Madras High Court: While hearing an arbitration petition challenging the award passed by the Arbitrator, a Single Judge Bench of N. Anand Venkatesh, J., stated that the Arbitral Tribunal does not have the jurisdiction to lift the corporate veil since its jurisdiction is confined by the arbitration agreement. The Court held that the Arbitrator had exceeded jurisdiction by lifting the corporate veil and fastening liability on an entity not party to the agreement, which is impermissible under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996 (‘Arbitration and Conciliation Act’).
Accordingly, the Court modified the award and directed repayment of Rs 2.50 Crores along with interest at 12 per cent per annum from 11-12-2015 till the date of actual payment, while setting aside the portion of the award granting damages of Rs 3.52 Crores.
Background:
The dispute arose from a Memorandum of Understanding (‘MoU’) dated 11-12-2015, under which financial assistance of Rs 2.50 Crores was provided to enable submission of a performance bank guarantee of Rs 3.52 Crores to the Kolkata Port Trust. The grievance was that the amount was not repaid and the cheque issued was dishonoured, leading to arbitration proceedings.
The respondent contended that the arrangement was not a mere financial transaction but part of a larger agreement to execute the work order, with obligations to supply equipment and share profits and losses. It was alleged that breach of the MoU by failure to provide equipment led to forfeiture of the performance bank guarantee and termination of the contract, giving rise to a counter claim of Rs 75 Crores.
The petitioner argued that the MoU only contemplated financial assistance, that there was no obligation to supply equipment, and that the Arbitrator wrongly exercised jurisdiction by lifting the corporate veil. It was further contended that damages were fixed without pleadings or proof, contrary to Section 73 of the Contract Act, 1872 (‘the Act’).
Analysis and Decision:
The Court emphasised that arbitration rests on consent and the jurisdiction of the Arbitrator is limited to the agreement between the parties. The Court highlighted that the MoU dated 11-12-2015 constituted an independent financial arrangement, as confirmed by the National Company Law Appellate Tribunal (‘NCLAT’) and upheld by the Supreme Court. The Court noted that the Arbitrator had wrongly applied the doctrine of alter ego by treating another entity as the petitioner’s sister concern and thereby fastening liability, which was impermissible.
The Court highlighted that the Arbitral Tribunal certainly does not have the jurisdiction to lift the corporate veil since its jurisdiction is confined by the arbitration agreement. The Court noted that even in a case of determining as to whether one entity is the alter ego of the other, this is conceptually the same as lifting the corporate veil. The Court observed that such an exercise can never be undertaken by the Arbitral Tribunal, which is a creature under an agreement with a limited jurisdiction to decide the dispute between the parties to the agreement as per the terms and conditions of the agreement.
The Court observed that damages cannot be awarded without proper pleadings and proof of actual loss. The Court stressed that a mere breach without injury or loss is not actionable per se under Section 73 of the Act, and that the Arbitrator had no basis to fix damages at Rs 3.52 Crores merely because the performance bank guarantee was encashed. The Court further noted that the award of damages was unsustainable and had to be interfered with.
Accordingly, the Court partly allowed the petition, set aside the invalid portion of the award, and directed repayment of Rs 2.50 Crores along with interest at 12 per cent per annum from 11-12-2015 till the date of actual payment.
[Sugesan Transport (P) Ltd. v. E.C. Bose & Co. (P) Ltd., 2025 SCC OnLine Mad 10996, decided on 26-11-2025]
Advocates who appeared in this case:
For the Petitioner: Nithyaesh Natraj for Nithyaesh & Vaibhav
For the Respondent: J. Ravikumar
Buy Arbitration and Conciliation Act, 1996 HERE
