Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5760 OF 2009
(Arising out of SLP [C] No.26906 of 2008)
Indian Oil Corporation Ltd. & Ors. ... Appellants
vs.
M/s Raja Transport (P) Ltd. ... Respondent
JUDGMENT
R. V. Raveendran, J.
Leave granted. This appeal by special leave is filed against the
order dated 26.9.2008 of the learned Chief Justice of the Uttaranchal
High Court, in a petition filed by the respondent herein, under
section 11(6) of the Arbitration & Conciliation Act, 1996 (‘Act’ for short),
whereby he appointed a retired Judge as the sole arbitrator to adjudicate
upon the disputes between the parties.
2. Under an agreement dated 28.2.2005, the appellant appointed the
respondent as its dealer for retail sale of petroleum products. Clause 69 of
the said agreement provided for settlement of disputes by arbitration. The
said clause reads thus :
“69. Any dispute or a difference of any nature whatsoever or regarding
any right, liability, act, omission or account of any of the parties hereto
arising out of or in relation to this Agreement shall be referred to the
sole arbitration of the Director, Marketing of the Corporation or of
some officer of the Corporation who may be nominated by the Director
Marketing. The dealer will not be entitled to raise any objection to any
such arbitrator on the ground that the arbitrator is an officer of the
contract relates or that in the course of his duties or differences. In the
event of the arbitrator to whom the matter is originally referred being
transferred or vacating his office or being unable to act for any reason
the Director Marketing as aforesaid at the time of such transfer, vacation
of office or inability to act, shall designate another person to act as
arbitrator in accordance with the terms of the agreement. Such person
shall be entitled to proceed with the reference from the point at which it
was left by his predecessor. It is also a term of this contract that no
person other than the Director, Marketing or a person nominated by
such Director, Marketing of the Corporation as aforesaid shall act as
arbitrator hereunder. The award of the arbitrator so appointed shall be
final, conclusive and binding on all parties to the Agreement, subject to
the provisions of the Arbitration Act, 1940 or any statutory modification
of re-enactment thereof and the rules made thereunder and for the time
being in force shall apply to the arbitration proceedings under this
clause.”(emphasis supplied)
3. By letter dated 6.8.2005, the appellant terminated the dealership of
the respondent on the recommendation of its Vigilance Department. The
respondent filed Suit No.43/2005 in the Court of Civil Judge, Junior
Division, Rishikesh, Dehradun for a declaration that the order of
termination of dealership dated 6.8.2005 was illegal and void and for a
permanent injunction restraining the appellant from stopping supply ofpetroleum products to its retail outlet.
4. In the said suit, the appellant filed an application under section 8 of
the Act read with Order VII Rule 11 of Civil Procedure Code, praying
that the suit be rejected and the matter be referred to arbitration in terms
of Clause 69 of the agreement. The learned Civil Judge, by order dated
16.11.2005 allowed the said application filed by the appellant directing
the parties to refer the matter to arbitration within two months, with a
further direction that appellant shall not stop supplies to the respondent
for a period of two months.
5. Both appellant and respondent challenged the order dated
16.11.2005. Respondent filed Civil Appeal No.96/2005 being aggrieved
by the restriction of supply for only two months from 16.11.2005. The
appellant filed Civil Appeal No.214/2005, being aggrieved by the
direction to continue the supply for a period of two months from
16.11.2005. The respondent also filed an application under Section 9 of
the Act seeking an interim injunction against the appellant. The two
appeals and the application under section 9 of the Act were disposed of
by a common order dated 20.1.2006 by the learned District Judge,
Dehradun. He dismissed both the appeals but allowed the applicationunder section 9 of the Act and restrained the appellant herein from
interrupting the supply of petroleum products to respondent for a period
of two months, and directed the parties to refer the matter to arbitration as
per the agreement within the said period of two months.
6. When the said appeals were pending, the respondent issued a
notice dated 4.1.2006 through its counsel to the appellant, referring to the
appellant’s insistence that only its Director (Marketing) or an officer
nominated by him could act as the arbitrator, in pursuance of the order of
the Civil Judge dated 16.11.2005. The respondent alleged that it did not
expect fair treatment or justice, if the Director (Marketing) or any other
employee of the appellant was appointed as arbitrator, and that therefore
any such appointment would be prejudicial to its interest. It contended
that any provision enabling one of the parties or his employee to act as an
arbitrator was contrary to the fundamental principle of natural justice that
no person can be a judge in his own cause. The respondent therefore
called upon the appellant by the said notice dated 4.1.2006, to fix a
meeting at Dehradun between the officers of the appellant and respondent
within seven days so as to mutually agree upon an independent arbitrator.
The appellant submits that the said request, apart from being contrary to
the arbitration agreement, was also contrary to the subsequent order dated20.1.2006 which directed that the disputes should be referred to the
arbitrator as per the agreement and therefore, it did not agree to the said
request for an outside arbitrator.
7. In this background, the respondent filed an application (Arbitration
Application No.2/2006) under section 11(6) of the Act in March 2006
before the Chief Justice of Uttaranchal High Court praying for
appointment of an independent arbitrator to decide the dispute relating to
the validity of the termination of the dealership, contending as follows :-
“That a dispute between the parties has arisen and by notice dated
4.1.2006, the applicant served the respondent a notice calling
upon them to appoint an independent arbitrator, but in spite of
expiry of reasonable time, no independent arbitrator has been
appointed.”The said petition was resisted by the appellant by contending that an
arbitrator can be appointed only in terms or clause 69 of the agreement.
The learned Chief Justice, after hearing the parties allowed the
application by the impugned order dated 26.9.2008, and appointed a
retired High Court Judge as sole arbitrator to decide the dispute. The
learned Chief Justice assigned the following two reasons to appoint a
retired Judge as Arbitrator, instead of the person named in the ArbitrationAgreement :-
(i) The Director (Marketing) of the appellant, being its employee,
should be presumed not to act independently or impartially.(ii) The respondent had taken steps in accordance with the agreed
appointment procedure contained in the arbitration agreement and the
directions of the civil court, by issuing a notice dated 4.1.2006 calling
upon the appellant to appoint an arbitrator. After the receipt of the notice
dated 4.1.2006, the appellant had to refer matter for arbitration to its
Director Marketing, but it did not do so. Nor did it take any step for
appointment of the Arbitrator. By not referring the matter to arbitration to
its own Director, despite receipt of the notice dated 4.1.2006, the
appellant had failed to act as required under the agreed procedure.8. The said order of the Chief Justice is challenged by the appellant.
On the rival contentions urged by the parties, the following questions
arise for our consideration :
(i) Whether the learned Chief Justice was justified in assuming that
when an employee of one of the parties to the dispute is appointed as an
arbitrator, he will not act independently or impartially?(ii) In what circumstances, the Chief Justice or his designate can ignore
the appointment procedure or the named arbitrator in the arbitration
agreement, to appoint an arbitrator of his choice?(iii) Whether respondent herein had taken necessary steps for
appointment of arbitrator in terms of the agreement, and the appellant had
failed to act in terms of the agreed procedure, by not referring the dispute
to its Director (Marketing) for arbitration?Re : Questions No.(i)
9. Arbitration is a binding voluntary alternative dispute resolution
process by a private forum chosen by the parties. It is quite common for
governments, statutory corporations and public sector undertakings while
entering into contracts, to provide for settlement of disputes by
arbitration, and further provide that the Arbitrator will be one of its senior
officers. If a party, with open eyes and full knowledge and
comprehension of the said provision enters into a contract with a
government/statutory corporation/public sector undertaking containing an
arbitration agreement providing that one of its Secretaries/Directors shall
be the arbitrator, he can not subsequently turn around and contend that he
is agreeable for settlement of disputes by arbitration, but not by the
named arbitrator who is an employee of the other party. No party can say
he will be bound by only one part of the agreement and not the other part,
unless such other part is impossible of performance or is void being
contrary to the provisions of the Act, and such part is severable from the
remaining part of the agreement. The arbitration clause is a package
which may provide for what disputes are arbitrable, at what stage the
disputes are arbitrable, who should be the arbitrator, what should be thevenue, what law would govern the parties etc. A party to the contract
cannot claim the benefit of arbitration under the arbitration clause, but
ignore the appointment procedure relating to the named Arbitrator
contained in the arbitration clause.
10. It is now well settled by a series of decisions of this Court that
arbitration agreements in government contracts providing that an
employee of the Department (usually a high official unconnected with the
work or the contract) will be the Arbitrator, are neither void nor
unenforceable. We may refer to a few decisions on this aspect.
10.1) In Executive Engineer, Irrigation Division, Puri vs. Gangaram
Chhapolia – 1984 (3) SCC 627, this Court was considering the validity of
appointment of the Arbitrator where the arbitration required that the
disputes shall be referred to the sole arbitration of a Superintending
Engineer of the Public Works Department unconnected with the work at
any stage nominated by the concerned Chief Engineer. This Court held :
“The use of the expression “Superintending Engineer, State Public
Works Department” in Clause 23 qualified by the restrictive words
“unconnected with the work” clearly manifests an intention of the parties
that all questions and disputes arising out of a works contract shall be
referred to the sole arbitration of a Superintending Engineer of the
concerned department. From the very nature of things, a dispute arising
out of a works contract relating to the Department of Irrigation has to be
referred to a Superintending Engineer, Irrigation as he is an expert on the
subject and it cannot obviously be referred to a Superintending Engineer,
Building & Roads. The only limitation on the power of the Chief
Engineer under Clause 23 was that he had to appoint a “Superintending
Engineer unconnected with the work” i.e. unconnected with the works
contract in relation to which the dispute has arisen. The learned
Subordinate Judge was obviously wrong in assuming that since D. Sahu,
Superintending Engineer, Irrigation was subordinate to the Chief
Engineer, he was not competent to act as an Arbitrator or since he was a
Superintending Engineer, Irrigation, he could not adjudicate upon the
dispute between the parties. The impugned order passed by the learned
Subordinate Judge is accordingly set aside.”10.2) In Eckersley vs. Mersey Dock and Harbour Board – 1894 (2) QB
667, it was held :
“The rule which applies to a Judge or other person holding judicial
office, namely, that he ought not to hear cases in which he might be
suspected of a bias in favour of one of the parties, does not apply to an
arbitrator, named in a contract, to whom both the parties have agreed to
refer disputes which may arise between them under it. In order to justify
the court in saying that such an arbitrator is disqualified from acting,
circumstances must be shown to exist which establish, at least, a
probability that he will, in fact, be biased in favour of one of the parties
in giving his decision….. Where, in a contract for the execution of works,
the arbitrator selected by the parties is the servant of one of them, he is
not disqualified by the mere fact that under the terms of the submission
he may have to decide disputes involving the question whether he has
himself acted with due skill and competence in advising his employer in
respect of the carrying out of the contract.”10.3) In Secretary to Government, Transport Department, Madras v.
Munuswamy Mudaliar – 1988 (Supp) SCC 651, the contract between the
respondent and State Government contained an arbitration clause
providing that the Superintending Engineer will be the arbitrator.
Disputes arising in respect of cancellation of the contract by the
department were referred to the said Arbitrator. An application undersection 5 of Arbitration Act, 1940 was filed by the contractor for removal
of the arbitrator on the ground of apprehended bias on the part of the
arbitrator as he was an employee of the State Government and was
subordinate of the chief Engineer who took the decision to cancel the
contract. This Court negatived the said contention and held :-
“When the parties entered into the contract, the parties knew the terms of
the contract including arbitration clause. The parties knew the scheme
and the fact that the Chief Engineer is superior and the Superintending
Engineer is subordinate to the Chief Engineer of the particular Circle. In
spite of that the parties agreed and entered into arbitration. …. Unless
there is allegation against the named arbitrator either against his honesty
or mala fide or interest in the subject matter or reasonable apprehension
of the bias, a named and agreed arbitrator cannot and should not be
removed in exercise of a discretion vested in the Court under Section 5
of the Act.This Court in International Authority of India v. K.D.Bali and Anr.
[1988 (2) SCC 360] held that there must be reasonable evidence to
satisfy that there was a real likelihood of bias. Vague suspicions of
whimsical, capricious and unreasonable people should not be made the
standard to regulate normal human conduct. In this country in numerous
contracts with the Government, clauses requiring the Superintending
Engineer or some official of the Govt. to be the arbitrator are there. It
cannot be said that the Superintending Engineer, as such, cannot be
entrusted with the work of arbitration and that an apprehension
simpliciter in the mind of the contractor without any tangible ground,
would be a justification for removal.”10.4) In S.Rajan v. State of Kerala – 1992 (3) SCC 608, this Court held :-
“Clause (3) of the agreement says that “the arbitrator for fulfilling the
duties set forth in the arbitration clause of the Standard Preliminary
Specification shall be the Superintending Engineer, Building and
Roads Circle, Travandrum”. Thus, this is a case where the agreement
itself specifies and names the arbitrator. In such a situation, it was
obligatory upon the learned Subordinate Judge, in case he was
satisfied that the dispute ought to be referred to the arbitrator, to refer
the dispute to the arbitrator specified in the agreement. It was not open
to him to ignore the said clause of the agreement and to appoint
another person as an arbitrator. Only if the arbitrator specified and
named in the agreement refuses or fails to act, does the court get the
jurisdiction to appoint another person or persons as the arbitrator. This
is the clear purport of Sub-section (4). It says that the reference shall be
to the arbitrator appointed by the parties. Such agreed appointment
may be contained in the agreement itself or may be expressed
separately. To repeat, only in cases where the agreement does not
specify the arbitrator and the parties cannot also agree upon an
arbitrator, does the court get the jurisdiction to appoint an arbitrator.”[emphasis supplied]
10.5) In M/s. Indian Drugs & Pharmaceuticals v. M/s. Indo-Swiss
Synthetics Germ Manufacturing Co.Ltd. – 1996 (1) SCC 54, this Court
held:
“Shri Desai submits that respondent No.3 may not be required to
arbitrate inasmuch as he being an appointee of the Chairman and
Managing Director of the appellant himself, respondents’ case may not
be fairly examined. He prays that any retired High Court Judge may be
appointed as an arbitrator by us. We have not felt inclined to accept
this submission, because arbitration clause states categorically that the
difference/dispute shall be referred “to an arbitrator appointed by the
Chairman and Managing Director of IPDL” (Indian Drugs &
Pharmaceutical Limited) who is the appellant. This provision in the
arbitration clause cannot be given a go-bye merely at the askance of the
respondent unless he challenged its binding nature in an appropriate
proceeding which he did not do.”
10.6) In Union of India v. M.P.Gupta (2004) 10 SCC 504, this Court was
considering an arbitration agreement which provided for appointment of
two Gazetted railway officers as arbitrators. But a learned Single Judge of
the High Court while allowing an application under section 20 of the
Arbitration Act, 1940, appointed a retired Judge as the sole arbitrator and
a Division Bench affirmed the same. Reversing the said decision, thisCourt held that having regard to the express provision in the arbitration
agreement that two Gazetted railways officers shall be the Arbitrators, a
retired Judge could not be appointed as sole Arbitrator.
10.7) In Ace Pipeline Contract Pvt. Ltd. v. Bharat Petroleum
Corporation Ltd. [2007 (5) SCC 304], this Court considered a somewhat
similar clause of another petroleum corporation which also provided that
the arbitration will be by its Director (Marketing) or some other officer
nominated by the Director (Marketing). The contractor expressed an
apprehension about the independence and impartiality of the named
arbitrator and prayed for appointment of a retired Judge as Arbitrator in
his application under section 11(6) of the Act. This Court held :
“In the present case, in fact the appellant’s demand was to get some
retired Judge of the Supreme Court to be appointed as arbitrator on the
ground that if any person nominated in the arbitration clause is
appointed, then it may suffer from bias or the arbitrator may not be
impartial or independent in taking decision. Once a party has entered
into an agreement with eyes wide open it cannot wriggle out of the
situation (by contending) that if any person of the respondent BPCL is
appointed as arbitrator he will not be impartial or objective. However,
if the appellant feels that the arbitrator has not acted independently or
impartially, or he has suffered from any bias, it will always be open to
the party to make an application under section 34 of the Act to set aside
the award on the ground that arbitrator acted with bias or malice in law
or fact.”
11. The learned counsel for the respondent attempted to distinguish the
said decisions. He submitted that except the last two decisions, all others
were rendered with reference to the provisions of the Arbitration Act,
1940, whose provisions were different from the provisions of the
Arbitration and Conciliation Act, 1996. It was also submitted that the last
two decisions merely followed the legal position enunciated with
reference to the old Act, without considering the provisions under the
new Act. It is contended that the provisions of the Arbitration and
Conciliation Act, 1996, in regard to appointment of arbitrators, are
materially different from the provisions of the old Act. It was submitted
that several provisions of the new Act lay stress upon the independence
and impartiality of the Arbitrator. Reference was invited to sub-section
(8) of section 11, sub-sections (1) and (3) of section 12 and Section 18 of
the Act. It is contended by the respondent that in view of the emphasis on
the independence and impartiality of an arbitrator, in the new Act, and
having regard to the basic principle of natural justice that no man should
be judged in his own cause, any arbitration agreement to the extent it
nominates an officer of one of the parties as the arbitrator, would be
invalid and unenforceable.
12. While the provisions relating to independence and impartiality are
more explicit in the new Act, it does not mean that the old Act
(Arbitration Act, 1940) enabled persons with bias to act as Arbitrators.
What was implicit under the old Act is made explicit in the new Act in
regard to impartiality, independence and freedom from bias. The
decisions under the old Act on this issue are therefore not irrelevant when
considering the provisions of the new Act. At all events, M. P. Gupta and
Ace Pipeline are cases under the new Act. All the decisions proceed on
the basis that when senior officers of government/statutory
corporations/public sector undertakings are appointed as Arbitrators, they
will function independently and impartially, even though they are
employees of such Institutions/organisations.
13. We find no bar under the new Act, for an arbitration agreement
providing for an employee of a government/ statutory corporation/public
sector undertaking (which is a party to the contract), acting as Arbitrator.
Section 11(8) of the Act requires the Chief Justice or his designate, in
appointing an arbitrator, to have due regard to “(a) any qualifications
required of the arbitrator by the agreement of the parties; and (b) other
considerations as are likely to secure the appointment of an independent
or impartial arbitrator”. Section 12(1) requires an Arbitrator, when
approached in connection with his possible appointment, to disclose in
writing any circumstances likely to give rise to justifiable doubts as to his
independence or impartiality. Sub-section 12(3) enables the Arbitrator
being challenged if (i) the circumstances give rise to justifiable doubts as
to his independence or impartiality, or (ii) he does not possess the
qualifications agreed to by the parties. Section 18 requires the Arbitrator
to treat the parties with equality (that is to say without bias) and give each
party full opportunity to present his case. Nothing in sections 11, 12, 18
or other provisions of the Act suggests that any provision in an arbitration
agreement, naming the Arbitrator will be invalid if such named arbitrator
is an employee of one of the parties to the arbitration agreement. Sub-
section (2) of section 11 provides that parties are free to agree upon a
procedure for appointment of arbitrator/s. Sub-section (6) provides that
where a party fails to act, as required under the procedure prescribed, the
Chief Justice or his designate can take necessary measures. Sub-
section (8) gives the discretion to the Chief Justice/his designate to
choose an arbitrator suited to meet the requirements of a particular case.
The said power is in no way intended to nullify a specific term of
arbitration agreement naming a particular person as arbitrator. The power
under sub-section (8) is intended to be used keeping in view the terms of
the arbitration agreement. The fact that the named arbitrator is an
employee of one of the parties is not ipso facto a ground to raise a
presumption of bias or partiality of lack of independence on his part.
14. There can however be a justifiable apprehension about the
independence or impartiality of an Employee-Arbitrator, if such person
was the controlling or dealing authority in regard to the subject contract
or if he is a direct subordinate (as contrasted from an officer of an inferior
rank in some other department) to the officer whose decision is the
subject matter of the dispute. Where however the named arbitrator though
a senior officer of the government/statutory body/government company,
had nothing to do with execution of the subject contract, there can be no
justification for anyone doubting his independence or impartiality, in the
absence of any specific evidence. Therefore, senior officer/s (usually
heads of department or equivalent) of a government/statutory corporation/
public sector undertaking, not associated with the contract, are
considered to be independent and impartial and are not barred from
functioning as Arbitrators merely because their employer is a party to the
contract.
15. The position may be different where the person named as the
Arbitrator is an employee of a company or body or individual other than
the state and its instrumentalities. For example, if the Director of a private
company (which is a party to the Arbitration agreement), is named as the
Arbitrator, there may be valid and reasonable apprehension of bias in
view of his position and interest, and he may be unsuitable to act as an
Arbitrator in an arbitration involving his company. If any circumstance
exists to create a reasonable apprehension about the impartiality or
independence of the agreed or named Arbitrator, then the court has the
discretion not to appoint such a person.
16. Subject to the said clarifications, we hold that a person being an
employee of one of the parties (which is the state or its instrumentality)
cannot per se be a bar to his acting as an Arbitrator. Accordingly, the
answer to the first question is that the learned Chief Justice was not
justified in his assumption of bias.
17. Before parting from this issue, we may however refer to a ground
reality. Contractors in their anxiety to secure contracts from government/
statutory bodies/public sector undertakings, agree to arbitration clauses
providing for employee-arbitrators. But when subsequently disputes arise,
they balk at the idea of arbitration by such employee-arbitrators and tend
to litigate to secure an “independent” arbitrator. The number of litigations
seeking appointment of independent Arbitrator bears testimony to this
vexed problem. It will be appropriate if governments/statutory
authorities/public sector undertaking reconsider their policy providing for
arbitration by employee-arbitrators in deference to the specific provisions
of the new Act reiterating the need for independence and impartiality in
Arbitrators. A general shift may in future be necessary for understanding
the word “independent” as referring to someone not connected with either
party. That may improve the credibility of Arbitration as an alternative
dispute resolution process. Be that as it may.
Re : Question No. (ii)
18. Where the arbitration agreement names or designates the arbitrator,
the question whether the Chief Justice or his designate could appoint any
other person as arbitrator, has been considered by this Court in several
decisions.
18.1) In Ace Pipeline Contract Pvt. Ltd. (supra), a two-Judge Bench of
this Court held that where the appointing authority does not appoint an
arbitrator after receipt of request from the other party, a direction can be
issued under section 11(6) to the authority concerned to appoint an
arbitrator as far as possible as per the arbitration clause. It was held that
normally the court should adhere to the terms of the arbitration agreement
except in exceptional cases for reasons to be recorded or where both
parties agree for a common name.
18.2) In Union of India v. Bharat Battery Manufacturing Company Pvt.
Ltd. [2007 (7) SCC 684], another two-Judge Bench of this Court held that
once the notice period provided for under the arbitration clause for
appointment of an arbitrator elapses and the aggrieved party files an
application under section 11(6) of the Act, the right of the other party to
appoint an arbitrator in terms of the arbitration agreement stands
extinguished.
18.3) The divergent views expressed in Ace Pipeline (supra) and Bharat
Battery (supra) were sought to be harmonised by a three-Judge Bench of
this Court in Northern Railway Administration v. Patel Engineering Co.
Ltd. [2008 (11) SCALE 500]. After examining the scope of sub-sections
(6) and (8) of section 11, this Court held :
“The crucial expression in sub-section (6) is “a party may request the
Chief Justice or any person or institution designated by him to take the
necessary measures”. This expression has to be read along with
requirement in sub-section (8) that the Chief Justice or the person or an
institution designated by him in appointing an arbitrator shall have “due
regard” to the two cumulative conditions relating to qualifications and
other considerations as are likely to secure the appointment of an
independent and impartial arbitration.
A bare reading of the scheme of Section 11 shows that the emphasis is
on the terms of the agreement being adhered to and/or given effect as
closely as possible. In other words, the Court may ask to do what has
not been done. The Court must first ensure that the remedies provided
for are exhausted. It is true as contended by Mr. Desai, that it is not
mandatory for the Chief Justice or any person or institution designated
by him to appoint the named arbitrator or arbitrators. But at the same
time due regard has to be given to the qualifications required by the
agreement and other considerations.
The expression ‘due regard’ means that proper attention to several
circumstances have been focused. The expression ‘necessary’ as a
general rule can be broadly stated to be those things which are
reasonably required to be done or legally ancillary to the
accomplishment of the intended act. Necessary measures can be stated to
be the reasonable step required to be taken…
… It needs no reiteration that appointment of the arbitrator or arbitrators
named in the arbitration agreement is not a must, but while making the
appointment, the twin requirements of sub-section (8) of section 11 have
to be kept in view, considered and taken into account.”
(emphasis supplied)
19. While considering the question whether the arbitral procedure
prescribed in the agreement for reference to a named arbitrator, can be
ignored, it is also necessary to keep in view clause (v) of sub-section (2)
of section 34 of the Act which provides that an arbitral award may be set
aside by the court if the composition of the arbitral tribunal or the arbitral
procedure was not in accordance with the agreement of the parties (unless
such agreement was in conflict with any provision of Part-I of the Act
from which parties cannot derogate, or, failing such agreement, was not
in accordance with the provisions of Part-I of the Act). The legislative
intent is that the parties should abide by the terms of the arbitration
agreement. If the arbitration agreement provides for arbitration by a
named Arbitrator, the courts should normally give effect to the provisions
of the arbitration agreement. But as clarified by Northern Railway
Administration, where there is material to create a reasonable
apprehension that the person mentioned in the arbitration agreement as
the Arbitrator is not likely to act independently or impartially, or if the
named person is not available, then the Chief Justice or his designate
may, after recording reasons for not following the agreed procedure of
referring the dispute to the named arbitrator, appoint an independent
Arbitrator in accordance with section 11(8) of the Act. In other words,
referring the disputes to the named arbitrator shall be the rule. The Chief
Justice or his designate will have to merely reiterate the arbitration
agreement by referring the parties to the named arbitrator or named
Arbitral Tribunal. Ignoring the named Arbitrator/Arbitral Tribunal and
nominating an independent arbitrator shall be the exception to the rule, to
be resorted for valid reasons.
20. This takes us to the effect of the condition in the arbitration
agreement that “it is also a term of this contract that no person other than
the Director, Marketing or a person nominating by such Director,
Marketing of the Corporation as aforesaid shall act as Arbitrator.” Such a
condition interferes with the power of the Chief Justice and his designate
under section 11(8) of Act to appoint a suitable person as arbitrator is
appropriate cases. Therefore, the said portion of the arbitration clause is
liable to be ignored as being contrary to the Act. But the position will be
different where the arbitration agreement names an individual (as
contrasted from someone referred to by designation) as the Arbitrator. An
example is an arbitration clause in a partnership deed naming a person
enjoying the mutual confidence and respect of all parties, as the
Arbitrator. If such an arbitration agreement provides that there shall be no
arbitration if such person is no more or not available, the person named
being inextricably linked to the very provision for arbitration, the non-
availability of the named arbitrator may extinguish the very arbitration
agreement. Be that as it may.
21. In the light of the above discussion, the scope of section 11 of the
Act containing the scheme of appointment of arbitrators may be
summarised thus:
(i) Where the agreement provides for arbitration with three arbitrators
(each party to appoint one arbitrator and the two appointed arbitrators to
appoint a third arbitrator), in the event of a party failing to appoint an
Arbitrator within 30 days from the receipt of a request from the other
party (or the two nominated arbitrators failing to agree on the third
arbitrator within 30 days from the date of the appointment), the Chief
Justice or his designate will exercise power under sub-section (4) of
section 11 of the Act.
(ii) Where the agreement provides for arbitration by a sole arbitrator
and the parties have not agreed upon any appointment procedure, the
Chief Justice or his designate will exercise power under sub-section (5) of
section 11, if the parties fail to agree on the arbitration within thirty days
from the receipt of a request by a party from the other party.
(iii) Where the arbitration agreement specifies the appointment
procedure, then irrespective of whether the arbitration is by a sole
arbitrator or by a three-member Tribunal, the Chief Justice or his
designate will exercise power under sub-section (6) of section 11, if a
party fails to act as required under the agreed procedure (or the parties or
the two appointed arbitrators fail to reach an agreement expected of them
under the agreed procedure or any person/institution fails to perform any
function entrusted to him/it under that procedure).
(iv) While failure of the other party to act within 30 days will furnish a
cause of action to the party seeking arbitration to approach the Chief
Justice or his designate in cases falling under sub-sections (4) & (5), such
a time bound requirement is not found in sub-section (6) of section 11.
The failure to act as per the agreed procedure within the time limit
prescribed by the arbitration agreement, or in the absence of any
prescribed time limit, within a reasonable time, will enable the aggrieved
party to file a petition under Section 11(6) of the Act.
(v) Where the appointment procedure has been agreed between the
parties, but the cause of action for invoking the jurisdiction of the Chief
Justice or his designate under clauses (a), (b) or (c) of sub-section (6) has
not arisen, then the question of Chief Justice or his designate exercising
power under sub-section (6) does not arise. The condition precedent for
approaching the Chief Justice or his designate for taking necessary
measures under sub-section (6) is that (i) a party failing to act as required
under the agreed appointment procedure; or (ii) the parties (or the two
appointed arbitrators), failing to reach an agreement expected of them
under the agreed appointment procedure; or (iii) a person/institution who
has been entrusted with any function under the agreed appointment
procedure, failing to perform such function.
(vi) The Chief Justice or his designate while exercising power under
sub-section (6) of section 11 shall endeavour to give effect to the
appointment procedure prescribed in the arbitration clause.
(vii) If circumstances exist, giving rise to justifiable doubts as to the
independence and impartiality of the person nominated, or if other
circumstances warrant appointment of an independent arbitrator by
ignoring the procedure prescribed, the Chief Justice or his designate may,
for reasons to be recorded ignore the designated arbitrator and appoint
someone else.
Re : Question (iii)
22. In this case, the respondent approached the Chief Justice of the
High Court by alleging that it had acted in terms of the agreed procedure
under the arbitration agreement, and that the appellant had failed to act as
required under the appointment procedure. Therefore, the respondent
invoked the power of the Chief Justice under sub-section (6) of section
11. In view of it, what falls for consideration is whether the appellant had
failed to act as required under the appointment procedure. This pre-
supposes that the respondent had called upon the appellant to act as
required under the agreed appointment procedure. Let us examine
whether the respondent had in fact called upon the appellant to act in
accordance with the agreed procedure.
23. When the dispute arose, the respondent did not seek arbitration, but
went to civil court. It was the appellant who sought reference to
arbitration in terms of the arbitration agreement. The order dated
16.11.2005 of the Civil Judge, Junior Division directing reference to
arbitration within two months from 16.11.2005 was challenged by both
the parties. The District Judge, Dehradun by its order dated 20.1.2006
directed the parties to refer the dispute to arbitrator as per agreement,
within two months. Therefore, the order dated 16.11.2005 stood merged
with the order of the District Judge dated 20.1.2006, which directed
reference of the dispute to arbitration as per the agreement, within two
months. But there was no direction by the court to appoint an independent
arbitrator contrary to the terms of the arbitration agreement. In view of
the order dated 20.1.2006, the respondent ought to have referred the
dispute to the Director (Marketing) of the appellant within two months
from 20.1.2006. It failed to do so. Therefore, it was the respondent who
failed to act in terms of the agreed procedure and not the appellant. In
fact, as the Arbitrator was already identified, there was no need for the
respondent to ask the appellant to act in accordance with the agreed
procedure. On the other hand, the respondent ought to have directly
referred the disputes to the Director (Marketing) of the appellant
corporation in terms of the arbitration agreement.
24. We may now deal with the notice dated 4.1.2006 by which the
respondent notified the appellant that it was not willing for appointment
of arbitrator in terms of the agreement and that both should therefore hold
discussions to decide upon an independent arbitrator. The letter dated
4.1.2006 cannot, be construed as a step taken by the respondent for
invoking arbitration in terms of the arbitration agreement, as it is a
demand in violation of the terms of arbitration agreement. It required the
appellant to agree upon an arbitrator, contrary to the provisions of the
arbitration agreement. If the respondent wanted to invoke arbitration in
terms of the arbitration agreement, it ought to have referred the disputes
to the Director (Marketing) in term of section 69 of the contract
agreement for arbitration. Alternatively, the respondent ought to have at
least called upon the appellant, to refer the dispute to the Director
(Marketing) for arbitration. In the absence of any such a demand under
clause 69, it cannot be said that the respondent invoked the arbitration
clause or took necessary steps for invoking arbitration in terms of the
arbitration agreement. If the respondent had called upon the appellant to
act in a manner contrary to the appointment procedure mentioned in the
arbitration agreement, it cannot be said that the appellant failed to
respond and act as required under the agreed procedure. As the letter
dated 4.1.2006 could not be construed as a valid demand for arbitration,
the finding of the learned Chief Justice that non-compliance with such
request would enable the respondent to appoint an independent arbitrator,
is clearly illegal. What is significant is that even subsequent to the order
dated 20.1.2006 passed by the District Court, the respondent did not refer
the disputes to the Director (Marketing) of the appellant nor called upon
the appellant to refer to the disputes in terms of the arbitration agreement,
nor withdraw its earlier letter dated 4.1.2006 demanding appointment of
an independent arbitrator contrary to the agreed procedure under the
arbitration agreement.
25. In the circumstances, the third question is answered in the negative.
Consequently, the learned Chief Justice erred in having proceeded on the
basis that the respondent had performed its duty in terms of the
arbitration agreement in seeking reference to arbitration and that the
appellant had failed to act in the matter and therefore, there was
justification for appointing an independent arbitrator.
26. The appellant is therefore entitled to succeed on both the points.
The appeal is, therefore, allowed. The order dated 26.9.2008 of the High
Court is set aside. The Director (Marketing) of the appellant Corporation
is appointed as the sole arbitrator to decide the disputes between the
parties.
………………………………………J
[R. V. Raveendran]
………………………………………J
[D. K. Jain]
New Delhi;
August 24, 2009.