Arbitrator can lift the corporate veil or determine an entity as the alter ego of another entity

Madras High Court Restricts Arbitrator's Authority in Corporate Veil and Damage Awards High Court clarifies that arbitrators cannot lift the corporate veil or award damages without substantial evidence of loss.

In a significant ruling, the Madras High Court has underscored the limitations of an arbitrator's jurisdiction, emphasizing that arbitrators cannot lift the corporate veil or determine an entity as an alter ego of another. Justice N. Anand Venkatesh delivered the judgment in the case of M/S Sugesan Transport Pvt. Ltd. versus M/S E.C. Bose & Company Pvt. Ltd., ruling that such determinations must be made by courts, not arbitrators.

The case arose from a dispute between Sugesan Transport and E.C. Bose, centering on a Memorandum of Understanding (MoU) for financial assistance. The arbitrator initially ruled that Sugesan Transport should pay damages to E.C. Bose, citing breach of contract, but the High Court found that the arbitrator overstepped by lifting the corporate veil and applying the doctrine of alter ego, which is beyond the scope of arbitration agreements.

Furthermore, the High Court stressed that mere breach of contract does not automatically entitle a party to damages unless loss or injury is proven. The Court found that the arbitrator awarded damages without proper pleading or evidence of actual loss, which is contrary to Sections 73 and 74 of the Indian Contract Act, 1872. The Court modified the arbitration award, directing E.C. Bose to pay Sugesan Transport Rs.2.50 Crores with interest, while setting aside the damages awarded to E.C. Bose.

This judgment clarifies the scope and limitations of arbitration, reinforcing that the power to lift the corporate veil remains with the judiciary. The decision is expected to have significant implications for arbitration proceedings, particularly concerning the extent of arbitrators' authority in corporate disputes.

Bottom Line:

Arbitrator does not have the jurisdiction to lift the corporate veil or determine an entity as the alter ego of another entity. Such findings fall beyond the scope of arbitration agreements and must be dealt with by courts.

Statutory provision(s): Arbitration and Conciliation Act, 1996 Section 34, Indian Contract Act, 1872 Sections 73 and 74.

M/S.Sugesan Transport Pvt. v. M/S.E.C.Bose & Company Pvt. Ltd., (Madras) : Law Finder Doc Id # 2813145