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Residuary powers of one party to appoint arbitrator are limited: High Court of Delhi

Any clause in an agreement allowing a party in case of dispute to choose an arbitrator independently, when the other party failed to respond within a period of 30 days informing about their choice of arbitrator, is not unlimited and such residuary powers cannot be exercised absolutely. This was held in the case of C S Electric Ltd. v. JOP Power [ARB.P. 86/2021 and IA 851/2021] in the High Court of Delhi by Hon’ble Judge C. Hari Shankar.

The facts of the case are that an Agreement was executed between the petitioner and the respondent, wherein the petitioner was required to supply Sandwich Bus Ducts to the respondent. Article 15.3.1 of the Agreement provided for resolution of the disputes by arbitrator. Disputes arose between the parties. Vide letter dated 14th June, 2014, the respondent appointed Mr. K. Sunil as the arbitrator to arbitrate on the disputes. However it was observed that he was not exercising his function with due diligence and he was unduly delaying the proceedings. He was terminated and a new arbitrator was to be appointed for which the respondent vide a mail addressed to the petitioner proposed three names of arbitrators to choose from. The respondent mailed after the period of 30 days and by then the respondent had already appointed an arbitrator.

This petition was filed under Section 11(6) of the Arbitration and Conciliation Act, to refer the dispute, between the petitioner and the respondent, to arbitration and nullify the appointment made.

The counsel for the petitioner argued that though the petitioner had not responded to the by selecting an arbitrator out of the three names within the period of 30 days stipulated in Clause 15.3.1 of the Agreement, the appointment, by the petitioner, of Mr. Bhatia as the arbitrator, as communicated to the respondent ought to be treated as valid 13. 

For this the court sought reliance on U.O.I. v. PREMCO-DKSPL wherein was specifically held “the covenants of the arbitration agreement are sacrosanct and have to be strictly enforced”. Taking note of this precedent, the court further stated” the period of 30 days stipulated in Clause 15.3.1, therefore, unquestionably bound the parties and on the expiry of 30 days from the communication dated 26th 1 (2016) 14 SCC 651 November, 2020, addressed by the respondent to the petitioner, the petitioner’s right to select an arbitrator out of the panel proposed by the respondent, stood extinguished”

At the same time, the court did not upheld the appointment of arbitrator made by the respondent as well citing that the law laid down by the Supreme Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd. and TRF Limited v. Energo Engineering Projects Ltd. read with Section 12(5) and Schedule VII to the 1996 Act according to which the residuary powers conferred by the clause of the agreement cannot be sustained or be permitted to be enforced.

It added “Respondent could not, in the face of law, have chosen an arbitrator out its choice, even out of the panel of three proposed by the respondent to the petitioner, to arbitrate on the disputes, on the petitioner failing to exercise such choice within 30 days. Resultantly, the appointment of Mr. Pharlia as arbitrator to arbitrate on the disputes between the parties must also be treated as without authority of law”.

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