Facts of the Case

L&T Hydrocarbon Engineering Limited, a wholly owned subsidiary of Larsen & Toubro Limited, approached the Delhi High Court under Sections 11(5), 11(6) and 11(8) of the Arbitration and Conciliation Act, 1996 seeking appointment of an independent and impartial sole arbitrator for adjudication of disputes with Indian Oil Corporation Limited (“IOCL”). The petition arose from a contract concerning the Salaya Mathura Pipeline De-bottlenecking Pipeline Project.

IOCL had issued a Letter of Award dated 11 June 2012 for mainline works, including small HDD works, civil works, mechanical works, TCP and electrical works, OFC laying works and instrumentation works. A formal contract was executed on 11 July 2012. The contract price was initially fixed at approximately ₹104.5 crore and was subsequently reduced to approximately ₹103.62 crore.

The work involved laying pipelines over substantial stretches in Rajasthan and Haryana. The scheduled completion date was 10 September 2013; however, according to the petitioner, the works were delayed for reasons not attributable to it and were ultimately completed on 24 February 2016. The petitioner submitted its revised final bill on 25 April 2018 and claimed that approximately ₹72.58 crore, excluding GST, remained due and payable by IOCL.

The petitioner had also furnished a performance bank guarantee of approximately ₹10.45 crore. Following a dispute concerning its possible invocation, proceedings under Section 9 of the Arbitration and Conciliation Act, 1996 were initiated, in which directions were issued concerning extension of the bank guarantee, invocation of the contractual dispute-resolution mechanism, and prior notice before any proposed invocation or encashment.

The GCC contained a structured arbitration mechanism. Clause 9.0.1.0 provided for arbitration of disputes arising from a contractor’s Notified Claims included in the Final Bill, subject to the contractual conditions. Clause 9.0.1.1 contemplated selection of a sole arbitrator by the contractor from a panel of three persons nominated by the owner. Clause 9.0.2.0 treated specified questions—including whether a claim was a Notified Claim and whether a Notified Claim was included in the Final Bill—as excluded matters to be decided by the General Manager before the arbitrator proceeded.

On 20 April 2019, the petitioner invoked arbitration in respect of claims of approximately ₹72.58 crore and stated that it did not wish to opt for the alternative dispute-resolution machinery under the GCC. The petitioner also questioned the General Manager’s authority to conclusively decide matters under Clause 9.0.2.0, but nevertheless called upon IOCL to refer the relevant questions to the General Manager and stipulated two weeks for a decision.

After no decision was received within that period, the petitioner, by communication dated 8 May 2019, challenged the validity of the contractual procedure requiring selection of the sole arbitrator from a three-member panel nominated by IOCL and suggested two retired judges for appointment. IOCL did not accept those names and instead forwarded a panel of three persons from which the petitioner was asked to select the sole arbitrator.

Issues Involved

The Delhi High Court identified two principal issues for consideration: first, the legal effect of the contractual requirement that claims must be notified and the role of the General Manager under Clause 9.0.2.0; and second, the validity of the procedure requiring the petitioner to select a sole arbitrator from a restrictive panel of three names forwarded by IOCL.

More specifically, the questions were whether claims not declared or treated as Notified Claims could be referred to arbitration; whether IOCL’s failure for more than three years to refer the claims to the General Manager amounted to waiver or a subsequent agreement permitting the arbitrator to determine the issue; whether the arbitrator could decide the status of the claims under Section 16 of the 1996 Act; and whether a three-name panel nominated at the discretion of one contracting party satisfied the standards of independence, impartiality and meaningful choice under arbitration law.

Petitioner’s Arguments

The petitioner argued that the General Manager could not conclusively determine questions affecting arbitral jurisdiction and that such questions should properly be decided by the arbitrator. It submitted that, notwithstanding this position, it had expressly called upon IOCL on 20 April 2019 to refer the claims to the General Manager under Clause 9.0.2.0.

The petitioner contended that IOCL’s failure to make such a reference for more than three years amounted to waiver of the contractual precondition. It argued that IOCL could not take advantage of its own omission and subsequently contend that the claims were non-arbitrable because the General Manager had not notified them. It further relied on Section 46 of the Indian Contract Act, 1872 to submit that, where no time was prescribed, the relevant act was required to be performed within a reasonable time.

It was further argued that IOCL’s conduct demonstrated waiver or a subsequent understanding because IOCL had itself responded to the arbitration invocation by forwarding a panel of three proposed arbitrators instead of insisting at that stage that the claims first be determined by the General Manager. The petitioner also submitted that an arbitral tribunal could determine its jurisdiction under Section 16 of the Arbitration and Conciliation Act, 1996.

On appointment procedure, the petitioner challenged Clause 9.0.1.1 insofar as it restricted its choice to only three persons nominated by IOCL. It relied principally on Voestalpine Schienen GmbH vs Delhi Metro Rail Corporation Limited, TRF Ltd. vs Energo Engineering Projects Ltd. and Perkins Eastman Architects DPC vs HSCC (India) Ltd. to argue that one interested party should not control the constitution of the tribunal and that any panel-based procedure must provide a broad, diverse and meaningful choice.

The petitioner further argued that Central Organisation for Railway Electrification vs ECI-SPIC-SMO-MCML (JV) should not govern the case because its correctness had been doubted in Union of India vs Tantia Constructions Ltd. and because earlier authorities such as TRF, Perkins Eastman and Voestalpine supported independence and neutrality in the appointment process.

Respondent’s Arguments

IOCL contended that the petitioner could not seek, in proceedings under Section 11, to invalidate or rewrite the agreed contractual arbitration mechanism. According to IOCL, only a contractor’s Notified Claims included in the Final Bill in accordance with the GCC could be referred to arbitration.

IOCL argued that Clause 9.0.1.1 expressly required the contractor to select the sole arbitrator from a panel of three persons nominated by the owner. If the contractor failed to select within thirty days, the owner could select the sole arbitrator from that panel. According to IOCL, this was a mutually agreed procedure and had to be respected.

The respondent further submitted that the petitioner’s letter dated 20 April 2019 improperly imposed a unilateral two-week deadline upon the General Manager, although the GCC prescribed no such period. It also argued that the petitioner had not properly asserted that its claims were Notified Claims under Clause 6.6.1.0 and included in the Final Bill under Clause 6.6.3.0; therefore, there was no occasion for the General Manager to decide the issue under Clause 9.0.2.0.

IOCL maintained that the three-member panel procedure was valid and did not contravene Sections 12(1) or 12(5), or the Fourth and Seventh Schedules to the Arbitration and Conciliation Act, 1996. It relied upon authorities including IOT Infrastructure & Energy Services Ltd. vs Indian Oil Corporation Ltd., Institute of Geoinformatics (P) Ltd. vs Indian Oil Corporation Ltd., Srico Projects Pvt. Ltd. vs Indian Oil Foundation, Union of India vs Parmar Construction and Kadimi International Pvt. Ltd. vs Emaar MGF Land Ltd.

The respondent also relied on USAE Equipment vs Krishna Shankar Tripathi, Bhayana Builders Pvt. Ltd. vs Oriental Structural Pvt. Ltd., Sriram Electrical Works vs Power Grid Corporation of India and Kadimi International Pvt. Ltd. vs Emaar MGF Land Ltd. to support the proposition that contractual appointment procedures could remain valid where the proposed arbitrators were not ineligible under Section 12(5) and the Seventh Schedule.

Court Order / Findings

The Delhi High Court delivered a two-part ruling.

First, on Notified Claims and arbitrability, the Court followed the Supreme Court’s decision in Indian Oil Corporation Limited vs NCC Limited. It held that the contractual language was clear: only claims notified by the General Manager were arbitrable, while claims not so notified constituted excepted matters and could not be referred to arbitration. The arbitrator acquired jurisdiction only in respect of claims satisfying the contractual notification requirement.

The Court specifically held that IOCL’s failure to refer the petitioner’s claims to the General Manager did not mean that all claims automatically became arbitrable. Nor did such omission create a subsequent agreement authorising the arbitrator to determine whether the claims were notified. The contractual mechanism required consideration by the General Manager, and the Supreme Court’s ruling made clear that, absent the required determination, the arbitral tribunal could not assume jurisdiction over such disputes.

Second, on the arbitrator-selection procedure, the Court held that the restrictive panel mechanism could not be sustained in its existing form. The Court relied on Voestalpine Schienen GmbH vs Delhi Metro Rail Corporation Limited and observed that a procedure requiring one party to choose from a narrowly selected panel forwarded by the other party deprived the choosing party of a meaningful and free choice and could create an apprehension that preferred persons had been selected.

The Court noted that IOCL had forwarded only three names, comprising retired officers of organisations such as ONGC, SAIL and GAIL. The Court did not question their integrity or impartiality; however, it held that the absence of free choice from a broad and diversified panel, coupled with IOCL’s discretion to forward any three names, could generate an apprehension regarding impartiality. Even an apprehension of bias was sufficient to undermine the purpose of a neutral arbitral process.

Accordingly, the Court declared that any procedure for appointment of an arbitrator must necessarily conform to the principles laid down by the Supreme Court in Voestalpine Schienen GmbH. The concerned General Manager was directed to consider the petitioner’s claims and decide whether they were to be notified within eight weeks from the date of judgment. Thereafter, the parties were directed to proceed in accordance with law. The petition was disposed of with no order as to costs.

Important Clarification

This judgment draws a crucial distinction between arbitrability of claims and validity of the arbitrator-selection procedure.

The Court did not hold that every contractual claim raised by the contractor became arbitrable merely because IOCL failed to promptly refer the matter to the General Manager. The Court expressly rejected that proposition. Under the contractual framework, the status of a claim as a Notified Claim remained a jurisdictional gateway to arbitration.

At the same time, the Court did not approve a restrictive appointment mechanism merely because the three proposed persons were retired officers from independent public-sector organisations. The decisive concern was the lack of meaningful choice from a broad and diversified panel and the unilateral discretion of IOCL to forward only three selected names.

Therefore, the legal position emerging from the judgment is that contractual preconditions governing arbitrability may remain enforceable, but the procedure for constituting the arbitral tribunal must independently satisfy standards of neutrality, independence, impartiality and meaningful choice.

Sections Involved

The principal statutory provisions involved were Sections 11(5), 11(6), 11(8), 12(1), 12(5), 16 and 29A of the Arbitration and Conciliation Act, 1996; the Fourth and Seventh Schedules to the Act; and Section 46 of the Indian Contract Act, 1872.

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