Arbitration clause wherein a party is forced to choose an arbitrator from a panel decided by another party falls foul of Section 12(5) r/w Schedule VII of A&C Act
The Hon’ble Bombay High Court vide its judgment dated 27.01.2023 in the matter of “PSP Projects Limited vs. Bhiwandi Nizampur City Municipal Corp., Arbitration Petition No. 89/2021” had the occasion to decide whether arbitration clauses which force a party to the agreement to choose an arbitrator from within a small panel already decided by the other party are in consonance with Section 12(5) r/w Schedule VII of the Arbitration & Conciliation Act (hereinafter referred to as the ‘Act’) or run contrary to it.
Brief Facts:
The Petitioner was a successful bidder in a tender floated by the Respondent for construction of dwelling units for economically weaker section s under the Pradhan Mantri Awas Yojna at Bhiwandi. Thereafter, the Petitioner and the Respondent entered into an agreement which also had an Arbitration Clause i.e. Clause 25 of the agreement.
Clause 25 of the agreement specified that the Petitioner would appoint its nominee on the Arbitral Tribunal from a panel of five names to be provided by the Respondent and the Respondent would then appoint its nominee from the panel and further that the two Arbitrators would choose the third Arbitrator.
Subsequently when disputes arose, the Petitioner invoked the Arbitration Clause of the agreement vide notice dated 30.07.2021 vide which the Petitioner proposed a name of a Sole Arbitrator instead of adhering to the mechanism under Clause 25 as the Petitioner was of the opinion that Clause 25 fell foul of Section 12(5) r/w Schedule VII of the Act. However, when the Respondent declined to appoint a sole arbitrator and insisted on following the mechanism prescribed under Clause 25 of the agreement, the Petitioner filed a Petition under Section 11(6) of the Act for appointing a sole arbitrator.
Analysis of the Judgment:
The Hon’ble Bombay High Court vide its judgment dated 27.01.2023 partly allowed the Arbitration petition and held that the arbitration clause i.e. Clause 25 of the above-mentioned agreement was vitiated as it was hit by Section 12(5) r/w Schedule VII of the Act. However, the court went on to appoint an arbitral tribunal of three members instead of acceding to the prayer of the Petitioner for appointment of a sole arbitrator.
The Hon’ble Bombay High Court relied upon the judgment of the Apex Court in “Voestalpine Schienen GMBH Vs. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 655” wherein the arbitration clause which was identical to the arbitration clause in the present case was held to be vitiated as it ran contrary to Section 12 (5) r/w Schedule VII of the Act. In the above-mentioned case, the Apex court held that the choice for the Petitioner stood restricted as it had to choose an Arbitrator nominee from a panel of only five people chosen by the Respondent which meant that there was no free choice to nominate a person out of a large and diverse panel. Additionally, the fact that the Respondents were getting to choose the five persons left a room for suspicion in the mind of the Petitioner that the Respondent may have picked up its own favourites. Thus, The Hon’ble Bombay High Court after a combined reading of Voestalpine Schienen GMBH Vs. Delhi Metro Rail Corporation Ltd. (Supra.) and “Perkins Eastman Architects DPC & Anr. vs HSCC (India) Ltd., (217) 8 SCC 377” found the arbitration clause i.e. Clause 25 in the present matter to be vitiated as it was hit by Section 12(5) read with Seventh Schedule to the said Act.
The Hon’ble Bombay High Court further held that the judgment of “Central Organization For Railway Electrification vs M/s. ECI-SPIC SMO-MCML (JV) A Joint Venture Company, (2020) 14 SCC 712” which upheld the validity of an arbitration clause which enabled the first party to forward four names to the other party to choose their arbitrator nominee from was not helpful in the present case as it was distinguishable on facts from the present case. In the case of Central Organization For Railway Electrification vs M/s. ECI-SPIC SMO-MCML (JV) A Joint Venture Company (Supra.), the arbitration clause was not identical to the present case and was such that the power to choose was counterbalanced between both the parties to the agreement and therefore, such an Arbitration Clause was not vitiated. However, in the present case, the Petitioner had no real power to choose and hence, the arbitration clause of the present case stood vitiated as it ran contrary to Section 12(5) r/w Schedule VII of the Act.