Supreme Court Upholds Foreign Award Against Non-Signatories Under Alter Ego Doctrine: Gemini Bay Transcription Pvt. Ltd. vs. Integrated Sales Service Ltd. (2021) INSC 482 (10 August 2021)

Date of the Judgment: 10 August 2021
Citation: (2021) INSC 482
Judges: R.F. Nariman, J and B.R. Gavai, J. The judgment was authored by R.F. Nariman, J.

Can a foreign arbitral award be enforced against entities that were not direct signatories to the arbitration agreement? This was a key question before the Supreme Court in a case involving a dispute over commissions. The court examined whether the ‘alter ego’ doctrine could be used to bind non-signatories to an arbitration award, ultimately upholding the enforcement of the award.

Case Background

Integrated Sales Services Ltd. (ISS), a Hong Kong-based company, entered into a representation agreement with DMC Management Consultants Ltd. (DMC), an Indian company, on September 18, 2000. The agreement, effective from October 3, 2000, stipulated that ISS would assist DMC in selling its goods and services, receiving a commission in return. The agreement was amended twice, with the second amendment on January 1, 2008, changing the governing law to Delaware, U.S.A.

Disputes arose, leading ISS to initiate arbitration proceedings on June 22, 2009, against DMC, Arun Dev Upadhyaya (Chairman of DMC), DMC Global, Gemini Bay Consulting Limited (GBC), and Gemini Bay Transcription Private Limited (GBT). ISS claimed that DMC and related entities had diverted business to avoid paying commissions. The core of the dispute was that DMC, through its Chairman Arun Dev Upadhyaya, allegedly used the corporate structure to avoid paying commissions to ISS by diverting business to GBT.

Timeline:

Course of Proceedings

The matter initially went to the Principal District Judge, Nagpur, but was then moved to the High Court of Judicature at Bombay, Nagpur Bench, as it was a foreign award. A Single Judge of the High Court ruled that while the award was enforceable against DMC, it could not be enforced against GBT and Arun Dev Upadhyaya, as they were not signatories to the arbitration agreement. This decision was appealed, and a Division Bench of the High Court overturned the Single Judge’s decision, holding that the award was enforceable against all parties, including the non-signatories, as Delaware law on the alter ego principle had been correctly applied by the Arbitrator. The Supreme Court then heard the matter.

Legal Framework

The judgment primarily deals with the interpretation and application of the Arbitration and Conciliation Act, 1996, specifically concerning the enforcement of foreign awards. Key provisions include:

• Section 44, Arbitration and Conciliation Act, 1996: Defines a “foreign award” as an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered commercial under Indian law, made in pursuance of a New York Convention agreement.
• Section 46, Arbitration and Conciliation Act, 1996: States that a foreign award enforceable under this chapter shall be treated as binding on the persons between whom it was made.
• Section 47, Arbitration and Conciliation Act, 1996: Outlines the evidence required for the enforcement of a foreign award, including the original award, the arbitration agreement, and proof that the award is a foreign award.
• Section 48, Arbitration and Conciliation Act, 1996: Specifies the conditions under which the enforcement of a foreign award may be refused, such as incapacity of parties, invalidity of the agreement, lack of proper notice, or the award dealing with matters outside the scope of the submission to arbitration.

The Supreme Court also considered the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which is Schedule I to the Arbitration Act, 1996, emphasizing its pro-enforcement bias.

Arguments

Arguments by GBT (Gemini Bay Transcription Private Limited):

• GBT argued that under Section 47(1)(c) of the Arbitration Act, 1996, the burden of proving that a foreign award may be enforced is on the party seeking enforcement. They contended that this burden was not met because ISS did not establish that GBT, a non-signatory, could be bound by the award.
• GBT also argued that under Section 48(1)(a) and (c), the award should be set aside because GBT was not a party to the arbitration agreement, and the reasons given in the award were inadequate.
• They claimed that the award was perverse, and that the non-examination of the two clients of DMC whose business was diverted to GBT vitiated the award.
• GBT argued that the damages were awarded without actual loss being proved.

Arguments by Arun Dev Upadhyaya:

• Arun Dev Upadhyaya argued that the dispute was essentially a tort claim, which was outside the scope of the arbitration agreement, which was limited to contractual disputes.
• He relied on the Dallah case to argue that a full review of evidence should have been undertaken, which was not done.
• He contended that Section 46 of the Arbitration Act, 1996, binds only the parties to the award and not those claiming under them.
• He also argued that there was no evidence to show his involvement and that the findings against him were unreasoned.

Arguments by ISS (Integrated Sales Services Ltd.):

• ISS supported the Division Bench judgment and argued that the Arbitrator had correctly applied the alter ego doctrine under Delaware law.
• They argued that the reasons in the arbitral award were sufficient and that elaborate reasons are not required.
• ISS contended that none of the grounds under Section 48 of the Arbitration Act, 1996, were applicable.
• They pointed out that the appellants had conceded before the Single Judge that only questions of law arose, and no evidence needed to be led.

Innovativeness of the argument: The arguments by GBT and Arun Dev Upadhyaya were innovative in trying to use Section 48(1)(a) and (c) to challenge the enforcement of the award against non-signatories, arguing that the lack of direct contractual relationship should invalidate the award against them. The argument by ISS was innovative in highlighting the alter ego doctrine and the interconnectedness of entities involved to justify the enforcement of the award.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether a foreign arbitral award can be enforced against non-signatories to an arbitration agreement.
2. Whether the ‘alter ego’ doctrine can be applied to bind non-signatories to an arbitration award.
3. Whether the grounds for refusal of enforcement under Section 48 of the Arbitration Act, 1996, were met in this case.
4. Whether the arbitral award was perverse and lacked sufficient reasons.
5. Whether the damages awarded were justified.

Treatment of the Issue by the Court:

Authorities

The Supreme Court relied on the following authorities:

Judgment

How each authority was viewed by the Court?

• Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1* was used to define the term “legal relationship” to establish that the dispute was within the scope of Section 44 of the Arbitration Act, 1996.
• R.M. Investment and Trading Co. (P) Ltd. v. Boeing Co., (1994) 4 SCC 541* was used to define the term “commercial” to establish that the dispute was commercial under the law in force in India.
• Emkay Global Financial Services Ltd. v. Girdhar Sondhi, (2018) 9 SCC 49* was used to interpret the term “proof” in Section 48 of the Arbitration Act, 1996, clarifying that it does not require oral evidence.
• Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131* was used to narrow the scope of grounds under Sections 34/48, emphasizing that these provisions should not be used to review the merits of the award.
• Vijay Karia v. Prysmian Cavi E Sistemi SRL, (2020) 11 SCC 1* was used to reiterate the pro-enforcement bias of the New York Convention and the narrow scope of interference with foreign awards.
• Dallah Real Estate and Tourism Co v Ministry of Religious Affairs of the Government of Pakistan [2010] 3 WLR 1472* was distinguished on facts and law, clarifying that a non-signatory’s objection cannot fit into Section 48(1)(a).
• IMC Aviation Solutions Pty Ltd. v Altain Khuder LLC [2011] VSCA 248* was distinguished on facts and law, and held to be inapplicable when construing Section 48(1)(a) of the Arbitration Act, 1996.
• Aloe Vera of America, Inc v Asianic Food (S) Pte Ltd & Anr., [2006] SGHC 78* was followed to hold that the equivalent of Section 48(1)(a) would not be attracted in similar facts.
• Olympus Superstructures (P) Ltd. v. Meena Vijay Khetan, (1999) 5 SCC 651* was used to explain the term “submission to arbitration,” clarifying that it refers primarily to the arbitration agreement.
• State of Goa v. Praveen Enterprises, (2012) 12 SCC 581* was used to explain the term “reference to arbitration.”
• Renusagar Power Co. Ltd. v. General Electric Co., (1984) 4 SCC 679* was used to explain that tort claims may be decided by an arbitrator if they arise in connection with the agreement.
• Tarapore & Co. v. Cochin Shipyard Ltd., (1984) 2 SCC 680* was used to explain that a claim is said to be arising out of contract if recourse to the contract is necessary to settle the dispute.
• Indowind Energy Ltd. v. Wescare (India) Ltd., (2010) 5 SCC 306*, Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641*, and Cheran Properties Ltd. v. Kasturi & Sons Ltd., (2018) 16 SCC 413* were cited by the appellants to argue that a foreign award would be binding on parties alone and not on others, but were distinguished by the Court.
• Frederick Thomas Kingsley v. The Secretary of State for India AIR 1923 Cal 49* was used to discuss the principle of damages and reasonable certainty.
• Agritrade International (P) Ltd. v. National Agricultural Coop. Mktg. Federation of India Ltd., 2012 SCC OnLine Del 896* was distinguished on facts, clarifying that actual loss was proved in the present case.
• Gary B. Born, International Commercial Arbitration (Wolters Kluwer, 2nd Edn., 2014)* was used for the interpretation of the New York Convention and the public policy exception.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Pro-Enforcement Bias: The court emphasized the pro-enforcement bias of the New York Convention and the need to uphold foreign awards unless clear grounds for refusal are established.
• Application of Alter Ego Doctrine: The court agreed with the arbitrator’s finding that the alter ego doctrine under Delaware law was correctly applied, thus binding the non-signatory entities.
• Narrow Interpretation of Section 48: The court narrowly interpreted Section 48 of the Arbitration Act, 1996, holding that it does not allow for a review of the merits of the award or for the inclusion of non-signatories under Section 48(1)(a).
• Procedural Compliance: The court found that the procedural requirements under Section 47 of the Arbitration Act, 1996, were met, and that the award was indeed a foreign award.
• Sufficiency of Reasons: The court held that the arbitrator’s award contained sufficient reasons and that elaborate reasoning is not required.
• Damages Assessment: The court found that the damages awarded were a reasonable assessment based on the evidence presented and did not shock the conscience of the court.

Logical Reasoning:

The Supreme Court rejected the arguments made by GBT and Arun Dev Upadhyaya, holding that the Arbitrator had correctly applied the alter ego doctrine under Delaware law, and that the grounds for refusal under Section 48 of the Arbitration Act, 1996, were not met. The Court emphasized that the pro-enforcement bias of the New York Convention requires that foreign awards be upheld unless there are clear reasons to refuse enforcement.

The Court also clarified that Section 48(1)(a) of the Arbitration Act, 1996, does not apply to non-signatories and that the expression “proof” in Section 48 does not require oral evidence but only evidence based on the record of the arbitral tribunal. The Court also rejected the argument that the award was perverse, holding that perversity is no longer a ground for challenging international commercial arbitration awards after the 2015 amendment.

The Court stated that “the expression “was otherwise unable to present his case” occurring in Section 48(1)(b) cannot be given an expansive meaning and would have to be read in the context and colour of the words preceding the said phrase.” It further stated that “poor reasoning, by which a material issue or claim is rejected, can never fall in this class of cases.” The Court also noted that “if a foreign award fails to determine a material issue which goes to the root of the matter or fails to decide a claim or counterclaim in its entirety, the award may shock the conscience of the Court and may not be enforced.”

Key Takeaways

• Foreign arbitral awards can be enforced against non-signatories if the alter ego doctrine applies, and the grounds for refusal under Section 48 of the Arbitration Act, 1996, are not met.
• The “alter ego” doctrine allows courts to pierce the corporate veil and hold entities liable for the actions of their related companies, even if they are not direct parties to the agreement.
• The grounds for refusing enforcement of a foreign award under Section 48 of the Arbitration Act, 1996, are to be narrowly construed and do not include a review of the merits of the award.
• Perversity is no longer a ground for challenging international commercial arbitration awards after the 2015 amendment to the Arbitration Act, 1996.
• The pro-enforcement bias of the New York Convention requires that foreign awards be upheld unless there are clear reasons to refuse enforcement.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

This judgment clarifies that the term “persons” in Section 44 of the Arbitration Act, 1996 can include non-signatories to an arbitration agreement and that the alter ego doctrine can be used to bind non-signatories to a foreign award. It also reinforces the pro-enforcementbias of the New York Convention and narrows the grounds for refusing enforcement of foreign awards under Section 48 of the Arbitration Act, 1996. The judgment is a significant step in aligning Indian arbitration law with international standards, particularly in the enforcement of foreign awards against non-signatories.

Impact of the Judgment:

• On Arbitration Law: This judgment reinforces the pro-enforcement bias of the New York Convention and clarifies that the term “persons” in Section 44 of the Arbitration Act, 1996, can include non-signatories to an arbitration agreement.
• On Corporate Law: The judgment emphasizes the application of the alter ego doctrine, which allows courts to pierce the corporate veil and hold entities liable for the actions of their related companies.
• On International Commercial Disputes: The judgment provides clarity on the enforceability of foreign arbitral awards against non-signatories, which is a common issue in international commercial disputes.