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TRF Ltd. V. Energo Engineering Projects Ltd.

“Once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator.”

Case name:TRF Ltd.. & Ors. V. Energo Engineering Projects Ltd.
Case number:CIVIL APPEAL NO. 5306 OF 2017
Court:THE SUPREME COURT OF INDIA
Bench:Dipak Misra J, A.M. Khanwilkar J, Mohan M. Shantanagoudar J
Decided on:July 03, 2017
Relevant Act/Sections:

BRIEF FACTS AND PROCEDURAL HISTORY:

  • The respondent-company is engaged in the business of procuring bulk material handling equipment for installation in thermal power plants on behalf of its clients like National  Thermal Power Corporation (NTPC) etc.
  • On 10th May, 2014, the respondent issued a purchase order to the appellant. To secure the performance under the purchase order, the appellant had submitted an advance bank guarantee and a performance bank guarantee.
  • As the controversy arose with regard to encashment of bank guarantee, the appellant approached the High Court under Section 9 of the Act seeking an order of restraint for encashment of the advance bank guarantee and the performance bank guarantee.
  • The appellant vide letter dated 28.12.2015 invoked the arbitration in terms of Clause 33 of the General Terms and Conditions of the Purchase Order (GTCPO) seeking reference of the disputes that had arisen between the parties to an arbitrator. The appellant had objected to the procedure for appointment of arbitrator provided under the purchase order and accordingly communicated that an arbitrator be appointed de hors the specific terms of the purchase order.
  • After the appointment was made, the appellant preferred an application under Section 11(5) read with Section 11(6) of the Act for appointment of an arbitrator under Section 11(2) of the Act. The said foundation was structured on the basis that under Section 12(5) of the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) read with the Fifth and the Seventh Schedules to the amended Act, the Managing Director had become ineligible to act as the arbitrator and as a natural corollary, he had no power to nominate.
  • The respondent controverted that the Fifth and the Seventh Schedules lay down the guidelines and the arbitrator is not covered under the same and even if it is so, his power to nominate someone to act as an arbitrator is not fettered or abrogated.
  • The High court directed that besides the stipulation in the purchase order governing the parties, the court was inclined to appoint the former Judge as the sole arbitrator to decide the disputes between the parties.

ISSUE BEFORE THE COURT:

  • Whether the High Court, while dealing with the applications under Section 11(6) of the Arbitration and Conciliation Act, 1996 is justified to repel the submissions of the appellants that once the person who was required to arbitrate upon the disputes arisen under the terms and conditions of the contract becomes ineligible by operation of law, he would not be eligible to nominate a person as an arbitrator
  • Whether a plea that pertains to statutory disqualification of the nominated arbitrator can be raised before the court in application preferred under Section 11(6) of the Act, for such an application is not incompetent.

RATIO OF THE COURT

  • The court referred to the case Newton Engineering and Chemicals Limited v. Indian Oil Corporation Limited and others and observed that it is not open to either of the parties to unilaterally appoint an arbitrator for resolution of the disputes in a situation that had arisen in the said case.
  • The court referred to various judgements namely; Municipal, Punj Lloyd Ltd. v. Petronet MHB Ltd., Deep Trading Company v. Indian Oil Corporation and others, Newton Engineering and Chemicals Limited v. Indian Oil Corporation Limited and others, Naginbhai C. Patel v. Union of India, B.W.L. Ltd. v. MTNL, Sharma & Sons v. Engineer-in-Chief, Army Headquarters, New Delhi, Datar Switchgears Ltd. v. Tata Finance Ltd. and another for the purpose explained that courts in certain circumstances have exercised the jurisdiction to nullify the appointments made by the authorities as there has been failure of procedure or ex facie contravention of the inherent facet of the arbitration clause.
  • The court referred to the judgement in Arasmeta Captive Power Company Private Limited and another v. Lafarge India Private Limited and Chloro Controls India Private Limited v. Severn Trent Water Purification Inc and observed that apart from the fact that the Designated Judge can, at the initial stage, adjudicate upon his jurisdiction, he is also entitled to scrutinize the existence of the condition precedent for the exercise of his power and also the disqualification of the arbitrator or arbitrators.
  • The court referred to sub-section (6A) of Section 11 of the Act and opined that the amended law requires the Court to confine the examination of the existence of an arbitration agreement notwithstanding any judgment of the Supreme Court or the High Court while considering an application under Section 11(6) of the Act.
  • The court examined the cases; Datar Switchgears(supra), Newton Engineering(supra) and Deep Trading Company(supra) and observed that the three cases exposit three different situations. The first one relates to non-failure of the procedure and the authority of the owner to appoint the arbitrator; the second relates to non-survival of the arbitration clause; and the third pertains to forfeiture of the right of the Corporation to appoint the sole arbitrator because of the failure to act with the procedure agreed upon by the parties in clause 29 which was the arbitration clause in the agreement
  • The court while answering to the issue that whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator stated that when there are two parties, one may nominate an arbitrator and the other may appoint another. That is altogether a different situation. If there is a clause requiring the parties to nominate their respective arbitrator, their authority to nominate cannot be questioned. What really in that circumstance can be called in question is the procedural compliance and the eligibility of their arbitrator depending upon the norms provided under the Act and the Schedules appended thereto.
  • The court concluded that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated.

DECISION HELD BY COURT:

  • The Court set aside the order appointing the arbitrator.
  • The court held that Once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated.
  • It was held that as Clause (c) is independent of Clause (d), the arbitration clause survives and hence, the Court can appoint an arbitrator taking into consideration all the aspects.

The appeals were allowed, the orders passed by the learned Single Judge were

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