Case: Indian Oil Corp.Ltd Vs. M/S Raja Transport(P) Ltd

Under an agreement dated 28.2.2005, the appellant appointed the respondent as its dealer for retail sale of petroleum products. Clause 69 of the said agreement provided for settlement of disputes by arbitration. The said clause reads thusAny dispute or a difference of any nature whatsoever or regarding any right, liability, act, omission or account of any of the parties hereto arising out of or in relation to this Agreement shall be referred to the sole arbitration of the Director, Marketing of the Corporation or of some officer of the Corporation who may be nominated by the Director Marketing. The dealer will not be entitled to raise any objection to any such arbitrator on the ground that the arbitrator is an officer of the contract relates or that in the course of his duties or differences. In the event of the arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason the Director Marketing as aforesaid at the time of such transfer, vacatin of office or inability to act, shall designate another person to act as arbitrator in accordance with the terms of the agreement. Such person shall be entitled to proceed with the reference from the point at which it was left by his predecessor. It is also a term of this contract that no person other than the Director, Marketing or a person nominated by such Director, Marketing of the Corporation as aforesaid shall act as arbitrator hereunder. The award of the arbitrator so appointed shall be final, conclusive and binding on all parties to the Agreement, subject to the provisions of the Arbitration Act, 1940 or any statutory modification of re-enactment thereof and the rules made thereunder and for the time being in force shall apply to the arbitration proceedings under thissupplied)3. By letter dated 6.8.2005, the appellant terminated the dealership of the respondent on the recommendation of its Vigilance Department. The respondent filed Suit No.43/2005 in the Court of Civil Judge, Junior Division, Rishikesh, Dehradun for a declaration that the order of termination of dealership dated 6.8.2005 was illegal and void and for a permanent injunction restraining the appellant from stopping supply of petroleum products to its retail outlet.4. In the said suit, the appellant filed an application under section 8 of the Act read with Order VII Rule 11 of Civil Procedure Code, praying that the suit be rejected and the matter be referred to arbitration in terms of Clause 69 of the agreement. The learned Civil Judge, by order dated 16.11.2005 allowed the said application filed by the appellant directing the parties to refer the matter to arbitration within two months, with a further direction that appellant shall not stop supplies to the respondent for a period of two months.5. Both appellant and respondent challenged the order dated 16.11.2005. Respondent filed Civil Appeal No.96/2005 being aggrieved by the restriction of supply for only two months from 16.11.2005. The appellant filed Civil Appeal No.214/2005, being aggrieved by the direction to continue the supply for a period of two months from 16.11.2005. The respondent also filed an application under Section 9 of the Act seeking an interim injunction against the appellant. The two appeals and the application under section 9 of the Act were disposed of by a common order dated 20.1.2006 by the learned District Judge, Dehradun. He dismissed both the appeals but allowed the application under section 9 of the Act and restrained the appellant herein from interrupting the supply of petroleum products to respondent for a period of two months, and directed the parties to refer the matter to arbitration as per the agreement within the said period of two months.6. When the said appeals were pending, the respondent issued a notice dated 4.1.2006 through its counsel to the appellant, referring to the appellants insistence that only its Director (Marketing) or an officer nominated by him could act as the arbitrator, in pursuance of the order of the Civil Judge dated 16.11.2005. The respondent alleged that it did not expect fair treatment or justice, if the Director (Marketing) or any other employee of the appellant was appointed as arbitrator, and that therefore any such appointment would be prejudicial to its interest. It contended that any provision enabling one of the parties or his employee to act as an arbitrator was contrary to the fundamental principle of natural justice that no person can be a judge in his own cause. The respondent therefore called upon the appellant by the said notice dated 4.1.2006, to fix a meeting at Dehradun between the officers of the appellant and respondent within seven days so as to mutually agree upon an independent arbitrator. The appellant submits that the said request, apart from being contrary to the arbitration agreement, was also contrary to the subsequent order dated 20.1.2006 which directed that the disputes should be referred to the arbitrator as per the agreement and therefore, it did not agree to the said request for an outside arbitrator.7. In this background, the respondent filed an application (Arbitration Application No.2/2006) under section 11(6) of the Act in March 2006 before the Chief Justice of Uttaranchal High Court praying for appointment of an independent arbitrator to decide the dispute relating to the validity of the termination of the dealership, contending as followsa dispute between the parties has arisen and by notice dated 4.1.2006, the applicant served the respondent a notice calling upon them to appoint an independent arbitrator, but in spite of expiry of reasonable time, no independent arbitrator has beensaid petition was resisted by the appellant by contending that an arbitrator can be appointed only in terms or clause 69 of the agreement. The learned Chief Justice, after hearing the parties allowed the application by the impugned order dated 26.9.2008, and appointed a retired High Court Judge as sole arbitrator to decide the dispute. The learned Chief Justice assigned the following two reasons to appoint a retired Judge as Arbitrator, instead of the person named in the Arbitration Agreement :-(i) The Director (Marketing) of the appellant, being its employee, should be presumed not to act independently or impartially.(ii) The respondent had taken steps in accordance with the agreed appointment procedure contained in the arbitration agreement and the directions of the civil court, by issuing a notice dated 4.1.2006 calling upon the appellant to appoint an arbitrator. After the receipt of the notice dated 4.1.2006, the appellant had to refer matter for arbitration to its Director Marketing, but it did not do so. Nor did it take any step for appointment of the Arbitrator. By not referring the matter to arbitration to its own Director, despite receipt of the notice dated 4.1.2006, the appellant had failed to act as required under the agreed procedure.8. The said order of the Chief Justice is challenged by the appellant.

Court's reasoning:
13. We find no bar under the new Act, for an arbitration agreement providing for an employee of a government/ statutory corporation/public sector undertaking (which is a party to the contract), acting as Arbitrator. Section 11(8) of the Act requires the Chief Justice or his designate, in appointing an arbitrator, to 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 or impartial arbitrator". Section 12(1) requires an Arbitrator, when approached in connection with his possible appointment, to disclose in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality. Sub-section 12(3) enables the Arbitrator being challenged if (i) the circumstances give rise to justifiable doubts as to his independence or impartiality, or (ii) he does not possess the qualifications agreed to by the parties. Section 18 requires the Arbitrator to treat the parties with equality (that is to say without bias) and give each party full opportunity to present his case. Nothing in sections 11, 12, 18 or other provisions of the Act suggests that any provision in an arbitration agreement, naming the Arbitrator will be invalid if such named arbitrator is an employee of one of the parties to the arbitration agreement. Sub-section (2) of section 11 provides that parties are free to agree upon a procedure for appointment of arbitrator/s. Sub-section (6) provides that where a party fails to act, as required under the procedure prescribed, the Chief Justice or his designate can take necessary measures. Sub-section (8) gives the discretion to the Chief Justice/his designate to choose an arbitrator suited to meet the requirements of a particular case. The said power is in no way intended to nullify a specific term of arbitration agreement naming a particular person as arbitrator. The power under sub-section (8) is intended to be used keeping in view the terms of the arbitration agreement. The fact that the named arbitrator is an employee of one of the parties is not ipso facto a ground to raise a presumption of bias or partiality of lack of independence on his part.Before parting from this issue, we may however refer to a ground reality. Contractors in their anxiety to secure contracts from government/ statutory bodies/public sector undertakings, agree to arbitration clauses providing for employee-arbitrators. But when subsequently disputes arise, they balk at the idea of arbitration by such employee-arbitrators and tend to litigate to secure an "independent" arbitrator. The number of litigations seeking appointment of independent Arbitrator bears testimony to this vexed problem. It will be appropriate if governments/statutory authorities/public sector undertaking reconsider their policy providing for arbitration by employee-arbitrators in deference to the specific provisions of the new Act reiterating the need for independence and impartiality in Arbitrators. A general shift may in future be necessary for understanding the word "independent" as referring to someone not connected with either party. That may improve the credibility of Arbitration as an alternative dispute resolution process. Be that as it may.In the light of the above discussion, the scope of section 11 of the Act containing the scheme of appointment of arbitrators may be summarisedWhere the agreement provides for arbitration with three arbitrators (each party to appoint one arbitrator and the two appointed arbitrators to appoint a third arbitrator), in the event of a party failing to appoint an Arbitrator within 30 days from the receipt of a request from the other party (or the two nominated arbitrators failing to agree on the third arbitrator within 30 days from the date of the appointment), the Chief Justice or his designate will exercise power under sub-section (4) of section 11 of the Act.(ii) Where the agreement provides for arbitration by a sole arbitrator and the parties have not agreed upon any appointment procedure, the Chief Justice or his designate will exercise power under sub-section (5) of section 11, if the parties fail to agree on the arbitration within thirty days from the receipt of a request by a party from the other party.(iii) Where the arbitration agreement specifies the appointment procedure, then irrespective of whether the arbitration is by a sole arbitrator or by a three-member Tribunal, the Chief Justice or his designate will exercise power under sub-section (6) of section 11, if a party fails to act as required under the agreed procedure (or the parties or the two appointed arbitrators fail to reach an agreement expected of them under the agreed procedure or any person/institution fails to perform any function entrusted to him/it under that procedure).(iv) While failure of the other party to act within 30 days will furnish a cause of action to the party seeking arbitration to approach the Chief Justice or his designate in cases falling under sub-sections (4) & (5), such a time bound requirement is not found in sub-section (6) of section 11. The failure to act as per the agreed procedure within the time limit prescribed by the arbitration agreement, or in the absence of any prescribed time limit, within a reasonable time, will enable the aggrieved party to file a petition under Section 11(6) of the Act.(v) Where the appointment procedure has been agreed between the parties, but the cause of action for invoking the jurisdiction of the Chief Justice or his designate under clauses (a), (b) or (c) of sub-section (6) has not arisen, then the question of Chief Justice or his designate exercising power under sub-section (6) does not arise. The condition precedent for approaching the Chief Justice or his designate for taking necessary measures under sub-section (6) is that (i) a party failing to act as required under the agreed appointment procedure; or (ii) the parties (or the two appointed arbitrators), failing to reach an agreement expected of them under the agreed appointment procedure; or (iii) a person/institution who has been entrusted with any function under the agreed appointment procedure, failing to perform such function.(vi) The Chief Justice or his designate while exercising power under sub-section (6) of section 11 shall endeavour to give effect to the appointment procedure prescribed in the arbitration clause.(vii) If circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore the designated arbitrator and appoint someone else.In the circumstances, the third question is answered in the negative. Consequently, the learned Chief Justice erred in having proceeded on the basis that the respondent had performed its duty in terms of the arbitration agreement in seeking reference to arbitration and that the appellant had failed to act in the matter and therefore, there was justification for appointing an independent arbitrator.