Membership Of An Arbitral Institution Cannot Be Insisted Upon As A Pre-Requisite For Invoking Arbitration: Delhi High Court

The bench of Justice Sachin Datta held that when parties agree to resolve their dispute through an arbitral institution, such an agreement cannot be construed to mean that they have agreed to take its membership.

The Court held that insistence by an arbitral institution for such membership impinges on the validity of the appointment procedure and amounts to failure to perform the function entrusted to such institution. It held that in such a situation the appointment would be made by the Court under Section 11(6) of the A&C Act.

Facts

The respondent invited bids for the project on 31.03.2017. The petitioner was selected as the successful bidder and the parties executed an agreement dated 16.11.2017. Clause 26 of the agreement provided for resolution of disputes under the aegis of SOCIETY FOR AFFORDABLE REDRESSAL OF DISPUTES (SAROD).

Disputes arose regarding the payment for executed work, availability of land free from encumbrances, deductions for liquidated damages, and alleged losses due to work prolongation. The petitioner invoked the dispute resolution clause and referred the dispute to the Project Engineer for conciliation.

Upon the failure of the conciliation, the petitioner invoked the arbitration clause and requested the respondent to appoint its nominee arbitrator. However, upon the failure of the parties to mutually constitute the tribunal, the petitioner approached the Court under Section 11(6) of the A&C Act.

Submissions of the Parties

Respondent objected to the maintainability of the petition on the following grounds:

• The parties had agreed to get their dispute resolved through SAROD, therefore, the appointment of the arbitrator must also be made under the SAROD Rules only.

The respondent made the following counter-submissions:

• That the agreement did not mandate SAROD membership for arbitration. Clause 26 of the agreement only referred to SAROD rules for arbitration procedures, not membership.
• That since they were not SAROD members and did not wish to become ones, invoking SAROD rules for arbitration was unworkable and should not be a precondition.
• Since, the petitioner cannot invoke arbitration under SAROD Rules for want of membership, the appointment has to be made under S. 11(6)

Analysis by the Court

The Court impleaded SAROD as a party to ascertain whether Rule 4.4 of SAROD Arbitration Rule was a necessary condition to avail its services. SAROD informed the Court that it is necessary for a party to have SAROD's primary membership to invoke the arbitration.

The Court observed that the agreement only provided for arbitration through SAROD, however, it did not provide for any requirement of membership. It held that when parties agree to resolve their dispute through an arbitral institution, such an agreement cannot be construed to mean that they have agreed to take its membership.

The Court held that insisting on membership would introduce an additional obligation not agreed upon by the parties, thus affecting the agreement's validity and the arbitration process.

The Court held that SAROD's insistence on membership as a precondition for arbitration was not valid, as it would impinge on the agreement's validity and the arbitration process, thus making it incumbent on the Court to appoint an arbitrator under Section 11(6)(c) of the A&C Act.

The Court also held that since the agreement did not provide for a specific number of arbitrator, it has to be construed that the parties have agreed to appoint a sole arbitrator.

Accordingly, the Court allowed the petition and appointed a sole arbitrator.

Case Title: Rani Construction v. Union of India

Citation: 2024 LiveLaw (Del) 361

Date: 22.03.2024

Counsel for the Petitioner: Mr. Navin Kumar, Ms. Surbhi Aggarwal, Ms. Rashmeet Kaur, Ms. Aarti Mahto, Ms. Bhagya Ajith and Mr. Manoj Shete, Advs.

Counsel for the Respondent: Ms. Nidhi Raman, CGSC alongwith Mr. Zubin Singh, Adv. for R-1/UOI. Ms. Astha Sharma and Mr. Karan Jaiswal, Advs. for R-2.

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