Arbitration Clause Invalid If Contractor Cannot Select Arbitrator From Railway's Panel: Delhi High Court

The High Court noted that there was a significant distinction between the clause and the arbitration clause previously considered by the Supreme Court in Central Organization for Railway Electrification v. ECI-SPIC-SMO-MCML (JV). The clause in CORE, detailed in Clause 64(3)(b) of the General Conditions of Contract, required the Railway to provide a panel of at least four retired Railway officers for arbitration. The contractor had the opportunity to select at least two names from this panel for the appointment of the contractor's nominee. The General Manager was then tasked with appointing one of these nominees and additional arbitrators to form a tribunal ensuring that one of the arbitrators had experience in the Accounts Department.

The High Court noted that Section 12(5) of the Arbitration Act prohibits the appointment of an arbitrator who is related to either party or the subject matter of the dispute as outlined in the Seventh Schedule. The Supreme Court's interpretation in cases such as Perkins Eastman Architects DPC v. H.S.C.C. (India) Ltd, Bharat Broadband Network Ltd v. United Telecoms Ltd, and TRF Ltd v. Energo Engineering Projects Ltd expanded this prohibition ruling that a person invalidated under Section 12(5) is also barred from appointing an arbitrator. This principle implies that any clause allowing unilateral appointment of an arbitrator by one party is inherently invalid.

The High Court noted that the clause did not provide for any choice by the Railway to the contractor regarding arbitrators which differs from the CORE clause where the contractor could choose from a panel provided by the Railway. Clause 26.3 of the General Conditions of Contract allowed the Respondent to unilaterally appoint an arbitrator from its panel which rendered it invalid under the Supreme Court's rulings. The High Court held that it could not modify or rewrite the arbitration clause to bring it into conformity with the law.

If an arbitration clause is found to be invalid based on the Supreme Court's rulings, the High Court held that it must be disregarded, and the court cannot replace it with a different arrangement. Unlike the CORE case, where the panel system was explicitly provided, the High Court noted that the Clause 26.3 did not contemplate such a choice mechanism and was thus invalidated.

Given the invalidity of Clause 26.3, the High Court exercised its jurisdiction under Section 11(6) of the Arbitration Act to appoint an arbitrator. The High Court appointed Justice Indermeet Kaur Kochhar, a retired Judge, to arbitrate the disputes between the parties.

Brief Facts:

M/s Kamladityya Construction Pvt Ltd (Petitioner) was awarded an Engineering, Procurement, and Construction (EPC) contract by the Respondent, the Indian Railways Stations Development Corporation Ltd (IRSDC). This contract was for the construction of a railway station at Bijwasan. A deed of novation was executed which transferred the work from IRSDC to the respondent, the Rail Land Development Authority (RLDA).

The contract between the Petitioner and IRSDC included a provision for resolving disputes through arbitration. The arbitration clause stipulated that any dispute arising out of or in connection with the agreement, if not resolved through specified sections, could be submitted to arbitration under the Indian Arbitration and Conciliation Act, 1996, as amended. Arbitration proceedings were to be conducted in New Delhi and the language for proceedings and communication was English. The IRSDC was responsible for appointing arbitrators from a panel it would empanel and the decision of the majority of these arbitrators was to be final and binding. Each party was to bear its own expenses related to the preparation and presentation of its case while the arbitrators' expenses were to be shared equally.

The Petitioner claimed that there were significant outstanding dues from the Respondent related to the contracted work. As the Respondent did not make payments, the Petitioner issued a notice invoking Clause 26.3 of the contract and requesting that the disputes be referred to arbitration. The Petitioner's total claim amounted to ₹51,38,15,849.70/-.

In response, the Respondent in its reply argued that the Petitioner previously approached the High Court through a writ petition and that a Division Bench of the High Court disposed of the matter. The judgment directed that disputes should be resolved through arbitration as provided in Clause 26.3 of the EPC contract indicating that the matter should be referred to arbitration and not delving into the merits of the dispute.

Given these circumstances, the Petitioner approached the court with the petition arguing that it should not be compelled to choose an arbitrator from the panel provided by the Respondent. In contrast, the Respondent contended that based on the Supreme Court's judgment in CORE the Petitioner must select an arbitrator from the list provided by the Respondent.

Case Title: M/S Kamladityya Construction Pvt Ltd VS Rail Land Development Authority

Citation: 2024 LiveLaw (Del) 948

Case Number: ARB.P. 1223/2023

Advocate for the Petitioner: Mr. Avinash Trivedi, Ms. Ritika Trivedi, Mr. Harleen Singh, Mr. Harkeerat Singh, Mr. Jatin Arora, Mr. Rhytham Nagpal, Mr. Anurag Kaushik and Mr. Rahul Aggarwal, Advocates.

Advocate for the Respondent: Ms. Rashmi Malhotra and Mr. Arnab Chanda, Advocates.

Date of Judgment: 31.07.2024

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