Two Indian Parties can Choose a Foreign Seat of Arbitration and a Non-Signatory to the Arbitration Agreement can be Made Party to the Arbitration Proceedings: Delhi High Court in GMR Energy.

[Devina Srivastava]

The author is a third-year student at Symbiosis Law School, Pune. She may be reached at devina.srivastava@symlaw.ac.in.

The Delhi High Court delivered a important judgment on 14th November, 2017 in the case of GMR Energy Ltd. v. Doosan Power Systems India Pvt. Ltd.,[1] resolving the persistent ambiguity regarding two critical issues of arbitration law in India: 1) whether two Indian parties can choose a foreign seat of arbitration, and 2) whether a non-party to the arbitration agreement can be joined to the arbitration proceedings. Answering both questions in the affirmative, the court has adopted a pro-arbitration approach. Though the judgment does open doors for progressive judicial perspectives on arbitration, questions are rife about the reasoning used by the court to reach its decision.

Facts of the Case

GMR Chattisgarh Energy Ltd. (GCEL) entered into three agreements with Doosan India in 2010 (EPC Agreements). These agreements contained an arbitration clause that specified the rules of Singapore International Arbitration Centre (SIAC) as the rules governing the arbitration. In addition to this, a corporate guarantee was executed between GCEL, GMR Infrastructure Ltd. (GIL) and Doosan in 2013. Further, two MOUs were executed between Doosan and GMR Energy in 2015. All these documents became the subject matter of a dispute when Doosan India invoked arbitration proceedings against GIL, GMR Energy and GCEL. In response to this, GMR Energy filed a civil suit before the Delhi HC seeking a stay against Doosan from continuing arbitration proceedings against it on the ground that it was not a signatory to the arbitration agreement. Doosan, on the contrary, cited the EPC Agreements, the Corporate Guarantee, the two MOUs and factors such as family governance, transfer of shareholding, comingling of funds among GMR Energy and GCEL and GIL and contended that GMR Energy was the ‘alter ego’ of GCEL and GIL. Nevertheless, Delhi HC granted a stay in July, 2017. Doosan then filed an application under Section 45 of the Arbitration Act, 1996 (Act), asking the court to refer parties to arbitration.

Issues for Consideration

For the purpose of this article, we shall discuss the following issues that arose before the court for consideration:

3. Whether the arbitration is a domestic arbitration, covered by Part I of the Act or an international commercial arbitration, covered by Part II of the Act.
4. Whether GMR can be made a party to the arbitration proceedings.
5. Whether the court should only form a prima facieopinion on the question of alter ego or should it return a finding on it.

Contentions of the Parties and Findings of the Court

Issue 1: Whether the arbitration is a domestic arbitration, covered by Part I of the Act or an international commercial arbitration, covered by Part II of the Act.

GMR contended that the arbitration was a domestic one and was not governed by Part II of the Act and hence, Doosan’s application under Section 45 was not maintainable. The court rejected this contention citing Yograj Infrastructure Ltd. v. Sangyong Engineering & Construction Co. Ltd.[2], in which it was held that where the arbitration clause provides that the proceedings shall be in accordance with the SIAC Rules, it translates to Singapore being the seat of arbitration. GMR Energy raised another argument that as per the definition of ‘international commercial arbitration’,[3] at least one of the parties must be foreign for the arbitration to be an international commercial arbitration. The court rejected this contention and held that as per the decision in Sasan Power Ltd. v. North American Coal Corporation[4], two Indian parties were free to arbitrate outside India and the same would constitute a foreign award.

A question that arose was whether the choice of a foreign seat was in contravention of Section 28 of the Indian Contract Act, 1872 as it would constitute an agreement in restraint of legal proceedings. The court answered this question in the negative as the arbitration clause forms a separate and independent substantive contract in itself.[5] Further, it could not be said that choosing a foreign seat amounted to derogation of Indian substantive law as under Section 45; the question only relates to whether the agreement is “null and void, inoperative or incapable of being performed” and it cannot be held to be illegal or void.

Issue 2: Whether GMR can be made a party to the arbitration proceedings.

This issue arose because GMR was not a signatory to any of the agreements containing the arbitration clause or to the corporate guarantee. Further, the two MOUs had been terminated by Doosan. GMR relied on the judgment given in Chloro Controls v. Seven Trent Water Purification Inc.[6], in which a word of caution against subjecting non-party to arbitration agreement to arbitration proceedings was iterated by the Supreme Court. However, in the same judgment, the court also recognized guarantee, apparent authority, piercing the corporate veil and implied consent as the basis to bind a non-signatory. Further, Doosan drew the court’s attention to a decision of the Singapore High Court inJiang Haiying v. Tan Lim Hui & Anr.[7], in which it was held that the privity rule, though strict, is not absolute and can be bent in situations where it may be imperative to pierce the corporate veil, such as in the case of an alter ego. In consonance with this, the court read Clause 17.1 of the Corporate Guarantee to reach the conclusion that in the present case, the intent of the parties was to consolidate all disputes relating to the project and, hence, GMR could be made a party to the arbitration proceedings. It was especially so because the companies did not observe separate corporate formalities and comingled funds.

Resultantly, another question that arose was whether the arbitral tribunal could pierce the corporate veil of the company or whether it is only the court that can exercise such a power. The attention of the court was drawn towards Integrated Sales Services Ltd. v. Arun Dev & Ors.[8] in which the Bombay High Court held that issues which were arbitrable can be looked into by a tribunal in a foreign-seated arbitration. Thus, the court reached the conclusion that the arbitral tribunal can pierce the corporate veil of the company.

Issue 3: Whether the court should only form a prima facie opinion on the question of alter ego or should it return a finding on it.

GMR relied on the decision in Chloro Controls[9], which discusses Shin Etsu Chemical Co. v. M/s. Aksh Optifibre Ltd.[10] and states that when an application in made under Section 45, the court must return a final finding (unless the arbitration agreement is void, inoperative or incapable of being performed). Doosan on the other hand, argued that the court should only apply the prima facie test and in case GMR is found to be an alter ego of GCEL, the court should refer the parties to arbitration, relying on the decision inMcDonalds India Pvt. Ltd. v. Vikram Bakshi & Ors.[11]. The reasoning was that the parties should not be compelled to pursue arbitration and spend time, money and effort if the question before the arbitral tribunal is futile. The court agreed to return a prima faciefinding on the issue.

After a due deliberation on all the aforementioned issues, the court held that the petition was infructuous under Section 45 of the Act as the arbitration proceedings had already commenced. However, it decided the above questions of law which were ought to be raised had the court still had the choice of enforcing the arbitration agreement.

Conclusion

The decision of the High Court is being hailed as a revolutionary step towards promoting arbitration and strengthening its framework in the country. However, doubts can still be raised regarding the line of reasoning used by the court. On the aspect of an alter ego being joined as a party to the arbitration proceedings, there are quite a few risky propositions that the court seems to have laid down. In several countries, courts have applied the alter ego doctrine only in cases of fraud, but India has marched a step ahead to hold that it can even apply on the basis of commonality of shareholders, comingling of funds and common Board of Directors, among other pretexts. This presents a precarious position for various reasons such as comingling of funds being a common feature of family-run businesses in India. Moreover, in the present case, there was no evidence of comingling of funds other than the corporate guarantee and the MOUs.[12] In the case of Vodafone International Holdings B.V. v. UOI[13], it has been held that directors of subsidiaries have separate responsibility to the subsidiary and hence, common directorship ought not to be considered as a criterion to lift the corporate veil. It is also hard to find any express or implied term by which GMR submitted to arbitration. This is when one of the clauses under the various contracts specified that all disputes could be consolidated if all the parties consented. It must be also be pointed out that the court’s reliance on Sasan[14] is misplaced as the Supreme Court, in appeal, ruled in that case that the American parent of an Indian company was also a party to the dispute and the court made no determination on the seat. Now, considering the judgment delivered by the Delhi High Court, another ambiguity may arise if the arbitral tribunal disagrees with the prima facie opinion of the court that GMR is an alter ego of GCEL and GIL. It will be interesting to note the turn of events in that case. Thus, though the court made a commendable effort to pursue a pro-arbitration approach, its reasoning can be said to be flawed in certain respects. Nevertheless, the judgment is a positive step towards strengthening the arbitration framework in the country.

[1] 2017 (6) ArbLR 447 (Delhi).

[2] (2011) 9 SCC 735.

[3] Section 2(1)(f), Arbitration and Conciliation Act, 1996.

[4] 2015 SCC OnLine MP 7417.

[5] Sasan Power Ltd. v. North American Coal Corporation, (2016) 10 SCC 813.

[6] (2013) 1 SCC 641.

[7] 2009 SGHC 42.

[8] 2017 SCC OnLine Bom 1.

[9] Supra at 6.

[10] (2005) 7 SCC 234.

[11] 2016 SCC OnLine Del 3949.

[12] Shalaka Patil & Jeet Shroff, Delhi High Court’s decision in GMR v. Doosan: Two steps forward, two steps back?, Kluwer Arbitration Blog (Jan 1, 2018), http://arbitrationblog.kluwerarbitration.com/2018/01/01/delhi-high-courts-gmr-v-doosan-two-steps-forward-two-steps-back/

[13] (2012) 6 SCC 613.

[14] Supra at 4.