JUDGMENT
Rama Jois, J.
1. This appeal is presented by M/s. Visveswaraya Iron and Steel Ltd., Bhadravathi, under Section 32(1) of the Arbitration Act, 1948, (‘the Act’ for short), against the order made by the Principal Civil Judge, Shimoga, on an application under Section 34 of the Act, presented by the respondent staying the suit and directing that the parties should settle their disputes through arbitration in accordance with the arbitration clause contained in the agreement entered into between the appellant and the respondent.
2. The facts of the case, in brief, are these:-An agreement was entered into between the appellant and the respondent – Dynacraft Machine Company Limited, for the supply, commissioning and erection of a Raw Material Handling Plant by the respondent, to the appellant. The agreement was entered into on 27th December, 1968. The entrustment of the contract to the respondent was on what is called ‘turn key basis’ which included the supply and installation of the plant at the premises of the appellant as also the execution of the civil engineering works connected therewith. Though plant and machinery was supplied and installed, according to the appellant it was not in accordance with the terms of contract for, at the time of demonstration functioning of the plaint, it was found that it was functioning at a capacity far below the agreed capacity. The respondent undertook to make necessary corrections and to achieve the rated capacity of 840 tonnes per hour. According to the appellant, the respondent also agreed to replace the vibratory feeders in stages and even after the attempted rectification of the feeders, the plant was found not functioning to its full capacity but was only working at 50% of the expected capacity. In the circumstances, a letter was addressed by the appellant to the respondent on 19-11-1975. In the said letter the defective functioning of the plant was pointed out and the respondent was asked to look into the matter and take such action as was necessary to ensure the rated capacity. To the said letter the respondent gave a reply on 18-12-1975. In the said letter the respondent disowned its liability. However, the respondent added that they would carry out modifications to the feeders as agreed. Thereafter on 28th February/1st March, 1976 the appellant again addressed a letter to the respondent. In the said letter the appellant pointed out that the contract entrusted to the respondent was of the value of Rs. 64,34,822/ and the appellant again pointed out that the two vibratory feeders set up by them were sent to the respondent during September for repairs but the respondent had returned only one vibratory feeder on 5-5-1975 and when it was tested, again it was found to be defective. In the last paragraph, the respondent was called upon to fulfill the terms of the agreement dated 27th December, 1968 within one month from the date of receipt of the said letter failing which the appellant would be forced to refer the matter for arbitration. Thereafter, on the ground that the respondent did not give any reply, the appellant proceeded to file a suit before the Principal Civil Judge, Shimoga. After the notice was served on the respondent (defendant) the respondent filed an application under Section 34 of the Arbitration Act. In the said application, the respondent stated that there was a specific arbitration clause in the agreement entered into between the appellant and the respondent on 27-12-1968 and therefore the suit should be stayed and the parties should be directed to settle the matter through arbitration in terms of the arbitration clause contained in the agreement. This application of the respondent was opposed by the appellant on the ground that though the appellant wanted the matter to be referred to arbitration, the respondent did not evince any interest and therefore the appellant had no other alternative than to file the suit and that having regard to the nature of the dispute between the appellant and the respondent there was no justification to stay the suit.
3. On consideration of the pleas of the appellant and the respondent and also on consideration of the correspondence that had ensued between the appellant and the respondent, the learned Judge held that there was justification to stay the suit and to direct the parties to settle the matter through arbitration as agreed to in the agreement dated 27-12-1968. Aggrieved by the said order, the appellant has presented this appeal.
4. Sri A.N. Jayaram, learned Counsel for the appellant, submitted that the correspondence ensued between the appellant and the respondent would indicate that at no time the respondent evinced any interest to settle the matter by arbitration and in this situation, as the period of limitation was coming to a close, the appellant had no other alternative than to file a suit and therefore having regard to the conduct of the respondent, it was not entitled to invoke the arbitration clause. In support of his contention, the learned Counsel for the appellant relied on the decision in FOOD CORPORATION OF INDIA v. THAKUR SHIPPING COMPANY, , He relied on the following observation in the said Judgment:
“Where a party to an arbitration agreement chooses to maintain silence in the face of repeated requests by the other party to take steps for arbitration, the case is not one of “mere inaction”. Failing to act when a party is called upon to do so is a positive gesture signifying unwillingness or want of readiness to go to arbitration.”
As can be seen from the facts of the said case, the plaintiff in that case, before filing the suit had issued a notice in terms of Clause 42 of the agreement concerned in that case, calling upon the opposite party to nominate its arbitrator and the opposite party was silent and in these circumstances, the Supreme Court held that as the party chose to maintain silence inspite of the repeated requests by the plaintiff to take steps for arbitration, it amounted to an expression of unwillingness or want of readiness to go to arbitration, and such a party in view of his conduct, could not invoke the provisions of Section 34 of the Arbitration Act. The learned Counsel also relied on the Judgment of the Supreme Court in UTTARA PRADESH CO-OPERATIVE FEDERATION LTD. v. SUNDER BROS. DELHI, and STATE OF PUNJAB v. GEETA IRON AND BRASS WORKS, the ratio of which is similar and in which the Supreme Court has held that it is for the trial Court to decide in its discretion as to whether the request of a party for stay of suit relying on arbitration should be rejected, if there is material to show that the party had indicated expressly or by necessary implication his unwillingness to go in for arbitration.
5. Sri V. Krishna Murthy, learned Counsel for the respondent, per contra, submitted that in the present case the appellant never called upon the respondent to nominate an Arbitrator as provided in the Arbitration clause and therefore the ratio of the decision of the Supreme Court in Food Corporation of India case had no application. The learned Counsel relied on the Judgment In State of Punjab v. Geeta Eron and Bros. Ltd. and pointed out, that the silence on the part of the Government to a notice Issued under Section 80 of the C.P.C. constitutes no ground for holding that the Government had denied itself the right to invoke the provisions of Section 34 of the Arbitration Act, if and when a suit is filed against it. He also relied on the Judgment in ARVIND EXPORTS PRIVATE LTD. v. KAMANI ENGINEERING CORPORATION LTD., . In the said case, the Calcutta High Court speaking through Sabyasachi Mukherji, J., (as he then was) pointed out that unless a party was called upon by issuing of notice to nominate an Arbitrator, the mere inaction on the part of the other party cannot be treated as unwillingness to go in for arbitration. The learned Counsel pointed out that the documentary evidence on record in this case would show that the appellant did not issue notice to the respondent in terms of the arbitration clause in the agreement and therefore there was no question of drawing an inference that the respondent had indicated its unwillingness to go in for arbitration by not replying.
6. From the ratio of the decisions relied on by both sides, it is clear that if the appellant had issued notice to the respondent in terms of Clause 14 of the agreement relating to arbitration and the respondent had kept silent, it could not be permitted thereafter to invoke the provisions of Section 34 of the Act and rely upon the arbitration clause. Therefore, the crucial question for consideration in this case is, whether any notice had been issued by the appellant to the respondent invoking the arbitration clause and the respondent had kept silent over the matter.
7. The relevant clause in the Arbitration Agreement reads:
“Arbitration:
Any dispute whatsoever arising out of this agreement shall be referred to the award of two arbitrators, one to be appointed by Mysiron and ether by the contractor The two arbitrators shall appoint an Umpire in advance before they consider any point in dispute. The decision of the arbitrators and failing which the decision of Umpire shall be final and conclusive and binding on both the parties. The provisions of Indian Arbitration Act of 1940 and rules made thereunder and any statutory modifications thereof shall be deemed to form a part of this agreement”.
According to the above clause, if any dispute arose between the appellant and the respondent in relation to the execution of the agreement dated 27-12-1968, each party was entitled to appoint an Arbitrator and the two Arbitrators so appointed were required to appoint an Umpire before they proceeded to consider any point of dispute and if there were to be any divergence of opinion between the two Arbitrators, the opinion of the Umpire was to be final. Further, the clause also stated that the provisions of the Act shall be deemed to form part of this agreement.
8. The relevant provision of the Act in relation to giving of notice invoking the Arbitration Clause is Section 9. It reads:-
“9. Power to party to appoint new arbitrator or in certain cases, a sole arbitrator :- Where an arbitration agreement provides that a reference shall be to two arbitrators one to be appointed by each party, then, unless a different intention is expressed in the agreement, –
(a) if either of the appointed arbitrators neglects or refuses to act, or incapable of acting, or dies, the party who appointed him may appoint a new arbitrator in his place;
(b) if one party fails to appoint an arbitrator, either originally or by way of substitution as aforesaid, for fifteen clear days after the service by the other party of a notice in writing to make the appointment, such other party having appointed his arbitrator before giving the notice, the party who has appointed an arbitrator may appoint that arbitrator to act as sole arbitrator in the reference, and his award shall be binding on both parties as if he had been appointed by consent:
Provided that the Court may set aside any appointment as sole arbitrator under Clause (b) and either, on sufficient cause being shown allow further time to the defaulting party to appoint an arbitrator or pass such other order as it thinks fit.
Explanation:- The fact that an arbitrator or umpire, after a request by either party to enter on and proceed with the reference, does not within one, month comply with the request may constitute a neglect or refusal to act within the meaning of Section 8 and this Section.”
According to Clause (b) if a party falls to appoint an arbitrator after having received a notice of 15 clear days, the party who issued the notice is entitled to appoint a sole arbitrator and the award of the sole arbitrator would be binding on all the parties. In the present case, the earliest letter written by the appellant to the respondent is dated 19-11-1975. In the said letter, the appellant after inviting the attention of the respondent to the defects in the plant and machinery installed by the respondent, concluded the letter as follows:-
“I am sure that you will now look into the issue personally and take such actions as is necessary to hand over plant and to give the rated capacity production after necessary modification. Please acknowledge the receipt of this letter and confirm action taken.”
To the said letter, the respondent replied on 18-12-1975. In the said letter, the stand taken by the respondent was that although the conveyors were designed and built to the rated capacity, the entire responsibility to achieve the capacity for the system as a whole cannot be laid at the doors of the respondent. The respondent, however, stated in the reply that they will carry out the modification to the feeders as agreed. In both these letters, the question of referring the matter to arbitration was not at all the subject matter. After the receipt of the letter dated 18-12-1975 addressed by the respondent to the appellant, the appellant again wrote letter dated 28th February/1st March 1976. In the said letter, the appellant pointed out the lapses on the part of the respondent in executing the contract. The last paragraph of that letter reads:-
“Since you have failed to fulfill the terms of the contract inspite of the extensions given to you now disputes and differences have arisen out of the above terms and contract and as per the clause found in the contract agreement dated 27-12-1968, we are hereby giving you notice that if you fail to fulfill the terms mentioned in the above contract agreement dated 27-12-1968 within one month from the date of this notice, we will be forced to refer the matter for arbitration which please note.”
As is clear from the above paragraph, the appellant stated that if the respondent failed to fulfill the conditions of contract dated 27-12-1968 within one month from the date of receipt of the said letter, the appellant would be forced to refer the matter for arbitration. There is no dispute that there was no reply to the above letter from the respondent. But it is also clear from the aforesaid letter, the appellant did not invoke Clause 14 of the agreement and did not call upon the respondent in terms of the said clause read with Section 9 of the Arbitration Act to appoint an Arbitrator. After the above letter, it appears the appellant addressed a letter to the Indian Council of Arbitration requesting them to help the appellant in settling the matter by arbitration, with the respondent. The said Council addressed a letter dated 23rd June 1977 to the respondent. The said letter reads:-
“M/s. Viswesvaraya Iron and Steel Ltd., Bhadravathi-577 301, Karnataka has written to us about the dispute which has arisen under the contract entered into by it with your company on 27-12-1968 for the supply, erection and commissioning of the complete Raw Material handling plant including civil engineering works on turn key basis.
V.I.S., has written that the contract contains an arbitration clause which provides that any dispute whatsoever arising out of the agreement shall be referred to two arbitrators, one to be appointed by the VISL and another by you. The two arbitrators have to appoint an Umpire in advance before they consider any point of dispute. VISL had stated that it had served a notice on you dated 28th February 1976/1-3-1976 stating that in case the contract is not fulfilled within one month, it will refer the matter to arbitration. It has not, it seems, received any reply from you. VISL has written that in modification of the arbitration clause in the agreement referred to above, it is willing to submit the dispute for arbitration under the Council’s Rules. If you are also agreeable to arbitration by the Council, we shall take the necessary action.
I may inform you that Indian Council of Arbitration is a body sponsored by the Government of India and apex business organisations. The Council provides arbitration and conciliation facilities with a view to settling commercial disputes amicably. It has evolved its Rule of Arbitration and set up a panel of arbitrators for the purpose. I am sending herewith a copy of the rules of arbitration of the Council for your information. Please let me have your concurrence for reference of the dispute under the Council’s Rules.”
In the said letter, the Council stated that it was a body sponsored by the Government of India and apex business organisations and that the Council provides arbitration and conciliation facilities with a view to seating commercial disputes amicably, and sought for concurrence of the respondent for reference of the dispute under the Council’s Rules. From the letter addressed by the Council to the respondent, it is clear that the appellant instead of invoking Clause-14 of the agreement, for the purpose of agreement, sought the aid of the Indian Council of Arbitration for settling the matter. But the respondent did not give its concurrence for the offer made by the Indian Council of Arbitration at the instance of the appellant, as is evident from the letter of the respondent addressed to the Indian Council of Arbitration. The said letter reads:-
“I am in receipt of your letter No. ICA/610/ AC/7 dated 17th September 1977. I am very sorry for the delay in replying to you, but I myself have just returned after six weeks abroad.
In view of the reference made to you by Viswesvaraya Iron and Steel Limited, we have now re-examined the entire matter and we have come to the conclusion that we are in no way liable to Visweswaraya Iron and Steel Limited under the terms of the Contract with them which you have referred to. You may not be aware that Viswesvaraya Iron and Steel Limited have already been working the plant for the past six years.
We have considered the suggestion made to you by Viswesvaraya Iron and Steel Limited for the modification of the arbitration clause in the contract. We do not think that the modification is necessary and therefore regret we do not wish to accept your suggestion. We wish however to thank the Indian Council of Arbitration for their kind offer.”
As can be seen from the above letter, the respondent expressed against the modification of the arbitration clause in the contract. The clear purport of the last paragraph of the letter is that the respondent was of the view that the matter should be settled in accordance with Clause 14 of the agreement and was not agreeable for the modification of the said arbitration clause. The position which emerges out of this is that upto this stage this case is similar to the case of Food Corporation of India referred to earlier. In the said case also, though the arbitration clause in the agreement entered into between the parties provided for nomination of an arbitrator by each of the parties, the plaintiff had asked the defendant whether it was agreeable to have the matter settled through the Director of Shipping. But when there was no reply from the defendant to that suggestion the plaintiff in that case was careful enough to issue a notice in accordance with arbitration Clause 42 of the Charter concerned in that case, read with Section 9 of the Arbitration Act, and it was only after the defendant kept silent to that notice and after the expiry of the period of notice, the suit was filed. In the present case, after the respondent declined to agree for the modification of the arbitration clause and to have the matter settled through the aid of the Indian Council of Arbitration, the appellant did not take care to issue any notice at all to the respondent in accordance with Clause 14 of the agreement read with Section 9 of the Arbitration Act. Had the appellant issued such a notice and the respondent had kept quiet, the ratio of the decision on which the learned Counsel for the respondent relied would have been applicable on all fours and the respondent could not have been permitted to invoke the arbitration clause and sought for stay of the suit under Section 34 of the Act.
9. The learned Counsel for the appellant, however, strenuously contended that the letter dated 28th February/1st March 1976 itself was a notice calling upon the respondent to nominate an arbitrator and the respondent having kept silent even after the receipt of the said notice had no right to depend upon the arbitration clause and seek stay of the suit. We are not impressed by the submission. As can be seen from the contents of the last paragraph of the said letter extracted earlier, what the appellant stated was if the respondent failed to fulfill the terms of the contract dated 27-12-1968, within one month from the date of receipt of the said letter, the appellant would be forced to refer the matter for arbitration, which meant that if within one month the respondent failed to do the work as suggested by the appellant in the said letter, the appellant would fall back upon the arbitration clause and would call upon the respondent to nominate an arbitrator, which the appellant never did. On the other hand, the appellant approached the Indian Council of Arbitration and as stated earlier the Council could not take up the matter unless the respondent agreed for the modification of the arbitration clause and in fact the respondent expressly disagreed for the modification of the arbitration clause.
10. The learned Counsel for the appellant next relied upon a reply given by the Advocate for the respondent to the notice got issued by the appellant on 7-11-1978. As can be seen from the said reply, the respondent denied its liability and in the last paragraph of the said letter, the Advocate who issued the reply stated thus:
“7. Without admitting that my clients are in any way responsible for the failure in the output of the said furnaces as alleged by you and liable for the compensation for loss claimed by your clients and without prejudice to the contentions of my clients made herein and which they may make hereafter, please note that your clients are absolutely debarred from claiming any damages from my clients because:-
(a) The claim is barred by limitation.
(b) The security for the performance by my clients has been provided to your clients by the guarantee issued by the State Bank of India against whom your clients should in law, proceed against as the primary obligor, if at all that guarantee is now valid and in force.
(c) The loss alleged did not arise naturally in the usual course of things from the alleged breach.
(d) The parties did not know and could not have known they made the contract that the said loss was likely to result from the breach of the contract.
(e) The compensation claimed, in the circumstances herein, is for some remote or indirect loss of damage sustained.
(f) Your clients have themselves failed to perform and to carry out their obligations under the contract.
(g) Your clients and/or DEMAG and the other contracts have each in their turn contributed to the failures which caused the loss, if any.
8. Therefore, if inspite of the aforesaid, your clients choose to proceed against my clients peremptorily or otherwise and with or without further reference to ray clients as threatened, please note that they do so at their own risk and cost.”
All that can be gathered from the above reply notice is that the appellant had taken the stand that the respondent was liable for damages not only for the non-functioning of the plant installed by the respondent to its full capacity, but also in respect of the expenses required to be incurred for making the plant and machinery fully effective and functioning, and the respondent totally denied its liability. In fact, it is because of this reply dispute between the appellant and the respondent arose. The fact that the respondent was denying its liability is not the same thing as saying that the respondent was unwilling to have the dispute settled in accordance with the arbitration clause. Such a question would have arisen if only the appellant had issued a notice in terms of the arbitration clause, read with Section 9 of the Act calling upon the respondent to nominate an arbitrator. This was not done. If the appellant had done so and if the respondent had kept silent, then two courses would have been open to the appellant, namely, either to appoint a sole arbitrator as provided under Section 9 of the Act or to file a suit on the ground that the respondent had waived his right to have the matter settled through arbitration. In such an event the respondent would not be permitted to fall back upon the arbitration clause and invoke the provisions of Section 34 of the Act and seek stay of the suit.
11. The learned Counsel for the appellant submitted that the appellant filed a suit as arbitration was likely to become time barred. As can be seen from Section 37 of the Act, the limitation prescribed for the suit and for commencement of arbitration is one and the, same and by the force of the said provision, the date on which notice is served on the opposite party calling upon him to nominate an arbitrator would be deemed to be a date on which the suit had been filed. Therefore, the last date of limitation would be the same for the suit and for the commencement of arbitration. In the present case, as stated earlier, the appellant had ample time to issue notice after the respondent failed to reply the letter dated 28th February/1st March 1976. Whatever that may be, the suit was filed within the period of limitation. In fact, when the respondent filed an application under Section 34 of the Act and wanted the Court to stay the proceedings and that application had been allowed and the suit had been stayed and the parties have been directed to settle the matter through arbitration in terms of Clause 14 of the agreement dated 27-12-1968 there is no question of the arbitration proceedings being barred by limitation.
12. In the circumstances and for the reasons aforesaid, we make the following order.
The Appeal is dismissed.
