Court Can Appoint New Arbitrator U/S 11(6) Of Arbitration Act If Designated Arbitral Institution No Longer Exists: Telangana HC

Brief Facts:

Danieli India Limited (Applicant) is a company incorporated under the Companies Act, 1956 (Companies Act) engaged in the design, engineering, and supply of steel plant equipment. Pursuant to a contract dated 28.04.2017, it entered into an agreement with Mishra Dhatu Nigam Limited (Respondent) for the establishment of a Single Stand Reversing 4HI Wide Plate Hot Rolling Mill (Phase-I) at the respondent's premises in Hyderabad.

Under the terms of the contract, the applicant undertook the design, engineering, manufacture, and supply of plant equipment and technological structures. Additionally, the applicant was responsible for the supply of refractories, civil and structural consultancy, intermediate storage, insurance and handling, erection, testing, start-up, commissioning, and demonstration of performance guarantee parameters of the facility.

Project completion was delayed by 26 months due to various reasons attributable to the respondent, such as Civil and Structural works delay, utilities and cranes readiness delays, equipment delivery and 3 KL,J unavailability of slab, for which the applicant incurred additional costs due to project prolongation.

On 11.07.2023, the respondent 6 KL,J sent an e-mail to the applicant informing that it would be imposing liquidated damages @ 10% due to the delayed commissioning of the contract.

By letter dated 09.10.2023, the applicant requested the respondent to release the contractual payments towards the Provisional Acceptance Certificate (PAC), Final Acceptance Certificate, and outstanding progressive payments. On 08.11.2023, the applicant met with the respondent's Delay Analysis Committee to discuss the delay and provide reasons for it.

Subsequently, the applicant issued a notice on 11.12.2023, invoking the Arbitration Clause under Article 9 of the contract, read with Clause 40 of the General Conditions of Contract (GCC), directing it to the International Centre for Alternative Dispute Resolution (ICADR) and the respondent. As no response was received from the respondent, the applicant filed the present application.

Contentions:

The Respondent submitted that delays in the project's execution due to poor planning, mismanagement, delayed submission of civil and structural drawings, and faulty erection work, resulting in incidents like furnace collapse and fire. Additionally, there were delays in the supply of critical equipment. As a result, the respondent imposed liquidated damages as per the contract.

It was further contended that proprietary rights over Engineering drawings were submitted as part of the contract deliverable and, hence, the respondent has right to use them for procurement of spare parts.

Observations:

The court noted that the applicant filed an application under Section 9 of the Arbitration Act seeking to restrain the respondent and its employees from disclosing or misusing the applicant's proprietary and confidential information. The Commercial Court dismissed the application on 14.08.2024, finding no infringement by the respondent.

It further noted that aggrieved by this, the applicant appealed before this Court. On 03.01.2025, a Division Bench set aside the Commercial Court's order, allowing the respondent to use the confidential drawings, including Work Roll Drawings, only for the operation, maintenance, and procurement of spares for the project. The respondent was restrained from using or sharing these drawings for any other purpose or with third parties.

Based on the above, it observed that there are disputes between the applicant and the respondent concerning the execution of the project, delays, and imposition of liquidated damages, as well as the use and sharing of the applicant's confidential drawings with third parties. These issues are arbitrable.

It further held that the applicant invoked Article 9 of the Contract Agreement, read with Clause 40 of the General Conditions of the Contract, and issued a notice to the respondent on 11.12.2023. Despite acknowledging the notice, the respondent did not provide a response.

The court further observed that when the intention to arbitrate is clear from the terms of the agreement, the courts will uphold that intention. If an arbitration clause becomes unworkable due to drafting errors, the death of a named arbitrator, or the dissolution of the designated arbitral institution, the court will still give effect to the intention to arbitrate by exercising powers under Section 11 of the Arbitration Act.

The Supreme Court in Enercon (India) Ltd. v. Enercon Gmbh (2014) held that the courts must adopt a pragmatic approach, rather than a pedantic or technical one, when interpreting an arbitration agreement or clause. If faced with an unworkable arbitration clause, it is the court's duty to make it workable within the permissible limits of the law, without stretching it beyond recognition. I

The Apex Court further held that a common-sense approach should be adopted to honor the parties' intention to arbitrate. The court should act like a reasonable businessperson, with practical business sense and an understanding of the specifics of the business venture, rather than approaching the issue with a purely legalistic mindset, as if interpreting a statutory provision.

In ACC Ltd. v. Global Cements Ltd. (2012), the agreement named specific arbitrators to resolve disputes. Following the death of the named arbitrators, the question before the Court was whether a new arbitrator could be appointed. The Supreme Court answered in the affirmative, holding that, unless there is a contrary intention in the agreement, a new arbitrator can be appointed in place of the deceased named arbitrators.

The court concluded that merely because the designated arbitral institution no longer exists, the intention to arbitrate cannot be left unenforced. Therefore, this Court deems it appropriate to exercise its powers under Section 11 of the Arbitration Act.

Accordingly, the present application was allowed.

Case Title: Danieli India Limited vs Mishra Dhatu Nigam Limited

Case Number: ARBITRATION APPLICATION No.266 OF 2024

Judgment Date: 02/05/2025

Mr. S. Ram Babu, learned counsel for the applicant

Ms. V. Uma Devi, learned counsel for the respondent.

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