Lombardi Engineering Limited vs Uttarakhand Jal Vidyut Nigam Limited
Background
Lombardi Engineering, a Switzerland-based design consultancy, was engaged by a Uttarakhand government corporation (originally UPDCC, later taken over by Uttarakhand Jal Vidyut Nigam Limited) to prepare a detailed project report for a hydroelectric project. Disputes arose over unpaid dues and losses from an alleged abandonment of the contract, and Lombardi sought to invoke the arbitration clause. That clause, however, required the party raising a claim to pre-deposit 7% of the claimed amount, and gave the Principal Secretary (Irrigation), Government of Uttarakhand, effectively a nominee of the contract-granting authority itself, the sole power to unilaterally appoint the arbitrator. Lombardi approached the Supreme Court directly under Section 11(6) of the Arbitration Act asking the Court to appoint an independent arbitrator instead.
Decision Breakdown
The Supreme Court struck down both contested conditions in the arbitration clause. Relying on its earlier rulings in TRF Ltd. and Perkins Eastman Architects, it held that a person who is himself ineligible to act as arbitrator (such as an official of one of the contracting parties) also cannot be allowed to unilaterally nominate someone else as arbitrator, because this violates the principle that no one should be a judge in their own cause and undermines the neutrality the Arbitration Act guarantees to both sides. On the 7% pre-deposit requirement, the Court found it vague, unconnected to the contract's separate performance-security clauses, and arbitrary, potentially discouraging genuine claims, and noted that frivolous claims can already be deterred through cost orders under Section 31A of the Act rather than an upfront financial barrier. The Court accordingly ignored both clauses and directly appointed a former Chief Justice of the Sikkim High Court as the sole, independent arbitrator to hear the dispute.
Lesson Learnt
A contract clause that lets one party unilaterally pick the arbitrator, or that forces the claimant to pay a large deposit just to start arbitration, can be struck down as unfair and unconstitutional: arbitration is meant to be a neutral process, not one tilted in favour of whichever side wrote the contract.