law with the Most Significant Relationship to the Dispute[45] as this law helps in expanding the power of the arbitral tribunal because it grants autonomy to the tribunal in deciding which law should be applicable thus implicitly favouring a better arbitrational jurisprudence while piercing the corporate veil.

(B) International Investment Arbitration (IIA)

The regime in IIA revolves around piecing the corporate veil where shareholders decide to sue the host-state for the loss incurred by them due to the expropriation or certain other activities done by the host state to the host-state company. The current trends while dealing with veil piercing in IIA is perfectly reflected by Tokios Tokeles v. Ukraine[46],(“Tokios Tokeles”) in this case the tribunal regard that the origin of the capital is of no consequence. Thus opening a flood gate of claims, as specifies that the origin of the capital is less decisive, emphasizing the requirement of fraud or malfeasance of an investor’s abuse of legal personality and the factual control of a corporation (this overlooking the argument of actual control or domination which is emphasized in commercial arbitration).

In contrast to TokiosTokeles , the denial of benefit clause limit the power of the tribunal while piercing the corporate veil as it prevents treaty shopping and allows only those people to have a claim who are legitimately protected under the treaty.[47]

In the ICSID regime under article 25(2) (b)[48] clause 1 of the ICSID convention it provides for the domestic company to bring a claim against the host state, however the company must have foreign control. The convention under article 25 lays down the two conditions for foreign control:

1) The objective presence of foreign control

2) The host State’s approval of that presence in the form of an agreement.[49]

The tribunal has been arbitrary while deciding upon these preconditions. However, that is beyond the scope of this paper.

V. Conclusion

The law in India regarding the power of the arbitration tribunal to piercing the corporate veil is still unclear as the Supreme Court is still silent on the topic, also as there are contradicting judgment from the same high court. The doctrine of a group of companies has been recognized by the Supreme Court, but no clear intention on veil piercing is present. On the International front, the doctrine of alter ego and veil piercing are well recognized. The paper has distinguished between International Commercial Arbitration and International Investment Arbitration and has tried to incorporate all major factors affecting the power of the arbitration tribunal while veil-piercing, such as the denial of benefits clause and choice-of-law problem.

*****

[2]Joint Stock Companies Act, 1844 (7 & 8 Vict. c.110)

[3]Saloman v. Saloman [1] (1897) AC 22

[4] Id.

[5] Ekelund, Robert B. and Tollison, Robert D. (1980): “Mercantilist Origins of the Corporation”, The Bell Journal of Economics, Vol. 11, No. 2, pp. 715- 720.

[6] Akeblom v Ezra Holdings Ltd, 848 F Supp (2d) 673 at 689 (SD Tex 2012)

[7] Georgios Petrochilos, “Extension of the Arbitration Clause to Non-Signatory States of State Entities: Does it Raise a Difference?” in Bernard Hanotiau & Eric A Schwartz, eds, Multiparty Arbitration (Paris: ICC Institute of World Business Law, 2010). King Fung Tsang, “Applicable Law in Piercing the Corporate Veil in the United States: A Choice with no Choice” (2014) 10:2 J Priv Int L 227 at 237.

[8] Sudhir Gopi v. Indira Gandhi National Open University, 2017 SCC OnLine Del 8345

[9] The Arbitration and Conciliation Act, 1996 as amended by The Arbitration and Conciliation (Amendment) Act, 2015, §8.

[10] UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006 at art. 7(1)

[11] Gary B Born, International Commercial Arbitration (Alphen aan den Rijn: Kluwer Law International, 2014) at 1432

[12] Chloro Controls India Private Limited v. Severn Trent Water Purification Inc & Others, (2013) 1 SCC 64.

 Id at 1415.

[13] Leonid Shmatenko, “Piercing the Corporate Veil” is relative, 2012

[14]  Life Insurance Corporation of India vs Escort Ltd. & others  (1986) 1 SCC 264

[15]  New Horizons Ltd. v. Union of India (1995) 1 SCC 478

[16] The Arbitration and Conciliation Act, 1996

[17] The Arbitration and Conciliation Act, 1996 as amended by The Arbitration and Conciliation (Amendment) Act, 2015, §8.

[18] The Arbitration and Conciliation Act, 1996 as amended by The Arbitration and Conciliation (Amendment) Act, 2015, §34.

[19] Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. And Ors. AIR2011SC2507.

[20] The Arbitration and Conciliation Act, 1996 as amended by The Arbitration and Conciliation (Amendment) Act, 2015, §8.

[21] Id

[22] Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. And Ors. AIR2011SC2507.

[23] Black’s Law Dictionary 899  (9th ed. 2009)

[24] Ayyasamy v. A Paramasivam and Ors, 2016 SCC OnLine SC 1110

[25] Vimal Kishor Shah v. Jayesh Dinesh Shah, (2016) 8 SCC 788.

[26] Swiss Timing Limited v. Organising Committee, Commonwealth Games 2010 Arbitration Petition No. 34 of 2013

[27] The Arbitration and Conciliation Act, 1996 as amended by The Arbitration and Conciliation (Amendment) Act, 2015, §16.

[28] Varuna Bhanrale, Ashish Kabra & Vyapak Desai, “ INDIA – ARBITRATION FRIENDLY- ALLEGATIONS OF FRAUD AND CORRUPTION NO BAR TO ARBITRATION!” Nishith Desai Associates.

[29] Balmer Lawrie and Company Ltd. v. Saraswathi Chemicals Proprietors Saraswathi Leather Chemicals (P) Ltd, 239 (2017) DLT 217

[30] Chloro Controls India Private Limited v. Severn Trent Water Purification Inc & Others, (2013) 1 SCC 641

[31] NOD Bearings Pvt. Ltd. v. Bhairav bearing Corporation, 2019 SCC OnLine Bom 366

[32] Integrated Sales Services Ltd. v Arun Dev, 2017 (1) MhLJ 681 (DB).

[33] Id

[34] The Arbitration and Conciliation Act, 1996 as amended by The Arbitration and Conciliation (Amendment) Act, 2015, §45.

[35] Integrated Sales Services Ltd. v Arun Dev, 2017 (1) MhLJ 681 (DB).

[36] Mahanagar Telephone Nigam v. Canara Bank AIR 2019 SC 4449

[37] “Evolution and Future of International arbitration” edited by Stavros Brekoulakis, Julian D.M. Lew published by Klunwer Law International.

[38] Thomson-CSF, S.A. v. American Arbitration Association, 64 F.3d 773 (2nd Cir. 1995)

[39] Id

[40] Callas v. Independent Taxi Owners Ass’n, (App. D.C. 1933), 66 F. 2d 192.

[41] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958, 1473 UNTS 330 art 2(1) (entered into force 7 June 1959)

[42] 1 Akeblom v Ezra Holdings Ltd, 848 F Supp (2d) 673 at 689 (SD Tex 2012)

[43] First Inv. Corp. of Marshall Islands v Fujian Shipbuilding Ltd, 703 F (3d) 742 at 752–53 (5th Cir 2012).

[44] William W Park, “Non-Signatories and International Contracts: An Arbitrator’s Dilemma” in Belinda McMahon, ed, Multiple Party Actions in International Arbitration: Consent, Procedure and Enforcement (Oxford: Oxford University Press, 2009) 1 at para 1.40.

[45] Rome I Regulation, Article 4. The Restatement (Second) of Conflict of Laws § 188 (1971)

[46] Tokios Tokeles v. Ukraine, Decision on Jurisdiction and Dissent, ICSID Case No. ARB/02/18; IIC 258 (2004); 20 ICSID Rev. – FILJ 205

[47] Thorn and Doucleff, “Disregarding the Corporate Veil and Denial of Benefits Clauses,” p. 5.

[48] Art 25(2)(b) clause 1 ICSID Convention ,1966

[49] Art. 25 ICSID Convention,1966

*****