Notice sent Invoking Arbitration Agreement u/s 21 of Arbitration Act is Valid Invocation: Delhi HC [Read Order]

Prism Johnson Ltd, the Petitioner filed petition under Section 11(4)(a) and (6) of the Arbitration and Conciliation Act, 1996 (‘1996 Act’) for appointment of nominee Arbitrator of the Respondent Company to adjudicate the inter se disputes between the parties.

In the year 2017, Respondent approached the Petitioner for procuring ready-mix concrete for a Thermal Power Project ‘Obra C Extension Thermal Power Station’ in Uttar Pradesh. Petitioner and Respondent entered into a Sub-Contract dated 08.07.2017 for the said project, under which Petitioner agreed to carry out works for consideration and on the terms and conditions specified therein.

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Respondent issued a Purchase Order dated 25.07.2017, as per which Petitioner was required to supply 2,68,798 cum of ready-mix concrete to the Respondent. During the contract period, apart from agreed quantity of 2,68,798 cum, Petitioner on demand from the Respondent from time to time, supplied additional quantities also, in respect of which revised Purchase Order was issued on 07.07.2020. Revised purchase order was, however, not acceptable to the Petitioner and thus, it was mutually agreed that the concrete will be supplied as per terms of the original sub-contract.

It is averred that for the first time, vide its letter dated 16.09.2021, Respondent raised frivolous claims towards penalties, interest, liquidated damages, extra material etc., which were refuted by the Petitioner vide letter dated 17.09.2021. At the same time, Petitioner sent a demand notice dated 30.12.2021 to the Respondent for payment of unpaid operational debt under Section 8 of Insolvency and Bankruptcy Code, 2016 (‘IBC’).

By letter dated 28.02.2022, Respondent admitted that as on 31.12.2021, a sum of Rs.9,23,99,780.71/- towards running accounts and Rs.81,25,299/- towards retention monies was due and payable to the Petitioner. Petitioner filed a petition under Section 9 of IBC, being Company Petition (IB)-474(ND)2022 before NCLT, Delhi against the Respondent, which was dismissed on 03.03.2023, against which Petitioner approached NCLAT in Company Appeal (AT)(INS) No.570/2023, which is stated to be pending for final hearing.

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It is further averred that the contract between the parties contains Arbitration Clause 25 in the General Terms of Conditions (‘GTC’) and since disputes had arisen, Petitioner sent a notice dated 13.09.2024 to the Respondent under Section 21 of 1996 Act invoking the arbitration agreement. By a subsequent letter dated 08.10.2024, Petitioner nominated its Arbitrator and intimated the same to the Respondent, however, vide letter dated 11.10.2024, Respondent refused to nominate its nominee Arbitrator stating that the invocation notice by the Petitioner was contrary to Clause 25(b) of GTC as amended by Special Terms and Conditions (‘STC’), providing that disputes shall be settled by arbitration in accordance with Rules of Domestic Commercial Arbitration of the Indian Council of Arbitration (‘ICA Rules’) and was therefore non-est with no legal consequence.

Since period of 30 days passed without the Respondent nominating its Arbitrator or in the alternative amicably resolving the disputes by conciliation, Petitioner approached this Court for appointment of nominee Arbitrator of the Respondent in terms of the Arbitration Clause which envisages constitution of three-member Arbitral Tribunal. Respondent filed its reply refuting the case of the Petitioner on merits and without prejudice thereto, raising preliminary objection to the maintainability of the petition having been filed in breach of the Arbitration Agreement between the parties and the ICA Rules.

Senior Counsel for the Respondent argued that the invocation notice dated 13.09.2024 was itself invalid as there was no commencement of arbitration by the Petitioner in accordance with the procedure agreed between the parties. Parties to the lis had expressly agreed that arbitration will be commenced by a formal notice under ICA Rules. Invocation notice was non-compliant with the ICA Rules and Petitioner also failed to intimate the ICA of the purported commencement of arbitration.

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Present petition has been filed by the Petitioner on the strength of Clause 25(g) of GTC glossing over the fact that sub-Clauses (a) and (b) of Clause 25 itself envisage a three-step procedure for appointment of the Arbitrator, whereby parties have to first try and settle their disputes amicably and should they fail, the disputes shall be settled in accordance with the procedure laid down in the ICA Rules. Rule 15 of ICA Rules prescribes the manner in which arbitration is to be commenced and postulates that a notice in writing is to be given to the Registrar, ICA, requesting for arbitration, accompanied by details/documents provided under Rule 15(ii). Simultaneously, notice is required to be sent to the Respondent.

It was contended that a petition under Section 11(6) of 1996 Act is maintainable only if the party which is recipient of the invocation notice fails to act in accordance with the procedure of appointment agreed upon between the parties. There is an obvious presumption in the provision that party seeking appointment has itself followed the agreed procedure of appointment of Arbitrator and thus where the party itself does not follow the agreed procedure, it would have no locus standi to approach the Court and seek appointment under Section 11(6) of 1996 Act.

It was submitted on behalf of the Petitioner that since Respondent has failed to nominate its Arbitrator under Clause 25(g) of GTC, this Court may appoint Respondent’s nominee Arbitrator so that both the Arbitrators can appoint the Presiding Arbitrator and constitute the Arbitral Tribunal envisaged in the said Clause.

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Petitioner seeks appointment of Respondent’s Arbitrator alleging failure of the Respondent to act in terms of the arbitration Clause 25(g) of GTC. Respondent opposes the petition on the ground that in the absence of valid invocation/commencement of the arbitration, there is no failure on the part of the Respondent and hence, the jurisdiction of this Court to appoint the nominee Arbitrator of the Respondent under Section 11 of 1996 Act is not attracted.

The Supreme Court in Delta Mechcons held that it is open to the parties while entering into an arbitration agreement to provide as to how the Arbitral Tribunal should be constituted and it is also open to them to provide the rules to be followed. The arbitration agreement as read, reserved the rights of the parties to nominate their Arbitrators, stipulating further that the two Arbitrators would appoint the third Arbitrator to act as the Chairman. It was also agreed that arbitration will be conducted in accordance with the ICC Rules.

The Supreme Court held that in light of this arbitration agreement, there was no obligation on the parties to undertake before ICC, to have the arbitration in accordance with its procedure and Rules including the constitution of the Arbitral Tribunal, for ICC to appoint the Chairman of the Arbitral Tribunal. It was observed that the process of settlement of disputes through arbitration is a process of settlement extra cursum curiae and the parties are at liberty to choose their judge and in the case on hand, parties had provided the manner of constituting the Arbitral Tribunal.

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Referring to Rule 4(c) of ICA Rules and the judgment of the Supreme Court in C.M.C. Ltd. (supra), the Court held that since parties had agreed on a procedure substantially different from the procedure envisaged in the ICA Rules for constitution of the Arbitral Tribunal, there was no requirement of invoking/commencing arbitration in terms of ICA Rules and the notice sent by the Petitioner to the Respondent under Section 21 of 1996 Act would be valid invocation and Respondent could not insist that the Petitioner should take recourse to ICA Rules to invoke arbitration.

A single bench of Justice Jyoti Singh held that there was no requirement for the Petitioner to resort to Clause 25(c) of GTC to formally notify the ICA for appointment of the Arbitrator and the notice sent by the Petitioner to the Respondent on 13.09.2024, invoking arbitration agreement under Section 21 of 1996 Act is valid invocation.

Existence of the arbitration agreement is not disputed by the Respondent. Respondent has clearly failed to nominate its Arbitrator in response to the notice of invocation and this confers jurisdiction on the Court to appoint the nominee Arbitrator of the Respondent.

The court allowed the petition and has nominated Mr. Justice Krishna Murari, former Judge of the Supreme Court as a nominee

Arbitrator.

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