The Delhi High Court, led by Justice Jyoti Singh, ruled that the appointment of a sole arbitrator by the Managing Director of Respondent No. 1 in case of failure to mutually appoint one violates established legal principles and Supreme Court directives. The ruling was issued in the case of Ballarpur Industries Limited vs. SG Enterprises & Ors., under O.M.P. (T) (COMM.) 40/2024.
The case stemmed from a dispute between the petitioner and Respondent No. 1, arising out of a Distribution Agreement dated 01.07.2009 related to stationery product distribution. Clause 20 of the agreement allowed for mutual appointment of a sole arbitrator, but in case of a deadlock, authorized the Managing Director of Respondent No. 1 to appoint one.
"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."
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The petitioner challenged the arbitrator's appointment under Section 14(1)(a) of the Arbitration and Conciliation Act, 1996, citing violation of party autonomy and impartiality principles established in landmark Supreme Court rulings including Perkins Eastman Architects DPC v. HSCC (India) Ltd. and Central Organisation for Railway Electrification v. ECI SPIC SMO MCML JV.
Disputes had previously led to a Title Suit (No. 1228/2018) in Alipore Civil Court, which later referred the matter to arbitration in 2022. However, when the petitioner failed to respond to the arbitrator proposal, Respondents unilaterally appointed one without seeking court intervention under Section 11(6) of the Act.
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The High Court also considered that the appointment occurred during the moratorium period under Section 14 of the Insolvency and Bankruptcy Code (IBC), which expressly prohibits continuation or initiation of arbitral proceedings.
"Under Section 14(1)(a), the Arbitrator becomes de jure incapable of continuing when appointment is made in violation of law and impartiality norms."
The petitioner further argued that claims by the respondents stood extinguished as they failed to file them during the Corporate Insolvency Resolution Process (CIRP). The approved Resolution Plan by Finquest Financial Solutions Pvt. Ltd. clearly indicated that claims prior to 17.01.2020 were extinguished.
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While the Respondents’ counsel admitted the unilateral appointment was legally unsustainable, they contested the extinguishment of claims. The Court, however, refrained from ruling on that issue and left it open for determination in any future proceedings.
"This Court has not expressed any opinion on the extinguishment of claims. The parties are free to initiate fresh arbitration as per law," the bench clarified.
Consequently, the High Court terminated the mandate of the arbitrator and disposed of the petition and related applications.
Case Title: BALLARPUR INDUSTRIES LIMITED versus SG ENTERPRISES & ORS.
Case Number: O.M.P. (T) (COMM.) 40/2024 & I.A. 9891/2024
For Petitioner: Mr. Kaustubh Prakash, Ms. Hita Sharma and Ms. Tanya Singh, Advocates.
For Respondents: Mr. Keshav Gulati and Mr. Rangon Choudhary, Advocates.
