Facts of the Case

Ram Kripal Singh Construction Pvt. Ltd., the petitioner, filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 seeking appointment of an arbitrator for adjudication of disputes arising from a Letter of Award dated 17 December 2010 concerning the setting-up of a township for NTPC’s Super Thermal Power Project at Barh, Bihar. The Letter of Award culminated in a Contract Agreement dated 1 February 2011 between the parties.

The contractual relationship was governed by the General Conditions of Contract. Clause 56 contained the arbitration agreement and contemplated reference of disputes to the sole arbitration of the General Manager of NTPC; if the General Manager was unable or unwilling to act, arbitration was to be conducted by another person appointed by the Chairman and Managing Director of NTPC. The clause further stipulated that no person other than a person appointed by the CMD, NTPC should act as arbitrator and that, if such appointment was not possible, the matter would not be referred to arbitration at all.

The petitioner contended that after insertion of Section 12(5) through the Arbitration and Conciliation (Amendment) Act, 2015, the contractual procedure permitting NTPC’s own officer or its CMD to control the appointment of the arbitrator had become legally invalid and unenforceable.

Earlier disputes had been invoked through a notice dated 27 January 2014, and those arbitral proceedings were terminated by the sole arbitrator on 22 June 2016. The petitioner stated that the project remained ongoing and further disputes subsequently arose. Accordingly, a second invocation notice dated 29 September 2020 was issued concerning later claims, including non-handing over of work fronts, non-supply of approved working drawings, changes in specifications, claims arising from changes in law including introduction of GST and labour-law changes, and alleged breaches of contractual provisions.

The petitioner therefore approached the Delhi High Court for appointment of a neutral and independent arbitrator.

Issues Involved

The principal issues before the Court were:

  1. Whether the arbitration agreement itself became invalid or inoperative because the agreed procedure for appointment of the arbitrator became legally unenforceable after insertion of Section 12(5) of the Arbitration and Conciliation Act, 1996.
  2. Whether the invalid appointment mechanism could be severed from the substantive agreement between the parties to refer disputes to arbitration.
  3. Whether a clause stipulating that disputes would not be referred to arbitration if the CMD, NTPC could not appoint the arbitrator prevented the Court from appointing an independent arbitrator under Section 11(6).
  4. Whether the petitioner’s claims were ex facie time-barred and therefore incapable of reference to arbitration.
  5. Whether the second notice invoking arbitration dated 29 September 2020 constituted a valid invocation despite the respondent’s objection that it did not quantify and detail the claims.
  6. Whether questions of limitation, involving disputed facts and subsequent claims arising during an ongoing project, should be determined by the arbitral tribunal rather than finally adjudicated at the Section 11 stage.

Petitioner’s Arguments

The petitioner argued that Clause 56 constituted a valid arbitration agreement, but the portion authorising the General Manager of NTPC or another person appointed by the CMD, NTPC to act as sole arbitrator had become inoperative and invalid in view of Section 12(5) of the Act.

It was submitted that a person who was legally ineligible to act as arbitrator could not nominate another arbitrator. The petitioner placed particular reliance on the principles laid down in:

  • TRF Ltd. vs Energo Engineering Projects Ltd.
  • Bharat Broadband Network Ltd. vs United Telecoms Ltd.
  • Perkins Eastman Architects DPC & Anr. vs HSCC (India) Ltd.

The petitioner argued that the contractual stipulation stating that no person other than an appointee of the CMD, NTPC could act as arbitrator, and that there would be no arbitration if such appointment became impossible, was also illegal and incapable of defeating the substantive agreement to arbitrate.

Reliance was also placed on T.K. Engineering Consortium Pvt. Ltd. vs Director (Project), RITES Ltd. & Anr. and ARSS Infrastructure Pvt. Ltd. vs IRCON International Ltd. & Anr., where independent arbitrators were appointed after the contractual appointment mechanism became legally impermissible.

On limitation, the petitioner submitted that the second invocation notice dated 29 September 2020 concerned subsequent disputes and claims arising after the earlier invocation dated 27 January 2014. Since the project was still ongoing, later causes of action had arisen, even where certain claims fell under similar broad heads.

The petitioner therefore sought appointment of a neutral arbitrator by the Court under Section 11(6).

Respondent’s Arguments

NTPC opposed the petition and argued that arbitration is fundamentally based upon party consent. According to NTPC, Clause 56 specifically provided that only:

  • the General Manager of NTPC; or
  • another person appointed by the CMD, NTPC

could act as arbitrator.

The respondent emphasised the contractual stipulation that no person other than an appointee of the CMD, NTPC could act as arbitrator, and if such appointment was not possible, the matter was not to be referred to arbitration at all.

NTPC argued that, following Section 12(5) and the decisions in TRF Ltd. and Perkins Eastman, if the agreed appointees became ineligible, the appointment procedure became impossible to perform and the arbitration agreement itself could not survive.

The respondent further contended that the Court could not sever the appointment procedure from the remainder of Clause 56 because the agreement to arbitrate and the agreed identity or method of appointment of the arbitrator formed part of the same consensual arrangement.

A further objection was raised that the claims were ex facie time-barred, allegedly relating to 2014 while arbitration was invoked through the notice dated 29 September 2020. Reliance was placed on Bharat Sanchar Nigam Ltd. & Anr. vs Nortel Networks India Pvt. Ltd.

NTPC also argued that the second invocation notice did not specify the exact quantum of disputes and claims and therefore did not satisfy the contractual requirements for valid invocation.

Court Order / Findings

The Delhi High Court allowed the petition and held that a valid and subsisting arbitration agreement continued to exist between the parties, notwithstanding the invalidity of the contractual procedure for appointment of the arbitrator.

1. Invalid Appointment Procedure Does Not Destroy the Arbitration Agreement

The Court held that merely because the agreed appointment mechanism had become invalid or unenforceable due to:

  • insertion of Section 12(5); and
  • the Supreme Court decisions in TRF Ltd. and Perkins Eastman,

the entire arbitration clause did not become invalid or void.

The Court observed that similar clauses had already been considered by Coordinate Benches of the Delhi High Court, which consistently held that invalidity of the appointment procedure does not extinguish the substantive agreement to arbitrate.

2. Appointment Mechanism Is Distinct and Severable from Core Consent to Arbitrate

A major finding of the judgment is that an arbitration clause may contain several separate elements, including:

  • procedure for appointment of arbitrators;
  • seat or venue of arbitration;
  • substantive and procedural law;
  • excepted matters;
  • allocation of costs; and
  • other procedural features.

The Court held that these are different strands of the agreed arbitral mechanism and are distinct from the core arbitration agreement, namely, the primary consent of parties to refer their disputes to arbitration.

Accordingly, the procedure for appointment of an arbitrator is distinct and separable from the agreement to arbitrate, even when both are contained in the same clause.

3. “My Way or the Highway” Approach Rejected

The Court expressly rejected the proposition that if NTPC’s own contractual appointment mechanism could not operate, there could be no arbitration at all.

The Court characterised such an approach as a “my way or the highway” approach and held it untenable in law.

Where a portion of the arbitration agreement becomes invalid, void or unenforceable because of changes in law or binding judicial interpretation, that defective portion must be severed or excised, while preserving the valid remainder of the arbitration agreement.

4. CMD, NTPC Appointment Procedure Severed

The Court concluded that the arbitration agreement remained valid and subsisting, but the procedure permitting appointment of the arbitrator at the hands of the CMD, NTPC was no longer valid and therefore had to be severed from the remaining arbitration clause.

5. Limitation Objection Left to Arbitrator

On NTPC’s plea that the claims were time-barred, the Court examined the second invocation notice dated 29 September 2020 and noted the petitioner’s case that further disputes had arisen after the earlier invocation while the work remained ongoing.

The Court applied the principle that unless claims are ex facie time-barred, courts should lean in favour of reference to arbitration — the principle described as “when in doubt, do refer.”

Accordingly, the limitation objection did not prevent appointment of an arbitrator. The issue of limitation was left open for determination by the arbitrator as a mixed question of fact and law.

6. Sole Arbitrator Appointed

The Court appointed a former Judge of the Supreme Court of India as the learned Sole Arbitrator to adjudicate the disputes between the parties.

The appointment was made subject to requisite disclosures under Section 12 of the Arbitration and Conciliation Act, 1996.

The Court further directed that:

  • the arbitrator’s fee would be governed by the Fourth Schedule or as otherwise agreed;
  • the parties would share the arbitrator’s fee and arbitral costs equally;
  • all rights and contentions concerning claims and counterclaims would remain open;
  • disputes would be decided on their own merits in accordance with law; and
  • the parties were to approach the appointed arbitrator within 10 days.

The petition was accordingly disposed of.

Important Clarification

The most important legal clarification emerging from this judgment is:

The invalidity of a unilateral or legally impermissible arbitrator-appointment mechanism does not automatically invalidate the parties’ substantive agreement to arbitrate.

The Court drew a clear legal distinction between:

(a) Core consent to arbitration — the parties’ agreement that disputes will be resolved through arbitration; and

(b) Appointment procedure — the contractual machinery identifying who will appoint or act as arbitrator.

If the appointment mechanism becomes invalid due to Section 12(5) or binding judicial decisions, the invalid portion can be severed while preserving the substantive arbitration agreement.

The judgment also clarifies that a contractual clause cannot necessarily defeat arbitration merely by declaring that if one party’s chosen appointment mechanism fails, there shall be “no arbitration at all.” Where the core agreement to arbitrate remains ascertainable and valid, the Court may preserve that agreement and appoint an independent arbitrator.

Further, at the Section 11 stage, a limitation objection should ordinarily not prevent reference unless the claims are demonstrably and ex facie dead or time-barred. Where limitation depends on subsequent claims, continuing work, later causes of action, or disputed facts, the arbitral tribunal may decide the issue.

Sections Involved

Section 11 of the Arbitration and Conciliation Act, 1996 — Appointment of arbitrators.

Section 11(6) — Court intervention where the agreed appointment procedure fails or becomes incapable of lawful implementation.

Section 12 — Grounds for challenge and mandatory disclosures concerning independence and impartiality of arbitrators.

Section 12(5) — Statutory ineligibility of persons falling within specified relationships and circumstances, notwithstanding prior contractual agreement, subject to the statutory waiver requirement.

Section 21 — Commencement of arbitral proceedings.

Section 25 — Consequences of default by a party in arbitral proceedings.

Fourth Schedule — Framework concerning arbitrators’ fees.

Seventh Schedule — Categories relevant to arbitrator ineligibility under Section 12(5).

Link to download the order - https://mytaxexpert.co.in/uploads/1783330176_1124compressed.pdf

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