Invalidity Of The Appointment Procedure Would Not Render The Entire Arbitration Clause Invalid: Delhi High Court

The bench of Justice Anup Jairam Bhambhani held that there are several elements present in an arbitration clause such as procedure for appointment of arbitrator, law of arbitration, law of contract, seat and venue, etc., however, the core element remains the consent of the parties to refer the dispute to arbitration, therefore, merely because one element has become invalid, it would not make the entire clause ineffective and the invalid clause can be easily severed.

Commenting upon the wording of the arbitration clause that provided arbitration only if the GM of respondent could act as or appoint the arbitrator, the Court remarked that 'my way or the highway' approach is not tenable in law.

Facts

The parties entered into an agreement dated 01.02.2011. Letter of award was governed by General Conditions of Contract (GCC). Clause 56 of GCC provided for resolution of dispute by way of arbitration. It also provided that only the General Manager could act as or appoint the arbitrator, it also provided that otherwise the dispute would not be referred to arbitration.^[1] Certain dispute arose between the parties, accordingly, the petitioner issued the notice of arbitration dated 17.12.2020. On failure of the parties to agree upon the name of the arbitrator, the petitioner filed an application under Section 11 of the A&C Act.

Contention of the Parties

The petitioner sought the appointment of the arbitrator on the following grounds:

• Clause 56 of GCC provides for unilateral appointment of arbitrator and in view of insertion of Section 12(5) by way of 2015 amendment act, the same is rendered invalid, thus, the Court should appoint the arbitrator.
• The invalidity of the procedure for the appointment of arbitrator would not render the entire arbitration clause ineffective.
• The notice of arbitration is given after the 2015 amendment came into force, therefore, Section 12(5) would squarely apply to the present controversy.
• The notice of arbitration is issued in relation to disputes that have arisen subsequent to the earlier notice of arbitration (2014) and since the project is still on-going, the claims relate to a subsequent period and the cause of action for such subsequent claims has arisen after the earlier notice and the claims are within time.

The respondent objected to the maintainability of the petition on the following grounds:

• The consent of the parties to arbitration is the foundation stone of an arbitration clause and Clause 56 of GCC stipulates a condition that only the General Manager of the respondent could either himself act as an arbitrator or appoint the arbitrator for the parties otherwise the dispute would not be referred to arbitration.
• As the GM cannot act as or appoint the arbitrator, the parties had expressly provided that in the given eventuality, there would be no arbitration, therefore, the entire arbitration clause does not survive.
• The Court cannot give effect to one part of the clause without giving effect to the other part of the same clause that provided that if the arbitrator could not be appointed as per the agreed procedure then there would be no arbitration at all.
• The claims of the petitioner are ex-facie barred by limitation as they relate to the year 2014 and the notice of arbitration was given at the later half of 2020.
• The notice of arbitration is also inadequate and does not specify the quantum of dispute, therefore, the same would not amount to a valid invocation or commencement of arbitral proceedings.

Analysis by the Court

The Court observed that the respondent does not dispute the existence of the arbitration clause but impugns the validity of the same on the ground that due to the illegality of process of appointment of arbitrator, the entire clause perishes with it.

The Court held that merely because the procedure for the appointment of the arbitrator has become invalid due to 2015 amendment act, the same would not render the entire arbitration clause invalid.

The Court held that there are several elements present in an arbitration clause such as procedure for appointment of arbitrator, law of arbitration, law of contract, seat and venue, excepted matters, liability of costs, etc., however, the core element remains the consent of the parties to refer the dispute to arbitration, therefore, merely because one element has become invalid, it would not make the entire clause ineffective and the invalid clause can be easily severed.

Commenting upon the wording of the arbitration clause that provided arbitration only if the GM of respondent could act as or appoint the arbitrator, the Court remarked that 'my way or the highway' approach is not tenable in law.

The Court held that arbitration clauses are not to be readily invalidates unless there is a compelling basis to do so and the arbitration is to be encouraged as an alternative mode or dispute resolution.

Next, the Court dealt with the objection regarding the limitation of the claims. The Court held that in its notice of arbitration, the petitioner has sought arbitration only for the claims that have arisen subsequent to the earlier arbitration.

It held that a mere allegation as to the claims being time barred would not deter the Court from appointing an arbitrator and should leave the issue of limitation to be decided by the arbitrator.

Accordingly, it allowed the application and appointed the arbitrator.

Case Title: Ram Kripal Singh Construction Pvt. Ltd. v. NTPC

Citation: 2022 LiveLaw (Del) 1090

Date: 09.11.2022

Counsel for the Petitioner: Mr. Amit Pawan, Mr. Hassan Zobair Waris, Mr. Aakarsh & Ms. Shivangi, Advocates.

Counsel for the Respondent: Mr. R. Sudhinder, Advocate with Mr. Nikhil Kumar Singh, Advocate.

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