Delhi High Court confirms that two Indian parties can choose a foreign seat of arbitration and applies the alter ego doctrine to join non-parties to the arbitration agreement

In GMR Energy Limited v. Doosan Power Systems India Private Limited, the Delhi High Court confirmed that two Indian parties can contract to have a foreign seat of arbitration (in this case, Singapore), and also ruled that a non-party to the Arbitration Agreement could be made part of the arbitral proceedings on the grounds that it acted as an alter ego to the contracting party.

A brief summary of the case can be found below.

Facts

The matter related to the development of a 1350 MW Coal Fired Thermal Power Plant in Chhattisgarh. Doosan India had entered into (i) three agreements with GMR Chhattisgarh Energy Limited (“GCEL”) all dated 22 January 2010 (together the "EPC Agreements"); (ii) a corporate guarantee dated 17 December 2013 with GCEL and GMR Infrastructure Ltd (“GIL”); and (iii) two subsequent Memoranda of Understanding (the "MOUs") with GCEL's parent, GMR Energy, dated 1 July and 30 October 2015.  The agreements with GCEL and GIL contained arbitration agreements providing for disputes to be resolved by arbitration under the rules of the Singapore International Arbitral Centre ("SIAC"), and for the "place" of such arbitration to be Singapore.  However, whilst the MOUs with GMR Energy referred to the agreements with GCEL and GIL, they did not make an express reference to arbitration.

When disputes subsequently arose, Doosan India sent a notice of arbitration under the SIAC Rules to GIL, GCEL and GMR Energy. GMR Energy applied to the Delhi High Court to restrain Doosan India from instituting or continuing or proceeding with the SIAC arbitration proceedings against it.

Issues

The main issues tried by the Delhi High Court in these proceedings included:

1. Whether the SIAC arbitration proceedings would fall under Part I or Part II of the (Indian) Arbitration and Conciliation Act, 1996 (the "Arbitration Act")^[1]?; and
2. Whether GMR Energy could be party to the arbitration in circumstances where it was not a party to the EPC Agreements or the corporate guarantee which contained the arbitration clauses?

Issue 1: Applicability of Part I or Part II of the Arbitration Act

This issue arose in relation to the procedure for the appointment of the arbitrators in the SIAC Arbitration Proceedings as well as in relation to whether the issue of alter ego (discussed below) should be decided by the Delhi High Court or the Arbitral Tribunal.

GMR Energy argued that the Court should apply the Arbitration Act as the law governing the seat of the arbitration because:

• on the plain reading of the arbitration clauses, Singapore was not the seat of arbitration but only the chosen place or venue for hearings;
• the parties being Indian, choice of a foreign seat for arbitration would be in contravention of Section 28 of the Indian Contract Act 1872 (the "Contract Act") which provides that agreements which restrain parties' rights to commence legal proceedings are void (save for those which do so by way of an arbitration agreement) - GMR Energy contended that an agreement between Indian parties to arbitrate offshore would fall foul of this provision; and
• for two Indian parties to choose an overseas seat for their arbitration (thereby disapplying Part I of the Arbitration Act) would amount to a derogation from Indian substantive law, and therefore would not be permissible.

The Court rejected GMR Energy's submissions and ruled that:

• as decided by the Supreme Court in Yograj Infrastructure Ltd v Ssangyong Engineering & Construction,[2] the reference to Singapore (and to the SIAC Rules) in this way amounts to a choice of Singapore as the seat of the arbitration;
• as to the submission relating to the Contract Act, this was rejected by the Supreme Court in Atlas Exports v Kotak,[3] as an offshore arbitration would meet the requirements of section 28 of the Contract Act.
• in any event a question about whether the arbitration agreement was lawful was not within the scope of the Court's inquiry: under section 45 of the Arbitration Act, the Court's inquiry was limited to the issue of whether the arbitration agreement was "null and void, inoperative or incapable of being performed".[4] The Court was not to look into the lawfulness or otherwise of the substantive provisions of the agreement at this stage.

The Court thus confirmed that, irrespective of the parties' substantive rights and obligations under the contract, Indian parties were free to choose an offshore seat for their arbitrations.

Issue 2: Applicability of Arbitral Proceedings to third parties

GMR Energy argued that it could not be made party to the Arbitral proceedings on the grounds that:

• It was not a signatory to any of the arbitration agreements, and could not be roped into an international arbitration by applying the alter ego doctrine - the mere fact that two companies have common shareholders or common directors will not make the two companies a single entity; and
• In any event, Doosan India had terminated the MoUs and discharged GMR Energy's liabilities under them.

Doosan India contended that GMR Energy should be party to the SIAC Arbitration proceedings by virtue of common family ownership and governance, lack of corporate formalities between the companies, common directorships, logos and letterheads, and GMR Energy's past conduct in making payments towards GCEL's debts.

Doosan India further argued that in any case the Delhi High Court should not determine the issue because it was one that fell within the competence of the Arbitral Tribunal in Singapore.  The issue was being raised in response to GMR Energy's injunction application, and not because Doosan India required the Court to make a final ruling on the matter.

The Court noted that the alter ego doctrine was not limited to cases where fraud was alleged, but was potentially of broader application. Therefore, it ruled that Doosan India had established grounds for proceeding against GMR Energy in the arbitration proceedings, alongside GCEL and GIL, on account of:

• the common ownership between the entities;
• the non-observance of separate corporate formalities and co-mingling of corporate funds; and
• GMR Energy's undertaking to discharge liabilities of GCEL (and the fact that it had made part payments towards the same);

However, the Court clarified that its finding on the issue of alter ego was limited to confirming that GMR Energy was a party to the arbitration, and not a final determination on merits as to GMR Energy's liability (if any), which would be in the domain of the Arbitral Tribunal's jurisdiction.

As to GMR Energy's arguments regarding the termination of the MOUs, the Court decided that this was a merits issue that could be determined within the arbitration.

Comment

The decision that Indian parties can chose to arbitrate in a seat outside India is helpful, but is perhaps unsurprising in light of other decisions from the Indian courts. The ability to choose an overseas seat is particularly useful for Indian subsidiaries of foreign investors, who might enter into agreements that are exclusively between Indian parties, but might nonetheless wish to have disputes resolved outside India.

Perhaps more noteworthy is the Court's application of the alter ego doctrine to bind GMR Energy in the arbitral proceedings.  In many jurisdictions, this doctrine is available only (or mostly) in the fraud context, but the developing Indian jurisprudence appears to be that it can apply on the basis of commonality of ownership and operations, and the apparent lack of separate legal personalities in practical, day-to-day terms (which will no doubt be common features of many corporate groups).  It is also interesting that, whilst Doosan (the party wishing to rely on the doctrine) suggested that the Court should not rule definitively on the question of whether GMR Energy should be bound under this doctrine, and should instead leave it to be dealt with by the arbitral tribunal in Singapore, the Court decided that it could and should rule on the matter itself.  This approach risks a potential conflict arising if the tribunal were to reach a different conclusion as to its jurisdiction over GMR Energy, and it remains to be seen whether this approach will be followed in other cases in future.

[1]        The Arbitration Act provides two distinct regimes depending on the seat of the arbitration. Part I provides a framework of rules for disputes – both domestic and those with an international element – where the seat of arbitration is in India. This Part confers significant powers on the Indian courts to order interim measures, appoint and replace arbitrators and hear challenges to arbitral awards. Part II applies to arbitrations seated outside India, and significantly limits the scope of judicial intervention in the arbitration.

[2] (2011) 9 SCC 735

[3] (1999) 7 SCC 61

[4] This was the reasoning of the Supreme Court in Sasan Power Limited vs. North American Coal Corporation India Private Ltd., which was followed here.

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