Party Agreeing To Constitute Arbitral Tribunal Forfeits Right To Oppose Appointment Based On Non-Fulfilment Of Pre-Arbitral Process: Delhi High Court

Brief Facts:

The matter pertained to a tender process initiated by the Respondents for the "Manufacturing and Supply of Metal liner for wider sleeper." The Surya Alloy Industires Ltd.'s (“Petitioner”) bid was accepted by the Respondents through a communication/letter of counter offer, stating that the counter offer would become a binding and concluded contract upon acceptance, which was later confirmed by the Petitioner. Subsequently, the Petitioner fulfilled contractual obligations by submitting two Fixed Deposit Receipts (FDRs) totaling Rs.27,44,600/- as a Security Deposit. The Respondents issued two formal purchase orders to the Petitioner. Despite the completion of supplies and the submission of a "No Claim Certificate," the FDRs were not released or returned by the Respondents.

The applicable 'Indian Railways Standard Conditions' of the Contract included an arbitration agreement, and, the disputes over the non-return/release of the security deposit, the Petitioner invoked the arbitration agreement. The Respondents, in their reply, requested the Petitioner to waive the arbitration, as per Section 12(5) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The Petitioner rejected this request in a letter. Thereafter, the Petitioner filed an application under Section 11(6) of the Arbitration Act in the Delhi High Court (“High Court”) for appointment of a Sole Arbitrator to adjudicate the disputes.

Opposing the petition, the Respondents argued that the Vigilance Department of the Northern Railway, through a letter, submitted findings of a vigilance check, indicating that the metal liners supplied by the Petitioner failed quality checks. The Respondents contended that the Petitioner did not fulfill its contractual obligations to replace the failed metal liners, and therefore, the security deposit was not released. Additionally, they argued that the petition was premature, as per clause 2900 of the contract, which required the Petitioner to approach the General Manager/Northern Railway for dispute settlement in accordance with IRS Conditions of Contract.

Observations by the High Court:

The High Court found no merit in the Respondents' argument that the Petitioner did not follow the pre-requisite for invoking the arbitration agreement. The High Court held that once a party has agreed to constitute an Arbitral Tribunal, it cannot later resist arbitration by relying on contract terms dealing with pre-arbitral procedures. It referred to the Respondents' agreement, through a letter, to constitute the Arbitral Tribunal and emphasized that the Respondent cannot now seek to resist arbitration based on Clause 63 of the General Conditions of Contract (GCC).

Furthermore, the High Court, referring the invocation letter, held that prima facie, none of the claims raised by the Petitioner fell within 'excepted matters.' However, it acknowledged that a detailed examination of the factual matrix was required and was best undertaken by a duly constituted Arbitral Tribunal.

The High Court noted that the Respondents agreed to constitute the arbitral tribunal in a letter. It noted that Respondents' request for waiver of clause 12(5) of the Arbitration Act and after the Petitioner's refusal do so, the Respondents were obligated, as per the arbitration agreement, to send a panel of arbitrators to the Petitioner within 60 days from the demand for arbitration. The High Court held that this crucial step was not been taken by the Respondents.

Consequently, the High Court appointed Ms. Natasha Sood as the Sole Arbitrator to adjudicate the disputes between the parties.

Case Title: Surya Alloy Industries Ltd Vs Union Of India And Anr.

Citation: 2024 LiveLaw (Del) 172

Case Number: ARB.P. 655/2023

Advocate for the Petitioner: Mr. Pukhrambam Ramesh Kumar.

Advocate for the Respondent: Ms. Richa Dhawan, Sr. Panel Counsel, alongwith Mr. Anuj Chaturvedi, Adv. (through VC) and Ms. Shreya Manjari, Adv.

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