Once Person Empowered To Nominate Arbitrator Becomes Ineligible U/S 12(5), Matter Shall Not Be Referred To Arbitration: Patna High Court

Brief Facts

An agreement was executed between the petitioner and the respondent in pursuance of a tender floated by the respondent. The agreement also contained clause 25 for dispute resolution. The petitioner is seeking appointment of an Arbitrator based on this clause.

On the other hand it is the case of the respondent that the Patna High Court in State of Bihar v. Kashish Developers Limited, 2024 while interpreting the clause of a same nature held that the matter shall not be referred to Arbitration as per the language employed in clause 25 of the agreement particularly after the amendment of 2016.

The view taken by the High Court was also affirmed by the Supreme Court by dismissing an SLP filed against this decision. Clause 25 of the agreement states that only a person appointed by the Engineer-in-Chief or administrative head can act as an arbitrator and if that is not possible, the matter shall not be referred to the Arbitration.

Observations:

The court referred to Kashish Developers (supra) wherein it was observed that in TRF Ltd. v. Energo Engineering Projects Ltd., (2017), the Supreme Court has held that Managing Director of a party is ineligible to act or appoint an arbitrator due to section 12(5) of the Arbitration Act. This decision was further reinforced by the Supreme Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) wherein it was held that once the managing director becomes ineligible to act as an arbitrator, he is precluded from nominating the arbitrator also.

The court in the Kashish Developers (supra) also observed that “In the context of the disability visited on the Engineer-in-Chief and the administrative head to make appointment of an arbitrator; the agreement does not have a clause for arbitration and the parties will have to approach the Civil Court or any other appropriate forum”.

Coming to the present case, the court observed that by reason of substitution of Section 12 by Act 3 of 2016, the arbitration clause enabling settlement of dispute through arbitration becomes otiose since the Engineer-in-Chief or the administrative head of the Public Works Division is dis-entitled from appointing an arbitrator.

It also observed that the invocation of Clause-25 is inconsequential since the parties have agreed that there would be no arbitration unless the arbitrator is a person appointed by the Engineer-in-Chief or the administrative head; which is not possible by reason of the substitution of Section 12 of the Arbitration and Conciliation Act by Act 3 of 2016. There is also no further agreement to waive the applicability of sub-section (5) of Section 12 as is required under the proviso to the sub-section.

The court observed that the decision in TRF Ltd. (supra), has been held to be not good law finding that unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution of India and the principle of express waiver contained in the proviso to Section 12(5) of the Act of 1996 also applies to circumstances where parties are seeking appointments unilaterally by one of the parties.

“It was held that a clause that allows one party to unilaterally appoint a sole arbitrator gives rise to justifiable doubts as to the independence and impartiality of the arbitrator. Further, such a unilateral clause is exclusive and hinders equal participation of the parties in the appointment process of arbitrators” the judge observed.

Accordingly, the present petition was dismissed.

Case Title: M/s R.S Construction Versus Infrastructure Development Authority and Ors.

Case Number: REQUEST CASE No.83, 85, 87 and 92 of 2024

Judgment Date: 6/12/2024

Click Here To Read/Download The Order