Arbitral Institution Cannot Insist That Parties To Arbitration Agreement Must Take Its Membership As A Pre-Requisite For Taking Recourse To Arbitration: Delhi HC
The Delhi High Court observed that an Arbitration Institution cannot insist that the parties to the arbitration agreement must take membership of the said institution, as a pre-requisite for taking recourse to Arbitration.
The court held that membership in Society for Affordable Redressal of Disputes (SAROD), an Arbitration Institution cannot be insisted upon as a prerequisite for taking recourse to arbitration under its rules.
In the present case, a dispute arose between the Petitioner, Rani Construction Private Limited and Respondent, Union of India over an EPC agreement which was executed to work on NH-94 in the State of Uttarakhand.
It was alleged that the respondent failed to pay the legitimate dues of the petitioner against the executed quantities of work, it was unable to make available 90% of the land free from encumbrances at the time of declaration of the appointed date, deducted a substantial amount from the bills of the petitioner towards liquidated damages. It was further alleged that the petitioner sustained losses on account of prolongation of work etc.
Petitioner’s effort to resolve the dispute through conciliation failed. Hence, he sought redressal of the disputes between the parties through arbitration. Petitioner by letter proposed that the disputes be adjudicated by a three-member arbitral tribunal by the A&C Act, 1996 and sought to appoint the nominee arbitrator.
In his letter, he admitted that did not take recourse to the rules of the arbitration of (SAROD) provided under the EPC Agreement on the ground that the SAROD Arbitration Rules, specifically provide that Primary Membership of SAROD shall be a prerequisite for invoking arbitration under its rules.
On behalf of the Petitioner, Advocate Navin Kumar contended that since it is not a primary member of SAROD nor is it desirous of becoming a primary member of SAROD, is not entitled to invoke the arbitration under SAROD Rules therefore, the procedure prescribed in the Arbitration Agreement for constituting the arbitral tribunal became unworkable. Hence, he proposed by letter that a three-member arbitral tribunal be constituted under the Act.
Respondent pressed in the reply to the letter that the petitioner must invoke arbitration by SAROD Rules.
However, the petitioner reiterated that since the primary membership of SAROD is a prerequisite for invocation under the SAROD Rules, it was not in a position to take recourse to the SAROD Rules. Hence, the Petitioner filed the present petition seeking the constitution of the arbitral tribunal.
The Court noted that the contractual mechanism that is prescribed for the constitution of the arbitral tribunal as per SAROD Rules cannot be implemented unless and until both the petitioner and the respondent become members of SAROD.
According to the Court, the key issue is whether an arbitral institution, whose rules are chosen by the parties and tasked with forming the arbitral tribunal, can require the parties to the arbitration agreement to become members of the institution before proceeding as per their agreement.
The Court agreed with the contention of the Petitioner that the contractual stipulation whereby the parties agreed that the arbitration would be conducted as per the rules of arbitration of SAROD, did not carry with it an additional obligation that the parties would take primary membership of SAROD.
As per the Court, the petitioner is willing to pay the applicable fee to SAROD for the functions discharged by SAROD in terms of the arbitration agreement, however, it is not willing to take primary membership of SAROD.
The Court further found merit in the contention of the petitioner that an arbitration agreement under which the parties agree on conducting arbitration as per rules of a particular arbitral institution, cannot be construed as subsuming within it, an additional obligation to become member/s of that arbitral institution.
The Court observed that in this case, SAROD's insistence that parties must become SAROD members before proceeding with the arbitral tribunal formation process as per its rules violates the appointment procedure's validity. This action triggers Section 11(6)(c) of the A&C Act, 1996, requiring the Court to step in and constitute the arbitral tribunal since SAROD failed to fulfil its function as agreed upon by the parties.
The Court relied on the decision of the Supreme Court in Sime Darby Engg. SDN. BHD. v. Engineers India Ltd., (2009) 7 SCC 545, and observed that “as per Section 10(2) of the A&C Act, that where the number of arbitrators is not determined, the ArbitralTribunal shall consist of a sole arbitrator.”
Accordingly, the Court appointed the sole arbitrator and disposed of the petition.
Cause Title: Rani Construction Pvt. LTD. v. Union Of India (Neutral Citation: 2024:DHC:2321)
Appearance:
Appellant: Adv. Navin Kumar, Adv. Surbhi Aggarwal, Adv. Rashmeet Kaur, Adv. Aarti Mahto, Adv. Bhagya Ajith, Adv. Manoj Shete
Respondent: CGSC Nidhi Raman, Adv. Zubin Singh, Adv. Astha Sharma, Adv. Karan Jaiswal