NLA Arbitration Newsletter
Key rulings from the Delhi High Court, Punjab & Haryana High Court, and Supreme Court on arbitrator appointment, pre-arbitral procedure defaults, jurisdiction, contract scrutiny, and foreign currency award conversion.
Delhi High Court — Arbitration clause invalid where contractor cannot select arbitrator from respondent’s panel
The Petitioner challenged the validity of an arbitration clause in a contract awarded by the Indian Railways Stations Development Corporation Ltd (IRSDC), later novated to the Rail Land Development Authority (RLDA). The dispute arose when the Petitioner, alleging substantial unpaid dues, invoked Clause 26.3 of the contract, which allowed the Respondent to unilaterally appoint Arbitrators from a pre-approved panel.
The High Court focused on whether this clause was valid, especially in light of recent Supreme Court judgments. The Respondent relied on the Supreme Court’s decision in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV), (2020) 14 SCC 712, which involved a similar arbitration clause. However, the High Court observed significant differences between the clause in the current case and the one in CORE.
In CORE, Clause 64(3)(b) of the General Conditions of Contract required the Railway to offer a panel of at least four retired Railway officers as potential Arbitrators. The contractor could then select two names from this panel, and the General Manager would appoint one as the contractor’s nominee, along with other Arbitrators to form a Tribunal. This system allowed for a level of choice and balance between the parties.
Conversely, Clause 26.3 in the present case did not provide such a mechanism. Instead, it allowed the Respondent to unilaterally appoint an Arbitrator from its panel, without offering any choices to the Petitioner. The High Court noted that this clause was incompatible with Section 12(5) of the Arbitration and Conciliation Act, 1996, which disqualifies anyone related to either party or the subject matter of the dispute from being appointed as an Arbitrator, unless both parties waive this disqualification in writing.
The High Court further relied on the Supreme Court’s rulings in Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760, (2019) 5 SCC 755, and TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377, which expanded the principle that a person disqualified under Section 12(5) cannot unilaterally appoint an Arbitrator. These rulings effectively invalidated any clause that allowed one party to unilaterally appoint an Arbitrator, as such clauses are inherently biased and violate the principles of impartiality and fairness.
Given these legal precedents, the High Court found that Clause 26.3 of the contract was invalid and unenforceable. The Court emphasised that it could not rewrite or modify the arbitration clause to align it with current legal standards; the clause must either stand as it is or be struck down. Since the clause allowed for unilateral appointment by the Respondent, it was deemed incompatible with the law and therefore invalid.
As a result, the High Court exercised its jurisdiction under Section 11(6) of the Arbitration and Conciliation Act, 1996, to appoint an independent Arbitrator. The arbitration would proceed under the aegis of the Delhi International Arbitration Centre (DIAC), ensuring that the process adhered to principles of impartiality and fairness.
Key Takeaway
An arbitration clause that permits only one party to unilaterally appoint an Arbitrator from its own panel—without offering the counterparty any meaningful choice—is incompatible with Section 12(5) of the Arbitration and Conciliation Act, 1996, and will be struck down as invalid. Courts will not rewrite such clauses; instead, they will exercise their power under Section 11(6) to appoint an independent Arbitrator.
Delhi High Court — Default in pre-arbitral procedure triggers immediate Section 11(6) jurisdiction
The Delhi High Court ruled on a petition filed under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking appointment of an Arbitrator to resolve disputes arising from an Engineering, Procurement, and Construction (EPC) contract between Bksons Infrastructure Pvt. Ltd (Petitioner) and the National Highways Authority of India (NHAI) (Respondent). The contract involved upgrading a two-lane stretch of NH 117 to a four-lane highway and contained an arbitration clause in Article 26, outlining the procedure for dispute resolution, including conciliation before arbitration.
The central issue was whether the Petitioner had exhausted the mandatory pre-arbitral procedures before invoking arbitration. The Respondent argued that the petition was premature as the Petitioner had not adhered to the three-stage pre-arbitral process detailed in Clause 26.2 of the contract. This clause required the Petitioner to first seek a decision from either the Authorized Engineer (AE) or an independent Conciliator. If that failed, the Petitioner was to approach the Chairman of the Respondent organisation, who would convene a joint meeting to examine the claim. If the dispute remained unresolved, the Petitioner was to approach the Conciliation Committee of Independent Experts before moving to arbitration.
The Petitioner contended that despite multiple requests, the Respondent failed to appoint a Conciliator as required under Stage 1 of the process. This failure, the Petitioner argued, entitled them to bypass the remaining stages and directly seek arbitration.
The High Court focused on the Respondent’s failure to act according to the agreed pre-arbitral protocol. The Court determined that under Section 11(6) of the 1996 Act, its jurisdiction is activated when one party fails to adhere to the agreed-upon procedure for appointing an Arbitral Tribunal, which includes any pre-arbitral steps specified in the contract. In this case, despite three reminders, the Respondent did not appoint a Conciliator, thereby failing to comply with the first stage of the process.
The Court concluded that this default by the Respondent effectively resolved the matter. The Petitioner automatically became entitled to invoke arbitration due to the Respondent’s failure to comply with the initial step of the dispute resolution process as outlined in Clause 26.2. The Court further noted that the Petitioner’s subsequent, unsuccessful attempt to involve the Chairman did not negate the Respondent’s initial default in failing to appoint a Conciliator.
Consequently, the High Court appointed an Arbitrator to resolve the disputes between the parties. The Court also acknowledged the Petitioner’s claim that the Respondent owed approximately ₹18 Crores. The arbitration was to be conducted under the Delhi International Arbitration Centre (DIAC) and would follow its rules and regulations.
Key Takeaway
When a respondent defaults on the very first step of a contractually mandated pre-arbitral process—such as failing to appoint a conciliator despite repeated reminders—the Court acquires jurisdiction under Section 11(6) immediately. A petitioner is not required to exhaust the remaining stages of a multi-step dispute resolution clause when the other party has already breached its obligations under the first stage.
Punjab & Haryana High Court — High Court is not a “Civil Court” under Section 2(1)(e) but retains Section 11(6) jurisdiction
The Applicant issued a legal notice demanding payment of outstanding dues following a dispute between the parties. The Respondent requested that the Applicant submit invoices from September 30, 2022, but did not take any further action. The Applicant subsequently issued a notice requesting appointment of an Arbitrator by mutual consent. When the Respondent failed to resolve the issue or appoint an Arbitrator within the stipulated 30-day period, the Applicant sought relief under Section 11(6) of the Arbitration Act.
The Respondent argued that the Court was not authorised to appoint an Arbitrator because the agreement designated Mumbai as the arbitration venue, and that the Civil Procedure Code’s provisions could not supersede the agreed venue.
The High Court examined the definition of “Court” as outlined in Section 2(1)(e) of the Arbitration Act, which encompasses the principal Civil Court of original jurisdiction and the High Court exercising ordinary original civil jurisdiction. The High Court observed that it does not have conventional original civil jurisdiction over these matters, as all civil suits within its territorial jurisdiction are filed with the District Court. Accordingly, the High Court determined that it does not meet the definition of a “Court” under Section 2(1)(e) and therefore cannot entertain civil or arbitration-related matters on its original side.
The Court also reviewed Section 42 of the Arbitration Act and found that it does not apply to applications under Section 11(6), which are required to be submitted to a High Court. Interpreting Sections 20 and 31(4) of the Arbitration Act, the Court held that parties may agree on the location of arbitration, and that a Tribunal appointed by a High Court may set the seat of arbitration outside the appointing Court’s jurisdiction if advantageous to the parties.
The High Court cited Brahmani River Pellets Ltd. v. Kamachi Industries Ltd., (2020) 5 SCC 462, and Indus Mobile Distribution (P) Ltd. v. Datawind Innovations (P) Ltd., (2017) 7 SCC 678, along with the Constitution Bench decision in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552 (“BALCO”), which distinguished between the ‘seat’ and ‘venue’ of arbitration and their jurisdictional implications.
The High Court ultimately determined that Clause 14 of the arbitration agreement—which permitted the Respondent to select either Mumbai or another location—indicated that Mumbai was not the sole seat of arbitration. Consistent with a prior Coordinate Bench decision in Green Global Energy v. G.R. Infra Projects Ltd., the Court held it possessed authority under Section 11(6) and appointed an Arbitrator to resolve the dispute.
Key Takeaway
A High Court that lacks ordinary original civil jurisdiction does not qualify as a “Court” under Section 2(1)(e) of the Arbitration and Conciliation Act, 1996, and Section 42 therefore does not apply to it. Nonetheless, such a High Court retains jurisdiction under Section 11(6) to appoint arbitrators. The agreed arbitration venue does not automatically oust this jurisdiction, particularly where the contract language allows flexibility in the choice of seat.
Supreme Court — Courts and Arbitral Tribunals must carefully scrutinise contract clauses when adjudicating claims
The Supreme Court emphasised the necessity for Courts and Arbitral Tribunals to scrutinise contract clauses in arbitration proceedings. The Court upheld the Calcutta High Court’s decision to set aside the Arbitrator’s Award of compensation for loss due to idle machinery and labour, where the contract explicitly prohibited such claims. The SC noted that “In reality, the High Court implemented the actions that the Arbitrator should have taken.”
On the claim for loss resulting from idle labour and machinery, the High Court reviewed the pertinent contract clauses and determined that the contract explicitly prohibited claims for unproductive labour and additional establishment costs over an extended period. The Supreme Court concurred, concluding that the Arbitrator had neglected to take into account the pertinent contractual provisions which forbade such claims.
On the claim of interest on delayed payment of running account bills, the Arbitrator had granted interest for delayed payments, finding that the contract did not prohibit interest on “blocked capital.” The High Court set aside this award, asserting that bills were settled promptly following preparation and that the Arbitrator had not resolved various ancillary issues. However, the Supreme Court disagreed, holding that the HC’s assertion that bills were paid promptly did not provide a basis for interference and that the Arbitrator’s failure to address those specific issues was insufficient to invalidate the Award. The Arbitrator’s reasoning was not perverse, and the Award was not against public policy.
On the award of pre-reference interest, the High Court had modified the Arbitrator’s decision to exclude the pre-reference period and allowed only pendente lite interest. The Supreme Court reinstated the original Award, noting that the Arbitrator is authorised to grant interest for the pre-reference period under Section 31(7) of the Arbitration and Conciliation Act, 1996, unless the contract explicitly prohibits it, which it did not.
Key Takeaway
Arbitrators and Courts alike are duty-bound to examine contract clauses carefully before granting or upholding any claim. Where a contract expressly bars a head of claim, no award can be made on it. Conversely, where the contract is silent, an Arbitrator’s reasoned award—including pre-reference interest—should not be interfered with unless it is perverse or contrary to public policy.
Supreme Court — Enforceability date governs foreign currency to INR conversion of Arbitral Awards; deposit date applies to amounts already withdrawn
The Supreme Court resolved two critical questions regarding the enforcement of an Arbitral Award expressed in foreign currency, in the context of International Commercial Arbitration.
The first question was on the most suitable and accurate date for determining the foreign exchange rate for conversion of the Award amount from foreign currency to Indian Rupees. The Court held that the relevant date is the date on which the Award becomes enforceable—i.e., the date on which objections to its enforceability are finally resolved. The Court applied the principle from Forasol v. O.N.G.C., 1984 Supp SCC 263: “When the objections against a foreign Arbitral Award are finally resolved, the statutory scheme of the Act renders it enforceable.” Accordingly, the conversion rate is to be fixed as on the date of enforceability.
The second question concerned the date of conversion where the Award debtor deposits a sum of money with the Court during the pendency of proceedings challenging the Award, and the Award holder withdraws that amount. The Court held that the amount deposited must be converted at the exchange rate prevailing on the date of deposit. The Award holder who withdraws the deposited amount during proceedings benefits from the deposited sum from that date and cannot seek conversion at the later, potentially more favourable, enforceability date for that portion. The exchange rate for any remaining Award amount not yet deposited continues to be determined as on the date the Award becomes enforceable.
The Respondent/Award holder argued that the rate should be determined on the date of enforcement for the entire amount, including the partial sum of ₹7.5 crores deposited in 2010 during the proceedings. The Court rejected this approach, asserting that it would be inequitable and unjust to maintain that the deposited amount does not stand converted on the date of its deposit, as it benefits the Award holder. The Court also rejected the argument that the Respondent could not furnish a bank guarantee from an Indian bank, finding it an attempt to capitalise on a higher exchange rate without legal justification.
Key Takeaway
When enforcing a foreign currency Arbitral Award in India, the conversion rate is fixed as on the date the Award becomes enforceable (i.e., when all objections are finally resolved). However, where the Award debtor has already deposited a sum with the Court and the Award holder has withdrawn it, that portion is converted at the rate prevailing on the date of deposit. This dual-date framework ensures fairness and prevents either party from gaining a windfall through exchange rate movements.
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