Arbitrator Gets Jurisdiction Only With Respect To 'Notified' Claims; Delay/ Failure to Certify Claim as 'Notified', Does Not Operate As Waiver: Delhi High Court

The Single Bench of Justice V. Kameswar Rao held that the procedure of forwarding a panel of names to the other contracting party, to choose its nominee arbitrator from amongst them, is no longer a valid procedure.

The Court added that in the absence of a free choice given to a party, to choose the arbitrator from a broad and diversified panel, there was a possibility of apprehension of bias arising in its mind, which would defeat the purpose of arbitration.

The respondent- Indian Oil Corporation Limited, issued a Letter of Award to the Hydrocarbon Division of L&T. A formal contract for execution of construction work was executed between the parties. The respondent allegedly failed to make payment with respect to the claims raised and the final bill submitted by the Hydrocarbon Division of L&T for the work executed by it.

The petitioner - L&T Hydrocarbon Engineering Limited, who subsequently became the successor to the Hydrocarbon Division of L&T, invoked the arbitration clause. The petitioner filed a petition before the Delhi High Court under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act), seeking appointment of an arbitrator.

The petitioner contended before the High Court that the arbitration agreement between the parties restricted the right of the petitioner to choose its arbitrator only from the panel prepared and forwarded by the respondent. It averred that the said procedure was invalid in law.

The respondent Indian Oil Corporation submitted before the Court that a clause which gives a party the right to maintain and suggest a panel of arbitrators, is valid in law. Thus, the respondent contended that the procedure agreed to by the parties to select a sole arbitrator from a panel of three persons, as proposed by the respondent, was a valid procedure, as long as the said people were not ineligible for appointment under Sections 12(1), 12(5) and Schedule VII of the A&C Act.

The respondent argued that as per the arbitration agreement, only those claims of the petitioner, as raised by it in its final bill, which were declared or certified by the General Manager as Notified Claims, could be referred to arbitration. The respondent added that since the claims of the petitioner were not certified as Notified Claims, the arbitration agreement between the parties did not cover the petitioner's claims.

The petitioner L&T submitted that it had requested the respondent to refer the matter to its General Manager, as specified in the arbitration clause, to decide whether the claims raised by it were Notified Claims or not. It added that the General Manager was bound to give a decision within a reasonable time. It contended that since the claims were not referred to General Manager and no decision was taken by the General Manager for three years, the delay had the effect of a waiver.

The Court referred to the decision of the Apex Court in Indian Oil Corporation Limited versus NCC Limited (2022), where the Supreme Court had ruled that only the claims notified by the General Manager of the Indian Oil Corporation, as specified in the arbitration clause, were arbitrable and that the non- notified claims were excepted matters, which could not be referred to arbitration.

"It is true that the respondent despite Clause 9.0.2.0 had not referred the claims of the petitioner to the General Manager, because of which the General Manager could not render its decision as to whether the claims forwarded by the petitioner are notified or not, but, merely because that process has not been gone into, it would not mean that all the claims have to be referred to arbitration," the Court said.

The bench ruled that the arbitrator gets the jurisdiction only if the claims are notified and that if the claims are not notified, they will not form the subject matter of arbitration.

The Court dismissed the contention of the petitioner that the respondent had waived the condition to certify the claims raised by it as 'Notified', as a pre-condition to arbitration. The Court thus held that the matter must be remanded back to the General Manager to decide whether the claims raised by the petitioner were required to be notified or not, and whether the said claims could become the subject matter of arbitration.

The Court added that the clause of a contract, which confers right of appointment to one party, cannot be challenged unless the stipulation is invalid on the anvil of Section 12(5) of the A&C Act.

Further, it observed that the Supreme Court in Voestalpine Schienen GmBH versus Delhi Metro Corporation Limited (2017) had ruled that a clause in the arbitration agreement which restricts the right of a contracting party to appoint or nominate his own Arbitrator, should be deleted.

The bench held that the appointment of the arbitrator cannot be invalidated if the parties have agreed for appointment of an arbitrator by one party, if it is not in violation of Section 12(5) of the A&C Act. However, referring to the decision of the Apex Court in Voestalpine Schienen GmBH (2017), the Court noted that the procedure of forwarding a panel of names to the other contracting party, to choose its nominee arbitrator from amongst them, is no longer a valid procedure.

"The stipulation requires forwarding three names (even if they are retired employees from other organizations and not IOCL) to the petitioners, for it to choose one name amongst them to act as the Sole Arbitrator. It cannot be overlooked that the list of three names is a restrictive panel limiting the choice of the petitioner to only three options", the Court observed.

The Court held that in the absence of a free choice given to the petitioner to choose the arbitrator from a broad and diversified panel, there was a possibility of apprehension arising in the mind of the petitioner regarding the impartiality of the people constituting the panel.

It added that it is a settled law that even an apprehension of bias regarding an arbitrator, arising in the minds of the parties, would defeat the purpose of arbitration and that such a situation must be avoided.

While ruling that the procedure for appointment of the arbitrator must be in terms of the law laid down by the Supreme Court in Voestalpine Schienen GmBH (2017), the Court directed the General Manager of the respondent to consider the claims of the petitioner and take a decision as to whether the said claims were to be notified or not.

Case Title: L&T Hydrocarbon Engineering Limited versus Indian Oil Corporation Limited

Citation: 2022 LiveLaw (Del) 1075

Counsel for the Petitioner: Mr. Rajshekhar Rao, Sr. Adv. with Mr. Dhirendra Negi, Ms. Pragya Chauhan and Mr. Areeb Amanullah, Advs.

Counsel for the Respondent: Mr. V.N. Koura, Ms. Paramjeet Benipal and Mr. Nirbhay Narain Singh, Advs

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