Arbitration Clause Allowing One Party To Appoint 2/3rd Of Arbitral Tribunal Is Not Enforceable: Delhi High Court

The bench of Justice Rekha Palli held that a narrow panel of 5 arbitrator with a further power to the party which has drawn the panel to nominee 2/3^rd members of the arbitral tribunal is against the principles of ‘counter-balancing’ as envisaged by the Apex Court in the case of Voestalpine Schienen.^[1]

Facts

The parties entered into a lease agreement dated 31.03.2015. Clause 23 of the agreement contained provision for arbitration. It provided that the dispute would be referred to a three members tribunal to be appointed out of a 5 members panel maintained by the respondent. Further, it provided that the respondent would not just have the power to nominate its arbitrator but also the presiding arbitrator.

A dispute arose between the parties. Accordingly, the petitioner invoked the arbitration clause, however, upon the failure of the parties to mutually agree on the members of the arbitral tribunal, the petitioner filed an application under Section 11 of the A&C Act.

Contention of the Parties

The petitioner sought the appointment of the arbitrator(s) on the following grounds:

• The procedure contemplated under the agreement cannot be enforced as it does not offer a broad-based panel to the petitioner to appoint its nominee arbitrator.
• Further, the procedure is invalid as it unequally distributes the appointment power between the parties as the respondent has the power to appoint 2/3^rd members of the arbitral tribunal.
• Once it is held that the appointment procedure is invalid, it is incumbent upon the Court to appoint the arbitrator.

The respondent made the following counter-arguments:

• The petitioner is bound by the arbitration clause contained in the agreement between the parties.
• The Supreme Court in CORE^[2] judgement has held an identical arbitration clause to be valid and held that the parties would be bound by such a clause as the power of one party to prepare a panel is counter-balanced by the power of the other party to choose its member from such a panel.

Analysis by the Court

The Court observed that the panel offered by the respondent only has 5 names and it does not satisfy the requirement of a broad-based panel as necessitated by the judgment of the Apex Court in Voestalpine (supra).

The Court held that a narrow panel of arbitrators containing merely 5 names cannot be enforced under the law and the petitioner cannot be compelled to nominate its arbitrator from such a narrow panel.

The Court further observed that the appointment procedure contemplated under the agreement confers power on the respondent to unilaterally appoint 2/3^rd members of the arbitral tribunal and fails to meet the requirement of ‘counter-balancing’.

The Court held that such an arbitration clause wherein one of the contracting party has the power to appoint the 2/3^rd members of the arbitral tribunal cannot be given effect to and it becomes incumbent upon the Court exercising powers under Section 11 to appoint arbitrator to constitute an impartial arbitral tribunal.

Accordingly, the Court allowed the petition and appointed two retired judges as nominee arbitrator for the parties with a further direction upon them to mutually appoint the presiding arbitrator.

Case Title: Taleda Square Pvt Ltd v. Rail Land Development Authority

Citation: 2023 LiveLaw (Del) 967

Date: 10.10.2023

Counsel for the Petitioner: Ms. Nina R. Nariman with Ms. Geetika Kapur, Advs.

Counsel for the Respondent: Mr. R.V. Sinha and Mr. A.S. Singh, Mr. Amit Sinha, and Mr. Rajeev Sharma, Advs.

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