Thyssen Krupp Industries India Pvt. Limited. vs S.D. Industries

S.J. Vazifdar, J.—This is an appeal u/s 37 of the Arbitration and Conciliation Act, 1996, challenging the judgment dated 2nd December 2008 passed by the District Judge, Pune dismissing the Appellant''s petition u/s 34 of the said Act to set aside an award passed by the arbitral tribunal dated 18th December 2004 read with a modification thereof dated 15th September 2005.

The Appellant has challenged the constitution of the arbitral tribunal consisting of three arbitrators as well as the award on merits. The impugned judgment warrants no interference. I however intend dealing with the matter in some detail as I would like to add reasons of my own for upholding the award.

The Appellant was awarded a contract by Saurashtra Chemicals Ltd. for systems engineering, design, manufacture, supply, erection and commissioning of machinery and equipment namely a boiler plant. The Appellant in turn issued two Letters of Intent both dated 17th December 1996 to the Respondents - one for erection and the other for fabrication of the machinery. The Letters of Intent were for a sum of Rs. 75, 00,000 and Rs. 25, 00, 280 respectively. The disputes between the parties arise under these Letters of Intent.

Both the Letters of Intent contained an arbitration clause as under:

In case of any difference or dispute between the parties in respect of any matter arising out of, or in relation to this Order, the same shall be referred to two arbitrators, one to be nominated by each party, as per the provisions of the Indian Arbitration Act and consequent modifications, if any. However, the applicability of this clause shall be as per the Rules prevailing under this Act.

The Respondents admittedly furnished the bank guarantee as per the terms and conditions of the agreements. It is also admitted that the Respondents mobilized their resources and commenced work on 29th March 1997. However on the instructions of the Appellant the work came to a standstill on 20th May 1997 on account of a strike and consequent lock-out declared at the factory of Saurashtra Chemicals Ltd. After almost a year, on 20th April 1998 the Appellant instructed the Respondents to remobilize and restart the work. On 8th June 1998 a cyclone hit the State of Gujarat. As a result thereof the work at site had to be stopped yet again. The work restarted only on 15th July 1998.

In March 1999 the Appellant instructed the Respondents to stop all work and related activities on site. The Appellant did not terminate the Letters of Intent but only instructed the work to be stopped. However, thereafter the Appellant did not instruct the Respondents to recommence the work. The Appellant contends that it terminated the agreements as a result of the Respondents defaults. The Respondents deny the same.

The Appellant, again admittedly, retained 10% of the amounts due under the Running Bills submitted by the Respondents. The aggregate amount so retained was Rs. 6, 27,383.

Disputes and differences having arisen between the parties, the Respondents by a letter dated the 26th February 2002 invoked the arbitration clause and appointed an arbitrator. The Appellant by its letter dated 27th March 2000 appointed its arbitrator. The said arbitrators appointed the presiding arbitrator on 19th June 2003.

It is the appointment of the presiding arbitrator more than 30 days after the appointment of the arbitrator by the Appellant that raises the first contention on behalf of the Appellant as to the constitution of the arbitral tribunal. Mr. Khandeparkar submitted that the presiding arbitrator having been appointed more than 30 days after the appointment of the arbitrator by the Appellant the Constitution of the arbitral tribunal was illegal and accordingly the award is liable to be set aside on this ground alone. He submitted that if the presiding arbitrator is not appointed within 30 days it is only the Chief Justice or his designate and not the arbitrators who can appoint the presiding arbitrator in view of Section 11 of the said Act.

Section 11(1) to (7) of the said Act read 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 Sub-section (6) to the Chief Justice or the person or institution designated by him is final.

....

I agree with Mr. Khandeparkar that the case does not fall within Sub-section (2) of Section 11, for the arbitration clause does not stipulate a procedure for appointing the presiding arbitrator. It falls within Sub-section (3). I however cannot agree with his submission that the two arbitrators not having appointed the presiding arbitrator within 30 days of their appointment they were not entitled thereafter to appoint a presiding arbitrator. Mr. Khandeparkar submitted that as the two arbitrators had failed to appoint the presiding arbitrator within 30 days of their appointment, in view of Sub-section (4) of Section 11 only the Chief Justice or any person or institution designated by him could have appointed the presiding arbitrator. I do not agree.

It is important to note at the outset that the expression in Section 11(4)(b) is "fail to agree" and not "fail to appoint". The error in Mr. Khandeparkar''s submission is on account of his equating the expression "fail to agree" with the expressions "fail to appoint" or "do not appoint". There is a fundamental difference between the two expressions.

Section 11(4) would come into play only if the two arbitrators "fail to agree" on the third arbitrator within 30 days from the date of their appointment. The expression "fail to agree" indicates a disagreement between the arbitrators on the name of the third arbitrator. There can be a failure to agree between the two arbitrators about the appointment of a third arbitrator only if and when the third arbitrator is named/identified by one of the arbitrators. In the absence thereof, there is nothing for them to agree to conversely nothing for them to fail to agree about. In the present case neither of the arbitrators proposed the name of a third arbitrator. The question of the said arbitrators having failed to agree on the appointment of the third arbitrator therefore does not arise.

The Legislature was obviously conscious of the same and has used these expressions deliberately not only in different sections of the said Act but in Section 11 itself in different circumstances. The clearest and most important indication of this is that these expressions have been used in Sub-section (4) itself.

Sub-section (4)(a) pertains to a case where a party "fails to appoint" an arbitrator within thirty days whereas Clause (b) pertains to a case where the two appointed arbitrators "fail to agree" on the third arbitrator within thirty days. If the Legislature intended withdrawing the power of the two appointed arbitrators to appoint the third arbitrator in the event of their having failed to appoint him within thirty days it would have so provided. In other words in that event instead of the words "fail to agree on" in Section 11(4)(b) would have been the words "fail to appoint". To accept Mr. Khandeparkar submission would be to rewrite Section 11(4)(b) which is not permissible.

Another indication although not as clear, is that in Sub-section (2) the Legislature has referred to a procedure "for appointing" the arbitrator or arbitrators. Again Sub-section (3) provides that the two appointed arbitrators "shall appoint the third arbitrator".

The Legislature was obviously aware of the provisions of the Arbitration Act, 1940. Section 8 of the 1940 Act reads as under:

Power of Court to appoint arbitrator or umpire.-(1) In any of the following cases,-

(a) where an arbitration agreement provides that the reference shall be to one or more arbitrators to be appointed by consent of the parties, and all the parties do not after differences have arisen, concur in the appointment or appointments; or

(b) if any appointed arbitrator or umpire neglects or refuses to act, or is incapable of acting, or dies, and the arbitration agreement does not show that it was intended that the vacancy should not be supplied, and the parties or the arbitrators, as the case may be, do not supply the vacancy; or

(c) where the parties or the arbitrators are required to appoint an umpire and do not appoint him;

any party may serve the other parties or the arbitrators, as the case may be, with a written notice to concur in the appointment or appointments or in supplying the vacancy.

(2) If the appointment is not made within fifteen clear days after service of the said notice, the Court may, on the application of the party who gave the notice and after giving the other parties an opportunity of being heard, appoint an arbitrator or arbitrators or umpire, as the case may be, who shall have like power to act in the reference and to make an award as if he or they had been appointed by consent of all parties.

Thus even under the 1940, Act the Legislature drew a distinction between cases where parties "do not ... concur" in the appointment "of an arbitrator" and cases where the arbitrators "do not appoint" an umpire. The Legislature having used these expressions differently it is obvious that each of them was meant to indicate different consequences in different circumstances.

This interpretation would not leave the matter open ended in the event of the two appointed arbitrators not appointing a third arbitrator indefinitely. Parties would not be left without a remedy in that event. The appointed arbitrators would in that case be held to have failed to act without undue delay within the ambit of that expression in Section 14(1)(a) leading to a termination of their mandate. The remedy then would be u/s 15(2) for the appointment of a substitute arbitrator. Whether the delay is undue or not would depend upon the facts of each case. Sections of 14 and 15 read as under:

Failure or impossibility to act.-(1) The mandate of an arbitrator shall terminate if-

(a) he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and

(b) he withdraws from his office or the parties agree to the termination of his mandate.

(2) If a controversy remains concerning any of the grounds referred to in Clause (a) of Sub-section (1), a party may, unless otherwise agreed by the parties, apply to the Court to decide on the termination of the mandate.

(3) If, under this section or Sub-section (3) of Section 13, an arbitrator withdraws from his office or a party agrees to the termination of the mandate of an arbitrator, it shall not imply acceptance of the validity of any ground referred to in this section or Sub-section (3) of Section 12.

Termination of mandate and substitution of arbitrator. c(1) In addition to the circumstances referred to in Section 13 or Section 14, the mandate of an arbitrator shall terminate

(a) where he withdraws from office for any reason; or

(b) by or pursuant to agreement of the parties.

(2) Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.

(3) Unless otherwise agreed by the parties, where an arbitrator is replaced under Sub-section (2), any hearings previously held may be repeated at the discretion of the arbitral tribunal.

(4) Unless otherwise agreed by the parties, an order or ruling of the arbitral tribunal made prior to the replacement of an arbitrator under this section shall not be invalid solely because there has been a change in the composition of the arbitral tribunal.

Mr. Khandeparkar relied upon the judgment of the Supreme Court in Ace Pipeline Contracts Private Limited Vs. Bharat Petroleum Corporation Limited, and Mr. Kanade relied upon the judgment of the Supreme Court in Narayan Prasad Lohia Vs. Nikunj Kumar Lohia and Others, . The judgments do not support either of their contentions. The question that arises in this case did not fall for the consideration of the Supreme Court in either of these cases. Nor did the Supreme Court decide this question.

In the circumstances Mr. Khandeparkar''s submission that the failure of the two appointed arbitrators to appoint the third arbitrator within thirty days of their appointment ipso facto precluded them from appointing the third arbitrator even though there was no disagreement between them about the third arbitrator is rejected. Where there is no disagreement between the appointed arbitrators about the third arbitrator it is open to the appointed arbitrators to appoint the third arbitrator even after the expiry of the period of thirty days from the date of their appointment. The period of thirty days would commence only in cases where there has been a disagreement between the appointed arbitrators about the appointment of the third arbitrator suggested/proposed by one of them.

This brings me to a consideration of the challenge to the award on merits. The arbitral tribunal made and published the award on 18th December 2004 for a sum of Rs. 31,35,810 together with interest at 18% per annum on the principal sum of Rs. 20,14,135 from the date of the award till payment in favour of the Respondents.

The Respondents made an application u/s 33 seeking correction of certain errors in the award. The arbitral tribunal by a further award dated 15th February 2005, made various corrections. As a result thereof the amount of the award stood reduced to Rs. 30, 84,176 and the interest was made payable on the sum of Rs. 21, 17,251. Both counsel agreed that nothing turn on the modified award as far as this petition is concerned.

The arbitral tribunal termed the 12 claims as issues and dealt with each of them separately. I will deal with the award accordingly. Claim Nos. 2, 3, 5 and 11 were rejected. As regards claim No. 12 the parties were directed to bear their own costs. I therefore proceed to deal with the award in respect of the other claims.

It is necessary at the outset to consider the award in so far as it deals with the appellants allegation that the quality of the Respondents work was unsatisfactory. The arbitral tribunal answered the question in the Respondents favour. Various factors were considered in this regard including the fact that the petitioner continued the Respondents on the job and never terminated the agreements until the end when it called upon the Respondents to stop the work. The arbitral tribunal was also justifiably impressed by the fact that the petitioners witness admitted that the major reason for stopping the work was due to the petitioner not having received payment from Saurashtra Chemicals Ltd. and for the recovery of which it had initiated legal proceedings. Similarly the arbitral tribunal was understandably impressed by the fact that the Appellant had not claimed a set off or made a counterclaim against the Respondents for the alleged breaches by the Respondents regarding the quality of the work. The arbitral tribunal found that there was hardly any convincing evidence produced by the Appellant to establish this allegation. Accordingly it was held that the Appellant had not established that the Respondents were guilty of any unsatisfactory or defective work.

Mr. Khandeparkar submitted that the finding that the Appellant had not terminated the Respondents services was wrong. He submitted that the arbitral tribunal had in this regard failed to take into consideration crucial evidence.

I do not find the evidence relied upon by Mr. Khandeparkar to be of any importance. It certainly does not warrant interference with the award.

Firstly, Mr. Khandeparkar relied upon paragraph 16 of the affidavit filed by the Respondents'' witness wherein he stated that the Appellant had asked the Respondents to stop the work. A direction to stop to work does not necessarily constitute a termination of the contract. This would depend upon the facts of the case. For instance in this very case the Appellant had admittedly called upon the Respondents on two earlier occasions to stop the work - the first on account of the lockout declared by Saurashtra Chemicals Ltd. and the second on account of the cyclone that hit the State of Gujarat. It is not even the Appellant''s case that it had thereby terminated the agreements contained in the Letters of Intent.

In this regard it is also important to note paragraph 10 of the same affidavit. The witness stated that the Appellant''s site - in - charge had abruptly informed the Respondents to stop the work stating that he had received instructions to that effect from the head office. The site-in-charge did not disclose any reasons as to why the work was to be stopped. The witness stated that therefore the Respondents were required to discontinue the work and that the uncertain situation continued to date.

Moreover even assuming that the request in March 1999 to stop the work constituted a termination of the agreements it would make no difference. What is important is the fact that prior thereto there was no termination of the agreements. It is this that weighed with the arbitral tribunal in coming to the conclusion that the Petitioner had not established that the quality of the Respondents work was unsatisfactory.

Mr. Khandeparkar also relied upon a letter dated 28th July 1998 addressed by the Appellant to the Respondents which contains various allegations about the progress and the quality of the Respondents'' work.

I do not see how the failure to refer to this letter would warrant the award being set aside on the ground that the arbitral tribunal had failed to take into consideration crucial evidence. The letter merely contains various allegations. Allegations do not constitute proof. It is not as if the arbitral tribunal had no other material before it. The award read as a whole in fact indicates that there was considerable evidence before the arbitral tribunal. The arbitral tribunal considered the evidence and analyzed the same satisfactorily. I have referred to the factors which weighed with the arbitral tribunal. They certainly would be entitled to greater weight than mere allegations in the correspondence. The decision was obviously on the basis of a balance of probability which was the correct approach. Thus even if I had construed the facts differently it would not justify my setting aside the award.

The reliance upon a letter dated 4th August 1998 addressed by Saurashtra Chemicals Ltd. is of even less assistance to the Appellant. Firstly allegations by a third party by itself are of little evidentiary value unless they are proved or there are compelling reasons to accept it. The mere proof of the letter can be of no assistance even in arbitral proceedings. More important is the fact that the Appellant has in fact taken a contrary stand in the litigation between itself and Saurashtra Chemicals Ltd.

Having come to the conclusion that the Respondents'' work was not unsatisfactory and that the Respondents had not committed any breach of the Letters of Intent, an award in respect of claims 9 and 10 had to follow as a matter of course. Claim No. 9 was for refund of the amount retained by the Appellant towards the retention money/security deposit. Claim No. 10 was for refund of the amount received by the Appellant upon it invoking the bank guarantee on 11th August 2001. The bank guarantee having been furnished for performance of the contract, in view of the finding of the arbitral tribunal that there were no defects in the performance of the contract by the Respondents the invocation was rightly held to be wrongful.

The arbitral tribunal, therefore, rightly made an award in the Respondents'' favour in respect of claim Nos. 9 and 10.

For the same reason the award in respect of claim No. 1, namely the charges incurred for extension of the bank guarantee, is also justified. As against the claim of Rs. 7500, the arbitral tribunal awarded a sum of Rs. 2500.

Claim No. 6 was for a sum of Rs. 48,000, 1,68,000 and Rs. 21, 000 on account of house rent, salary and bonus paid to the engineer respectively. The claim had been computed for the extended period of the contract namely from April 1999 till March 2001.

The award has dealt with this claim more than just satisfactorily. The engineer''s presence at the site was established. In fact the Petitioner''s witness had admitted his presence at site up to April 1999. The correspondence exchanged between the Appellant and Saurashtra Chemicals Ltd established that he had worked at site even thereafter. As per the appointment letter produced by the Respondents the site engineer was, in addition to salary, to be paid bonus. The inference that he had been paid a salary and bonus as per the terms of the letter of appointment proved before arbitral tribunal is reasonable and justified. Once it is established that the employer i.e. the Respondents had in fact engaged the engineer and that the engineer had worked at site, it is only reasonable to presume that he had been paid a salary and provided the facilities as stipulated in his letter of appointment. Moreover as noted in paragraphs 30 to 34 of the award the documents on record also established the same. In any event this was an inference based on a balance of probabilities which the arbitral tribunal was justified in arriving at. Here again even assuming that applying this test I had come to a different conclusion it would not have justified any interference with the award.

Claim No. 7 was for a sum of Rs. 41, 39,800 towards rent/compensation for loss of opportunities on account of detention of their tools, tackle and other engineering items from April 1999 to 31st August 2003.

The arbitral tribunal found that the claim had not been proved by cogent evidence; that there was nothing on record to suggest that the amounts claimed had actually been paid to the supplier of the tools and tackle and that the quotation furnished by another supplier related to the letting during the year 2001 and not to the relevant period. The entire amount claimed therefore was not granted.

The arbitral tribunal however found that the evidence produced established the value of the material at Rs. 10, 69,685. It was held that the cross-examination did not suggest this value to be false or untrue. Thus instead of allowing the claim of Rs. 41,39,300 the arbitral tribunal allowed the claim to the extent of a return at the rate of 9% per annum on the value of the material, namely Rs. 10,69,685. This was also during the extended period i.e. after April 1999.

The award cannot seriously be faulted for the approach adopted by the arbitral tribunal. There was obviously a loss suffered by the Respondents on account of the material lying idle during the extended period. The value of the material was established. Damages to the extent of a return at the rate of 9% per annum on the value thereof cannot be said to be either unreasonable or irrational.

This brings me to claim No. 8. The Respondents claimed a sum of Rs. 15,00,000 towards loss of profit due to the abrupt stoppage of work. In other words the claim was on account of loss of profit arising due to the cancellation of a part of the work which was to be carried out under the Letters of Intent.

In view of the finding that the Respondents had not committed any breaches of the agreements and that a part of the work remained to be completed the Respondents would be entitled to damages on account of the loss of profit in respect of the work which remained to be completed. The arbitral tribunal computed the incomplete work to the extent of Rs. 31, 69,120. This is a finding of fact and cannot seriously be challenged.

What was challenged before me was the quantification of the damages. The arbitral tribunal computed damages at 15% of the value of the incomplete work. This percentage, it was held, represented the loss of profit. Mr. Khandeparkar submitted that there was no basis for arriving at the percentage. He submitted that there was neither any pleading nor any evidence to establish the profit to be at 15% of the value of the work.

The submission that the Respondents had not pleaded that the loss of profit is to the extent of 15% of the value of the work is not well founded. Paragraph 8 of the statement of claim tabulates the claims. Claim C 11 reads: "Claim for loss of profits due to the abrupt stop of work pertaining to the LOIs by the Opponent-details enclosed Rs. 15,00,000." The aggregate value of the two Letters of Intent was about Rs. 1,00,00,000. It is obvious, therefore, that by claiming a sum of Rs. 15, 00,000 towards loss of profit the contention was that the Respondents had provided/accepted the work on the basis that its profit margin would be 15% of the value of the work. Even though the same has not been pleaded in so many words it can hardly be suggested that that was not the effect of the pleading.

The submission that there was no evidence to establish that the profit was factored at 15% of the value of the work is also not well founded. In paragraph 3 of the claim affidavit the Respondents'' witness expressly stated: "While submitting the quotation the applicant has kept a profit margin of 15% on the total value of Rs. 1,00,00,000 (Rs. One Crore)(C-11-B) of Claim C-11)." The quotation was accepted. It cannot therefore be said that there was no evidence. Whether the witnesses oral evidence was proved or not was a question for the arbitral tribunal to determine. The arbitral tribunal accepted the evidence.

The arbitral tribunal relying upon the judgment of the Supreme Court in the Dwaraka Das Vs. State of Madhya Pradesh and Another, and A.T. Brij Paul Singh and Others Vs. State of Gujarat, held that it was not necessary to have a very accurate calculation while determining the loss of profit and that the rate of 15% in such contracts is reasonable. Mr. Khandeparkar tried to distinguish these judgments on the ground that in those cases the claimants had alleged that they had suffered loss on account of loss of profit whereas in the present case the Respondents had not done so. I have already demonstrated this contention to be erroneous. The Respondents had pleaded as well as established in the evidence loss of profit to the extent of 15% of the value of the work. Considering the nature of the contracts the arbitral tribunal accepted the oral evidence of the Respondents witness. Mr. Khandeparkar did not suggest that there was any evidence which belied the evidence of the Respondents'' witness. Nor did he invite my attention to any evidence that the arbitral tribunal had failed to consider while determining this aspect of the matter. The award therefore cannot be set aside in respect of this claim either.

In the circumstances the judgment of the District Court and the award are upheld. The appeal is dismissed with costs fixed at Rs. 10, 000. The costs shall be paid on or before 31st October 2010. This judgment is stayed up to and including 31st October 2010 to enable the Appellant to challenge the same.