2000 INSC 1124
Datar Switchgears Ltd.
Vs
Tata Finance Ltd. & Anr.
Civil Appeal No. 5986 of 2000
(M.Jagannadha Rao and K.G. Balakrishnan, JJ.)
18.10.2000
JUDGMENT
Mr. K.G. Balakrishnan, J.:- Leave granted.
The appellant challenges an order passed by the Chief Justice of Bombay High Court, under Section
11 of the Arbitration and Conciliation Act, 1996 [For short, "the Act"]. The appellant had entered
into a lease agreement with the 1st respondent in respect of certain machineries. Dispute arose
between the parties and the 1st respondent sent a notice to the appellant on 5.8.1999 demanding
payment of Rs. 2,84,58,701 within fourteen days and in the notice it was specifically stated that in
case of failure to pay the amount, the notice be treated as one issued under Clause 20.9 (Arbitration
clause) of the Lease Agreement. The appellant did not pay the amount as demanded by the 1st
respondent. The st respondent did not appoint an Arbitrator even after the lapse of thirty days, but
filed Arbitration Petition No. 405/99 on 26.10.99 under Section 9 of the Act for interim protection.
On 25.11.99, the 1st respondent appointed the 2nd respondent as the sole Arbitrator by invoking
clause 20.9 of the Lease Agreement and the Arbitrator in turn issued a notice to the appellant asking
them to make their appearance before him on 13th March, 2000. Thereafter, the appellant filed
Arbitration Application No. 2/2000 before Hon'ble the Chief Justice of Bombay and prayed for
appointment of another Arbitrator and the 1st respondent opposed this application. This petition was
rejected by the Chief Justice holding that as the Arbitrator had already been appointed by the first
respondent, the Lessor, the petition was not maintainable. This order is challenged before us.
We heard the appellant's Counsel Mr. V.A. Mohta and respondent's Counsel Mr. R.F. Nariman. The
appellant's Counsel questioned the authority of the 1st respondent in appointing an Arbitrator after
the long lapse of the notice period of 30 days. According to the appellant, the power of appointment
should have been exercised within a reasonable time. The appellant's Counsel also urged that
unilateral appointment of Arbitrator was not envisaged under the Lease Agreement and the 1st
respondent should have obtained the consent of the appellant and the name of the Arbitrator should
have been proposed to the appellant before appointment. On the other hand, the Counsel for the 1st
respondent supported the impugned order.
Learned counsel for the appellant, Shri V.A. Mohta argued that the oder pased by the Chief Justice
is amenable to Article 136 of the Constitution of India. Even if it is an administrative order as
decided by a three Judge Bench in Konkan Railway Corporation Ltd. vs. M/s. Mehul Construction
Co. 2000(6) SCALE 71, it is amenable to Article 136. Learned Senior Counsel for the 1st
respondent, Shri R.F. Nariman, however, stated that in this case we need got go into this controversy
and we may decide the matter on merits on the assumption that Article 136 is attracted. In view of
the above stand takan for the respondents, we are not deciding the question of maintainability.
The Arbitration and Conciliation Act, 1996 made certain drastic changes in the Law of Arbitration.
This Act is codified in tune with the Model Law on International Commercial Arbitration as
adopted by the United Nations Commission on International Trade Law (UNCITRAL). Section 11
of the Act deals with the procedure for appointment of Arbitrator. Section 11(2) says that the parties
are free to agree to any procedure for appointing the Arbitrator. If only there is any failure of that
procedure, the aggrieved party can invoke sub-clause (4), (5) or (6) of Section 11, as the case may
be. In the instant case, the Arbitration clause in the Lease Agreement contemplates appointment of a
sole Arbitrator. If the parties fail to reach any agreement as referred to in Sub-Section (2), or if they
fail to agree on the Arbitrator within thirty days from receipt of the request by one party, the Chief
Justice can be moved for appointing an Arbitrator either under sub-clause (5) or sub-clause (6) of
Section 11 of the Act.
Sub-clause (5) of Section 11 can be invoked by a party who has requested the other party to appoint
an Arbitrator and the latter fails to make any appointment within thirty days from the receipt of the
notice. Admittedly, in the instant case, the appellant has not issued any notice to the 1st respondent
seeking appointment of an Arbitrator. An application under sub-clause (6) of Section 11 can be filed
when there is a failure of the procedure for appointment of Arbitrator. This failure of procedure can
arise under diffeernt circumstances. It can be a case where a party who is bound to appoint an
Arbitrator refuses to appoint the Arbitrator or where two appointed Arbitrators fail to appoint the
third Arbitrator. If the appointment of Arbitrator or any function connected with such appointment
is entrusted to any person or institution and such person or institution falls to discharge such
function, the aggrieved party can approach the Chief Justice for appointment of Arbitrator.
The appellant in his application does not mention under which sub-section of Section 11 the
application was filed. Evidently it must be under Sub-section (6)(a) of Section 11, as the appellant
has no case that a notice was issued but an Arbitrator was not appointed or that there was a failure to
agree on certain Arbitrator. The contention of the appellant might be that the first respondent failure
to act as required under the procedure.
Therefore, the question to be considered is whether there was any real failure of the mechanism
provided under the Lease Agreement. In order to consider this, it is relevant to note the Arbitration
clause in the Agreement.
Clause 20.9 of the Agreement is the Arbitration clause, which is to the following effect:--
20.9" It is agreed by and between the parties that in case of any dispute under this Lease the same
shall be referred to an Arbitrator to be nominated by the Lessor and the award of the Arbitrator shall
be final and binding on all the parties concerned. The venue of such arbitration shall be in Bombay.
Save as aforesaid, the Courts as Bombay alone and no other Courts whatsoever will have
jurisdiction to try suit in respect of any claim or dispute arising out of or under this Lease or in any
way relating to the same".
The above clause gives an unfettered discretion to the 1st respondent-lessor to appoint an Arbitrator.
The 1st respondent gave notice to the appellant and later appointed the 2nd respondent as the
Arbitrator. It is pertinent to note that no notice period is prescribed in the above arbitration clause
and it does not speak about any concurrence or consent of the appellant being taken in the matter of
the choice of Arbitrator.
The question then arises whether the purposes of Section 11(6) the party to whom a demand for
appointment its 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.
Learned Senior counsel for the respondents submits that the Bombay, Delhi and Andhra Pradesh
cases relied upon are distinguishable. It is also contended that under Section 11(6) no period of time
is prescribed and hence the opposite party can make an appointment even after 30 days provided it
is made before the application is filed under Section 11.
The appellant contended that the 1st respondent did not appoint the Arbitrator within a reasonable
period and that amounts to failure of the procedure contemplated under the Agreement. Our
attention was drawn to a decision of the Bombay High Court reported in 1999(2) Bombay CR. 189
(Naginbhai C. Patel Vs. Union of India). There, the petitioner, a Govt. Contractor, as per the form
of the Arbitration clause requested the Secretary P.W.D. to appoint the arbitrator. The Secretary,
P.W.D. did not take any action and the petitioner filed an application under Section 11(6) of the Act.
After the filing of this application, the respondent appointed an Arbitrator and urged before the
Chief Justice that application under Section 11(6) filed by the petitioner became infructuous. It was
held that the petitioner had waited for 30 days for appointment of the arbitrator and as the
respondent had failed to appoint the arbitrator the objection was not sustainable and the appointment
of arbitrator made by the respodent was not valid in the eye of law.
The above decision has no application to the facts of this case as in the present case, the Arbitrator
was already appointed before the appellant invoked Section 11 of the Act. The Counsel for the
appellant contended that the Arbitrator was appointed after a long lapse of time and that too without
any previous consultation with the appellant and therefore it was argued that the Chief Justice
should have appointed a fresh arbitrator. We do not find much force in this contention, especially in
view of the specific words used in the Arbitration clause in the Agreement, which is extracted
above. This is not a case where the appellant requested and gave a notice period for appointment of
arbitrator and the latter failed to comply with that request. The 1st respondent asked the appellant to
make payment within a stipulated period and indicated that in the event of non-payment of the
amount within fourteen days, the said notice itself was to be treated as the notice under the
Arbitration clause in the Agreement. The amount allegedly due from the appellant was substantial
and the 1st respondent cannot be said to be at fault for having given a larger period for payment of
the amount and setting the dispute. It is pertinent to note that the appellant did not file an application
even after the 1st respondent invoked Section 9 of the Act and filed a petition seeking interim relief.
Under such circumstances, it cannot be said that there was a failure of the procedure prescribed
under the contract.
The decision of the Delhi High Court in B.W.L. Ltd. vs. MTNL & Ors. [2000(2) Arb. LR 190
(Del.)] decided on 23.2.2000 is also distinguishable inasmuch as the respondent, in spite of being
given opportunity on 11.10.99 by the Court after filing of the application under Section 11 to
appoint an arbitrator, failed to do so and the Court felt that it was a fit case for appointment of an
arbitrator under Section 11. This case is also distinguishable as the appointment was not made
before the filing of the application under Section 11.
In Sharma & Sons vs. Engineer-in-Chief, Army Headquarters, New Delhi & Ors. [2000(2)
Arb.LR 31 (AP)], the respondents were requested on 26.6.95, 6.8.95 and other dates in 1997 to
appoint an arbitrator. Application under Section 11 was filed after nearly 4 years on 21.4.99. Only
thereafter the respondent appointed an arbitrator on 13.5.99, but only in respect of some of the
disputes. The respondent felt that the other disputes were outside the ambit of the arbitration clause.
The High Court of Andhra Pradesh held that in view of Section 11(6) read with Section 11(8) the
respondent had forfeited his right to appoint an arbitrator after the expiry of 30 days from the date
of demand for arbitrator. Even in the above case, the appointment was not made before the
application under Section 11 was filed. Hence, the case is not applicable to the facts of this case.
In all the above cases, therefore, the appointment of the arbitrator was not made by the opposite
party before the application was filed under Section 11. Hence, all the above cases are not directly
in point.
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?
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 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. 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.
In the present case the respondent made the appointment before the appellant filed the application
under Section 11(6) though it was beyond 30 days from the date of demand. In our view, the
appointment of the arbitrator by the respondent is valid and it cannot be said that the right was
forfeited after expiry of 30 days from the date of demand.
We need not decide whether for purposes of sub-clauses (4) and (5) of Section 11, which expressly
prescribe 30 days, the period of 30 days is mandatory or not.
While interpreting the power of the Court to appoint arbitrator under Section 8 of the Arbitration
Act, 1940, this Court in Bhupinder Singh Bindra vs. Union of India and Another (1995) 5 SCC 329,
in para 3 held as under:-
"It is settled law that court cannot interpose and interdict the appointment of an arbitrator, whom the
parties have chosen under the terms of the contract unless legal misconduct of the arbitrator, fraud,
disqualification etc. is pleaded and proved. It is not in the power of the party at his own will or
pleasure to revoke the authority of the arbitrator appointed with his consent. There must be just and
sufficient cause for revocation".
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 social 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.
Therefore, we do not think that the first respondent, in appointing the second respondent as the
Arbitrator, failed to follow the procedure contemplated under the Agreement or acted in
contravention of the Arbitration clause.
Lastly, the appellant alleged that "nomination" mentioned in the arbitration clause gives the 1st
respondent a right to suggest th name of the Arbitrator to the appellant and the appointment could
be done only with the concurrence of the appellant. We do not find any force in the contention.
In P. Ramanatha Aiyar's Law Lexicon (2nd Edition) at page 1310, the meaning of the word
"Nomination" is given as follows:-
"The action, process or instance of nominating; 2. The act, process or an instrument of nominating;
an act or right of designating for an office or duty.
"Nominations" is equivalent to the word "appointments", when used by a mayor in an instrument
executed for the purpose of appointing certain persons to office".
Nomination virtually amounts to appointment for a specific purpose and the 1st respondent has
acted in accordance with Section 20.9 of the Agreement. So long as the concurrence or ratification
by the appellant is not stated in the arbitration clause, the nomination amounts to selection of the
Arbitrator.
Hence, the appellant, while filing the the application under Section 11 of the Act had no cause of
action to sustain the same as there was no failure of the agreement or that the 1st respondent failed
to act in terms of the agreement. The application was rightly rejected. The appeal deserves to be and
is accordingly dismissed, however, without any order as to costs.