Delhi High Court Sets Aside Arbitral Award: Holds Unilateral Appointment of Arbitrators by Respondent Violated Section 12(5) of Arbitration Act, Ex Parte Proceedings Denied Petitioner a Fair Hearing, and Award Exceeded Contract Value

Court’s Decision

The Delhi High Court ruled in favor of the petitioner, setting aside an arbitral award that had been passed against it. The court held that:

1. The unilateral appointment of arbitrators by the respondent was invalid as it violated Section 12(5) of the Arbitration and Conciliation Act, 1996.
2. The arbitrators, who were senior officials of the respondent company, were not impartial and their appointments did not follow the contractual arbitration clause.
3. The arbitral proceedings proceeded ex parte, depriving the petitioner of a fair opportunity to present its case.
4. The award granted damages exceeding the actual contract value, making it against public policy.

Given these reasons, the court allowed the petition under Section 34 of the Arbitration and Conciliation Act, 1996, setting aside the arbitral award in its entirety.

Facts

• The petitioner was awarded a contract by the respondent, a joint venture between NTPC (National Thermal Power Corporation) and SAIL (Steel Authority of India Ltd.).
• The contract was for raising an ash dyke (Lagoon-A) at Rourkela CPP-II (2 × 60 MW) power plant.
• The total contract value was ₹2,59,43,975, with a completion period of 12 months.
• The petitioner faced delays due to the respondent, as:
  • The work site was not handed over in time.
  • Drawings were delayed.
  • The rates for additional work were not finalized.
• The respondent, despite granting an extension of time, imposed liquidated damages on the petitioner and later terminated the contract on August 23, 2008.
• The petitioner, aggrieved by the termination, invoked arbitration under Clause 56 of the General Conditions of Contract (GCC).

Arbitration Clause (Clause 56 of GCC)

The arbitration clause stated that:

1. The General Manager/Business Unit Head of NTPC would act as the sole arbitrator.
2. If the General Manager was unable to act, the Chairman & Managing Director (CMD) of NTPC would appoint another arbitrator.
3. No other arbitrator could be appointed except as per this procedure.

Events Leading to Arbitration

1. The petitioner objected to the General Manager of the respondent acting as an arbitrator, as he was directly involved in contract execution and termination.
2. The petitioner requested the appointment of an independent arbitrator, but the respondent refused.
3. On June 14, 2011, the petitioner again requested an independent arbitrator, but the General Manager, Debasis Sarkar, assumed jurisdiction.
4. The petitioner filed a petition before the Orissa High Court under Section 11 of the Arbitration Act, seeking an independent arbitrator.
5. On October 5, 2012, the Orissa High Court kept the arbitration proceedings in abeyance.
6. On March 10, 2017, the Orissa High Court clarified that there was no stay on arbitration.
7. The petitioner did not file a Statement of Claim, but the respondent filed counterclaims on August 16, 2017.
8. On August 28, 2017, the arbitrator proceeded ex parte against the petitioner.
9. The final award was passed on December 13, 2017, directing the petitioner to:
   • Pay ₹1,35,60,291.34 with 10% simple interest from October 1, 2012, till the date of award and 18% from the date of the award till payment.
   • Pay ₹3 lakhs as arbitration costs.
10. The petitioner challenged the award under Section 34 of the Arbitration Act.

Issues Before the Court

1. Was the unilateral appointment of the arbitrator valid, or did it violate the principles of natural justice?
2. Was the automatic appointment of successive General Managers as arbitrators legal under the arbitration clause?
3. Did the arbitral tribunal proceed unfairly by conducting ex parte proceedings against the petitioner?
4. Was the arbitral award in excess of the contract value and against public policy?

Petitioner’s Arguments

1. Bias and Conflict of Interest:
   • The General Manager was directly involved in executing and terminating the contract.
   • This raised a justifiable apprehension of bias.
   • Despite objections, the same department’s officers continued to appoint successive arbitrators.
2. Violation of Arbitration Clause:
   • The arbitration clause required that if the named arbitrator could not act, the CMD of NTPC was to appoint a new arbitrator.
   • Instead, successive General Managers automatically assumed jurisdiction, violating the agreed procedure.
3. Unfair Ex Parte Proceedings:
   • The petitioner was denied a fair hearing.
   • The tribunal proceeded ex parte without valid justification.
4. Unreasoned and Excessive Award:
   • The award was unreasoned, failing to explain how the petitioner “abandoned” the contract.
   • The arbitrator awarded ₹2,05,66,441, while the balance work was only ₹1,84,78,029, making the award legally unsustainable.

Respondent’s Arguments

1. The petitioner failed to participate in arbitration despite the Orissa High Court’s clarification that there was no stay.
2. Unilateral appointments were legal before 2015, and the petitioner did not provide strong evidence of bias.
3. The petitioner had waived its right to object by failing to raise objections in time.

Analysis of the Law

1. Independence of Arbitrator Pre-2015 Amendment

• The court referred to:
  • Aravali Power Co. v. Era Infra Engg. Ltd. (2017)
  • Ellora Paper Mills Ltd. v. State of M.P. (2022)
• It held that even before 2015, unilateral appointments could be challenged if the arbitrator was directly involved in the contract.

2. Appointment of Arbitrators Contrary to Arbitration Clause

• Clause 56 of the GCC required the CMD of NTPC to appoint a new arbitrator in case of vacancy.
• However, successive General Managers assumed jurisdiction on their own, violating the contract.
• This made the arbitration proceedings non est (invalid).

3. Supreme Court Precedents

• The court relied on:
  • TRF Ltd. v. Energo Engg. Projects Ltd. (2017)
  • Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2019)
  • Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV) (2024).
• It held that unilateral appointments violate Article 14 of the Constitution and cannot be upheld.

Court’s Reasoning

1. Unilateral Appointments Were Invalid:
   • The General Managers of NTPC were directly involved in contract execution.
   • Their appointment violated Section 12(5) of the Arbitration Act.
2. Automatic Appointment of Arbitrators Was Illegal:
   • The arbitration clause did not permit automatic assumption of jurisdiction by successive General Managers.
3. Ex Parte Proceedings Were Unfair:
   • The arbitrator rushed to conclude the case without giving the petitioner a fair chance.
4. The Award Was Against Public Policy:
   • The arbitrator granted an excessive amount, exceeding the actual contract value.

Conclusion

The arbitral award dated December 13, 2017, was set aside because:

1. The arbitrators were unilaterally appointed, violating natural justice.
2. The appointment procedure under the contract was ignored.
3. The arbitrators were not independent or impartial.
4. The award was excessive and against public policy.

Outcome

• The petition was allowed, and the arbitral award was set aside.
• All pending applications were disposed of.

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