THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Arbitration Application No.156 of 2010 (Dated : 05-09-2011) Between: Mr. Vimal Vikrant Vardhan ….Applicant A n d Maytas Properties Limited & Another …Respondents THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Arbitration Application No.156 of 2010 ORDER: This application has been taken out by Vimal Vikrant Vardhan represented by his General Power of Attorney Holder-M.Gyana Vardhan under sub-sections (5) and (6) of Section 11 of the Arbitration & Conciliation Act, 1996 (“the Act”, in short) read with Para 3(i)(c) of the Scheme for appointment of Arbitrators, 1996 seeking appointment of an arbitrator for resolution of the disputes relatable to Construction Agreement dated 22-11-2008. 2. Maytas Properties Limited (in short, `1st respondent-company’) is a Public Limited Company and it is engaged in the business of Real Estate and Township Development. It took up development of township known as “MAYTAS HILL COUNTY” consisting of independent houses and multi-storied residential apartments together with facilities like Club Apartment, Parks, Open Spaces, Gym, Health Clubs, Play Grounds, Shopping Centres, etcetera. 2(b) The applicant purchased a semi-finished flat forming part of residential apartment known as “Hill County” along with an undivided share of land from the land owners under registered sale deed dated 22-11-2008. The details of the semi-finished flat are as follows:- Apartment Block Name Munnar Type 4 Floor Number 1 Apartment Number 1A Built up area in square feet 1584 Common area in square feet 396 Number of car parkings 2( 240 sft approximately) Undivided share of land in Square yards 88 On the very same day, Construction Agreement came to be entered between the applicant and the 1st respondent-company. The construction consideration was Rs.45, 87, 610/- and the same was duly paid by the applicant to the 1st respondent-company. The construction agreement came to be registered as Document No.14295 of 2008 in the office of the Sub Registrar, Quthbullapur, Ranga Reddy District. As per the said construction agreement, the 1st respondent- company was to complete construction by 01-10-2009 and hand over the same to the applicant on 01-11-2009. According to the applicant, the 1st respondent-company collected Rs.654 Crores from many prospective purchasers of apartment and diverted a major portion of the amount for other purposes, such as buying of lands in the names of other front/surrogate companies. The 1st respondent-company having agreed to complete the construction by 01-10-2009 delayed the construction of flat and thereby, committed breach of the terms of the construction agreement. The 1st respondent-company contravened various provisions of the Andhra Pradesh Apartments (Promotion of Construction and Ownership) Act, 1987 and inflated the value of its assets at Rs.6523 Crores as against the turn over of mere Rs.22 Crores. The omissions and the commissions of the 1st respondent-company constitute violation of various provisions of the Andhra Pradesh Apartments (Promotion of Construction and Ownership) Act, 1987. The 1st respondent-company has not taken up any construction activity and thereby, the Project has come to a standstill. 2(c ) The applicant issued a legal notice dated 26-03-2010 calling upon the 1st respondent-company and its other Directors to get the sale deed cancelled and refund the entire amount received by the 1st respondent-company along with incidental expenses , such as Stamp Duty, Registration Charges, Service tax and other incidental expenses Rs.81,75,202/- together with interest on the same at 24% per annum along with damages of Rs.8,20,000/-. The applicant also called upon the Vice Chairman of the 1st respondent-company to nominate a sole arbitrator to adjudicate upon the claims made by him within 30 days of receipt of his request. The 1st respondent-company under letter dated 21-4-2010 referred all the claims, and disputes relatable to the agreement to Arbitration and nominated Sri Justice V.Bhaskara Rao, a retired judge of this Court (2nd respondent herein). According to the applicant, referring the matter to the arbitrator without indicating the exact nature of disputes is not proper and legal. Hence this application seeking the relief stated supra. 2(d) For completion of narration of facts, I deem it appropriate to refer paras 28 to 31 of the affidavit filed in support of the application, which read as hereunder:- “28. I submit that the Respondent No.1 did not raise any claim against the Applicant so far and hence it cannot refer its unspecified claims directly for arbitration. 29. The Respondent No.2 purporting to act as an Arbitrator has issued a notice to the Applicant stating that he had “entered upon Arbitration” and directed both parties to appear before him to “settle the terms of reference” on 08-6-2011 at 11 A.M. 30. The law is well settled that an Arbitrator has to act only upon the terms of reference and not adjudicate upon issues, which are beyond the terms of reference. In the instant case the Arbitrator has adopted the strange procedure of “entering upon arbitration” and then subsequently calling upon the parties to “settle the terms of reference”. The procedure adopted by the Respondent No.2 is against the cannons of Arbitration Law. The powers of the Arbitrator are confined to his order and reference and can neither be enlarged nor narrowed by the view the Arbitrator may take of his duties. 31. That the Respondent No.1 has so far not indicated as to what exactly is its dispute with the Applicant. Without indicating its exact nature of the dispute with the Applicant it cannot refer the matter for Arbitration. Moreover the Respondent No.1 cannot ask the Arbitrator to adjudicate its so called claimed when it had not raised any demands till date on the Applicant. It is therefore clear that, the Respondent No.1 wants to avoid its contractual obligations by seeking shelter under the Arbitration clause and appointing an Arbitrator without definite terms of reference. Thus, the so called reference of the Respondent No.1 dated 21-04- 2010 is a sham and a nominal one. The Respondent No.1 has received the entire sale consideration, and, therefore, it could not have any further “claim” against the Applicant. In spite of the same it has referred its anonymous and non specified “claims” against the Applicant for adjudication. As per clause No.7 of the Agreement for construction only the “disputes” between the parties have to be referred for Arbitration. A dispute is a claim made by one party and its denial by the other. In the instant case, the Respondent No.1 has not denied receiving the entire sale consideration both the for the semi finished flat as well as the Agreement for Construction. Without specifying why it is not adhering to its contractual obligations, the Respondent No.1 cannot refer the matter for Arbitration. Similarly, without at all making any demand whatsoever, the Respondent No.1 cannot refer its so called “claims” for Arbitration. Thus, the Respondent No.1 has resorted to abuse of the process of law by appointing the Respondent No.2 as an Arbitrator without specifying the terms of reference. I submit that Respondent No.1 did not bother to give any reply either to the legal notice dated 26-03-2010. The Respondent No.1 has deliberately kept the terms of reference mischievously vague and nebulous in order to protract and prolong the litigation. If at all the Respondent No.1 was serious about the dispute resolution through arbitration, it ought to have clearly spelt out the points of dispute or differences between the Applicant and itself and referred those very specific points for adjudication instead of making an omnibus reference that is impermissible in law.” 3. The 1st respondent-company filed counter affidavit resisting the application. R.Sumith Reddy has sworn to the counter affidavit. The counter affidavit, in brief, is:- Execution of the construction agreement is not disputed. The 2nd respondent came to be nominated as an arbitrator consequent on the request of the applicant and in terms of the construction agreement to adjudicate the respective claims and disputes between the parties. The arbitrator has been appointed in terms of Clause (7) of the construction agreement. Once an arbitrator is appointed in terms of the arbitration clause in the construction agreement, the proper course for challenging the appointment of arbitrator is by taking recourse to the procedure contemplated in Clause (13) of the Act. Since the arbitrator has already been appointed, the application is liable to be dismissed. 4. Heard learned counsel appearing for the parties. 5. Learned counsel appearing for the applicant submits that the Vice Chairman of the 1st respondent company is not competent to nominate Sri V. Bhaskar Rao, a retired High Court Judge (2nd respondent herein) as an arbitrator without an affirmative vote of nominee Director and therefore, the nomination of the 2nd respondent as arbitrator i s void ab initio. He would also contend that a company is a juristic person and it acts through its Directors, who are collectively referred to as the Board of Directors. An individual Director has no power to act on behalf of a company unless specific power is given to him by some resolution of the Board of Directors. In a way, the contention of the learned counsel is that it is the Board of Directors with an affirmative vote of the nominee Director to nominate Sri V.Bhaskara Rao(2nd respondent) a retired High Court Judge, as arbitrator and there being no such Board Resolution, the very nomination of the 2nd respondent as arbitrator cannot be said to be in terms of the arbitration clause in the agreement. It is also contended by him that the 2nd respondent without indicating the nature of disputes entered reference by giving notice directing the applicant to appear on 8-6-2010 at 11 A.M and the said notice cannot be said to be in accordance with the provisions of the Act. Learned counsel took me to the various aspects as to how the project came to standstill and also the orders passed by the Company Law Board which appointed the Government nominee Director with an affirmative vote. In support of his submissions, learned counsel placed reliance on the decisions of the Supreme Court in Shubh Shanti Services Ltd. v. Manjula S.Agarwalla[1], Dale & Carrington Invt.(P) Ltd. v. P.K.Prathapan and others[2] and J. and K.State Forest Corporation v. Abdul Karim Wani and others[3]. Learned counsel by referring the notice dated 21-04-2010 contends that the said notice cannot be construed as a reply to the notice dated 26-03-2010 issued by the applicant since it does not contain any reference of various allegations made by the applicant in the notice dated 26-03-2010 and it does not even indicate that the arbitrator came to be appointed pursuant to the notice dated 26-03-2010. Learned counsel also tries to explain the meaning of the word “Chairman” by referring various dictionaries such as Black’s Law Dictionary, Advanced Law Lexicon. According to him, the function of the Chairman would be to preside over the meeting and therefore whoever presides the meeting on a particular day, he stands designated as the Chairman. 6. Learned counsel appearing for the 1st respondent-company submits that the applicant sought for appointment of arbitrator for resolution of the disputes relatable to the construction agreement under notice dated 26-03-2010. The 1st respondent-company considered the request and nominated Sri Justice V.Bhaskara Rao, a retired Judge of this Court (2nd respondent herein) as arbitrator and referred all issues pertaining to agreement for adjudication, in which case, there is no cause of action for the applicant to approach this Court invoking jurisdiction under sub-sections (5) and (6) of Section 11 of the Act. He would also submit that there is no requirement of consent of the Board of Directors for nominating arbitrator for resolution of the disputes relatable to the construction agreement. Since the applicant has terminated the construction agreement, the validity or otherwise of the termination agreement forms part of the subject of the arbitration. 7. The Supreme Court in S.B.P And Company v. Patel Engineering Ltd. and Another[4] has held that when an application is filed under Section 11, the Chief Justice or his designate is required to decide only two issues, that is whether the party making the application has approached the appropriate Court and whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such agreement. Any wider examination in such a summary proceeding will not be warranted. 8. The Relevant provisions of the Act and their analysis : “11. 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) xxx xxx xxx (8) The Chief Justice or the person or institution designated by him, in appointing an arbitrator, shall have due regard to- (a) any qualifications required of the arbitrator by the agreement of the parties; and (b) other considerations as are likely to secure the appointment of an independent and impartial arbitrator. (9) to (12) xxx xxx xxx 12. Grounds for challenge.— (1) and (2) xxx xxx xxx (3) An arbitrator may be challenged only if-- (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or (b) he does not possess the qualifications agreed to by the parties. (4) xxx xxx xxx 13. Challenge procedure.— (1) and (2) xxx xxx xxx (3) Unless the arbitrator challenged under sub-section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge. (4) to (6) xxx xxx xxx 14. 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 remain 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. 15. Termination of mandate and substitution of arbitrator. – (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.” 9. An analysis of the scheme of Section 11, which relates to appointment of arbitrators shows that in terms of sub-section (1) thereof, a person of any nationality can be appointed as an arbitrator unless there is a contra agreement between the parties. Sub-section (2) lays down that the parties are free to agree on a procedure for appointing the arbitrator or arbitrators. This is subject to the provision contained in sub-section (6). Sub-section (3) lays down that if there is no agreement between the parties in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two arbitrators appointed by the parties shall appoint the third arbitrator who shall act as the Presiding Arbitrator. Sub-section (4) lays down that if a party fails to appoint an arbitrator within 30 days from the date of receipt of request to do so from the other party or the two arbitrators fail to agree on the third arbitrator within 30 days from the date of their appointment, then the Chief Justice or any person or institution designated by him can be approached for appointing an arbitrator or the third arbitrator, as the case may be. The procedure prescribed in sub-section (4) also applies to a case involving appointment of a sole arbitrator. Sub-section (6) enumerates the contingencies in which a party may request the Chief Justice or any person or institution designated by him to take necessary measure unless the agreement on the appointment procedure provides other means for securing the appointment. The contingencies contemplated in sub-section (6) are: (i) if a party fails to act as required under the agreed procedure or, (ii) the parties or the two appointed arbitrators fail to reach an agreement expected of them under such procedure, or (iii) a person including an institution fails to perform any function entrusted to him or it under the procedure. Sub-section (8) requires that in appointing an arbitrator, the Chief Justice or any person or institution designated by him shall have due regard to any qualification required of the arbitrator by the agreement of the parties and other considerations as are likely to secure the appointment of an independent and impartial arbitrator. Sections 14 and 15 enumerate the circumstances in which the mandate of an arbitrator shall terminate. Sub-section (1) of Section 14 lays down that the mandate of an arbitrator shall terminate if he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay and he withdraws from his office or the parties agree to terminate his mandate. Sub-section (2) lays down that if there is any controversy between the parties in relation to any of the grounds referred to in Clause (a) of sub-section (1) and there is no other provision in the agreement between the parties, either party can apply to the Court for termination of the mandate of an arbitrator unless the parties agree otherwise. By sub- section (3) of Section 14 it has been clarified that if an arbitrator withdraws from his office under sub-section (1) of Section 14 or sub- section (3) of Section 13 or a party agrees to the termination of the mandate of an arbitrator, same shall not be construed as an acceptance of the validity of any of the grounds referred to in Section 14 or sub-section (3) of Section 12 which speaks of the grounds of challenge to the appointment of an arbitrator. Section 15 specifies additional circumstances in which the mandate of an arbitrator shall terminate and also provides for substitution of an arbitrator. Sub- section (1) of this section lays down that in addition to the circumstances referred to in Sections 13 and 14, the mandate of an arbitrator shall terminate where he withdraws from office for any reason or pursuant to agreement of the parties. Sub-section (2) of Section 15 postulates appointment of a substitute arbitrator in accordance with the rules that were applicable to the appointment of the original arbitrator. 10. The Court while considering the question whether the dispute between the parties is to be referred for arbitration or not should refrain from expressing any opinion on the merits of the dispute, which embarrasses the arbitrator. 11. It is well settled that merely because the contract has come to an end by its termination due to breach, the arbitration clause does not perish nor is rendered inoperative rather it survives for resolution of the disputes arising under or in connection with the contract, vide decision of Supreme Court in Branch Manager, Magma Leasing & Finance Ltd. vs. Potluri Madhavilata[5]. At the cost of the repetition, I may state that the present application has been moved by the applicant under sub-sections (5) and (6) of Section 11 of the Act. Existence of an arbitration clause in the construction agreement dated 22-11-2008 is not in dispute. Indeed, the applicant in the notice dated 26-03-2010 while calling upon the respondents to cancel the sale deed and refund the entire amount received from him along with incidental expenses invoked Clause (7) of the construction agreement dated 22-11-2008 and called upon the Vice Chairman of the 1st respondent-company to nominate a sole arbitrator to adjudicate upon the dispute within thirty days. For better appreciation, I may refer paragraphs 18 to 20 of the notice dated 26- 03-2010, which read as hereunder:- “18. My client does not foresee the first of you completing the construction in the near future. The first of you along with 2, 3, 4, 5, & 7 are jointly and severally responsible for the tortuous acts committed by you and the loss sustained by my client. The sixth of you has been appointed by the Government of India as Nominee Director of the said Company in view of the vast irregularities committed by the said company with the object of setting its affairs right. My clients therefore, call upon to forthwith and get the sale deed cancelled and refund the entire amounts received by you along with incidental expenses, such as Stamp Duty, Registration charges, service tax, and other incidental expenses amounting to Rs.72,96,813/- (Rupees seventy two lakhs ninety six thousand eight hundred and thirteen only ) along with incidental expenses such as Stamp Duty, Registration Charges, service tax and other incidental expenses together with interest on the same at 24% per annum along with damages of Rs.7,30,000/- (Rupees seven lakhs thirty thousand only), being the loss sustained by him by parting with his hard earned funds in a bogus project and towards mental agony. Had he invested this amount in a genuine construction company, he would have not only had a fully completed apartment but also enjoyed its rents. This amount should be refunded within one week of the receipt of this notice. 17. In case you fail to do so clause-7 of the Construction Agreement dated 22-11-2008 would come into play and the dispute should be resolved through Arbitration under the provisions of the Arbitration and Conciliation Act through a sole Arbitrator to be appointed by the first/seventh of you. 18. My client hereby calls