Case: M/S.S.B.P. &amp; Co Vs. M/S. Patel Engineering Ltd.

5. In March, 1992, the Government of Maharashtra awarded contract to respondent No.1 for execution of works relating to Stage IV of the Koyna Hydroelectric Project. Respondent No.1 sub-contracted a portion of that work i.e., construction of civil works from Lake Intake to Emergency Valve Tunnel - K.H.E.P. Stage IV - I.C.B. No.1 to the appellant and M/s. B.T. Patil & Sons (Construction) Ltd., Belgaum (herein after described as "B.T. Patil & Sons"). For this purpose, the parties entered into two agreements on 15.10.1992 viz., sub-contract agreement and piece work agreement. Both the agreements contained identical clauses for resolution of disputes and differences between the parties by arbitration. For the sake of convenient reference, Clause 19 of the piece work agreement is reproduced below:"The continuance of this piece work agreement / contract or at any time after the termination thereof, any difference or dispute shall arise between the parties hereto in regard to the interpretation of any of the provisions herein contained or act or thing in relation to this agreement / contract, such difference or dispute shall be forthwith referred to two Arbitrators for Arbitration in Bombay one to be appointed by each party with liberty to the Arbitrators in case of differences or their failure to reach an agreement within one month of the appointment, to appoint an umpire residing in Bombay and the award which shall be made by two Arbitrators or umpire as the case may be shall be final, conclusive and binding on the parties heretoIf either party to the difference or dispute shall fail to appoint an arbitrator within 30 calendar days after notice in writing having been given by the parties or shall appoint an arbitrator who shall refuse to act then the arbitrator appointed by the other party shall be entitled to proceed with the reference as a Sole Arbitrator and to make final decision on such difference or dispute and the award made as a result of such arbitration shall be a condition precedent to any right of action against any two parties hereto in respect of any such difference and dispute."6. In October 1996, some disputes and differences arose between the Government of Maharashtra and respondent No.1 with regard to contract dated 10.3.1992. The panel of three arbitrators appointed by the parties passed unanimous awards on 11.2.2000 requiring the State Government to pay Rs.24,09,25,965/- to respondent No.1. The State Government challenged those awards but, later on, withdrew its challenge and paid the amount to respondent No.17. On 3.7.2001, the appellants through their power of attorney holder, Balasaheb B. Patil served a notice upon respondent No.1 requiring it to pay the amount allegedly due to them, but the latter did not comply with their demand. After three months, the appellants invoked the arbitration clauses enshrined in the sub-contract agreement and piece work agreement and issued letter dated 3.10.2001 appointing Shri T.G. Radhakrishna (retired Chief Engineer) (respondent No.2 herein) as an arbitrator on their behalf. In its response dated 1.11.2001, respondent No.1 denied the claim of the appellants and, at the same time, appointed Shri S.N. Huddar, Joint Secretary, Irrigation Department, Government of Maharashtra as an arbitrator on its behalf. However, vide letter dated 1.2.2002, Shri Huddar declined to arbitrate in the matter by stating that he had remained associated with Kyona Project as Superintending Engineer and Chief Engineer. Thereafter, respondent No.1 sent letter dated 26.2.2002 to Shri S.L. Jain of S & S Consultants, Bhopal with the request to act as an arbitrator on its behalf. Shri Jain communicated his consent vide letter dated 27.2.2002. On the same day, respondent No.1 informed respondent No.2 that in terms of Section 15(2) of the Act, it was entitled to appoint a substitute in place of Shri S.N. Huddar and had, in fact, appointed Shri S.L. Jain as an arbitrator and the latter had consented to such an appointment. On 7.3.2002, the power of attorney holder of the appellants informed respondent No.1 that appointment of Shri S.L. Jain as replacement arbitrator is contrary to the terms of sub-contract agreement and piece work agreement8. In the meanwhile, power of attorney holder of the appellants sent letter dated 22.1.2002 to respondent No.2 and Shri S.N. Huddar requesting them to appoint the third arbitrator. On his part, respondent No.2 suo motu sent letter dated 21.2.2002 informing the parties that in view of Shri Huddars refusal to act as an arbitrator on behalf of respondent No.1, he had become the Sole Arbitrator and asked them to appear at Mumbai for a preliminary meeting9. After his appointment as an arbitrator on behalf of respondent No.1, Shri S.L. Jain sent letter dated 11.3.2002 to respondent No.2 and suggested the names of three retired Bombay High Court judges for appointment as Presiding Arbitrator. In his reply dated 25.3.2002, respondent No.2 claimed that Section 15(2) of the Act has no application in the case and that in terms of Clause 18 of the sub-contract agreement and Clause 19 of the piece work agreement, he was entitled to act as the Sole Arbitrator10. At that stage, respondent No.1 filed Arbitration Application Nos.114 of 2002 and 90 of 2002 under Section 11 of the Act for appointment of the third arbitrator by asserting that in view of refusal of Shri S.N. Huddar to act as an arbitrator, it had appointed Shri S.L. Jain as a substitute arbitrator in terms of Section 15(2) of the Act and in that view of the matter respondent No.2 was not entitled to act as the Sole Arbitrator. The designated Judge of the Bombay High Court allowed both the applications and appointed Shri Justice M.N. Chandurkar (Retired) as the third arbitrator. The learned designated Judge noticed the arguments made on behalf of the parties, the provisions of Section 15 of the Act and observed:-"Section 15 is a new provision. Sub-section (1) and (2) thereof correspond to Article 155 of the UNCITRAL model Law. Sub-section (2) of section 15 provides that where the mandate of arbitrator is terminated, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced. Thus the Legislature clearly intended that upon termination of the mandate of an arbitrator, a substitute arbitrator shall be appointed in accordance with the same rules as were applicable to the appointment of the original arbitrator. Therefore the arbitrator appointed by the other party is not entitled to act as the sole arbitrator in view of this clear language of section 15(2). This can be compared to the old provision of section 9 of the 1940 Act providing that unless a different intention is expressed in the agreement the court has power to appoint a new arbitrator. The words used in sub-section (2) of section 15 do not admit of any such exception. The decisions relied upon by Dr. Tulzapurkar have no application to the facts of the present case. In Datar Switchgears Ltd. v. Tata Finance Ltd. and Anr. while construing section 11(6) of the 1996 Act, the court held that if one party demands the opposite party to appoint an arbitrator and the opposite party does not make an appointment within 30 days of demand being made by the other party, the right to make the 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. Only then the right of the opposite party ceases. It is in this context that the court observed in para 23 that "when parties have entered into a contract and settled on a procedure, due importance has to be given to such procedure even though rigor of the doctrine of `Freedom of contract has been whittled down by various labour and special welfare legislation, still the court has to respect the terms of the contract entered into by parties and endeavour to give importance and effect to it. When the party has not disputed the arbitration clause, normally he is bound by it and obliged to comply with the procedure laid down under the said clause". This case has no bearing on the issue involved in the instant case. The other case cited by Dr. Tulzapurkar in Open Sea Maritimes Inc. v. R. Pyarelal International Pvt. Ltd. is distinguishable on facts. In that case respondents had failed to make appointment of an arbitrator even after the notice period. The court held that if the party fails to appoint an arbitrator even after the notice then the Arbitrator appointed by the other party can act a sole arbitrator and pass the award. The court referred to clause 24 of the agreement between the parties which provide that if the other party fails to appoint an arbitrator in spite of the notice, the arbitrator appointed shall be entitled to act as the sole arbitrator as such procedure was agreed upon between the parties. The case before Patankar J. was under Part II of the Act. In the instant case, in view of the provisions contained in section 15(2) of the Act, upon withdrawal of the arbitrator Shri Huddar the petitioners had right to appoint a new arbitrator as per the Rules that were applicable to appointment of arbitrator."11. The appellants challenged the orders of the learned designated Judge in two separate writ petitions, but could not persuade the Division Bench of the High Court to entertain their prayer for nullifying the appointment of Shri Justice M.N. Chandurkar as the third arbitrator. The Division Bench referred to the judgments of this Court in Konkan Railway Corporation Ltd. and others v. Mehul Construction Company (supra) and Konkan Railway Corporation Ltd. and another v. Rani Construction Pvt. Ltd. (supra), and held that the writ petitions are not maintainable against the orders passed by the designated Judge, which were administrative in nature. However, liberty was given to the appellants to raise the issue relating to appointment of the third arbitrator before the Arbitral Tribunal12. The Constitution Bench, which heard the special leave petitions filed by the appellants against the orders of the High Court, opined that the judgment rendered by an earlier Constitution Bench in Konkan Railway Corporation Ltd. and another v. Rani Construction Pvt. Ltd. (supra), may require reconsideration and directed that the matter be placed before a larger Bench. Thereafter, the cases were heard by a seven-Judge Bench. By majority judgment, the larger Bench overruled the Constitution Bench judgment in Konkan Railway Corporation Ltd. v. Rani Construction Pvt. Ltd. (supra), and held that the power exercised by the Chief Justice of the High Court or the Chief Justice of India under Section 11(6) of the Act is a judicial power and not an administrative power and that an order passed by the Chief Justice of the High Court or by the designated Judge of that High Court is appealable under Article 136 of the Constitution. The conclusions of the majority are contained in paragraph 47 of the judgment, the relevant portions of which are extracted below:"47. We, therefore, sum up our conclusions as follows:(i) The power exercised by the Chief Justice of the High Court or the Chief Justice of India under Section 11(6) of the Act is not an administrative power. It is a judicial power(ii) The power under Section 11(6) of the Act, in its entirety, could be delegated, by the Chief Justice of the High Court only to another Judge of that Court and by the Chief Justice of India to another Judge of the Supreme Court(iii) In case of designation of a Judge of the High Court or of the Supreme Court, the power that is exercised by the designated Judge would be that of the Chief Justice as conferred by the statute(iv) The Chief Justice or the designated Judge will have the right to decide the preliminary aspects as indicated in the earlier part of this judgment. These will be his own jurisdiction to entertain the request, the existence of a valid arbitration agreement, the existence or otherwise of a live claim, the existence of the condition for the exercise of his power and on the qualifications of the arbitrator or arbitrators. The Chief Justice or the designated Judge would be entitled to seek the opinion of an institution in the matter of nominating an arbitrator qualified in terms of Section 11(8) of the Act if the need arises but the order appointing the arbitrator could only be that of the Chief Justice or the designated Judge(v) xxx xxxx xxxx(vi) Once the matter reaches the Arbitral Tribunal or the sole arbitrator, the High Court would not interfere with the orders passed by the arbitrator or the Arbitral Tribunal during the course of the arbitration proceedings and the parties could approach the Court only in terms of Section 37 of the Act or in terms of Section 34 of the Act(vii) Since an order passed by the Chief Justice of the High Court or by the designated Judge of that Court is a judicial order, an appeal will lie against that order only under Article 136 of the Constitution to the Supreme Court(viii) xxxx xxxx xxxx(ix) In a case where an Arbitral Tribunal has been constituted by the parties without having recourse to Section 11(6) of the Act, the Arbitral Tribunal will have the jurisdiction to decide all matters as contemplated by Section 16 of the Act(x ) xxxx xxxx xxxx(xi) xxxx xxxx xxxx

Court's reasoning:
20. We may now advert to the scope of Clause 19 of piece work agreement, which provides for appointment of two arbitrators, one by each party, with liberty to the arbitrators to appoint an Umpire, in case of difference or their failure to reach an agreement within one month of their appointment. The award made by two arbitrators or Umpire, as the case may be, is treated as final, conclusive and binding on the parties. This clause also specifies the consequence of failure of either party to the difference or dispute to appoint an arbitrator within 30 calendar days counted from the date of notice in writing given by the other side or refusal of the arbitrator appointed by either party to accept such appointment or act upon the same. In that event, the arbitrator appointed by the other party becomes entitled to proceed with the reference as the Sole Arbitrator and make an award. There is nothing in Clause 19 from which it can be inferred that in the event of refusal of an arbitrator to accept the appointment or arbitrate in the matter, the party appointing such arbitrator has an implicit right to appoint a substitute arbitrator. Thus, in terms of the agreement entered into between the parties, respondent No.1 could not appoint Shri S.L. Jain as a substitute arbitrator simply because Shri S.N. Huddar declined to accept the appointment as an arbitrator. The only consequence of Shri S.N. Huddars refusal to act as an arbitrator on behalf of respondent No.1 was that respondent No.2 who was appointed as an arbitrator by the appellants became the Sole Arbitrator for deciding the disputes or differences between the parties21. The learned designated Judge appointed the third arbitrator because he was of the view that in terms of Section 15(2), a substitute arbitrator could be appointed where the mandate of an already appointed arbitrator terminates. In taking that view, the learned designated Judge failed to notice that Section 15(1) provides for termination of the mandate of arbitrator where he withdraws from office for any reason or by or pursuant to agreement of the parties and not where the arbitrator appointed by either party declines to accept the appointment or refuses to act as such and that the term `rules appearing in Section 15(2) takes within its fold not only the statutory rules, but also the terms of agreement entered into between the parties22. The words `refuse and `withdraw have not been defined in the Act. Therefore, we may usefully refer to dictionary meanings of these words. As per P. Ramanatha Aiyars Advanced Law Lexicon (Third Edition 2005), the word `refuse means to decline positively; to express or show a determination not to do something. As per Century Dictionary, the word `refuse means to deny, as a request, demand or invitation; to decline to accept; to reject, as to refuse an offer. As per New Oxford Illustrated Dictionary, Volume II, p.1421, the word `refuse meanssay or convey by action that one will not accept, submit to, give, grant, gratify consent23. The above extracted meanings of two words bring out sharp distinction between them. While the word `refuse denotes a situation before acceptance of an invitation, offer, office, position, privilege and the like, the word `withdraw means to retract, retire or retreat from a place, position or situation after acceptance thereof. Therefore, Section 15(2) of the Act does not per se apply to a case where an arbitrator appointed by a party to the agreement declines to accept the appointment or refuses to arbitrate in the matter. Of course in a given case, refusal to act on the arbitrators part can be inferred after he has entered upon arbitration by giving consent to the nomination made by either party to the agreement24. Insofar as this case is concerned, we find that the arbitrator appointed by respondent No.1, namely, Shri S.N. Huddar declined to accept the appointment/arbitrate in the matter on the ground that in his capacity as Superintending Engineer and Chief Engineer, he was associated with Koyna Hydel Project implying thereby that he may not be able to objectively examine the claims of the parties or the other party may question his impartiality. To put it differently, Shri S.N. Huddar did not enter upon the arbitration. Therefore, there was no question of his withdrawing from the office of arbitrator so as to enable respondent No.1 to appoint a substitute arbitrator. In any case, in the absence of a clear stipulation to that effect in the agreements, respondent No.1 could not have appointed a substitute arbitrator and the learned designated Judge gravely erred in appointing the third arbitrator by presuming that the appointment of Shri S.L. Jain was in accordance with lawAlthough, the language of paragraph 4 of the judgment gives an impression that the Court decided the matter by presuming that the agreement between the parties did not contain a provision for appointment of a substitute arbitrator if the original appointment terminates or if the original arbitrator withdraws from the arbitration and this omission is supplied by Section 15(2) of the Act, if that paragraph is read in conjunction with paragraphs 2 and 3 it becomes clear that the arbitration agreement did provide for appointment of another arbitrator in the event originally appointed arbitrator was to resign and there was no plausible reason for the Court to presume that there is an omission in the agreement on the issue of appointment of a substitute arbitrator. In any case, the judgment cannot be read as laying down a proposition of law that in the absence of a specific provision in the arbitration clause, either party to the agreement can appoint a substitute arbitrator in the event of the originally appointed arbitrator refusing to act26. At the cost of repetition, we consider it necessary to observe that the agreements entered into between the appellant and respondent No.1 do not contain a provision for appointment of a substitute arbitrator in case arbitrator appointed by either party was to decline to accept appointment or refuse to arbitrate in the matter. Therefore, respondent No.1 cannot draw support from the ratio of the judgment in Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd. (supra).