Facts of the Case

K.R. Foods Limited entered into a work agreement dated 06.08.2019 with the Punjab State Cooperative Supply and Marketing Federation (MARKFED) for the supply of Vanaspati. Under the agreement, the petitioner was allotted a substantial quantity of the annual procurement requirement as the lowest bidder (L1).

Disputes subsequently arose regarding the payment of outstanding dues, GST-related packing material charges, compensation, and damages allegedly resulting from breach of contractual obligations. The petitioner issued a legal notice demanding payment and thereafter invoked the arbitration clause by requesting the respondent to appoint an arbitrator. However, despite receiving the notices, the respondent neither cleared the dues nor appointed an arbitrator within the statutory period, compelling the petitioner to approach the Punjab & Haryana High Court under Section 11(5) of the Arbitration and Conciliation Act, 1996 for appointment of an independent arbitrator.

Issues Involved

  1. Whether the High Court could appoint an arbitrator under Section 11(5) of the Arbitration and Conciliation Act, 1996 when the respondent failed to appoint one within the prescribed period.
  2. Whether the Managing Director of the respondent organization was competent to nominate an arbitrator after the amendments introduced through Section 12(5) of the Arbitration and Conciliation Act, 1996.

Petitioner's Arguments

  • The petitioner contended that despite repeated legal notices, the respondent failed to discharge its contractual obligations by making payment of the outstanding amount.
  • The petitioner submitted that arbitration had been validly invoked through notice and even proposed the name of an arbitrator, but the respondent neither agreed nor appointed any arbitrator within the statutory period.
  • It was argued that because the respondent failed to comply with the contractual and statutory requirements, the Court should exercise its jurisdiction under Section 11(5) and appoint an independent arbitrator.
  • The petitioner further claimed recovery of outstanding dues, GST-inclusive packing material charges, compensation, and damages arising from breach of contract.

Respondent's Arguments

  • The respondent relied upon the dispute resolution mechanism provided under Clause 24 of the agreement, which contemplated attempts to resolve disputes in good faith before arbitration.
  • However, the respondent did not appoint an arbitrator even after invocation of the arbitration clause and did not consent to the arbitrator proposed by the petitioner.

Court Order / Findings

The Punjab & Haryana High Court observed that the respondent had failed to appoint an arbitrator within the prescribed period after invocation of the arbitration agreement.

The Court referred to the decisions of the Supreme Court in TRF Limited v. Energo Engineering Projects Ltd., Bharat Broadband Network Ltd. v. United Telecoms Ltd., Perkins Eastman Architects DPC v. HSCC (India) Ltd., and Ellora Paper Mills Ltd. v. State of Madhya Pradesh, holding that after the amendment introducing Section 12(5), a Managing Director or any person rendered ineligible under the Act cannot nominate an arbitrator.

Consequently, the Court appointed Sh. B.M. Bedi, District & Sessions Judge (Retd.), as the Sole Arbitrator to adjudicate the disputes between the parties.

The Court further directed that:

  • the Arbitrator shall furnish the declaration of independence and impartiality under Section 12;
  • the arbitration proceedings shall be completed within the time prescribed under Section 29A;
  • the Arbitrator's fee shall be governed by the Fourth Schedule of the Act and shared equally by both parties.

The petition was accordingly disposed of.

Important Clarification

  • Failure of a party to appoint an arbitrator within the statutory period empowers the High Court to appoint an independent arbitrator under Section 11(5).
  • After the amendment introducing Section 12(5), a Managing Director or any similarly ineligible authority cannot nominate an arbitrator.
  • The independence and impartiality of the arbitrator remain mandatory requirements before commencement of arbitral proceedings.
  • Arbitration proceedings are required to be concluded within the timeline prescribed under Section 29A of the Arbitration and Conciliation Act, 1996.

Important Judgments Referred

  • TRF Limited v. Energo Engineering Projects Limited (2017) 8 SCC 377
  • Bharat Broadband Network Limited v. United Telecoms Limited (2019) 5 SCC 755
  • Perkins Eastman Architects DPC v. HSCC (India) Limited (2020) 20 SCC 760
  • Ellora Paper Mills Limited v. State of Madhya Pradesh (2022) 3 SCC 1


Link to Download the Order

https://www.mytaxexpert.co.in/uploads/1785403045_2372compressed.pdf

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