Arbitrator Can't Pierce Corporate Veil To Fasten Liability On Non-Signatory: Madras High Court Partially Sets Aside Award

The Madras High Court partially set aside an arbitral award holding that arbitrator cannot pierce a corporate veil or treat a non-signatory as an alter ego to fasten liability, while modifying the award to direct repayment of a loan of Rs. 2.5 crore with interest. Justice N. Anand Venkatesh held that the arbitrator exceeded its jurisdiction by treating a third party as the petitioner's sister concern and concluding breach of contract based on that inference. Sugesan Transport Pvt. Ltd. paid ₹2.5 crore to E.C. Bose & Co. Pvt. Ltd. under a Memorandum of Understanding (MoU) so that the latter could furnish a performance bank guarantee of Rs. 3.52 crore to Kolkata Port Trust (KOPT). The amount was to be returned within 30-89 days. When the respondent defaulted and the cheque issued was dishonoured, the petitioner initiated arbitration seeking repayment with interest. The respondents contended that the agreement was not merely financial but was aimed at executing port operations through a Special Purpose Vehicle (SPV) alleging that the petitioner failed to supply necessary equipment. On that basis, the arbitrator not only denied interest on the loan but awarded of Rs. 3.52 crore as damages to the respondent taking the forfeited bank guarantee amount as the measure of loss. The court observed that the arbitrator was not entitled to pierce the corporate veil as it could be done by the courts only. Therefore, the arbitrator committed an error by treating Collate Consultants Pvt. Ltd. (a different entity) as the petitioner's alter ego. “The jurisdiction that was exercised by the learned Arbitrator was circumscribed by the agreement between the parties and as a consequence, an Arbitrator will not have the power to extend the scope of the arbitral proceedings and include persons, who have not consented to arbitrate. Ex consequenti, an Arbitrator will not have the power to pierce the corporate veil so as to bind another entity, which was not a party to the agreement”, the court held. Referring to the Supreme Court's affirmation of the NCLAT judgment, the court held that the loan transaction was independent and did not bind the petitioner to supply the equipment. Therefore, no breach of contractual obligations could be attributed to the petitioner. On Damages, the court held that the damages could not be awarded by the arbitrator in the absence pleadings, proof of loss or contractual stipulation. The court further held that the damages under section 73 of the Contract Act cannot be awarded without proving actual loss and using forfeited performance as a metric was legally impermissible. The court relied on M/s.Prime Store, Rep. by its Partner Mr.S.Kaarthi & others Vs. Sugam Vanijya Holdings Private Limited & others where it was held that “a mere breach of the contract will not automatically result in the payment of damages unless a party is able to show that such loss or damage had arisen naturally in the usual course of things from such breach and that the breach must necessarily be coupled with some loss or damage, which resulted in an actionable claim for damages.” The court observed that the arbitrator had arbitrarily fixed damages of Rs. 3.52 crore solely on the basis of the encashed performance guarantee without any pleading or proof of actual loss. The amount improperly included Rs. 2.5 crore contributed by the petitioner while arbitral proceedings were pending against KOPT regarding the encashment. Holding that damages without any legal basis cannot be awarded, the court ruled that only the repayment of Rs. 2.5 crore with 12% interest was justified. Applying the Supreme Court's judgment in Gayatri Balasamy, the court severed the invalid portion of the award. Case Title: M/S.Sugesan Transport Pvt. Ltd. Versus M/S.E.C.Bose & Company Pvt. Ltd.Citation: 2025 LiveLaw (Mad) 452 Case Number: 2025:MHC:2699 Order Date: 26.11.2025 For Petitioner: Mr.Nithyaesh Natraj For Respondent: Mr.J.Ravikumar Click Here To Read/Download Order

Arbitrator Can't Pierce Corporate Veil To Fasten Liability On Non-Signatory: Madras High Court Partially Sets Aside Award

Mohd Malik Chauhan

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