Pre-Arb Step(s) Cannot Be Treated As Mandatory If Could Not Be Fructified: Rajasthan High Court

The bench of Justice Sudesh Bansal at the Rajasthan High Court opined that where pre-arbitration steps mentioned in the agreement could not be fructified, it could not be held that those were mandatory in nature and in the event of failure of these no arbitration could be initiated. The Court held that it was a well settled principle of law that an arbitration agreement being a commercial one needed to be interpreted in a manner so as to give effect to the intention of the parties of referring a dispute to arbitration, rather than invalidating the same on technicalities.

The Court was hearing an application for appointment of arbitrator filed by Larsen and Tourbo (“L&T”) in relation to a dispute with Rajasthan Urban Sector Development Project (“RUIDP”). The arbitration agreement between the parties had a condition that before referring the matter to arbitration, a Dispute Adjudication Board (“DAB”) had to be appointed by the parties for settlement of the dispute. However, when the dispute arose and L&T sent communications to RUIDP about appointing a DAB, these requests were denied by the latter which later argued that the matter could not be referred to arbitration since no DAB was appointed in relation to the same.

The Court held that,

“In the opinion of this Court, it is not appropriate to dismiss the application for appointment of Arbitrators only for the reason that dispute between parties could not be placed before the DAB…proposal to constitute DAB and to place the dispute before the DAB was made which had been turned down by the respondents. Thus, the procedure to appoint DAB and to adjudicate the dispute by DAB…indeed could not fructify between parties.”

It was stated that it was very clear that the parties intended to refer the disputes to arbitrators for which they entered into an arbitration agreement, hence, when other pre-arbitration steps of amicable settlement or DAB appointment could not fructify, it would be inappropriate and unjust to deny the application filed by L&T for appointment of arbitrators.

Furthermore, the Court also highlighted, while considering the application for appointment of arbitrators, the High Court was only required to examine the existence of an arbitration agreement as provided under Section 11(6A) of the Act. In this regard, the Court referred to a recent judgment by the Supreme Court in Re: Interplay Between Arbitration Agreements Under The Arbitration and Conciliation Act 1996 and the Indian Stamps Act, 1989, in which it has been observed that the omission of Section 11(6A) of the Act proposed by Arbitration and Conciliation (Amendment) Act 2019, was not notified in official gazette and hence, the provision remained in force.

Accordingly, the application was appointment of arbitrators was allowed by the Court.

Appointment of Arbitrator(s)

On the question of appointment of arbitrators, the Court highlighted that as per the arbitration agreement of the parties, a panel of 5 arbitrators had to be made by RUIDP out of which both the parties were to choose one arbitrator each and the two arbitrators would choose the third one.

However, since the parties were not able to appoint the arbitrators, the Court considered it appropriate to appoint a sole arbitrator in accordance with Section 10(2) of the Arbitration and Conciliation Act, 1996 (“the Act”) instead of a panel of three.

“This Court finds that instead of appointing a panel of three Arbitrators from the panel of named Arbitrators of respondents, appointment of sole Arbitrator would meet the aim and object of the A&C Act to settle the dispute through Arbitration.”

The Court referred to the Delhi High Court case of Union of India v M/S Singh Builders Syndicate in which the contention of the Government that the Court was not vested with the power to appoint a sole arbitrator in distinction to the arbitration agreement was rejected and the same was upheld by the Apex Court.

The Court also stated that arbitrator, being the most crucial part of the arbitration proceedings, was expected to be independent, impartial and unbiased, due to which it would be against the spirits of the Act to appoint the arbitrator from the panel made by RUIDP.

Based on this analysis, a sole arbitrator was appointed by the Court to settle the dispute between the parties.

Title: M/S Larsen and Tourbo v Rajasthan Urban Sector Development Project & Anr.

Citation: 2024 LiveLaw (Raj) 215

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