Clause Exclusively Empowering Chief Project Manager To Appoint Arbitrator From A Panel Maintained By It, Illegal: Delhi High Court

The bench of Justice Yashwant Varma was dealing with an arbitration clause which exclusively empowered the Chief Project Manager to appoint the arbitrator from a panel which was itself maintained by it.

The Court observed that the arbitration clause did not bestow a right on any of the parties to the dispute to independently choose their nominee from the panel maintained by the Chief Project Manager. Further, the composition of the panel itself was left to the sole discretion of the Chief Project Manager.

The bench thus concluded that the constitution of the Arbitral Tribunal, as contemplated by the arbitration clause, was clearly tainted by fundamental illegality.

After certain disputes arose between the Union of India and the petitioner, Shapoorji Pallonji and Company, under a Construction Contract, the petitioner invoked the arbitration clause and filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Delhi High Court.

Referring to the relevant clause (clause 25) contained in the Contract, the Court observed that the same envisages an Arbitral Tribunal comprising of three arbitrators to be chosen from a panel of seven maintained by the Chief Project Manager. The Chief Project Manager is to make an appointment from out of the said panel, within 30 days from the receipt of a request by either party. The two appointed arbitrators, in turn would nominate the presiding arbitrator from the same panel, the Court noted.

“It also becomes pertinent to observe that clause 25 does not bestow a right on any of the parties to independently choose from the panel maintained by the respondents. In fact, the clause essentially only empowers the Chief Project Manager to make a nomination of two arbitrators from the said limited panel of seven. Neither of the parties are given the liberty to exercise their right to choose or nominate an arbitrator from their respective sides,” the bench said.

While holding that the Chief Project Manager could be perceived to be an appointing authority who may have an interest in the outcome of the arbitral proceedings, the Court referred to the decision of the Apex Court in Perkins Eastman Architects DPC vs. HSCC (India) Ltd (2019), where it was held that since the Managing Director itself became ineligible by operation of law to act as an arbitrator, he could not nominate another person to act as arbitrator. The same was different from a case where both the parties could nominate the respective arbitrators of their choice, since whatever advantage a party may derive by nominating an arbitrator of its choice would get counter-balanced by an equal power with the other party, the Supreme Court had ruled.

Thus, the High Court noted that when a person who is otherwise ineligible to be considered for appointment as an arbitrator, is exclusively given the power to nominate the Arbitrator/ Sole Arbitrator, the same cannot be sustained.

The bench further reckoned that the relevant clause not only fails to enable the petitioner to choose from out of a panel of seven names, the composition of that panel itself is left to the sole discretion of the Chief Project Manager.

“Thus, the Court comes to conclude that the constitution of a Tribunal in accordance with the procedure prescribed in clause 25 would clearly be tainted by fundamental illegality. It neither permits a party to independently choose or nominate an arbitrator, it also vests the power of constitution exclusively in the hands of the Chief Project Manager,” the Court said.

“Since the Chief Project Manager would itself be disqualified in law to arbitrate upon the dispute, the said authority cannot possibly be countenanced in law to have the power to constitute the Tribunal,” it concluded.

The Court thus allowed the petition, granting liberty to the parties to nominate a person whose name may not form a part of the panel, with the two nominated arbitrators choosing the presiding arbitrator.

Case Title: Shapoorji Pallonji and Company Private Limited versus Union of India

Citation: 2023 LiveLaw (Del) 183

Counsel For the Petitioner: Mr. Sandeep Sethi, Sr. Adv. with Mr. Saurav Agarwal, Mr. Saad Sherwani, Mr. Ravi Tyagi, Mr. Mayank Mishra, Mr. Chirag Sharma, Mr. Siddharth Dey, Ms. Mayuri Shukla, Ms. Sakshi Tibrewal, Ms. Shreya Sethi, Ms. Janvi Tewari, Mr. J. Amakl Anand, Ms. Alisha Sharma, Mr. Babit Jamwal, Ms. Sonali Jaittley Bakhshi, Mr. Jaiyesh Bakhshi, Mr. Ajay Sharma and Mr. Vikram Singh Dalal, Advs

Counsel for the Respondent: Mr. Apporv Kurup, CGSC, Ms. Swati Bhardwaj, Ms. Nidhi Mittal, Ms. Aparna Arun and Mr Ojaswa Pathak, Advs. for UOI

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