: 1 : IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ARBITRATION ARBITRATION ARBITRATION PETITION NO.493 OF 2003 PETITION NO.493 OF 2003 PETITION NO.493 OF 2003 Konkan Railway Corporation Ltd. ) having its Corporate office at ) Belapur Bhavan, Plot No.6, ) Section 11, C.B.D., Belapur, ) Navi Mumbai - 400 614 ) ..Petitioners. Vs. Patel Engineering Company Ltd. ) P.B.Box No.8357, Jogeshwari (W) ) Mumbai - 400 102 ) ..Respondents. Mrs.Kiran Bagalia with Ms.Asha Bhambwani with Latika Panakshari, Advocate for the Petitioners. Mr.Aspi Chinoy, Senior counsel with Z.Andhyarujina i/b. M/s.B.Munim & Co., Advocate for the Respondents. CORAM CORAM CORAM : S.J.VAZIFDAR, J. S.J.VAZIFDAR, J. S.J.VAZIFDAR, J. DATE DATE DATE OF OF OF RESERVING RESERVING RESERVING THE THE THE JUDGMENT JUDGMENT JUDGMENT : 6TH JULY, 2004 6TH JULY, 2004 6TH JULY, 2004 DATE DATE DATE OF OF OF PRONOUNCING PRONOUNCING PRONOUNCING THE THE THE JUDGMENT JUDGMENT JUDGMENT : 19TH AUGUST, 2004 19TH AUGUST, 2004 19TH AUGUST, 2004 ORAL ORAL ORAL JUDGMENT : JUDGMENT : JUDGMENT : This is a Petition under section 34 of the Arbitration and Conciliation Act, 1996 to set aside an award dated 19th May, 2003 passed by the Arbitral Tribunal in respect of the disputes and differences between the parties. The award held the Respondent : 2 : to be entitled to recover a sum of Rs.3,04,71,013.06 together with interest thereon at 18% per annum. INTRODUCTION 2. The Respondent invited tenders for the construction of a tunnel in connection with one of its projects. The Petitioner’s tender was accepted. An agreement in writing dated 27th November, 1991 for the performance of the work for a total contractual cost of Rs.6,81,02,517/- was entered into between the parties. The work was to be carried out in accordance with the said agreement, the schedule annexed thereto and in conformity with the printed schedule of rates, Special Conditions and the General Instructions which were incorporated therein by clause 5. These documents in turn incorporated other documents including the General Conditions of Contract for works. The date of commencement of the work was 29th October, 1991 and the scheduled date of completion thereof was 28th April, 1994. The work was not completed by the scheduled date. It was substantially completed on 30th September, 1995. The : 3 : Respondent issued a certificate dated 14th March, 1996 which specified the date of completion as 10th March, 1996. 3. The Respondent contended that despite its having completed the work satisfactorily the Petitioner failed to pay various amounts due to it under the contract and made unauthorised deductions from its final bill. The Petitioner having failed to settle the final bill the Respondent by its letter dated 1st July, 1998 requested the Petitioner to refer the disputes to arbitration in accordance with clause 63 of the General Conditions of Contract. 4. I will refer to the arbitration clause shortly. Before doing so however it is necessary to note that the Petitioner having failed to respond to this request the Respondent filed Arbitration Petition No.321 of 1998 in this Court under section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the 1996 Act). By an order dated 24th December, 1998 two of the arbitrators were appointed. The two arbitrators then proceeded to appoint the presiding arbitrator. That is how the arbitral tribunal was constituted. : 4 : 5. The Petitioner applied to the arbitral tribunal to hear its objection regarding the validity of the constitution of the arbitral tribunal as a preliminary issue. The arbitral tribunal by its order dated 8th October, 2002, which has also been challenged in the Petition, rejected the objection and proceeded with the hearing of the reference on merits. 6. Mrs.Bagalia, the learned counsel appearing on behalf of the Petitioner, impugned the order dated 8th October, 2002 and the award in so far as it related to certain claims. The Petitioner’s challenge to the award thus falls under two parts. The first relates to the constitution of the arbitral tribunal and the other to some of the claims awarded by the arbitrators. CHALLENGE TO THE CONSTITUTION OF THE ARBITRAL TRIBUNAL : 7. Mrs.Bagalia contended that the arbitral tribunal : 5 : was not constituted in accordance with the provisions of the arbitration clause in the contract. The composition of the arbitral tribunal not being in accordance with the agreement of the parties, the award, she submitted, was liable to be set aside under Section 34(2)(v) of the 1996 Act. The submission is not well founded. 8. Clause 63 of the General Conditions of Contract pertaining to arbitration reads as under : "DEMAND "DEMAND "DEMAND FOR ARBITRATION : FOR ARBITRATION : FOR ARBITRATION : 63.1.1 In the event of any dispute or difference between the parties hereto as to the construction or operation of this contract, or the respective rights and liabilities of the parties on any matter in question, dispute or difference on any account, or as to the with-holding by the Corporation of any certificate to which the Contractor may claim to be entitled to, or if the Corporation fails to make a decision within a reasonable time, then and in any such case, save the "excepted matters" referred to in clause 62 of these conditions, the Contractor after 90 days but within 180 days of his presenting his final claim on disputed matters, shall demand in writing that the dispute or difference be referred to arbitration. : 6 : 63.1.2 The demand for arbitration shall specify the matters which are in question, dispute or difference. Only such dispute(s) or difference(s) in respect of which the demand has been made shall be referred to arbitration and other matters shall not be included in the reference. 63.1.3 If the Contractor does not prefer his specific and final claims in writing, within a period of 90 days of receiving the intimation from the Corporation that the final bill is ready for payment, he will be deemed to have waived his claims and the Corporation shall be discharged and released of all liabilities under the contract in respect of these claims." ARBITRATION ARBITRATION ARBITRATION 63.3(a) Matters in question, dispute or difference to be arbitrated upon shall be referred for decision to:- i) A Sole Arbitrator who shall be an Officer of the Corporation nominated by the Chairman and Managing Director of the Corporation in that behalf in cases where the claim in question is below Rupees Five Lakhs and where the issues involved are not of a complicated nature. The Chairman & Managing Director shall be the sole judge to decide whether or not the issues involved are of a complicated nature. : 7 : ii) Two Arbitrators, who shall be Corporation Officers of equal status to be appointed in the manner laid down in Clause 63.3(b) for all claims of Rupees Five Lakhs and above, and for all claims irrespective of the amount or value of such claims if the issues involved are of a complicated nature. The Chairman & Managing Director shall be the sole judge to decide whether the issues are of a complicated nature or not. In the event of the two Arbitrators being divided in their opinions the matter under dispute will be referred to an Umpire to be appointed in the manner laid down in Clause 63.3(b) for his decision. 63.3.(b) For the purposes of appointing two Arbitrators as referred to in Clause 63.3(a)(ii) above, the Corporation will send a panel of more than three names of officers of the appropriate status of the Corporation to the Contractor, who will be asked to suggest a panel of three names out of the list so sent by the Corporation. The Chairman and Managing Director will appoint one Arbitrator out of this panel as the Contractor’s nominee, and then appoint a second Arbitrator of equal status as the Corporation’s nominee either from the panel or from outside the panel ensuring that one of the two Arbitrators so nominated is from the Accounts Department. : 8 : Before entering upon the reference the two Arbitrators shall nominate an Umpire who shall be an officer of the Corporation to whom the case will be referred to in the event of any differences between the two Arbitrators." 9. Mrs.Bagalia submitted that the procedure prescribed in the arbitration clause was admittedly not followed while constituting the arbitral tribunal. There is no dispute that the arbitral tribunal appointed in this case is different from the one that may have been constituted had the procedure prescribed by clause 63.1.1 been followed. That however, by itself, does not answer the question. 10. Admittedly, despite the Respondent’s repeated requests the Petitioner failed to act in accordance with clause 63.3(b). By its letter dated 28th July, 1997 the Respondent invoked the arbitration clause and requested the Petitioner to initiate proceedings in terms of clause 63.3. The request was repeated by the Respondent’s letters dated 22nd February, 1998 and 1st July, 1998. Despite the aforesaid letters the Petitioner failed and neglected to initiate action in accordance with clause 63 for about a year. It is in these circumstances that the Respondent : 9 : ultimately filed an application under section 11(6) requesting Chief Justice and/or his designate to take the necessary measure for securing the appointment of the arbitrators. By the order dated 24th December, 1998, a learned single Judge of this Court, designated by the Chief Justice under the 1996 Act, appointed two of the arbitrators. Considering the nature of the disputes the learned Judge appointed a retired Executive Director of the Madhya Pradesh Electricity Board and a chartered accountant. The order records that the parties had no objection to the appointment of the said two arbitrators on the ground of independence or impartiality. They in turn appointed the presiding arbitrator. 11. The order dated 24th December, 1998 was challenged by the Petitioner by Special Leave Petition No.4311 of 1999. Mrs.Bagalia stated that the Supreme Court, following its earlier judgments, held that an order under section 11 was an administrative order and no appeal therefore lies against such an order. It is apparently for this reason that the Petitioners challenged the constitution of the arbitral tribunal under section 16 of the 1996 Act. : 10 : 12. Section 11 of the 1996 Act so far as is relevant for this case, reads as under : "11. "11. "11. Appointment Appointment Appointment of arbitrators.- of arbitrators.- of arbitrators.- (2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators. (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. : 11 : (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. (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". 13. Mrs.Bagalia contended that the expression "to take the necessary measure" mandates the Chief Justice or his designate compelling the parties to comply with the agreed procedure and nothing more. In the present case therefore, according to her, the order under section 11 could only have compelled the Petitioner to take steps for the appointment of the arbitrators in accordance with clause 63. The Chief Justice or his designate did not have the jurisdiction or the power to appoint arbitrators except strictly in accordance with the arbitral clause. : 12 : 14. The submission is unfounded. Firstly, it is contrary to the language of section 11. Secondly, even assuming the submission to be well founded the constitution of the arbitral tribunal cannot be faulted for it is not contrary to the provisions of the 1996 Act. While the first aspect is supported by a judgment of the Supreme Court the second is expressly covered by another judgment of the Supreme Court. 15. Section 11(6) comes into operation when the party to the arbitration agreement fails to appoint an arbitrator in accordance with the procedure agreed upon by the parties. Had the legislature intended an order of the nature suggested by Mrs.Bagalia the language and the entire scope of section 11(6) would have been different. There is nothing in the section that either expressly or even impliedly curtails the scope or ambit of the expression "to take the necessary measure". If I were to accept Mrs.Bagalia’s submission I would be adding in section 11(6) after this expression, words to the effect "by compelling the party so failing to comply with the agreed procedure", which I am not entitled to do. : 13 : 16. The submission is contrary to the judgment of the Supreme Court in Datar Switchgears Ltd. v. Tata Finance Ltd. (2000) 8 Supreme Court Cases 151, where it is held that if a party fails to make an appointment within 30 days of the demand by the other party and even till that other party makes an application under section 11 it forfeits its right to make an appointment as per the agreed procedure. The Supreme Court held as under : "19. 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 : 14 : 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. We do not, therefore, agree with the observation in the above judgments that if the appointment is not made within 30 days of demand, the right to appoint an arbitrator under Section 11(6) is forfeited." (emphasis supplied) 17. It is thus clear that even if the appointment is not made within the time stipulated, the right to appoint does not get automatically forfeited provided the same is exercised before the other party moves an application under section 11. But, if the appointment is not made within time the right to appoint stands forfeited upon the other party making an application under section 11. Mrs.Bagalia did not dispute this to be the effect of the judgment. She however submitted that the judgment ought not to be considered as binding on me for two reasons. 18. Firstly, she submitted that the question did not arise before the Supreme Court and that the Supreme Court therefore did not really either hear the parties or apply its mind to the question. I am afraid this is an argument which merely requires to : 15 : be stated to be rejected. I am unable to understand the basis on which Mrs. Bagalia made the submission. The question squarely arose before and was answered by the Supreme Court. This is clear inter-alia from paragraphs 11 and 18 which are as follows : "11. The question then arises whether for purposes of Section 11(6) the party to whom a demand for appointment is made, forfeits his right to do so if he does not appoint an arbitrator within 30 days. Learned Senior Counsel for the appellant contends that even though Section 11(6) does not prescribe a period of 30 days, it must be implied that 30 days is a reasonable time for purposes of Section 11(6) and thereafter, the right to appoint is forfeited. Three judgments of the High Courts from Bombay, Delhi and Andhra Pradesh are relied upon in this connection." "18. In the present case, the respondent made the appointment before the appellant filed the application under Section 11 but the said appointment was made beyond 30 days. Question is whether in a case falling under Section 11(6), the opposite party cannot appoint an arbitrator after the expiry of 30 days from the date of demand ?" 19. In answering the question whether the right of appointment stands forfeited if made beyond 30 days, : 16 : the Supreme Court considered when that right stands forfeited. It did not accept the extreme contention that it stands forfeited on the expiry of 30 days. While arriving at this conclusion the Supreme Court also held that the right would stand forfeited upon the expiry of 30 days and after an application under section 11 is made. I do not understand how then it can be contended that the question was not present to the minds of the learned Judges of the Supreme Court. This was the ratio-decidendi of the judgment. It was most certainly not a casual observation. 20. The contention that the observations of the Supreme Court are at the highest merely obiter does not advance the Petitioner’s case either. Even assuming that they are merely obiter-dicta, it is well settled that obiter-dicta of the Supreme Court is binding on the High Courts. 21. This view is also supported by the judgment of the Supreme Court in G. Ramchandra Reddy and Co. v. Chief Engineer, Madras Zone, Military Engineering Service, AIR 1994 Supreme Court, 2381. This was a decision under section 20 of the Arbitration Act, 1940. Even in that case which was under section 20 : 17 : of the 1940 Act, the Supreme Court held that a party not availing of its right to appoint an arbitrator in accordance with an arbitration agreement, would forfeit the power to appoint an arbitrator. The Supreme Court held thus in paragraph 6 : "6. Thus when the notice was given to the opposite contracting party to appoint an arbitrator in terms of the contract and if no action had been taken, it must be deemed that he neglected to act upon the contract. When no agreement was reached, even in the court between the parties, the court gets jurisdiction and power to appoint an arbitrator. Even if S.8(a) per se does not apply, notice was an intimation to the opposite contracting party to act upon the terms of the contract and his/its non-availment entails the forfeiture of the power to appoint an arbitrator in terms of the contract and gives right to the other party to invoke the court’s jurisdiction under S.20. In the instant case the respondent did not appoint an arbitrator, after the notice was received. The respondent averred in the written statement that it was under consideration. Even before the learned single Judge he did not even state that he was willing to appoint an arbitrator. The learned singled Judge rightly exercised the power under S.20(4) of the Act and appointed the arbitrator. The Division Bench, therefore, was not right in holding that the respondent has : 18 : by giving option to the appellant to agree for appointment of an arbitrator out of the five named persons had left it to the appellant to appoint an arbitrator and allowing appellant to appoint an arbitrator. On the other hand, the appointment of an arbitrator made by the learned single Judge must be deemed to have been approved by us." The observations in this case apply a fortiorari to a case under section 11(6) of the 1996 Act which confers an express power of appointment on the Chief Justice or his designate in a similar situation. 22. In view of the Petitioner’s failure to act in accordance with clause 63 in the appointment of arbitrators, it must be held that it forfeited its right of appointment in accordance with the said clause. 23. In the circumstances, it must also be held that the Petitioner forfeited its right to insist on the appointment in accordance with the procedure prescribed by clause 63. The Petitioner having forfeited its right to the appointment of arbitrators in accordance with the procedure prescribed, the submission that the Chief Justice or his designate under section 11 is nevertheless bound to merely : 19 : direct the appointment of the arbitrators in accordance with the agreed procedure, is ex-facie unsustainable. It would be illogical and contrary to common sense to suggest that the party that forfeits its right to the appointment as per the agreed procedure is entitled to have that very right which stands forfeited to be enforced in an application by the other side under section 11. 24. The fallacy of Mrs.Bagalia’s submission can be demonstrated by a simple illustration. The Chief Justice or his designate acting under section 11 cannot in any event name the arbitrator even if he were to adopt the procedure under clause 63. He can only direct the party to act in accordance with the procedure. What would happen if that party did not comply with the order ? If I were to accept Mrs.Bagalia’s submission, the answer to the question would be: ‘nothing’. This would render section 11(6) redundant. Surely this could not have been the intention of the legislature. 25. To this dilemma, Mrs.Bagalia’s contention was that if despite the order under section 11(6) : 20 : directing the party to act in accordance with the prescribed procedure a party failed to do so, then on a further application the Chief Justice/ his designate could make an appointment otherwise than in accordance with the agreed procedure. This answer exposes the fallacy in Mrs.Bagalia’s principal submission. It establishes that there is no jurisdictional bar to the Chief Justice/his designate making an appointment otherwise than in accordance with the agreed procedure in the first instance itself. Once again, had this been the intention, the section would have been differently worded. The section itself would have provided for both the steps. 26. The fallacy in Mrs.Bagalia’s submission arises from confusing the question of the existence of power under section 11(6) with that of the manner of exercise of that power by the Chief Justice/his designate. The Chief Justice/his designate is not bound in the first instance, to appoint the arbitrator/s himself and is entitled to give the party another opportunity of making the appointment in accordance with the agreed procedure. Speaking for myself, I may well afford the party another : 21 : opportunity to exercise its right of appointment if I were convinced that there were no circumstances which ought to disentitle it from being given a further chance to make an appointment as per the agreed procedure. But, that is a question relating to