Delhi High Court: Arbitral Institution Membership Not Mandatory For Invoking Arbitration

Delhi High Court: Arbitral Institution Membership Not Mandatory for Invoking Arbitration

The Delhi High Court has ruled that membership of an arbitral institution cannot be mandated as a prerequisite for initiating arbitration.

Justice Sachin Datta has observed that when parties decide to settle their dispute through an arbitral institution, such an agreement should not be interpreted to imply that they have consented to become members of that institution.

The court determined that requiring membership in an arbitral institution undermines the validity of the appointment process and constitutes a failure to fulfill the function delegated to such an institution. Consequently, in such circumstances, the court affirmed that appointments would be carried out by the court pursuant to Section 11(6) of the Arbitration and Conciliation Act.

The respondent issued bids for a project on March 31, 2017. The petitioner was chosen as the successful bidder, and on November 16, 2017, the parties entered into an agreement. Clause 26 of the agreement stipulated that all the disputes would be resolved under the purview of the Society for Affordable Redressal of Disputes (SAROD).

Disputes emerged concerning payment for completed work, the availability of unencumbered land, deductions for liquidated damages, and alleged losses stemming from project delays. The petitioner utilized the dispute resolution clause and forwarded the dispute to the project engineer for conciliation.

Following the unsuccessful conciliation attempt, the petitioner activated the arbitration clause and urged the respondent to designate its chosen arbitrator. However, as the parties could not agree on the composition of the tribunal, the petitioner sought the court's intervention under Section 11(6) of the Arbitration and Conciliation Act.

The respondent objected to the maintainability of the petition on the following grounds:

i. The parties had agreed to resolve their dispute through SAROD; hence, the appointment of the arbitrator must adhere exclusively to SAROD Rules.

In response, the respondent made the following counter-submissions:

i. The agreement did not stipulate SAROD membership as a requirement for arbitration. Clause 26 of the agreement merely referred to SAROD rules for arbitration procedures, not membership.

ii. As they were not SAROD members and had no intention to become ones, enforcing SAROD rules for arbitration was impractical and should not be obligatory.

iii. Since the petitioner cannot initiate arbitration under SAROD Rules due to a lack of membership, the appointment must be made under Section 11(6).

The Court joined SAROD as a party to determine whether Rule 4.4 of the SAROD Arbitration Rule constituted a mandatory requirement to access its services. SAROD apprised the Court that primary membership with SAROD is indeed necessary for a party to initiate arbitration proceedings.

The Court noted that while the agreement stipulated arbitration through SAROD, it did not mandate membership as a prerequisite. It affirmed that when parties opt to resolve disputes through an arbitral institution, such a choice does not inherently imply consent to become members of that institution.

The Court ruled that imposing a requirement for membership would impose an additional obligation not expressly agreed upon by the parties, thereby impacting the validity of the agreement and the arbitration process.

The Court determined that SAROD's requirement for membership as a prerequisite for arbitration lacked validity, as it would undermine the agreement's integrity and the arbitration process. Consequently, the Court was compelled to appoint an arbitrator under Section 11(6)(c) of the Arbitration and Conciliation Act.

The Court further ruled that in the absence of a specified number of arbitrators in the agreement, it must be inferred that the parties intended to appoint a sole arbitrator.

In accordance with these findings, the Court granted the petition and designated a sole arbitrator.