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The Supreme Court of India ruled that even if the agreed appointment process in an arbitration clause is invalid, the arbitration agreement remains enforceable, and courts can appoint an arbitrator
I. Introduction
The Supreme Court of India has recently delivered an important judgment in Offshore Infrastructures Limited v. Bharat Petroleum Corporation Limited ("BPCL"), further clarifying the law on arbitrator appointments under the Arbitration and Conciliation Act, 1996 ("the Act"). This decision builds on recent precedents ending unilateral arbitrator appointments and confirms the validity of arbitration agreements even when appointment mechanisms become inoperative due to statutory changes.
II. Background
The dispute arose from a contract for works at a refinery, awarded to Offshore Infrastructures Limited. The General Conditions of the Contract ("GCC") named the Managing Director of BPCL or their nominee as the sole arbitrator. After completion of the works, disputes arose between the parties over payments due, and the Appellant invoked arbitration.
On 14 June 2021, the Appellant issued a notice to the Managing Director of the Respondent, requesting the appointment of an arbitrator as per Clause 8.6 of the GCC. Recognising that neither the Managing Director nor any officer of the Respondent was eligible to act as arbitrator following the 2015 amendments to the Act, the Appellant requested the Respondent to suggest a list of at least four qualified, independent persons to be considered for appointment as sole arbitrator. The Respondent, however, refused to engage, arguing that the arbitration clause had become obsolete and refused to appoint an arbitrator.
The Appellant then filed an application under Section 11(6) of the Act before the High Court of Madhya Pradesh, seeking the appointment of a sole arbitrator. The High Court dismissed the application as time barred. The Appellant approached the Supreme Court. The Supreme Court considered the following issues:
- Whether the Court could appoint an arbitrator when the contractual mechanism had become inoperative?
- Whether the application was filed within the applicable limitation period?
III. Judgment
Appointment of arbitrators upon failure of agreed appointment mechanism
The central issue considered by the Supreme Court was whether the Court retained the power to appoint an arbitrator when the agreed appointment mechanism stipulated by the arbitration clause is rendered invalid by statutory amendments, specifically, Section 12(5) and the Seventh Schedule of the Act, which disqualify certain persons (such as employees or officers of a party) from acting as arbitrators and, as later interpreted by the court, even acting as appointing authorities.
The Supreme Court applied the principles set out in Perkins Eastman Architects DPC v. HSCC (India) Ltd. and TRF Ltd. v. Energo Engineering Projects Ltd., holding that once a named arbitrator (such as the Managing Director) becomes ineligible by operation of law, their power to nominate or appoint arbitrators is also extinguished. The Court further relied on Voestalpine Schienen GmbH v. DMRC Ltd., which underscored the legislative intent behind the 2015 amendments, to ensure the neutrality and impartiality of arbitrators, overriding any contrary stipulation in the arbitration clause.
Crucially, the Supreme Court rejected the argument that an inoperative appointment mechanism renders the entire arbitration agreement void. Instead, it held that the core agreement to arbitrate endures, and that courts are empowered under Section 11(6) of the Act to appoint an independent arbitrator when the agreed procedure fails or becomes invalid due to statutory changes. The Court emphasised that arbitration clauses should be interpreted purposively, not literally, to uphold the parties' intent to resolve disputes through arbitration rather than to defeat the mechanism altogether. Accordingly, the Supreme Court directed that the matter be referred to the Delhi International Arbitration Centre for appointment of an arbitrator, ensuring the dispute resolution process could proceed as intended.
This approach provides clarity following the judgment in Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV)., where the Supreme Court had effectively brought an end to unilateral appointments of arbitrators in India, including appointments by 'ineligible' persons, but applied the decision prospectively, leaving the treatment of arbitration agreements with inoperative appointment clauses to be tested in other cases. For a detailed discussion of that case, see our earlier blog post.
Limitation: When does the clock start?
The second issue before the Court was whether the application for appointment of an arbitrator was filed within the prescribed limitation period.
The Supreme Court examined its earlier decisions, reiterating that the limitation period for invoking arbitration is three years from the date when the cause of action arises, typically, when the final bill becomes due. Mere correspondence or reminders do not extend this period.
However, the Court recognised the exceptional circumstances created by the COVID-19 pandemic. Relying on its order in In Re: Cognizance for Extension of Limitation, excluding the period from 15 March 2020 to 28 February 2022 from the computation of limitation for all judicial and quasi-judicial proceedings, the Court found that the appellant's application under Section 11(6) of the Act fell within the limitation period.
IV. Comment
This judgment delivers useful certainty for commercial parties and those drafting arbitration agreements. By confirming that arbitration agreements remain enforceable where the original appointment mechanism fails after the statutory amendments, the Supreme Court has confirmed that parties are not left without a remedy as courts can step in to appoint an arbitrator. In this case, the Court referred the matter to the Delhi International Arbitration Centre to appoint the arbitrator, an indication of the increasing significance of arbitral institutions in India.
For commercial entities, this judgment means that outdated or non-compliant appointment clauses should not frustrate the arbitration process. It should also encourage the parties to reach agreement on the process of constituting the tribunal when the agreed mechanism has failed or otherwise facilitate appointment through the courts.
The authors would like to thank Adya Garg for her contribution to this post.
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