Managing Director's Power to Nominate Sole Arbitrator Found Ineligible; Mandate Terminated and Matter Referred to DIAC

A bench of Justice Manoj Misra and Justice Ujjal Bhuyan heard appeals against a Delhi High Court order that had rejected petitions under Section 14(2) of the Arbitration and Conciliation Act, 1996 seeking termination of the mandate of a sole arbitrator appointed under a contractual clause which empowered the respondent company's Managing Director to nominate the sole arbitrator. The appeals arose from SLP (C) Nos. 7161-7162 of 2018.

The Court allowed the appeals, held that a clause permitting one party's Managing Director to unilaterally nominate a sole arbitrator gave rise to justifiable doubts as to independence and impartiality, and terminated the mandate of the arbitrator appointed under that clause. The Court relied on its earlier decisions in TRF Ltd. v. Energo Engg. Projects Ltd., and the Constitution Bench decision in Central Organization for Railway Electrification v. ECI SPIC SMO MCML (JV), which affirmed that a person who is ineligible to be appointed as an arbitrator under Section 12(5) and paragraph 5 of the Fifth Schedule could not validly nominate a sole arbitrator. The Court, in its reasoning, observed: “In TRF (supra), this Court had held that if a person cannot be appointed an arbitrator being ineligible by operation of law, he cannot nominate another as a sole arbitrator. The Constitution Bench has upheld the view taken in TRF (supra). In such circumstances, since managing director of a company would be ineligible for being appointed as an arbitrator in view of Section 12 (5) read with paragraph 5 in the Fifth Schedule to the 1996 Act, he would be ineligible to nominate a sole arbitrator. Accordingly, we allow the appeals and terminate the mandate of the sole arbitrator nominated by the Managing Director of the respondents. In consequence, we refer the matter to the Delhi International Arbitration Centre for nominating a suitable Arbitrator for resolution of the dispute inter se the parties.”

Background The dispute arose from a subcontract work order which contained Clause 9.03 providing for settlement of disputes by a "Sole Arbitrator to be nominated (including nomination of replacement of Arbitrator, if necessitated by vacancy of the post caused by any reason whatsoever) by the Managing Director of the First Party, New Delhi." The appellant, Bhayana Builders Pvt. Ltd., challenged the continued mandate of the sole arbitrator appointed by the Managing Director of the respondent Oriental Structural Engineers Pvt. Ltd., filing O.M.P. (T) (COMM) Nos. 101 and 105 of 2017 under Section 14(2) of the 1996 Act for termination of that mandate and for appointment of an arbitrator by the Court. The High Court rejected the petitions. Relying on TRF and subsequent authorities, the appellant contended that the unilateral nomination clause created a justifiable doubt as to the arbitrator's independence and impartiality and that the Managing Director was ineligible under Section 12(5) read with paragraph 5 of the Fifth Schedule to act as an arbitrator or to nominate one.

Counsel for the respondents did not dispute that the Constitution Bench decision in CORE squarely applied. The Supreme Court agreed that the TRF principle was affirmed by the Constitution Bench and held that where the nominating person was ineligible by law to be an arbitrator, he could not validly nominate a sole arbitrator. The Court allowed the appeals, terminated the mandate of the arbitrator nominated by the Managing Director, and directed reference of the matter to the Delhi International Arbitration Centre (DIAC) to nominate a suitable arbitrator for resolution of the dispute. Pending applications were disposed of.

Case Details: Case No.: 2025 INSC 1073 (Arising out of SLP (C) No(s).7161-7162/2018) Case Title: Bhayana Builders Pvt. Ltd. v. Oriental Structural Engineers Pvt. Ltd. & etc. Appearances: For the Petitioner(s): Not indicated in the judgment For the Respondent(s): Not indicated in the judgment