Delhi High Court Sets Aside ₹6.35 Crore Award Over Unilateral Arbitrator Appointment By Defence Ministry

The Delhi High Court has set aside a ₹6.35 crore arbitral award in favour of Goodrich Foodtech Ltd. in a dispute with the Ministry of Defence over contracts for supplying malted milk food with cocoa.

Justice Subramonium Prasad held that the unilateral appointment of the arbitrator by the Union through its Competent Financial Authority was invalid under Section 12(5) read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996.

The court found that the authority was part of the Ministry of Defence and an official of the Union of India, which was itself a party to the dispute.

The court observed, “the arbitrator shall be appointed by the Competent Financial Authority, who is a part of the Ministry of Defence, and thus, an official of the Petitioner/Union of India, who is a party to the dispute herein and as such, not qualified to appoint an arbitrator.”

The dispute arose from a Request for Proposal dated April 17, 2017, floated for the supply of malted milk food with cocoa under Defence Food Specification No. 51A. Goodrich emerged as the successful bidder for 1,390 metric tonnes for the 2017-18 consumption year.

The parties entered into five contracts through separate letters of acceptance issued on May 19, 2017. Deliveries were scheduled between June 2017 and March 2018. Goodrich furnished five performance bank guarantees totalling ₹2.49 crore.

The dispute began after the Union issued a defect notice on January 19, 2018. It alleged that Goodrich's product contained soya protein and non-milk fat, including palm oil, contrary to the contractual specifications. A show-cause notice followed on March 24, 2018.

The Union terminated four contracts on August 21, 2018. It also forfeited and encashed Goodrich's bank guarantees.

Goodrich challenged the termination before the High Court but withdrew its writ petition on October 12, 2018, with liberty to pursue alternative remedies.

Goodrich invoked arbitration on October 25, 2018. The contractual clause provided that disputes which could not be settled amicably could be referred to arbitration, with the arbitrator to be appointed by the Competent Financial Authority.

The sole arbitrator passed the award on April 27, 2022. It was modified on May 6, 2022. Goodrich was awarded ₹1.34 crore towards finished stock and unpaid supplies under one contract and ₹5.01 crore towards finished stock under another.

The arbitrator also directed refund of ₹2.41 crore towards the bank guarantees with 8% annual interest. Another 8% interest was awarded on the ₹6.35 crore granted under the first two claims, from the date of institution of the claims until payment.

The Union challenged the award under Section 34 of the Arbitration Act. During the final hearing, the court noticed that the arbitrator had been appointed unilaterally under the contractual mechanism.

Goodrich argued that it had itself asked the Competent Financial Authority to appoint the arbitrator. It also relied on its participation in the proceedings without objection, contending that this amounted to a waiver under Section 12(5).

The court rejected the argument. It held that waiver under Section 12(5) must be through an express written agreement after the dispute has arisen. Such waiver cannot be inferred from participation in the arbitration proceedings.

The court further held that even the party which made the unilateral appointment can challenge the appointment at the Section 34 stage.

In the present case, the court found no express written agreement between the parties waiving the ineligibility of the arbitrator. It therefore held that the appointment violated Section 12(5) read with the Seventh Schedule and was void ab initio.

“The appointment of the arbitrator is void ab-initio and renders the Impugned Award nullity,” the court observed.

The court accordingly allowed the Union's Section 34 petition and set aside the arbitral award.

For Petitioner (Union of India): CGSC Bhagvan Swarup Shukla, with Advocates Sarvan Kumar, Pradyumn Singh, Mukesh Kumar Pandey, Dashmesh Tripathi and Jyoti Yadav.

For Respondent (Goodrich Foodtech Ltd.): Senior Counsel Jayant Mehta and Senior Counsel Parthiv Goswami, with Advocates Deepanshu Jain, Shaantanu Jain and Jahanvi Khanna.