M/s Control Systems Vs M.P. Micro and Small Enterprises Facilitation Council & Ors.

In this petition filed under Article 226 of the Constitution, the petitioner has assailed the order dated 14-07-2016 passed by M.P. Micro and

Small Enterprises Facilitation Council (Council) whereby the council has directed the respondent No.2 & 3 to appoint an Arbitrator as per the

direction of Nagpur Bench of the High Court and Clause 2.14 of the agreement.

The main objection of the petitioner is regarding appointment of private/departmental Arbitrator. Learned counsel for the petitioner contended

that in the year 2013, the petitioner filed Misc. Civil Application No.260/13 before the Nagpur Bench of High Court which was disposed of on

03-05-2013. Before the High Court, a statement was made on behalf of the official respondents that steps to appoint the Arbitrator in accordance

with agreement would be initiated immediately. Thereafter, one Shri M.D. Dutt was appointed as an Arbitrator but, admittedly, he could not

complete the said arbitration proceedings. The petitioner then prayed for appointment of an Arbitrator. Learned counsel for the petitioner

contended that conciliation under the Micro, Small and Medium Enterprises Development Act, 2006 (Act of 2006) could not succeed and,

therefore, an Arbitrator needs to be appointed. He submits that the petitioner is a micro enterprises and, therefore, the Act of 2006 which is a

special act is applicable on the petitioner. Reliance is placed on Section 24 of the Act of 2006 to contend that Section 15 to 23 of this Act will

have overriding effect on any other law inconsistent therewith.

During the course of arguments, learned counsel for the petitioner further contended that the Arbitration Act was amended in the year 2015. As

per legislative mandate ingrained in Section 5 of Section 12, departmental Arbitrator cannot be appointed. In support of these contentions, reliance

is placed on the judgment of Allahabad High Court in the case of M/s. Paper and Board Convertors vs. U.P. State Micro & Small Enterprises &

Ors., (2011) 5 SCC 532 (Booz Allen & Hamilton Inc. vs. SBI Home Finance Ltd. & Ors.), (2012) 4 SCC 307 (Kanwar Singh Saini vs. High

Court of Delhi) and on the latest judgment reported in 2017 ALL SCR 1633 (TRF Ltd. vs. Energo Engineering Projects Ltd.). Learned counsel

for the petitioner submits that a cumulative reading of various provisions of Act of 1996 and 2006 makes it clear that the council has committed an

error of law in still invoking the arbitration clause and appointing a private/departmental Arbitrator.

Per contra, Shri Thakur, learned counsel for the respondents submits that as per the petitioner''s own demand in Misc. Civil Application

No.260/13, a departmental Arbitrator was appointed and in his absence another Arbitrator as per Clause 2.14 has already been appointed.

Certain proceedings have taken place before the said Arbitrator and, therefore, now the matter cannot be switched over before another arbitrator.

No other point is pressed by the parties.

I have heard the parties at length and perused the record.

Sub-section 5 of Section 12 reads as under:-

12(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the

dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an Arbitrator.

A plain reading of this provision makes it crystal clear it begins with a non obstante clause, which has an overriding effect on any other prior

agreement which runs contrary to the legislative mandate ingrained in Sub-section 5 of Section 12 of the Act. If the relevant entries of seventh

schedule are read, it will be clear like noonday that a departmental Arbitrator cannot function as an Arbitrator. This point is considered by

Supreme Court in the case of TFR Ltd. (supra).

This Court recently followed the aforesaid dicta in AC. No.78/16 (M/s Sahib Infrastructure Pvt. Ltd., Bhopal vs/ The Secretary to the

Government of India) and opined as under:-

In view of the aforesaid expression, there is no scintilla of doubt that even if parties agreed for appointment of three member Board,such prior

agreement for appointment of Arbitrators which runs contrary to the mandate ingrained in sub-section (5) and relevant entries of Seventh Schedule

have lost its complete significance. Thus, I find force in the argument of Shri Naman Nagrath, learned senior counsel for the applicant that the

named Arbitrators cannot be appointed. I find force in my view from the judgment of Supreme Court in the case of DelhiMetro Rail Corporation

Ltd. (supra). Para 25 reads as under:

25.Section 12 has been amended with the objective to induce neutrality of arbitrators, viz., their independence and impartiality. The amended

provision is enacted to identify the ''circumstances'' which give rise to ''justifiable doubts'' about the independence or impartiality of the arbitrator. If

any of those circumstances as mentioned therein exists, it will give rise to justifiable apprehension of bias. The Fifth Schedule to the Act enumerates

the grounds which may give rise to justifiable doubts of this nature. Likewise, the Seventh Schedule mentions those circumstances which would

attract the provisions of sub-section (5) of Section 12 and nullify any prior agreement to the contrary. In the context of this case, it is relevant to

mention that only if an arbitrator is an employee, a consultant, an advisor or has any past or present business relationship with a party, he is

rendered ineligible to act as an arbitrator.

Likewise, that person is treated as incompetent to perform the role of arbitrator, who is a manager, director or part of the management or has a

single controlling influence in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.

Likewise,persons who regularly advised the appointing party or affiliate of the appointing party are incapacitated. A comprehensive list is

enumerated in Schedule 5 and Schedule 7 and admittedly the persons empaneled by the Respondent are not covered by any of the items in the

said list."" [Emphasis Supplied]

The Supreme Court poignantly held that Seventh Schedule mentions the circumstances which would attract the provisions of sub-section (5) of

Section 12 and nullify any prior agreement to the contrary. The legislative mandate ingrained in sub-section (5) of Section 12 is clearly explained by

Supreme Court in the case of Delhi Metro (supra).

This court in WP No.11258/2010 (Swadesh Kumar Agrawal vs. Dinesh Kumar Agrawal) decided on 07.09.2017 dealt with a question whether a

substitute arbitrator can be appointed despite a contrary clause in the arbitration agreement. It was poignantly held as under:

The appointment of a different independent arbitrator despite a contrary clause in the arbitration agreement is not unknown to law. In catena of

judgments, even prior to amendment of Section 12 of the Arbitration Act Courts have appointed the arbitrators, giving a go-by to the agreed

arbitration clause in certain contingency and situations, having regard to the provisions of the Act which, inter alia, provided that while appointing

the arbitrator, Chief Justice, or the person or the institution designated by him, shall have regard to the other conditions as are likely to secure the

appointment of an independent and impartial arbitrator. See Datar Switchgears Ltd. v. Tata Finance Ltd. (2000) 8 SCC 151] , Punj Lloyd Ltd. v.

Petronet MHB Ltd.(2006) 2 SCC 638] , Union of India v. Bharat Battery Mfg. Co. (P) Ltd (2007) 7 SCC 684] , Deep Trading Co. v. Indian Oil

Corpn. (2013) 4 SCC 35, Union of India v.Singh Builders Syndicate, (2009) 4 SCC 523 and North Eastern Railway v.Tripple Engg. Works,

(2014) 9 SCC 288. Taking note of the aforesaid judgments, this Court in Union of India v. U.P. State Bridge Corpn. Ltd., (2015) 2 SCC 52

summed up the position in the following manner:

No doubt, ordinarily that would be the position. The moot question, however, is as to whether such a course of action has to be

necessarily adopted by the High Court in all cases, while dealing with an application under Section 11 of the Act or is there room for

play in the joints and the High Court is not divested of exercising discretion under some circumstances? If yes, what are those

circumstances? It is this very aspect which was specifically dealt with by this Court in Tripple Engg. Works (supra). Taking note of

various judgments, the Court pointed out that the notion that the High Court was bound to appoint the arbitrator as per the contract

between the parties has seen a significant erosion in recent past. In paras 6 and 7 of the said decision, those judgments wherein

departure from the aforesaid ""classical notion"" has been made are taken note of. It would, therefore, be useful to reproduce the said

paragraph along with paras 8 and 9 hereinbelow:

The ""classical notion"" that the High Court while exercising its power under Section 11 of the Arbitration and Conciliation Act,

1996 (hereinafter for short ""the Act"") must appoint the arbitrator as per the contract between the parties saw a significant erosion in

ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd (2007) 5 SCC 304] , wherein this Court had taken the view that

though the contract between the parties must be adhered to, deviations therefrom in exceptional circumstances would be permissible.

A more significant development had come in a decision that followed soon thereafter in Union of India v. Bharat Battery Mfg. Co. (P)

Ltd. (2007) 7 SCC 684] wherein following a three-Judge Bench decision in Punj Lloyd Ltd. v. Petronet MHB Ltd. (2006) 2 SCC

638] , it was held that once an aggrieved party files an application under Section 11(6) of the Act to the High Court, the opposite

party would lose its right of appointment of the arbitrator(s) as per the terms of the contract. The implication that the Court would be

free to deviate from the terms of the contract is obvious.

The apparent dichotomy in ACE Pipeline v. Bharat Petroleum Corpn. Ltd., (2007) 5 SCC 304 and Union of India v. Bharat

Battery Mfg. Co. (P) Ltd., (2007) 7 SCC 684] was reconciled by a three- Judge Bench of this Court in Northern Railway Admn.,

Ministry of Railway v. Patel Engg. Co. Ltd. (2008) 10 SCC 240], wherein the jurisdiction of the High Court under Section 11(6) of

the Act was sought to be emphasised by taking into account the expression ""to take the necessary measure"" appearing in sub-section

(6) of Section 11 and by further laying down that the said expression has to be read along with the requirement of sub-section (8) of

Section 11 of the Act. The position was further clarified in Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd. (2009) 8 SCC 520

Para 48 of the Report wherein the scope of Section 11 of the Act was summarised may be quoted by reproducing sub-paras (vi) and

(vii) hereinbelow: (Indian Oil case [Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd., (2009) 8 SCC 520 : (2009) 3 SCC (Civ)

460] , SCC p. 537)

(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.

The above discussion will not be complete without reference to the view of this Court expressed in Union of India v. Singh

Builders Syndicate[Union of India v. Singh Builders Syndicate, (2009) 4 SCC 523, wherein the appointment of a retired Judge

contrary to the agreement requiring appointment of specified officers was held to be valid on the ground that the arbitration

proceedings had not concluded for over a decade making a mockery of the process. In fact, in para 25 of the Report in Singh

Builders Syndicate this Court had suggested that the Government, statutory authorities and government companies should consider

phasing out arbitration clauses providing for appointment of serving officers and encourage professionalism in arbitration.

A pronouncement of late in Deep Trading Co. v. Indian Oil Corpn. (2013) 4 SCC 35 followed the legal position laid down in Punj

Lloyd Ltd. which in turn had followed a two-Judge Bench decision in Datar Switchgears Ltd.. The theory of forfeiture of the rights of

a party under the agreement to appoint its arbitrator once the proceedings under Section 11(6) of the Act had commenced came to

be even more formally embedded in Deep Trading Co. subject, of course, to the provisions of Section 11(8), which provision in any

event, had been held in Northern Railway Admn. not to be mandatory, but only embodying a requirement of keeping the same in

view at the time of exercise of jurisdiction under Section 11(6) of the Act.''

Speedy conclusion of arbitration proceedings hardly needs to be emphasised. It would be of some interest to note that in England

also, Modern Arbitration Law on the lines of UNCITRAL Model Law, came to be enacted in the same year as the Indian law which

is known as the English Arbitration Act, 1996 and it became effective from 31-1-1997. It is treated as the most extensive statutory

reform of the English arbitration law. Commenting upon the structure of this Act, Mustill and Boyd in their Commercial Arbitration,

2001 companion volume to the 2nd Edn., have commented that this Act is founded on four pillars. These pillars are described as:

(a) The first pillar: Three general principles.

(b) The second pillar: The general duty of the Tribunal.

(c) The third pillar: The general duty of the parties.

(d) The fourth pillar: Mandatory and semimandatory provisions.

Insofar as the first pillar is concerned, it contains three general principles on which the entire edifice of the said Act is structured.

These principles are mentioned by an English Court in its judgment in Deptt. of Economics, Policy and Development of the City of

Moscow v. Bankers Trust Co. 2005 QB 207 : (2004) 3 WLR 533 : (2004) 4 All ER 746 : 2004 EWCA Civ 314] In that case,

Mance, L.J. succinctly summed up the objective of this Act in the following words: (QB p. 228, para 31)

''31. ... Parliament has set out, in the Arbitration Act, 1996, to encourage and facilitate a reformed and more independent, as well as

private and confidential, system of consensual dispute resolution, with only limited possibilities of court involvement where necessary

in the interests of the public and of basic fairness.''

Section 1 of the Act sets forth the three main principles of arbitration law viz. (i) speedy, inexpensive and fair trial by an impartial

tribunal; (ii) party autonomy; and (iii) minimum court intervention. This provision has to be applied purposively. In case of doubt as to

the meaning of any provision of this Act, regard should be had to these principles.

In the book O.P. Malhotra on the Law and Practice of Arbitration and Conciliation (3rd Edn. revised by Ms Indu Malhotra), it is

rightly observed that the Indian Arbitration Act is also based on the aforesaid four foundational pillars.

First and paramount principle of the first pillar is ""fair, speedy and inexpensive trial by an Arbitral Tribunal"". Unnecessary delay or

expense would frustrate the very purpose of arbitration. Interestingly, the second principle which is recognised in the Act is the party

autonomy in the choice of procedure. This means that if a particular procedure is prescribed in the arbitration agreement which the

parties have agreed to, that has to be generally resorted to. It is because of this reason, as a normal practice, the court will insist the

parties to adhere to the procedure to which they have agreed upon. This would apply even while making the appointment of

substitute arbitrator and the general rule is that such an appointment of a substitute arbitrator should also be done in accordance with

the provisions of the original agreement applicable to the appointment of the arbitrator at the initial stage. [See Yashwith

Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd. (2006) 6 SCC 204] ] However, this principle of party autonomy in the

choice of procedure has been deviated from in those cases where one of the parties have committed default by not acting in

accordance with the procedure prescribed. Many such instances where this course of action is taken and the Court appoint the

arbitrator when the persona designata has failed to act, are taken note of in paras 6 and 7 of Tripple Engg. Works. We are conscious

of the fact that these were the cases where appointment of the independent arbitrator made by the Court in exercise of powers under

Section 11 of account of ""default procedure"". We are, in the present case, concerned with the constitution of substitute Arbitral

Tribunal where earlier Arbitral Tribunal has failed to perform. However, the above principle of default procedure is extended by this

Court in such cases as well as is clear from the judgment in Singh Builders Syndicate.

In the case of contracts between government corporations/State-owned companies with private parties/contractors, the terms of

the agreement are usually drawn by the government company or public sector undertakings. Government contracts have broadly two

kinds of arbitration clauses, first where a named officer is to act as sole arbitrator; and second, where a senior officer like a Managing

Director, nominates a designated officer to act as the sole arbitrator. No doubt, such clauses which give the Government a dominant

position to constitute the Arbitral Tribunal are held to be valid. At the same time, it also casts an onerous and responsible duty upon

the persona designata to appoint such persons/officers as the arbitrators who are not only able to function independently and

impartially, but are in a position to devote adequate time in conducting the arbitration. If the Government has nominated those officers

as arbitrators who are not able to devote time to the arbitration proceedings or become incapable of acting as arbitrators because of

frequent transfers, etc., then the principle of ""default procedure"" at least in the cases where Government has assumed the role of

appointment of arbitrators to itself, has to be applied in the case of substitute arbitrators as well and the Court will step in to appoint

the arbitrator by keeping aside the procedure which is agreed to between the parties. However, it will depend upon the facts of a

particular case as to whether such a course of action should be taken or not. What we emphasise is that Court is not powerless in this

regard.

15.The paramount consideration of appointment of an arbitrator is the impartial and speedy resolution of dispute between the parties.

Section 14 is wide enough to include cases where named arbitrator is unable to perform his function or ''''for other reasons"" fails to

act without undue delay. In the present case, there is an undue delay on the part of the named arbitrator in proceeding with and

concluding the proceeding. As noticed, the common string in the judgments mentioned above shows that where the arbitrator gives

gp-by to the very purpose of arbitration, the courts are not powerless in this regard and can, in a fit case, appoint a suitable

arbitrator.

Justice (Dr.) D.Y. Chandrachud, Chief Justice (as His Lordship then was) opined for the Division Bench of Allahabad High Court in Writ C.

No.24343/14 (M/s Paper and Board Convertors vs. U.P. State Micro and Small Enterprises & Ors.) as under:

The respondents appointed a sole arbitrator on 5 October 2011 after the petitioner had invoked the intervention of the Facilitation

Council on 3 October 2011 under Section 18 of the 2006 Act. Once the jurisdiction of the Facilitation Council has been validly

invoked, the Council has exclusive jurisdiction to enter upon conciliation in the first instance and after conciliation has ended in failure,

to refer the parties to arbitration. The Facilitation Council was clearly in error in entertaining the objection filed by the respondents

and referring the to the sole arbitrator so designated by the respondents.

The non-obstane provision contained in subsection (1) of Section 18 and again in sub-section (4) of Section 18 operates to ensure

that it is a Facilitation Council which has jurisdiction to act as an arbitrator or Conciliator in a dispute between a supplier located

within its jurisdiction and a buyer located anywhere in India. The Facilitation Council had only one of the two courses of action open

to it; either to conduct an arbitration itself or to refer the parties to a centre or institution providing alternate dispute resolution services

stipulated in sub-section (3) of Section 18.

In this view of the matter, the impugned order of the Facilitation Council directing the parties to a reference before the sole arbitrator

appointed by the respondents was manifestly illegal. We would, accordingly, have to allow the petitin and set aside the impugned

order dated 13 February 2014. We order accordingly.

As a consequence, we restore the proceedings back to the first respondent. The first respondent shall now act in accordance with the

provisions of sub-section (3) of Section 18 and either conduct the arbitration itself or refer the arbitral proceedings to any institution

or centre provision alternate dispute resolution services. The first respondent shall pass necessary orders in consequence of this

direction within a period of one month from the receipt of a certified copy of this order.

In view of aforesaid legal position, it is clear that the aspect of nutrality and impartiality is a necessary facet, which needs to be seen in cases of

statutory Arbitration. Even if arbitration clause provides otherwise, in order to ensure fairness in action and in order to translate the legislative

mandate into reality, it is necessary to appoint an independent arbitrator. Sub-section 3 of Section 18 of the Act of 2006 makes it clear that

Arbitration and Conciliation Act is applicable for the purpose of arbitration under the Act of 2006. Thus, I have no scintilla of doubt that the

respondent No.1 has committed an error in appointing the departmental Arbitrator by invoking Clause 2.14 of the agreement.

No doubt, when the Nagpur Bench passed the order on 03-05-2013, the Court was justified in passing the said order because at that point of

time the Arbitration and Conciliation Act was not amended and Sub-section 5 of Section 12 of the Act of 1996 was not part of the statute book.

In the circumstances prevailing therein, the order was justified but in the changed scenario when impartiality and independence of Arbitrator has

been statutorily recognized and became part of the statute, appointment and continuance of arbitration proceedings by departmental Arbitrator is

wholly impermissible. The respondent No.1 has completely failed to see these statutory provisions. Resultantly, order dated 14-07-2016 is set

aside. The matter is remitted back before the council to take up the proceeding under Section 18 of the Act of 2006 and proceeded from that

stage.

The petition is allowed. No cost.