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Lifting of Corporate Veil in Arbitration.

2 March, 2012

 

Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution

 

LIFTING OF CORPORATE VEIL IN ARBITRATION

 
An arbitral tribunal constituted in Hong Kong under the UNCITRAL Arbitration Rules (“Tribunal”) recently held that in principle, it has jurisdiction under Hong Kong law to lift the corporate veil in order to make an individual, who was not a signatory to an arbitral agreement, a respondent to the arbitration on the grounds that he was the alter ego of the corporate vehicle which was a party to the said arbitral agreement.
 
However, the Tribunal ultimately held that it had no jurisdiction to lift the corporate veil on the facts of the case on account of the Claimants’ failure to properly plead its cause of action against the alter ago in its Notice of Arbitration or Statement of Claim. 
 
Abraham Vergis and Erroll Joseph represented the Respondents in the arbitration.
 
BACKGROUND
 
Two individuals, the 2nd Claimant and the 3rd Respondent, had verbally agreed to incorporate the 1st Respondent as a real-estate investment vehicle to make and manage the 3rd Respondent’s investments. To this end, the 2nd Claimant’s corporate vehicle (ie. the 1st Claimant) and the 3rd Respondent’s corporate vehicles (ie. the 1st and 2nd Respondents) entered into a Management Agreement where it was envisaged that the 1st Respondent would make and manage real-estate investment of up to US$100 million (under the direction of the 1st Claimant). The corporate parties also entered into a Consideration Agreement which governed the payment of guaranteed compensation to the 1st Claimant for services rendered.
 
Neither the 2nd Claimant nor the 3rd Respondent was a party to either of these agreements. The Management Agreement provided that any dispute arising thereto would be governed by Hong Kong law, and that such dispute would be resolved by arbitration under the UNCITRAL Arbitration Rules and administered by the Hong Kong International Arbitration Centre.
 
Ten months later, the 1st Respondent terminated the Management Agreement on grounds that there had been no understanding and/or conformity between the parties with respect to the performance of the Management Agreement. The 1st Respondent also terminated the Consideration Agreement.
 
The 1st and 2nd Claimants commenced arbitration against the 1st, 2nd and 3rd Respondents alleging, among other things, that the Respondents had made fraudulent misrepresentations to the Claimants and had failed to perform the Management Agreement and Consideration Agreement in good faith. The Claimants sought damages for breach of contract, loss of earnings and/or loss of profits.
 
The Respondents made a preliminary application to strike out the 2nd Claimant and the 3rd Respondent as parties to the arbitration as both of them were not signatories to the arbitration agreement embodied in the Management Agreement and Consideration Agreement pursuant to which the arbitration was commenced.
 
The Respondents argued that the Tribunal had no jurisdiction over the 3rd Respondent and could not purport to exercise any powers over him because the 3rd Respondent was not a signatory to any binding arbitration agreement to arbitrate upon which the Tribunal’s jurisdiction and powers could be founded.
 
The Respondents also argued that the Claimants had failed to plead their claim to lift the corporate veil or their cause of action against the 3rd Respondent in either their Notice of Arbitration or Statement of Claim.
 
THE TRIBUNAL’S DECISION ON THE LIFTING OF THE CORPORATE VEIL
 
At the preliminary hearing, the Tribunal decided to defer its decision on the jurisdictional challenge to the Final Award on the basis that it was premature to determine whether to strike out the 2nd Claimant and 3rd Respondent as parties to the arbitration on grounds that there was insufficient information and evidence available at that stage of the arbitration to decide the issue conclusively. The 3rd Respondent thereafter refused to participate in the arbitration and the arbitration proceeded accordingly.
 
In its Final Award, the Tribunal held that, under Hong Kong law, it has the jurisdiction and power to lift the corporate veil to join individuals, who are non-signatories to an arbitration agreement, as parties to the arbitration proceedings insofar as those proceedings involve the corporate vehicles which these individuals are alter egos of. However, given that the Claimants did not properly plead their cause of action against the 3rd Respondent which could serve as grounds for lifting the corporate veil, the Tribunal concluded that it did not have the jurisdiction to do so.
 
It bears noting that the Claimants had declined to plead a cause of action or to state the legal basis for any claim against the 3rd Respondent in the Notice of Arbitration despite having been reminded by the Tribunal to do so if they intended to seriously pursue their claim against the 3rd Respondent.
 
CONCLUSION
 
This arbitration is significant in two aspects.
 
First, it sounds a cautionary signal to business owners and investors that the setting up of corporate structures by which to conduct business may not always shield them against personal liability, even where it is pre-agreed that the disputes will be determined by arbitration proceedings.
 
Second, whilst procedural rules in arbitration proceedings are not as strict as in litigation, there are still certain fundamental procedural requirements that parties must observe. One fundamental tenet in arbitration and litigation is that a party must plead its case carefully and comprehensively, as arbitral tribunals cannot decide awards based on unpleaded or improperly pleaded facts.
 
 
For further information, please contact:
 
Abraham Vergis, Director, Drew & Napier
abraham.vergis@drewnapier.com
 
Erroll Joseph, Drew & Napier
erroll.joseph@drewnapier.com
 

 

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