K.V. Mohan Rao vs Indian Oil Corporation Limited

Nawal Kishore Agarwal, J.—The applicant has preferred this application u/s 11 (6) of the Arbitration and Conciliation Act, 1996 (for short ''the Act'') for appointment of Arbitrator. Pursuant to respondent''s tender No. LPG/ENG/PT-134/05 for the work of land development, construction of asphalted roads, concrete pavements, culverts and drains at proposed LPG Bottling Plant, Raipur, the applicant submitted his quotation, which was accepted and consequently work order was issued in his favour by the respondent.

The agreement entered into between the parties contains an arbitration clause. Section 9 reads as under:

ARBITRATION AND ALTERNATIVE DISPUTE RESOLUTION MACHINERY

9.0.0.0 ARBITRATION

9.0.1.0 Subject to provisions of Clauses 6.7.1.0, 6.7.2.0 and 9.0.2.0 hereof, any dispute arising out of Notified Claim of the CONTRACTOR included in the Final Bill of (lie CONTRACTOR in accordance with the provisions of Clause 6.6.3.0 hereof, if the CONTRACTOR has not opted for the Alternative Dispute Resolution Machinery referred to in Clause 9.1.1.0 hereof, any dispute arising out of any Claim (s) of the OWNER against the CONTRACTOR shall be referred to the arbitration of a Sole Arbitrator selected in accordance with the provisions of Clause 9.0.1.1 hereof. It is specifically agreed that the owner may prefer its Claim (s) against the CONTRACTOR as counterclaim (s) if a Notified Claim of the CONTRACTOR has been referred to arbitration. The CONTRACTOR shall not, however, be entitled to raise as a set off defence or counterclaim any claim which is not a Notified Claim included in the CONTRACTOR''S Final Bill in accordance with the provisions of Clause 6.6.3.0 hereof.

9.0.1.1. The Sole Arbitrator referred to in Clause 9.0.1.0 hereof shall be selected by the CONTRACTOR out of a panel of 3 (three) persons nominated by the OWNER for the purpose of such selection, and should the CONTRACTOR fail to select an arbitrator within 30 (thirty) days of the panel of names of such nominees being furnished by the OWNER for the purpose, the Sole Arbitrator shall be selected by the OWNER out of the said panel.

9.0.2.0. Any dispute (s) or difference (s) with respect to or concerning or relating to any of the following matters are hereby specifically excluded from the scope, purview and ambit of this Arbitration Agreement with the intention that any dispute or difference with respect to any of the said following matters and/or relating to the Arbitrator''s or Arbitral Tribunal''s Jurisdiction with respect thereto shall not and cannot form the subject matter of any reference or submission to arbitration, and the Arbitrator or the Arbitral Tribunal shall have no jurisdiction to entertain the same or to render any decision with respect thereto, and such matter shall be decided by the General Manager prior to the Arbitrator proceeding with or proceeding further with the reference. The said excluded matters are:

(i) With respect to or concerning the scope or existence or otherwise of the Arbitration Agreement:

(ii) Whether or not a Claim sought to be referred to arbitration by the CONTRACTOR is a Notified Claim;

(iii) Whether or not a Notified Claim is included in the CONTRACTOR''S Final Bill in accordance with the provisions of Clause 6.6.3.0 hereof.

(iv) Whether or not the CONTRACTOR has opted for the Alternative Dispute Resolution Machinery with respect to any Notified Claim included in the CONTRACTOR''S Final Bill.

9.0.3.0 The provisions of the Indian Arbitration & Conciliation Act, 1996 and any reenacement (s) and/or modification (s) thereof and of the Rules framed thereunder shall apply to arbitration proceedings pursuant hereto subject to the following conditions:

(a) The Arbitrator shall give his Award separately in respect of each Claim and Counterclaim; and

(b) The Arbitrator shall not entitled to review any decision, opinion or determination (howsoever expressed), which is stated, to be final and/or binding on the CONTRACTOR in terms of tire Contract Documents.

9.0.4.0 The venue of the arbitration shall be New Delhi provided that the Arbitrator may with the consent of the OWNER and the CONTRACTOR agree upon any other venue.

The dispute and differences arose between the parties. The applicant vide letters dated 03.03.2008 (Annexure A/4) and 21.5.2008 (Annexure A/6) requested the Chief L.P.G. Manager (E), I.O.C.L. for appointment of an Arbitrator to adjudicate the dispute between the parties in terms of arbitration clause. The respondent failed to act. The applicant then served 30 days notice dated 23.5.2008 on the respondent demanding appointment of Arbitrator in terms of arbitration clause. The respondent again failed to act. Therefore, the applicant moved this instant application for appointment of independent Arbitrator on 18.08.2008. Admittedly, till the date of moving of the application, the respondent had not made appointment consistently with the arbitration clause.

The respondent put in its appearance in the case on 02.09.2008 and only thereafter it proposed, vide its letter dated 08.09.2008, a panel of Arbitrators, as per arbitration clause.

Shri Y.C. Sharma, learned counsel appearing for the applicant would submit: the respondent failed to act in accordance with the arbitration clause within a period of 30 days of the demand and also before instant application has been moved by the applicant, therefore, the respondent''s right to appoint Arbitrator ceases. The dispute and differences between the parties may be referred to an independent Arbitrator.

On the other hand, by placing reliance upon the ratio of law laid down by the Supreme Court in the case of Northern Railway Administration, Ministry of Railway, New Delhi Vs. Patel Engineering Company Ltd., and Bharat Sanchar Nigam Ltd. and Another Vs. Dhanurdhar Champatiray, Shri Sanjay K. Agrawal, learned counsel appearing for the respondent contended: the respondent has already proposed, vide its letter dated 08.09.2008, a panel of three arbitrators so that the applicant may choose one of them as sole Arbitrator. He would further submit, a reading of the scheme of Section 11 of the Act shows that the emphasis is on the terms of the agreement being adhered to and/or given effect as closely as possible. 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 that it is not mandatory for this Court 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.

I have heard learned counsel for the parties.

Before considering the arguments raised by the learned counsel for the parties, it would be necessary to refer to Section 11 of the Act, which reads as under:

Appointment of arbitrators-

(1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.

(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.

(4) If the appointment procedure in sub-section (3) applies and-

(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or

(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.

(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.

(6) Where, under an appointment procedure agreed upon by the parties,-

(a) a party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or subsection (6) to the Chief Justice or the person or institution designated by him is final.

(8) The Chief Justice or the person or institution designated by him, in appointing an arbitrator, shall 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 and impartial arbitrator.

(9) In the case of appointment of sole or third arbitrator in an international commercial arbitration, the Chief Justice of India or the person or institution designated by him may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities.

(10) The Chief Justice may make such scheme as he may deem appropriate for dealing with matters entrusted by sub-section (4) or sub-section (5) or sub-section (6) to him.

(11) Where more than one request has been made under sub-section (4) or sub-section (5) or sub-section (6) to the Chief Justices of different High Courts or their designates, the Chief Justice or his designate to whom the request has been first made under the relevant sub-section shall alone be competent to decide on the request.

(12) (a) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and (10) arise in an international commercial arbitration the reference to, "Chief Justice in those sub-sections shall be construed as a reference to the "Chief Justice of India".

(b) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and (10) arise in any other arbitration, the reference to "Chief Justice" in those sub-sections shall be construed as a reference to, the Chief Justice of the High Court within whose local limits the principal Civil Court referred to in clause (e) of sub-section (I) of section 2 is situate and, where the High Court itself is the court referred to in that clause, to the Chief Justice of that High Court.

A plain reading of Section 11 (4) and 11 (5) of the Act would show that if one party demands appointment of an arbitrator and the other party does not appoint any arbitrator within thirty days of such demand, the right to appointment at the instance of one of the parties does not get automatically forfeited. If the respondent makes an appointment even after 30 days of demand but the applicant has not moved the Court u/s 11 of the Act, that action on the part of the respondent would be sufficient. In other words, in cases arising u/s 11(4) and 11(5), if the respondent has not made an appointment within thirty days of demand, right to make an appointment of an arbitrator is not forfeited but continues, but such appointment shall be made before the other party files the application u/s 11 seeking appointment of an arbitrator before the High Court. It is only then the right of the respondent ceases. But so far as the period of 30 days is concerned, it is not mentioned in sub-section (6). The period of limitation is only provided in sub-sections (4) and (5).

A three judge Bench of the Supreme Court, in the case of Punj Lloyd Ltd. v. Petronet MHB Ltd., (2006) 2 SCC 638, has held: once notice period of thirty days has expired and the party has moved the Hon''ble Chief Justice of the High Court u/s 11 (6) of the Act, the other party loses his right to appoint an arbitrator on the basis of arbitral agreement.

The Supreme Court, in the above case, while taking the above view, had relied on the judgment of its own rendered in the case of Datar Switchgears Ltd. Vs. Tata Finance Ltd. and Another, In para 19 of the judgment, the Supreme Court has observed as under:

So far as cases falling u/s 11 (6) are concerned-such as the one before us no time limit has been prescribed under the Act, whereas a period of 30 days has been prescribed u/s 11(4) and Section 11 (5) of the Act. In our view, therefore, so far as Section 11(6) is concerned, if one party demands the opposite party to appoint an arbitrator and the opposite party [do] not make an appointment within 30 days of the demand, the right to appointment does not get automatically forfeited after expiry of 30 days. If the opposite party makes an appointment even after 30 days of the demand, but before the first party has moved the court u/s 11, [which] would be sufficient. In other words, in cases arising u/s 11(6), if the opposite party has not made an appointment within 30 days of demand, the right to make appointment is not forfeited but continues, but an appointment has to be made before the former files application u/s 11 seeking appointment of an arbitrator. Only then the right of the opposite party ceases.

The Supreme Court, in the case of Ace Pipeline Contracts Private Limited Vs. Bharat Petroleum Corporation Limited, has observed in para 10 of its judgment as under:

10 But in sub-section (6), where, the procedure has already been agreed upon by the parties, as in the present case, and in that event, if a party fails to act as required under that procedure or the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure or a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may in that event, request the Chief Justice or a person or an institution designated by him to make necessary measures, unless the agreement on the appointment procedure provides other means for appointment of arbitrator. Therefore, so far as the period of thirty days is concerned, it is not mentioned in sub-section (6). The period of limitation is only provided under sub-sections (4) and (5) of Section 11. As such, as per the statute, the period of limitation of thirty days cannot be invoked under sub-section (6) of Section 11 of the Act.

Somewhat different view was expressed by the Supreme Court in the case of Union of India (UOI) Vs. Bharat Battery Manufacturing Co. (P) Ltd., .

Looking to difference of opinion of two co-ordinate Benches of the Supreme Court, the matter was referred to three Judge Bench in Northern Railway Administration, Ministry of Railway, New Delhi Vs. Patel Engineering Company Ltd., wherein the Supreme Court in paras 12 and 14 of its judgment has observed as under:

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.

In all these cases at hand the High Court does not appear to have focused on the requirement to have due regard to the qualifications required by the agreement or other considerations necessary to secure the appointment of an independent and impartial arbitrator. 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. If it is not done, the appointment becomes vulnerable. In the circumstances, we set aside the appointment made in each case, remit the matters to the High Court to make fresh appointments keeping in view the parameters indicated above.

Indisputably, the instant case falls u/s 11 (6) of the Act. So far as period of 30 days is concerned, it is not mentioned in sub-section (6). The period of limitation is only provided under sub-sections (4) and (5) of Section 11 of the Act, As such, as per the statute, the period of limitation of thirty days cannot be invoked under sub-section (6) of Section 11 of the Act.

Now, I shall examine the applicant''s prayer in the light of judgment of Supreme Court in the case of Northern Railways Administration, Ministry of Railway v. Patel Engineering Company Limited (supra) in which the Hon''ble Supreme Court has held, as per scheme of Section 11 of the Act the terms of the agreement being adhered to and/or given effect as closely as possible although it is not mandatory for the Court to appoint named arbitrator or arbitrators.

The applicant''s demand for appointment of arbitrator de hors the arbitration agreement is only on the ground that the respondent failed to appoint arbitrator in terms of arbitration agreement even after 30 days of demand and also before the filing of application for appointment of arbitrator by it. Therefore, considering the facts and circumstances of the case in the light of Section 11 (6) and 11 (8) of the Act and in the light of the ratio of law laid by the Supreme Court in the cases referred hereinabove, in my opinion, the applicant has failed to demonstrate any ground for appointment of independent arbitrator de hors the arbitration agreement.

In view of above, I pass the following order:

i) The applicant within a period of 45 days from today shall choose the name of one person to be appointed as sole arbitrator and in case of default, the respondent shall appoint one person out of panel of three, as proposed by it, to be sole arbitrator to resolve the dispute between the parties. In either case, the respondent shall refer the claims and counter claims of the parties to such sole arbitrator.

ii) The Arbitrator so appointed shall decide the matter in accordance with law.

Accordingly, the application is disposed of to the extent indicated above.