Law on appointment of arbitrator | What happens if parties fail to agree on arbitrator within 30 days from receipt of request by one party? Del HC explains

Delhi High Court: Sanjeev Narula, J., allowed an arbitration petition by appointing a sole arbitrator to adjudicate the disputes between the contesting parties.

Instant petition sought appointment of a Sole Arbitrator to adjudicate the disputes that were stated to have arisen under a Settlement Agreement containing an arbitration agreement.

Facts in a Nutshell

Sellers hold the complete shareholding in petitioner 1 company.

Buyers and Sellers entered into a Memorandum of Understanding for transferring the seller’s shareholding in petitioner 1 company to the buyers for a consideration of Rs 84.43 crores.

Under the terms of the MoU, initial payments were made by the Buyers in favour of the Sellers. Thereafter, the Buyers defaulted, and cheques issued by them were dishonoured. Sellers issued legal notices to the Buyers for breaches of the terms of the MoU and sought specific performance thereof. In some cases, the Sellers even proceeded under Section 138 of the Negotiable Instrument Act, 1881.

Further, a Settlement Agreement was entered into between all the Petitioners and Respondents (except Respondent 3) wherein it was agreed that the MoU stood terminated and cancelled and the parties would be restored to pre-MoU status, thereafter the buyers claimed a refund of Rs 21 crores from the sellers and in return offered re-possession of the project land.

Petitioners vide notice invoking arbitration, called upon the contesting Respondents to pay compensation to the tune of Rs. 25 crores, or in alternative, settle disputes in terms of the Clause 11 of the Settlement i.e., through arbitration mechanism.

On receiving no response from the respondent’s present petition was filed.

Respondent’s contentions:

  • Claims urged by the Sellers are barred by limitation, and hence, should not be referred to arbitration.
  • The claims sought to be referred to arbitration, arise under the MoU and not under the Settlement.

Analysis, Law and Decision

Whether court should refuse to refer the disputes to arbitration on account of non-arbitrability of disputes?

In Court’s opinion, respondent’s objection with regard to arbitrability of claims is an aspect that has to be agitated before the Arbitral Tribunal.

Prima facie, the contesting Respondents were correct in contending that in light of execution of the Settlement, the MoU stood cancelled and ceased to exist, and therefore, no claim could arise from a cancelled agreement.

Court stated that it was an admitted position that payments were partially made under the Settlement, by way of cheques. It can also not be denied that the contesting Respondents did not receive entire payment under the MoU as they had admittedly initiated criminal proceedings under the Negotiable Instrument Act, 1881 on account of dishonour of cheques.

Sellers contended that the Settlement was executed under coercion.

Factual Dispute:

Whether the settlement was executed under duress or coercion; whether payments under the Settlement were due or not whether claims against the contesting respondents were barred under Section 62 of the Indian Contract Act, 1872 in view of the novation of contract?

Court found no merit in the arguments by the contesting respondents.

Whether court should refuse to refer the disputes to arbitration on account of being barred by limitation?

Limitation is a mixed question of fact and law.

In the Supreme Court decision of Indian Farmers Fertilizers Cooperative Ltd. v. Bhadra Products, (2018) 2 SCC 534,  Supreme Court held that the issue of limitation, being a jurisdictional issue, should be left to be decided by the Arbitral Tribunal under Section 16 of the Act, the said is based on the principle of “kompetenz-kompetenz” which favoured minimum judicial intervention at the pre-reference stage.

Recently, the Supreme Court in BSNL v. Nortel Networks, (2021) 5 SCC 738      observed that only in very limited category of cases, where there is not even a vestige of doubt that the claim is ex facie time barred, or that the dispute is non-arbitrable, should a Court decline to make reference to an Arbitrator. However, at the same time, the Supreme Court also added a cautionary note that if there is even the slightest doubt, the rule is to refer the disputes to arbitration, otherwise it would encroach upon what is essentially a matter to be determined by the Tribunal.

Bench noted that the parties are undoubtedly at loggerheads since they have ongoing criminal litigations against each other.

Petitioners gave an explanation that they did not have any occasion to invoke arbitration prior to such date, since they received a copy of the Settlement Agreement only in the cheque bouncing proceedings initiated by the contesting respondents. From the said date when they gained knowledge, the invocation was within time.

Thus, the question of limitation was indeed a question of both fact and law.

Hence, the genuineness of the parties’ stand was a matter of trial, and the Court found the question of limitation in the instant matter to be disputed. Court did not find the instant case to be falling in the exceptional category of cases set out in the BSNL v. Nortel Networks, (2021) 5 SCC 738      where, on a prima facie basis, the Court concluded that the petition was ex facie barred by limitation.

Accordingly, Justice J.R. Midha, (Retd.) Former Judge of this Court was appointed as the Sole Arbitrator to adjudicate the disputes between the parties.

High Court allowed the present petition in view of the above. [Pooja Infotech (P) Ltd. v. Prabhuprem Infotech (P) Ltd., 2021 SCC OnLine Del 4749, decided on 21-10-2021]


Advocates before the Court:

For the Petitioners:

Sanjay Goswami, Advocate

For the Respondents:

Mr. Sanat Kumar, Senior Advocate with Mr. Sanjay Sharma Darmora, Advocate for Respondent No. 1-4. Mr. Pawan Kumar Mittal, Advocate for Respondent No. 5.

Mr. Akhil Sachar, Advocate for R-6.

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