PNP 1 ARP35-13.8 IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION ARBITRATION PETITION NO.35 OF 2009 M/s.Khurana Constructions ..Petitioner. Vs. IOT Infrastructure and Energy Services Ltd. and another ..Respondents. .... Ms. Lopa Munim with Mr. H.K. Bhalerao i/b M/s.Rajesh Kothari and Co. for the Petitioner. Mr.S.B.Shetty for Respondent No.1. ..... CORAM : DR.D.Y.CHANDRACHUD, J. 13 August 2010. ORAL JUDGMENT : 1. In pursuance of a bid submitted by the Petitioner for carrying out civil and U/G piping work related to the MSQ project of the Gujarat Refinery of the Respondents a letter of intent was issued to the Petitioner on 9 October 2004. An agreement was entered into between the parties on 28 February 2005. Clause 83 of the agreement contains an agreement to arbitrate. Clause 83 insofar as is material reads as follows : “83. PROCEDURE FOR ARBITRATION (a) Except as otherwise provided by this Agreement and when the decision, directions and certificates with respect to any matters, decisions, are specifically provided by the Agreement to be made or given by IOT or its officials; the Parties shall negotiate in good faith with a view to amicably resolving all PNP 2 ARP35-13.8 questions, issues, disputes and differences between IOT and the Contractor whether relating to the Contractor’s claim against IOT or vice versa relating to any clause or provision of this Agreement or the Bid Package or any interpretation thereof or the right or liability of any Party or as to any act or omission of either party whether arising during the course of this Agreement or after the completion or abandonment thereof, its termination, expiry or otherwise howsoever relating to the Work. If the Parties fail to amicably resolve such questions, issues, disputes and differences within 90 days from the date such questions, issues, disputes or differences arose the same shall be referred by any aggrieved party to the sole arbitration of the Managing Director of IOT or Arbitrator appointed by the Managing Director of IOT. The award of the arbitrator so appointed shall be final, conclusive and binding on the Parties and provisions of the Arbitration and Conciliation Act, 1996 and the Rules made thereunder and for the time being in force shall apply to the arbitration proceedings which shall be held in Mumbai. The existence of any questions, issues, disputes or differences or the initiation or continuance of arbitration proceedings shall not postpone or delay the performance by the Parties of their obligations under this Agreement.” 2. On 1 September 2008 the Petitioner addressed a notice to the Respondent recording that disputes had arisen between the parties and raising a claim of Rs.10.91 Crores. A formal reply was sent by the Respondent on 1 October 2008 stating that while the contentions and claims of the Petitioner were refuted, a detailed reply would be sent. On 12 November 2008 the Petitioner recorded that there was no response thereafter to the claims and contentions raised on 1 September 2008. Accordingly in terms of Clause 83 the Respondent was called upon to fix a PNP 3 ARP35-13.8 meeting for negotiations with a view to resolve the claims amicably. The Petitioner stated that the period of ninety days would commence from the date of the letter. Since there was no response from the Respondent, the Petitioner by a letter dated 18 February 2009 invoked the provision for arbitration. The Arbitration Petition came to be instituted before this Court under Section 11(6) of the Arbitration and Conciliation Act 1996 on 16 July 2009. 3. During the course of the hearing, the existence of the arbitration clause has not been disputed on behalf of the Respondents. However, the defence of the Respondents is that by a letter dated 17 August, 2009 the Petitioner was informed that since the Managing Director of the First Respondent is unable to act as a sole arbitrator in his place the Vice President – Operations has been appointed to adjudicate upon the disputes in terms of Clause 83. 4. The contention of counsel appearing on behalf of the Petitioner is that upon the filing of the Petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, the Respondents would forfeit their right to appoint either the Managing Director or his nominee as arbitrators and PNP 4 ARP35-13.8 thereupon the jurisdiction vests in the Chief Justice or his designate to appoint an independent or impartial arbitrator under Section 11(6). On the other hand, it has been urged on behalf of the Respondents that under Section 11(6), the Chief Justice or his designate while taking “the necessary measure” would have to have due regard to the qualifications required of the arbitrator by the agreement and other considerations as are likely to secure the appointment of an independent or impartial arbitrator within the meaning of sub section (8). Hence, it was urged that the only order which can be passed by this Court under Section 11(6) is in terms of the agreed procedure which is that the Managing Director of the First Respondent or his nominee can act as an arbitrator. 5. The issue which arises before the Court is not res integra. In Datar Switchgears Limited v. Tata Finance Limited1 the Supreme Court held that no time is prescribed for the appointment of an arbitrator in cases falling under Section 11(6). Consequently, if the opposite party to whom a demand is addressed makes an appointment even after thirty days of the demand, but before the claimant has moved the Court under Section 11(6) that would be sufficient. However, the right of the opposite party would 1 (2000) 8 SCC 151. PNP 5 ARP35-13.8 stand forfeited once the Court has been moved under Section 11(6) for the appointment of an arbitrator. The Supreme Court observed as follows : “So far as cases falling under Section 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 under Section 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 does 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 under Section 11, that would be sufficient. In other words, in cases arising under Section 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 under Section 11 seeking appointment of an arbitrator. Only then the right of the opposite party ceases.” 6. The judgment in Datar Switchgears which was of Two Learned Judges was followed by a Bench of Three Learned Judges of the Supreme Court in Punj Lloyd Ltd. v. Petronet MHB Ltd.2. In Punj Lloyd, the arbitration agreement provided that disputes and differences between the parties shall be referred to the functional director of the owner who may either act himself as a sole arbitrator or nominate some officer as an arbitrator. A notice was served by the Appellant on the Respondent 2 (2006) 2 SCC 638. PNP 6 ARP35-13.8 invoking arbitration and on the expiry of thirty days, the Appellant moved the Chief Justice of the High Court under Section 11(6). The Respondent did not make an appointment consistent with the arbitration clause until the date on which the application was moved under Section 11(6). The Judge designated by the Chief Justice refused to appoint an arbitrator holding that the only remedy available to the Appellant was to move in accordance with the arbitration agreement under which the functional director of the Respondent would adjudicate upon the disputes as sole arbitrator. The Supreme Court held that the issue was governed by the judgment in Dater Switchgears and came to the conclusion that the High Court was not correct in taking a contrary view. Accordingly the application under Section 11(6) was restored before the Chief Justice for a fresh decision. 7. The decision in Datar Switchgears is therefore an authority for the proposition that after a notice is issued by the claimant to the other side for the appointment of an arbitrator, the right of the latter to nominate an arbitrator is not forfeited even after the expiry of thirty days. The other side is entitled to nominate an arbitrator until the claimant moves the Chief Justice or his designate under Section 11(6) of the Arbitration and PNP 7 ARP35-13.8 Conciliation Act 1996. Once an application under Section 11(6) is instituted, the right of the other side stands forfeited. The judgment in Punj Lloyd is authority for the proposition that in such an event the Chief Justice of the High Court is then not fettered by a provision such as the one in the present case under which the Managing Director or some other officer of the Respondent had to act as an arbitrator under the arbitration clause. In fact, in Punj Lloyd that was the ground on which the designate of the Chief Justice had refused to appoint an arbitrator. This approach was held to be erroneous by the Supreme Court. 8. The same view has been taken by the Full Bench of the Delhi High Court in HBHL-VKS (J.V.) v. Union of India3. Hon’ble Mr. Justice Swatanter Kumar (as His Lordship then was) speaking for the Full Bench of the Delhi High Court held thus : “Clause 64 of the General Terms and Conditions, which was accepted by the parties, deals with appointment of an arbitrator and procedure to be adopted for that purpose. The fine distinction sought to be created between the power to appoint and procedure to appoint can hardly hold the ground. In cases of default or forfeiture or loss of right to appoint an arbitrator would normally take away the power to appoint an arbitrator. Consequently in those cases, it would also render the prescribed procedure uncertain and ineffective. The dissection of power and procedure would hardly be permissible for the reason that 3 2007(1) Arb. LR 252 (Delhi). PNP 8 ARP35-13.8 they are interdependent and so intermingled that their severability would hardly be possible. The contention of partial forfeiture or loss of right can hardly be justified in view of the scheme of the Act and the purpose sought to be achieved by the legislature.” The conclusions of the Full Bench in paragraph 40 of the judgment are as follows _ “(i) Once the party, which has been served with the demand notice in terms of arbitration clause, fails or refuses to act in making appointment in terms of arbitration clause within 30 days or in any case prior to institution of a petition by the other side under Section 11(6) of the Act, then its right to make such appointment ceases or is forfeited. Such cessation is absolute in terms of the judgment of the Supreme Court in Datar Switchgears’ case and cannot be revived. (ii) The court has jurisdiction to take necessary measures in terms of Section 11(6) of the Act and this expression would take within its ambit and scope, the power to make appointment of independent and impartial arbitrator with reference to the accepted arbitration clause, unless the court in its discretion directs an institution specified in the arbitration clause not in default, to make such an appointment.” 9. Counsel appearing on behalf of the Respondents, however, relied upon a judgment of a Bench of three Learned Judges of the Supreme Court in Northern Railway Administration v. Patel Engineering Co. Ltd.4. The larger Bench of the Supreme Court was constituted in view of the 4 (2008) 10 SCC 240. PNP 9 ARP35-13.8 divergence of view in two decisions of the Supreme Court in Ace Pipeline Contracts (Pvt.) Ltd. V. Bharat Petroleum Corporation Ltd. and Union of India v. Bharat Battery Manufacturing Co. (P) Ltd.5 The Supreme Court held that under Section 11(6) a party may request the Chief Justice or his designate to take necessary measures. This expression, according to the judgment of the Supreme Court, has to be read along with the requirement in sub section (8) that the Chief Justice or his designate in appointing an arbitrator shall have due regard to the two cumulative conditions relating to the qualifications of the arbitrator and other considerations as are likely to secure the appointment of an independent and impartial arbitrator. While holding that the terms of the agreement should be given effect to as closely as possible and that the Court may ask parties to exhaust remedies, the Supreme Court has clarified that “it is not mandatory for the Chief Justice or any person or institution designated by him to appoint the named arbitrator or arbitrators”. At the same time due regard has to be given to the qualifications required by the agreement and other considerations. The Supreme Court has observed thus : “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 5 2007 (7) SCC 684. PNP 10 ARP35-13.8 and taken into account.” 10. Now in the present case, the facts to which a reference has been made earlier would show that after the Petitioner raised a dispute on 1 September 2008. Sufficient opportunities were granted to the Respondents to follow the procedure prescribed in the contract. The First Respondent was called upon to negotiate with a view to resolving the dispute amicably by the Petitioner’s letter dated 12 November 2008 and it was after the expiry of ninety days that the Petitioner invoked arbitration by its letter dated 18 February 2009. The First Respondent chose to remain completely silent save and except for a formal letter of 1 October 2008 baldly refuting all claims and contentions. It was after the Petition was instituted on 16 July 2009 that the First Respondent by a letter dated 17 August, 2009 purported to inform the Petitioner of the appointment of an arbitrator. However, upon the institution of the Petition under Section 11(6) the right of the First Respondent to nominate an arbitrator stood forfeited in view of the judgments of the Supreme Court in Datar Switchgears and Punj Lloyd. In terms of the law laid down by the Supreme Court in Northern Railway Administration, this Court, undoubtedly has to have due regard to the requirements under sub section (8) of Section 11 insofar as they relate to PNP 11 ARP35-13.8 the qualifications required of the arbitrator by the agreement and other considerations as are likely to secure the appointment of an independent and impartial arbitrator. Insofar as the issue of qualifications is concerned, it may be noted that in sub clause ( c) of Clause 83 of the contract, the arbitrator is at liberty to appoint, if necessary an accountant, engineer or technical person to assist him in the case. This would take due account of any technical issues that may arise in the course of the proceedings. Insofar as the issues of impartiality and independence are concerned, there can be no gainsaying fact that as opposed to an officer of the First Respondent who was purported to be nominated by the Managing Director after the institution of the Section 11(6) proceedings, the interests of justice would be better sub served by the appointment of an independent and impartial arbitrator by this Court under Section 11(6). Above all, this Court must be guided by the circumstance that the First Respondent, despite ample opportunities prior to the institution of the proceedings, failed to take steps under the agreement. The First Respondent refused even to negotiate in good faith and thereafter failed to appoint an arbitrator until the date of the institution of the petition. 11. In these circumstances, in exercise of the powers conferred by PNP 12 ARP35-13.8 Section 11(6) of the Arbitration and Conciliation Act 1996, Justice S.P. Kurdukar, Former Judge of the Supreme Court is appointed as sole arbitrator. The Arbitration Petition is accordingly disposed of. There shall be no order as to costs. (Dr. D.Y.Chandrachud, J.)