Arbitration Clause Allowing MD To Appoint Sole Arbitrator After Failure Of Appointment By Mutual Consent Violates SC's Order: Delhi High Court

It further held that the Company acting through its Managing Director will have interest in the outcome of the dispute and therefore, appointment of Sole Arbitrator will be directly hit by the law laid down by the Supreme Court. Party autonomy as also impartiality and independence of the Arbitrator appointed to adjudicate inter se disputes between the parties are the foundational pillars of arbitration.

Brief Facts:

This petition is filed on behalf of the Petitioner under Section 14(1)(a) of the Arbitration and Conciliation Act, 1996 ('1996 Act') seeking termination of the mandate of the learned Sole Arbitrator.

Petitioner and Respondent No. 1 entered into a Distribution Agreement on 01.07.2009 for distribution of stationery products of the Petitioner. The Distribution Agreement contained an arbitration clause 20.

During business dealings, disputes arose as the Petitioner claimed dues while Respondent No. 1 alleged excess payments. Respondent No. 1 filed Title Suit No. 1228/2018 before the Civil Judge, Alipore. On 08.06.2019, the Petitioner's erstwhile management filed an application under Sections 5 and 8 of the Arbitration and Conciliation Act, 1996, seeking reference to arbitration.

Meanwhile, on 17.01.2020, NCLT, Mumbai initiated CIRP against the Petitioner and imposed a moratorium under Section 14 of the IBC. On 02.05.2022, the Civil Judge referred the dispute to arbitration and disposed of the suit, allowing the parties to appoint an arbitrator. Respondents proposed an arbitrator via letter dated 27.06.2022, but receiving no response from the Petitioner, they unilaterally appointed a Sole Arbitrator without following the procedure under Section 11(6).

On 15.07.2022, the Arbitrator entered reference and, on 24.09.2022, forfeited the Petitioner's right to file a Statement of Defence, contrary to Section 14 of the IBC. Upon learning of the proceedings, the Petitioner, through the Resolution Professional, wrote to the Arbitrator on 10.10.2022 requesting a halt.

Meanwhile, Finquest's Resolution Plan was approved. On 05.03.2024, the Arbitrator issued notice to Finquest on Respondents' request for impleadment. The new management sought arbitral records on 15.03.2024 and appeared before the Arbitrator on 04.04.2024, objecting to her unilateral appointment, but the proceedings continued.

The petitioner seeks termination of the Arbitrator on the ground that the appointment is a unilateral appointment by the Respondents in the teeth of the judgments of the Supreme Court in Perkins Eastman Architects DPC and Another v. HSCC (India) Limited, (2020) and Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV) A Joint Venture Company.

It was further submitted that arbitration clause 20 provides that the Arbitrator would be appointed by mutual consent of the parties and in case of failure to do so, Arbitrator would be appointed by the Managing Director of Respondent No. 1, which cannot be sustained, as appointment by the Managing Director would clearly be a unilateral appointment and against the principles of party autonomy, impartiality and independence of the Arbitrator.

The Petitioner further submitted that the arbitral proceedings are non-est as the Arbitrator entered upon reference during the subsistence of the moratorium under Section 14 of the IBC, which expressly bars the initiation or continuation of arbitration. Moreover, the Arbitrator acted illegally by proceeding with the matter and forfeiting the Petitioner's right to file its Statement of Defence.

Lastly, it was submitted that a bare perusal of Clauses 4.7.1 and 4.7.3 of the Resolution Plan indicates that Respondent No. 1 failed to file its claims during the CIRP process and therefore, the alleged liability of the Petitioner arising in relation to the period prior to 31.03.2023 and purported dues for the period prior to 17.01.2020 are deemed to be extinguished and in this light, Respondents cannot even resort to fresh arbitration proceedings for agitating these claims.

The Respondent strongly denies the Petitioner's claim that the arbitral claims stand extinguished and submits that the issue be left open for determination in any future arbitration, a proposal to which the Petitioner's counsel has no objection.

Observations:

The court observed that a unilateral appointment by an interested party is legally impermissible. Although the arbitration clause requires mutual consent, it empowers the Managing Director of Respondent No. 1 to appoint a Sole Arbitrator upon failure—an individual clearly interested in the dispute's outcome.

It further added that such an appointment violates the Supreme Court's mandate emphasizing party autonomy, impartiality, and independence in arbitration. Consequently, the appointment is unsustainable. Further, under Section 14(1)(a) of the Arbitration Act, the Arbitrator's mandate stands terminated de jure, as she is legally incapable of continuing.

The court concluded that ordinarily, this Court may have appointed a substitute Arbitrator. However, given the disputed issue regarding the extinguishment of Respondents' claims under the IBC regime, the parties are left to pursue further proceedings for appointment of an Arbitrator as per law. It is clarified that the Court has not expressed any view on the merits or on the Petitioner's objections regarding extinguishment of claims.

Accordingly, the present application was disposed of.

Case Title: BALLARPUR INDUSTRIES LIMITED versus SG ENTERPRISES & ORS.

Citation: 2025 LiveLaw (Del) 693

Case Number: O.M.P. (T) (COMM.) 40/2024 & I.A. 9891/2024

Judgment Date: 16/05/2025

For Petitioner: Mr. Kaustubh Prakash, Ms. Hita Sharma and Ms. Tanya Singh, Advocates.

For Respondents: Mr. Keshav Gulati and Mr. Rangon Choudhary, Advocates.