Article

When disputes arose[1], the claimant approached the other party for referring the disputes for arbitration.  As per the arbitration clause, no person other than a person appointed by the Chief-Executed Officer of the Respondent was to act as arbitrator and if for any reason, that was not possible, “the matter is not to be referred to the arbitration at all.” The arbitration clause, thus, was couched in such a manner that the arbitration itself would not be possible as the Chief Executive Officer of the Respondent Authority, being an officer was denuded of jurisdiction to act as arbitrator or to appoint an arbitrator by virtue of 7^th Schedule read with Section 12(5) of the Arbitration and Conciliation Act, 1996 (the “Act”).

Relying on the clause, the Respondent declined the request on the ground that Chief Executive Officer of the Authority alone was competent to arbitrate in the matter as per the agreement and as he had become ineligible by virtue of Section 12(5) of the Act, therefore, the arbitration clause itself had ceased to exist.

When the Claimant approached Hon’ble Allahabad High Court under section 11 of the Act, the Respondent relied upon the judgment in the case of Nandini Constructions,Through Attorney, Authorised Signatory v. State Of U.P.Through Prin.Secy.Irrigation,Lucknow And Ors. [Arbitration Application No. – 54 of 2017 decided by the Hon’ble Allahabad High Court on 14.2.2019] to object the petition for appointment of arbitrator. In this case [Nandini Constructions,], the application under section 11 of the Act was objected to on the basis of similarly worded arbitration clause. The application for appointment of arbitrator was rejected by the Hon’ble Court on the ground of party autonomy. According to the judgment, the words in arbitration clause clearly evinced the agreed intent of the parties not to refer the dispute to Arbitration if such arbitration could not be held by the ‘Chief Engineer or any person nominated by him’. The Court in Nandini Constructions, held that since the agreed intent not to refer the matter to arbitration in such an eventuality is evident from the arbitration clause, and the stipulation in the Agreement is binding upon the parties including the applicant, the application under section 11 of the Act was not maintainable.

The Claimant, on the other hand, contended that the arbitration agreement is broadly in two parts, firstly, agreement for reference of dispute to arbitrator and secondly, the procedure to be followed in the matter on such reference. It was contended that the procedure part contemplating party autonomy is always subservient to the statutory interdict contained in Section 12(5) of the Act of 1996 and cannot be construed as obliterating the first part of the agreement for reference of dispute to arbitrator. It was further argued that the authority of the Chief Executive Officer to act as arbitrator or to appoint an arbitrator forms part of the procedure for appointment and even if such authority ceases to exist by virtue of Section 12(5) of the Act, the core clause contemplating adjudication of dispute by arbitrator would continue to subsist.

The Court, after hearing the submissions from the parties, was of the opinion that the agreement between the parties to refer all disputes arising out of contract to arbitrator is the core part of the agreement. The manner to appoint the arbitrator would, at best, fall in the realm of procedure. Merely because the person, who could act as an arbitrator in terms of arbitration clause becomes ineligible to act as arbitrator by virtue of Section 12(5) of the Act read with 7th Schedule, it would not mean that the core part of the agreement for referring the dispute for adjudication to arbitrator would be rendered nugatory.

The Court opined that if the Respondent’s argument was accepted that would clearly defeat the object of neutrality of arbitrator or reference of dispute to arbitration. Section 12(5) of the Act read with 7th Schedule has been introduced so as to lend greater legitimacy to the process of arbitration by providing for an independent person to act as arbitrator and exclude the other party from becoming a judge in their own cause. The Court was therefore inclined to lean in favour of an interpretation which effectuates the remedy of arbitration consistent with the legislative intent i.e. Section 12(5) of the Act of 1996 read with the 7th Schedule.

The Court further dived deep to look into the objective behind the Act and further the objective of introducing of Schedule VII in the Act. The Court relied upon Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 wherein it was held that in light of the necessity to encourage arbitration, the court is required to exercise its jurisdiction in a pending action, to hold the parties to the arbitration clause and not to permit them to avoid their bargain of arbitration by bringing civil action involving multifarious causes of action, parties and prayers. The Court further relied on judgment of the Hon’ble Apex Court in Ellora Paper Mills Ltd. v. State of M.P., (2022) 3 SCC 1,  wherein it was observed that since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the Arbitral Tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles — even if the same has been agreed prior to the disputes having arisen between the parties.

Applying the principles laid down by the Apex Court, the Court was of the view that stipulation under the Agreement clearly manifests the intent of Respondent to retain the power of adjudication, which goes against the spirit of neutrality of arbitrator for which alone Section 12(5) of the Act of 1996 is introduced. It was dictated by the Court that the principles of impartiality or independence has to be respected in the matter of appointment of arbitrator. Once the statute has stepped in to enforce neutrality of arbitrator in an arbitration agreement, by virtue of Section 12(5) of the Act, the Court would not be justified in literally interpreting the clause in the agreement to keep the power of adjudication or the party autonomy with the Respondent at the cost of abandoning the arbitration itself. Such arbitration clause which ousts the arbitration in case of neutrality of arbitrator has thus to be necessarily construed as being subservient to Section 12(5) of the Act of 1996.

The Court relied upon the judgment in Ram Kripal Singh Construction Pvt. Ltd. Vs. NTPC, ARB.P 582/2020, dated 9.11.2022 (Delhi High Court) to emphasize the distinction between the procedure of appointment from right to refer dispute to arbitration under the agreement. In Ram Kripal Singh it was held that “The procedure for appointment of an arbitrator is clearly distinct and separable from the agreement to refer disputes to arbitration, even if these are contained in the same arbitration clause. If therefore, by reason of amendment, re-statement or re- interpretation of the law, as has happened in the present case by insertion of section 12(5) in the A&C Act and the verdicts of the Supreme Court in TRF Ltd. and Perkins Eastman (supra), the procedure for appointment of arbitrator at the hands of one of the parties becomes legally invalid, void and unenforceable, that does not mean that the core agreement between the parties to refer their inter-se disputes to arbitration itself perishes. In the opinion of this court – this “my way or the highway” approach – is not tenable in law; and in such circumstances, that part of the arbitration agreement which has been rendered invalid, void and enforceable is to be severed or excised from the arbitration clause, while preserving the rest of the arbitration agreement”.

The Court, on the aforesaid reasoning, allowed the application and appointed an arbitrator.

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[1] M/S Bansal Construction Office v.  Yamuna Expressway Industrial Development Authority And 2 Others  ARBITRATION AND CONCILI. APPL.U/S11(4) No. – 142 of 2019