Residuary powers of one party to appoint arbitrator are limited: High Court of Delhi

IN THE HIGH COURT OF DELHI AT NEW DELHI Decided on 29th J anuar y 2021 ARB.P. 86 2021 and IA 851 2021C S ELECTRIC LTD Through Mr. Rahul Malhotra Adv. ..... Petitioner JOP POWER Through Mr. Raman Kapur ..... Respondent Advocate with Mr. Varun Kapur Adv. HON BLE MR. JUSTICE C. HARI SHANKAR JUDGMENT29.01.2021 This is a petition under Section 11(6) of the Arbitration and Conciliation Act 1996to refer the dispute between the petitioner and the respondent to arbitration. Given the nature of the controversy a brief recital of facts would suffice. On 3rd December 2011 an Agreement was executed between the petitioner and the respondent whereunder the petitioner was required to supply Sandwich Bus Ducts to the respondent. Article 15.3.1 of the Agreement dated 3rd December 2011 provided for resolution of the disputes by arbitrator which read thus: ARB.P. 86 2021 “15.3.1 All disputes shall be resolved through Arbitration. The appointment of a sole arbitrator to be selected by the Supplier Manufacturer out of the names 3 such notable persons to be given by "JOP" within a period of 30 days from the notice of reference of unresolved disputes between the parties. The jurisdiction of holding the proceedings of such arbitration shall be the state of Delhi. The applicable law will be Arbitration and Conciliation Act 1996. In case the Supplier Manufacturer fails to choose the name of an Arbitrator from the 3 names of Arbitrators suggested by “JOP” BOARD reserves its right to appoint an Arbitrator of its choice and the Supplier Manufacturer shall be bound by such Arbitrator and his award.” Disputes arose between the parties. Vide letter dated 14th June 2014 the respondent appointed one Mr. K. Sunil as the arbitrator to arbitrate on the disputes. Contending that the learned arbitrator was not exercising its function with due diligence and he was unduly delaying the proceedings the petitioner filed OMP(T)(COMM) 1 2018 before the learned Additional District Judge under Sections 14(1) and 14(2) of the 1996 Act for termination of the mandate of Mr. K. Sunil. Vide order dated 29th September 2020 OMP(T)(COMM) 1 2018 was allowed by the learned ADJ and mandate of Mr. K. Sunil to arbitrate on the disputes between the petitioner and the respondent was terminated in terms of Section 14 of the 1996 Act. This order has admittedly attained Pursuant to the termination of the mandate of Mr. Sunil it became necessary to appoint a substitute arbitrator to arbitrate on the ARB.P. 86 2021 disputes between the petitioner and the respondent. The respondent acting in accordance with the afore extracted Clause 15.3.1 of the Agreement proposed vide letter dated 26th November 2020 addressed to the petitioner the names of three persons out of which the petitioner was requested to suggest one to appoint its arbitrator to arbitrate on the aforesaid disputes. The petitioner responded only on 4th January 2021 after the period of 30 days stipulated in Clause 15.3.1 of the Agreement had expired suggesting the name of Mr. O.P. Bhatia one of three names proposed by the respondent to act as an arbitrator to arbitrate on the disputes between the parties. On the same day the respondent wrote to the petitioner stating that it had already appointed Mr. G.K. Pharlia also one of the three names proposed by the respondent in its communication dated 26th November 2020 to arbitrate on the disputes. Apparently thereafter Mr. Pharlia accepted his nomination as arbitrator and fixed hearing in the matter. 10. The petitioner however vide email dated 9th January 2021 opposed the appointment of Mr. Pharlia as the arbitrator stating that it had already appointed Mr. Bhatia as arbitrator vide its communication January 2021. It is in these circumstances that the petitioner has moved the ARB.P. 86 2021 present petition requesting this Court to appoint an independent arbitrator in exercise of its powers conferred by Section 11 of the 1996 Act. 12. Mr. Rahul Malhotra learned counsel for the petitioner first sought to argue that though the petitioner had not responded to the communication dated 26th November 2020 of the respondent by selecting an arbitrator out of the three names proposed in the said communication within the period of 30 days stipulated in Clause 15.3.1 of the Agreement the appointment by the petitioner of Mr. Bhatia as the arbitrator as communicated to the respondent on 4th January 2021 ought to be treated as valid. For this purpose Mr. Malhotra submitted that the period of 30 days stipulated in Clause 15.3.1 of the Agreement should only be regarded as directory and not mandatory. He however acknowledged candidly on the last date of hearing that he could not lay hands on any judicial authority to support this submission. In my view the submission is not ex facie acceptable. The 1 specifically Supreme Court has in U.O.I. v. PREMCO DKSPL14 SCC 651 ARB.P. 86 2021 respondent stood extinguished. 14. The appointment of Mr. Bhatia as suggested by the petitioner January 2021 cannot therefore pass muster as it was effected beyond the period of 30 days as stipulated in Clause 15.3.1 of the Agreement and was therefore in violation of the terms of the Agreement between the parties. 15. Accordingly the prayer of the petitioner for approval of the appointment of Mr. Bhatia as the arbitrator to arbitrate on the disputes is rejected. 16. Equally however I am of the opinion that the appointment of Mr. Pharlia as the sole arbitrator as effected by the respondent also cannot pass legal muster. Mr. Raman Kapur learned Senior Counsel appearing for the respondent acknowledges that the appointment of Mr. Pharlia by the respondent was in exercise of the residuary authority conferred by Clause 15.3.1 on the respondent to select an arbitrator out of the panel suggested by the respondent to the petitioner consequent on default by the petitioner to select the arbitrator within 30 days of communication of the names by the respondent. 17. There is no gainsaying the fact that Clause 15.3.1 of the Agreement does authorize the respondent in the event of the petitioner failing to select an arbitrator out of the panel proposed by the respondent within 30 days of communication of such proposal to ARB.P. 86 2021 itself select one of the names from the panel as the arbitrator to arbitrate on the disputes. In my view however this residuary power as conferred by Clause 15.3.1 is in the teeth of the law laid down by the Supreme Court in Perkins Eastman Architects DPC v. HSCCLtd2 and TRF Limited v. Energo Engineering Projects Ltd3 read with Section 12(5) and Schedule VII to the 1996 Act. The Supreme Court has in these decisions clearly discountenanced conferment of any authority on either of the parties to the Agreement either to act as arbitrator or to appoint the arbitrator to arbitrate on the disputes. 19. As such the stipulation in Clause 15.3.1 of the Agreement that in the event of failure on the part of the supplier manufacturer i.e. the petitioner to select a name out the panel suggested by the respondent JOP within 30 days of the such suggestion the JOP could appoint an arbitrator of its choice out of the said panel cannot in my view be sustained or be permitted to be enforced. This part of Clause 15.3.1 is according to me clearly severable from the earlier part of the said clause and being contrary to the law laid down in Perkins Eastman2 supra) could not have been invoked or enforced by the respondent. 20. Mr. Kapur has sought to place reliance on the judgment of the Supreme Court in Central Organisation for Railway Electrification v. ECI SPIC SMO MCML8 SCC 377 4 2019 SCC OnLine SC 1635 ARB.P. 86 2021 clause was not invalid. Having gone through the decision in Central Organisation for Railway Electrification4 I am unable to find anything in the said decision which would validate such a residuary conferment of authority as contained in Clause 15.3.1 in the agreement between the petitioner and the respondent. The arbitration clause in Central Organisation for Railway Electrification4 provided for the proposal of a panel of the names by Central Organisation for Railway Electrification to the respondent before the Supreme Court out of which the respondent was authorised to select any two. Once the respondent had selected two names out of the panel of four proposed by CORE the Managing Director of CORE was authorised to pick one of the said two names as the contractor nominee to arbitrate on the disputes. There was no conferment of any residuary authority on CORE in the event of default by the respondent to suggest the names out of the panel of four to itself select an arbitrator of its own choice out of the said panel to arbitrate on the disputes. The situation that arises in the present case therefore was not before the Supreme Court in Central Organisation for Railway Electrification4 and therefore the said decision cannot be of any assistance to the respondent. In view thereof I am of the opinion that respondent could not 2 and TRF3 have in the face of law laid down in Perkins Eastman chosen an arbitrator out its choice even out of the panel of three proposed by the respondent to the petitioner to arbitrate on the disputes on the petitioner failing to exercise such choice within 30 days of suggestion of names by the respondent. The respondent could ARB.P. 86 2021 in such circumstances have approached this Court but did not choose to do so. 22. Resultantly the appointment of Mr. Pharlia as arbitrator to arbitrate on the disputes between the parties must also be treated as without authority of law. 23. The task of appointing arbitrator to arbitrate on the disputes between the parties therefore devolves on this Court. In view thereof this Court appoints Mr. Vijay Motwani retired ADG as arbitrator to arbitrate on the disputes between the 25. The contact details of the learned arbitrator are as under: CII 153 Satya Marg Chanakyapuri New Delhi 110 021 Phone No.9811793440 Email ID: motwanivijayg@gmail.com 26. The parties are directed to contact the learned arbitrator within one week of communication of email by the Registry of this Court the copy of this order. 27. The fees of the learned arbitrator shall be fixed by the learned arbitrator in consultation with the parties. ARB.P. 86 2021 28. The learned arbitrator shall furnish the requisite disclosure under Section 12(2) of the 1996 Act within a week of entering on 29. Subject to the aforesaid directions this petition stands disposed IA 851 2021stands disposed of. JANUARY 29 2021 r.bararias In view of the order passed in the petition this application C. HARI SHANKAR J. ARB.P. 86 2021 

Summary: Any clause in an agreement allowing a party in case of dispute to choose an arbitrator independently, when the other party failed to respond within a period of 30 days informing about their choice of arbitrator, is not unlimited and such residuary powers cannot be exercised absolutely. This was held in the case of C S Electric Ltd. v. JOP Power [ARB.P. 86/2021 and IA 851/2021] in the High Court of Delhi by Hon’ble Judge C. Hari Shankar. The facts of the case are that an Agreement was executed between the petitioner and the respondent, wherein the petitioner was required to supply Sandwich Bus Ducts to the respondent. Article 15.3.1 of the Agreement provided for resolution of the disputes by arbitrator. Disputes arose between the parties. Vide letter dated 14th June, 2014, the respondent appointed Mr. K. Sunil as the arbitrator to arbitrate on the disputes. However it was observed that he was not exercising his function with due diligence and he was unduly delaying the proceedings. He was terminated and a new arbitrator was to be appointed for which the respondent vide a mail addressed to the petitioner proposed three names of arbitrators to choose from. The respondent mailed after the period of 30 days and by then the respondent had already appointed an arbitrator. This petition was filed under Section 11(6) of the Arbitration and Conciliation Act, to refer the dispute, between the petitioner and the respondent, to arbitration and nullify the appointment made. The counsel for the petitioner argued that though the petitioner had not responded to the by selecting an arbitrator out of the three names within the period of 30 days stipulated in Clause 15.3.1 of the Agreement, the appointment, by the petitioner, of Mr. Bhatia as the arbitrator, as communicated to the respondent ought to be treated as valid 13.  For this the court sought reliance on U.O.I. v. PREMCO-DKSPL wherein was specifically held “the covenants of the arbitration agreement are sacrosanct and have to be strictly enforced”. Taking note of this precedent, the court further stated” the period of 30 days stipulated in Clause 15.3.1, therefore, unquestionably bound the parties and on the expiry of 30 days from the communication dated 26th 1 (2016) 14 SCC 651 November, 2020, addressed by the respondent to the petitioner, the petitioner’s right to select an arbitrator out of the panel proposed by the respondent, stood extinguished” At the same time, the court did not upheld the appointment of arbitrator made by the respondent as well citing that the law laid down by the Supreme Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd. and TRF Limited v. Energo Engineering Projects Ltd. read with Section 12(5) and Schedule VII to the 1996 Act according to which the residuary powers conferred by the clause of the agreement cannot be sustained or be permitted to be enforced.