The Supreme Court of India has reaffirmed a crucial principle of arbitration law, ruling that an individual who is ineligible to be an arbitrator due to a conflict of interest cannot nominate another person to act as a sole arbitrator. A bench comprising Justice Manoj Misra and Justice Ujjal Bhuyan set aside a Delhi High Court order and terminated the mandate of a unilaterally appointed arbitrator in a dispute between Bhayana Builders Pvt. Ltd. and Oriental Structural Engineers Pvt. Ltd.
The decision reinforces the legal position established in previous landmark judgments, ensuring the independence and impartiality of the arbitral process.
Background of the Case
The dispute originated from a work order sub-contract between the two companies, which contained an arbitration clause, Clause 9.03, for the settlement of disputes. The clause stipulated:
“9.03 Settlement of Disputes Any dispute arising of this sub-contract work shall be settled in terms of this work order. In case of failure to settle amicably, the dispute shall be finally resolved in accordance with the Arbitration and Conciliation Act, 1996 by 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 venue shall be New Delhi…”
Following this clause, the Managing Director of Oriental Structural Engineers Pvt. Ltd. nominated a sole arbitrator. Bhayana Builders Pvt. Ltd. challenged this appointment before the Delhi High Court, filing petitions under Section 14(2) of the Arbitration and Conciliation Act, 1996, seeking the termination of the arbitrator’s mandate. The High Court, in its order dated February 21, 2018, rejected the petitions. Bhayana Builders then appealed this decision to the Supreme Court.
Arguments Presented
Before the Supreme Court, the appellant, Bhayana Builders, argued that the case was squarely covered by the precedent set in TRF Ltd. vs. Energo Engg. Projects Ltd., (2017) 8 SCC 377. They further submitted that this position was affirmed by a Constitution Bench of the Supreme Court in Central Organization for Railway Electrification vs. ECI SPIC SMO MCML (JV), (2025) 4 SCC 641.
The appellant contended that these judgments clearly established that a clause allowing one party to unilaterally appoint a sole arbitrator gives rise to “justifiable doubts as to the independence and impartiality of the arbitrator.”
According to the judgment, the counsel for the respondent, Oriental Structural Engineers, “could not dispute that the instant case is squarely covered by Constitution Bench decision of this Court in ‘CORE (supra).”
Court’s Analysis and Final Decision
The Supreme Court bench analyzed the submissions in light of its previous rulings. The Court noted that in TRF (supra), it had held that if a person is legally ineligible to be appointed as an arbitrator, they are also disqualified from nominating another person as a sole arbitrator.
Upholding this principle, which was affirmed by the Constitution Bench, the Court stated, “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.”
Based on this clear legal position, the Supreme Court allowed the appeals and terminated the mandate of the sole arbitrator nominated by the Managing Director of the respondent company.
In consequence, the Court referred the matter to the Delhi International Arbitration Centre for the nomination of a suitable arbitrator to resolve the dispute between the parties.
