Andhra HC (Pre-Telangana)
G. Venkata Reddy And Co. Engineers And ... vs The Vice-Chairman And Managing ... on 22 February, 2008
Equivalent citations: 2008(2)ALT720, 2008(2)ARBLR301(AP)
Author: Ramesh Ranganathan
Bench: Ramesh Ranganathan
ORDER Ramesh Ranganathan, J.
1. This application is filed, under Section 11 of the Arbitration & Conciliation Act, 1996, for appointment of an arbitrator to resolve the disputes, referred to in the applicant's letter dated 27.06.2006, arising out of the agreement dated 31.01.2000.
2. The applicant, a registered partnership firm and a special class contractor, entered into an agreement with the respondent on 31.01.2000 for excavation and removal of overburden and production of Barytes Ore (ROM), loading, transportation, unloading and leveling at Mangampeta Barytes project, Mangampeta village, near Koduru railway station, Cuddapah district. The scheduled date of completion of the work, under the agreement of three years duration, was extended upto 08.03.2005. On completion of the work, and after receiving final payment on furnishing a "no claim certificate", the applicant, in their letter dated 27.06.2006, consolidated their claims for Rs. 22 crores with interest thereon. They requested the respondent to settle the disputes within thirty days or furnish a panel of three names to enable the applicant to consider one of them as the sole arbitrator. Thereafter the applicant, vide letter dated 16.11.2006, furnished a list of three names to the respondent requesting them to choose one as the arbitrator. Since the respondent did not appoint the arbitrator, the present application is filed.
APPLICATION UNDER SECTION 11: SCOPE OF ENQUIRY BY THE CHIEF JUSTICE'S DESIGNATE:
When approached with an Section 11 of the Act, the Chief Justice's designate has to decide his own jurisdiction and determine whether the applicant has approached the right High Court. He has to decide whether there is an arbitration agreement as defined in the Act, and whether the applicant is a party to such an agreement. He can also decide the question whether the claim is a dead one, or a long-barred claim that was sought to be resurrected, whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations or by receiving final payment without objection and whether the applicant has satisfied the conditions under Section 11(6) of the Act for appointment of an arbitrator. It may, however, not be possible for him to conclusively decide whether the claim is one which comes within the purview of the arbitration clause. It is appropriate, therefore, that such questions along with the merits of the claims raised are left to be decided by the arbitral tribunal. (SBP & Co. v. Patel Engineering Ltd. (2005)8 SCC 618) In examining the request for appointment of an arbitrator, it is well to remember that no issue would remain to be decided if the parties have recorded satisfaction of their mutual rights and obligations or the claim is a dead one. It is in this sense that the Chief Justice's designate has to examine whether there remains anything to be decided between the parties in respect of the agreement and whether the parties are still at issue on any such matter. It is only for the purpose of ascertaining whether the arbitral procedure should be started that the Chief Justice's designate has to record his satisfaction that there remains a live issue between the parties. Similarly on the question of limitation, which is a mixed question of law and fact, the Chief Justice's designate has to record his satisfaction that, prima facie, the issue has not become dead by lapse of time or that a party to the agreement has not slept over its rights beyond the time permitted by law to agitate these issues covered by the agreement. All that he has to do is to record his satisfaction that the parties have not closed their rights and the matter is not barred by limitation. (Shree Ram Mills Ltd. v. Utility Premises (P) Ltd. (2007) 4 SCC 599)
3. While examining an application for appointment of an arbitrator, the primary exercise is to decide whether there is an arbitrable dispute or not. That does not mean that the Chief Justice's designate can go deep into these matters and examine the validity, sustainability or acceptability of the claims. What is required to be examined at this stage is only the "subjective consideration of a limited area whether there is an arbitrable dispute in existence or not." Section 11(6) does not permit a detailed objective consideration and examination of the merits of the disputes. (M. Rama Krishna Reddy, rep., by its Managing Partner, Hyderabad v. A.P. Mineral Development Corporation Ltd. rep., by its Vice Chairman and Managing Director Judgment in A.A. No. 58 of 2007 dated 23.10.2007. While the Chief Justice's designate can examine the aforesaid issues, the enquiry to be made in this regard is only with the object of putting the arbitral proceedings in motion and not to adjudicate conclusively on these issues. The Chief Justice's designate has only to record his prima-facie satisfaction that an issue exists between the parties which necessitates resolution through arbitral proceedings, nothing less, nothing more.
It is in this context that the objections of the respondents, to applicant's request for appointment of an arbitrator, as emphatically put across by the Learned Advocate General, must be examined. The objections are:
(1) the applicant-contractor received final payment, secured release of the earnest money deposit and return of the original performance bank guarantees, having informed the respondents that there were no claims against the Corporation under the agreement and, since there is accord and satisfaction between the parties, there is no arbitral dispute in existence necessitating its resolution by arbitration;
(2) The agreement specifically prohibits claims relating to escalation in the cost of diesel and, since the arbitrator is required to act strictly in accordance with the agreement, the applicant's claim towards escalation in the cost of diesel must necessarily be rejected. No useful purpose would be served, therefore, in referring this claim for arbitration.
Accord and Satisfaction: Scope of Examination Under Section 11 of The Act:
On the first issue of accord and satisfaction, Clause 11 of the General Conditions of contract relates to final payment and release. Clauses 11.1 to 11.3 read thus:
11.1 Immediately, on completion of the work, the contractor shall submit his final bill indicating the gross and net amount payable. On receipt of this, the Corporation shall very the same, determine the total value of the work done by the contractor and after deducting all sums paid to him already and due to the Corporation on any account and such further sums as the Corporation is or may be authorized or required to reserve or retain under the terms of the contract or otherwise, make over to the contractor as his final payment, subject to the contractor furnishing an unconditional certificate to the effect that he has no further claim of whatsoever nature or description on the Corporation.
11.2 All prior certificates upon which advance payments may have been made shall be subject to correction in the final certificate.
11.3 No claim shall be made or be filed by the contractor and Corporation shall not be liable to any money to the contractor except as specifically provided in the contract. Acceptance by the contractor of the final payment as aforesaid shall operate as and shall be a release to the Corporation from all claim and liability to the contractor in respect of anything done or furnished by the contractor for or in relation to the work, or in respect of any act or omission of the Corporation or the Project Manager or any other person relating to or affecting the work.
4. Sri N. Subba Reddy, Learned Counsel appearing for the applicant, would place reliance on the applicant's letter dated 7.6.2005, informing the respondent that they were furnishing an unconditional certificate to the effect that they would not claim any further amount due to completion of the contract, without prejudice to their claims, as insisted by the respondent, for releasing payment of their final bill. He would contend that it is only on the respondents' insistence that the applicant had furnished the certificate dated 07.06.2005 without prejudice to their claims. Learned Counsel would refer to the letter dated 29.5.2006 whereby the applicant informed the respondent that, since the amounts due were released only after giving an undertaking, they had no other alternative but to give such an undertaking much against their will and that linking release of the amounts due to them with the undertaking was "undue influence" and that they had furnished the undertaking under "economic duress" and not out of 'free will'. Learned Counsel would submit that construction of the letter dated 7.6.2005, and whether it is unconditional or without prejudice to the applicant's claims, are again issues which can be conclusively decided only by the arbitrator and that the Chief Justice's designate, in an application under Section 11 of the Act, would relegate parties to have these questions determined by the arbitral tribunal. Learned Counsel would contend that the question whether the no-claim certificate was conclusive or not fell within the arbitrator's domain and that this question would not be examined in an application filed under Section 11(6) of the Act. He would refer to the conditions of the agreement to contend that it is only if such a certificate was furnished would the final bill have been prepared and, even if the contractor wished to raise certain claims, the contract required him to submit such a certificate to receive payment. Learned Counsel would submit that a clause in the contract for issuing "no claim certificate", similar to Clause 11.1, is only a safeguard against frivolous claims after final measurement and it cannot be construed as an absolute bar for raising genuine claims after submission of such a "no claim certificate". He would rely on Chairman & MD NTPC Ltd. v. Reshmi Constructions, Builders & Contractors and Ambica Construction v. Union of India 2006(1) Decisions Today (SC) 1031.
5. On the other hand, the Learned Advocate General would refer to the applicant's letter dated 19.4.2006 whereby the respondent was informed that there were no claims against the Corporation with regards the agreement, that the earnest money deposit amount be released, and the original performance bank guarantee be returned, in view of the no claim certificate furnished by them. He would also refer to the respondent's letter dated 26.5.2006 informing the applicant that, as they had submitted an unconditional "no claim certificate", the earnest money deposit was being released and the performance bank guarantees were being returned in original. He would make a detailed analysis of the various clauses of the agreement to contend that, in view of accord and satisfaction between the parties, there was no arbitrable dispute in existence necessitating appointment of an arbitrator. He would rely on P.K. Ramaiah and Co. v. Chairman & Managing Director, National Thermal Power Corporation 1994 Supplement (3) SCC 126 wherein the Supreme Court held:
...Admittedly the full and final satisfaction was acknowledged by a receipt in writing and the amount was received unconditionally. Thus there is accord and satisfaction by final settlement of the claims. The subsequent allegation of coercion is an afterthought and a devise to get over the settlement of the dispute, acceptance of the payment and receipt voluntarily given. In Russell on Arbitration , 19th Edn., p. 396 it is stated that "an accord and satisfaction may be pleaded in an action on award and will constitute a good defence". Accordingly, we hold that the appellant having acknowledged the settlement and also accepted measurements and having received the amount in full and final settlement of the claim, there is accord and satisfaction. There is no existing arbitrable dispute for reference to the arbitration....
6. The aforesaid judgment in P.K. Ramaiah & Co. 1994 Supplement (3) SCC 126 was considered in Reshmi Constructions, Builders & Contractors (2004) 2 SCC 663 and the Supreme Court observed:
...The jurisdiction of the arbitrator under the 1940 Act although emanates from the reference, it is trite, that in a given situation the arbitrator can determine all questions of law and fact including the construction of the contract agreement. [See Pure Helium India (P) Ltd. v. Oil and Natural Gas Commission ]
(xi) The cases cited by the learned Counsel for the appellant (P.K. Ramaiah and Co. v. Chairman & MD, National Thermal Power Corporation 1994 Suppl (3) SCC 126 and Nathani Steels Ltd. v. Associated Constructions 1995 Supp (3) SCC 324) would show that the decisions therein were rendered having regard to the finding of fact that the contract agreement containing the arbitration clause was substituted by another agreement. Such a question has to be considered and determined in each individual case having regard to the fact situation obtaining therein....
In Ambica Construction 2006(1) Decisions Today (SC) 1031, a similar clause in the agreement, which required a "no-claim certificate" to be submitted by the contractor, on the final measurement of the work, fell for consideration and the Supreme Court held:
...Since we are called upon to consider the efficacy of Clause 43(2) of the General Conditions of Contract with reference to the subject matter of the present appeals, the same is set out herein below:
43(2) Signing of "No claim" Certificate. The Contractor shall not be entitled to make any claim whatsoever against the Railways under or by virtue of or arising out of this contract, nor shall the Railways entertain or consider any such claim, if made by the contractor, after he shall have signed a "No Claim" certificate in favour of the Railways, in such form as shall be required by the Railways, after the works are finally measured up. The contractor shall be debarred from disputing the correctness of the items covered by "No Claim Certificate" or demanding a reference to arbitration in respect thereof.
A glance at the said clause will immediately indicate that a No Claim Certificate is required to be submitted by a contractor once the works are finally measured up. In the instant case the work was yet to be completed and there is nothing to indicate that the works, as undertaken by the contractor, had been finally measured and on the basis of the same a No Objection Certificate had been issued by the appellant. On the other hand, even the first Arbitrator, who had been appointed, had come to a finding that No Claim Certificate had been given under coercion and duress. It is the Division Bench of the Calcutta high Court which, for the first time, came to a conclusion that such No Claim Certificate had not been submitted under coercion and duress. From the submissions made on behalf of the respective parties and in particular from the submissions made on behalf of the appellant, it is apparent that unless a discharge certificate is given in advance, payment of bills are generally delayed. Although, Clause 43(2) has been included in the General Conditions of Contract, the same is meant to be a safeguard as against frivolous claims after final measurement. Having regard to the decision in the case of Reshmi Constructions's (supra), it can no longer be said that such a clause in the contract would be an absolute bar to a contractor raising claims which are genuine, even after the submission of such No Claim Certificate.
We are convinced from the materials on record that in the instant case the appellant also has a genuine claim which was considered in great detail by the Arbitrator who was none other than the counsel for the respondent-Railways. In such circumstances we are inclined to hold that notwithstanding Clause 43(2) of the General Conditions of Contract and the submission of a No claim Certificate by the appellant, the appellant was entitled to claim a reference under the contract and the Division Bench of the Calcutta High Court was wrong in holding otherwise....
7. Clause 11.1 of the General conditions of agreement, provides for final payment to be made to the contractor only on his furnishing an unconditional certificate that he has no further claim, of whatsoever nature or description, on the Corporation. Whether furnishing such a certificate, as mandated by Clause 11.1, would bar a genuine claim, whether the "no-claim certificate" was submitted under "economic duress" or "undue influence", whether there is accord and satisfaction between the parties etc., are issues which involve not only an interpretation of the conditions of the contract but also a detailed examination of the correspondence, and are better examined in arbitral proceedings. It would be wholly inappropriate for the Chief Justice's designate, while exercising jurisdiction under Section 11 of the Act to appoint an arbitrator, to conclusively decide these issues.
"No Escalation" Clause in The Agreement: Its Scope:
On the contractor's claim for payment towards escalation in the cost of diesel, the Learned Advocate General would refer to Clause 7.2.1(2) of the instructions to the tenderers which provides that no escalation would be allowed towards increase in the rates of diesel etc., that such increase shall be to the account of the tenderer, that the Corporation would not be responsible to pay any higher amount due to increase in the rates of these items and no increase in rates would be permitted under any circumstances. Reference is also made by him to the escalation clause in Clause 24.0 of the General conditions of contract, more particularly to Clause 24.3 whereunder the rates quoted by the contractor for all items shall also provide for the cost of material inclusive of diesel, petrol, etc. He would rely on Ramnath International Construction (P) Ltd. v. Union of India and on Ch. Ramalinga Rddy v. Superintending Engineer 1999(9) SCC 610.
On the other hand, Sri N.Subba Reddy, Learned Counsel appearing on behalf of the applicant-contractor, would contend that the "no-escalation clause" contemplated escalation by an act of parties and not by law, that the un-precedented hike in the price of diesel by legislative mandate would justify the applicant's claim for compensation, that the law could not impose an impossibility, that the abnormal hike had frustrated the contract, that such an abnormal hike, which resulted in ruination of the contractor, went to the root of the matter, that the question whether the contractor could be relieved of the rigour of the clause was again a matter to be adjudicated by the arbitrator and that the Chief Justice's designate would not take upon himself the task of conclusively resolving these issues. Learned Counsel would submit that the underlying principle of Section 64(A) of the Sale of Goods Act was applicable. According to the Learned Counsel when the contractor is required to incur extra expenditure due to increase in rates, the authorities could not have visualized that they would do so by cutting down their profit. He would rely on Tarapore & Co. v. State of M.P. JT 1994(1) Supreme Court 162 and S. Haricharan Singh v. Union of India in this regard. Learned Counsel would submit that, since escalation in price of diesel is by reason of statutory variations the "no escalation clause" in the agreement would not bar a claim to be compensated for such increase. He would rely on Tarapore & Co. v. Cochin Ship Yard Ltd. and Food Corporation of India v. A.M. Ahmed & Co. JT 2006(10) SC 62.
In Ramnath International Construction (P) Ltd. 2007(2)SCC 453, the contract provided that if there was any delay, attributable either to the contractor or the employer or to both, and the contractor sought and obtained extension of time for execution on that account, he would not be entitled to claim compensation of any nature, on the ground of such delay, in addition to the extension of time obtained by him. The Supreme Court held that the claim for compensation, as a consequence of delay, was barred by such a clause in the contract.
In Ch. Ramalinga Reddy , Clause 59 of the A.P. Standard Specifications, which applied to the contract between the parties, provided that no claim for compensation on account of delays or hindrances to the work from any cause would lie except as therein defined. The claim fell outside the defined exceptions. The Supreme Court held that, since extension of time was granted to the contractor to complete the work and the respondents had made it clear that no claim for compensation would lie, the claim for compensation was impermissible on both counts.
In Cochin Shipyard Ltd. AIR 1984 SC 1072, the Supreme Court held that over-simplification of the clauses of the contract involving works of a large magnitude was impermissible, that the whole gamut of discussions, negotiations and correspondence must be taken into consideration to arrive at a true meaning of what was agreed to between the parties, that when an agreement was predicated upon an agreed fact situation, if the latter ceased to exist, the agreement to that extent became irrelevant or otiose and, once the rates became irrelevant on account of circumstances beyond the control of the contractor, it was open to the contractor to make a claim for compensation.
In S. Harcharan Singh , the Supreme Court observed:
...The contractors, on the other hand, placed reliance on the following observations of McCardie J. in Naylor, Benzon & Co. v. Krainische Industrie Gesellschaft (1918) 1 KB 331) It is essential to remember, however, that words, even though general, must be limited to circumstances within the contemplation of the parties.
8. Accepting the contention urged on behalf of the contractors Asquith, L.J. observed:
[I]f the original contract plus the deed are read without any implied limitation on their literal meaning, the result, as indicated above, is that after 300,000 profit has been earned by the contractor, he can be compelled to labour like the Danaids without reward or limit, or any further "extras" which the Commissioners may elect to exact from him, 'till the last syllable of recorded time'.... Only the most compelling language would induce a court to construe the combined instruments as placing one party so completely at the mercy of the other. Where the language of the contract is capable of a literal and a more restricted, meaning, all relevant circumstances can be taken into account in deciding whether the literal or a more limited meaning should be ascribed to it.
9. Similarly Singleton, L.J. has observed (KB p. 673) I find myself unable to agree with the submission of Mr Rewcastle that, under the contract as varied by the deed of variation, the contractors would have been bound to continue making alterations and additions, if ordered, for years and years, without any extra payment by way of profit. That would have led to manifest absurdity and injustice, as Mathew, J. said in Bush v. Whitehaven Town & Harbour Trustees (I) 2006(1) Decisions Today (SC) 1031. There must be a limit....
10. The question whether the clauses referred to hereinabove would bar a claim for escalation in the price of diesel, whether the rates have become irrelevant on account of circumstances beyond the control of the contractor, whether the aforesaid clauses in the contract have placed the applicant-contractor completely at the mercy of the respondent, whether the contractor was bound to continue executing the work for years without any extra payment, whether such construction of the conditions of contract would lead to manifest absurdity and injustice etc are again matters which are better resolved by the arbitrator and not by the Chief Justice's designate in an application under Section 11 of the Act. The arbitration clause, in Clause 31.1 of the General conditions of contract, is wide enough to bring within its fold the aforementioned disputes/differences between the applicant and the respondent.
11. I am satisfied that, both on the question of "accord and satisfaction", and the "no escalation clause" in the agreement, the parties are at issue and that arbitral proceedings must be set in motion to decide these and other related issues.
Failure of the Respondent to Appoint An Arbitrator Within the Time Stipulated:
Is The Chief Justice's Designate Bound to Appoint an Arbitrator or Can He Relegate Parties to Adhere to The Conditions of The Agreement:
Sri N. Subba Reddy, learned Counsel appearing on behalf of the applicant, would submit that if one party requests the opposite party to appoint an arbitrator, and the opposite party does not make an appointment within 30 days of the request, the right to appoint an arbitrator does not stand automatically forfeited after expiry of 30 days but, if the appointment is not made before the former files an application under Section 11 seeking appointment of an arbitrator, then the right of the opposite party ceases. Learned Counsel would rely on Datar Switch Gears Ltd. v. Tata Finance Ltd. ; Shin Satellite Public Co Ltd. v. Jain Studios Ltd. Punj Lloyd Ltd. v. Petronet MHB Ltd. (2006) 2 SCC 638; and Union of India v. Bharat Battery Manufacturing Co (Private) Ltd. (2007) 7 SCC 684.
12. On the other hand, the Learned Advocate General would submit that the respondents had rejected the applicant's request for appointment of an arbitrator on the bonafide premise that there was accord and satisfaction between the parties and that there was no dispute in existence necessitating reference to an arbitrator. He would contend that, even if this Court were to hold that the question of accord and satisfaction, and the claim towards escalation in the price of the diesel, should be referred to arbitration, primacy must be given to Clause 31.2 of the General conditions of contract and the respondents must be permitted to now proceed in accordance with the procedure prescribed therein for appointment of an arbitrator.
Among the purposes, for which the Arbitration and Conciliation Act, 1996 (Act 26 of 1996), was made, is to encourage settlement of disputes between parties through mediation, conciliation or other procedures failing which, alone, is it to be resolved by an arbitral tribunal. Arbitration is an alternative dispute resolution mechanism and the Act lays stress on a more congenial procedure for resolution of disputes than the acrimonious adversorial system of litigation in Courts. The underlying scheme of the Act lays emphasis on the parties to the arbitration agreement choosing a person, in whom both of them repose faith and trust, to amicably settle/resolve the disputes between them and it is only when they are not ad idem does the Act provide another mechanism for appointment of an arbitrator.
While Sub-section (5) of Section 11 enables a party to the arbitration agreement to request the Chief Justice, or his designate, to appoint an arbitrator, Sub-section (6) enables the party to request that "the necessary measure" be taken. The power to take "the necessary measure" is circumscribed and cannot, ordinarily, be resorted to where the appointment procedure, prescribed in the arbitration agreement, provides other means for securing the appointment of an arbitrator. Where the arbitration agreement provides other means, for securing the appointment, resort must be had to such means alone and a party to such an agreement may not be justified in making a request to the Chief Justice, or his designate, to take "the necessary measure".
The distinction between the words "the necessary measure" in Sub-section (6) of Section 11 of the Act, and the word "appointment" in Sub-section (5), is significant. In the absence of an appointment procedure being prescribed, in the arbitration agreement, a request can be made to the Chief Justice's designate to appoint an arbitrator. Where, however, a procedure to secure the appointment of an arbitrator is prescribed in the arbitration agreement, then the request to the Chief Justice's designate can only be to "take the necessary measure". If the legislature intended to confer power on the Chief Justice or his designate to appoint an arbitrator nothing prevented it from using the same language in Sub-section (6) as it has employed in Sub-section (5) of Section 11. The distinction is relevant. The power of the Chief Justice or his designate under Clause (6) is to take "the necessary measure" for securing appointment of an arbitrator and, ordinarily, not to take upon himself the task of appointing an arbitrator merely because one of the parties to the arbitration agreement had requested him to do so.
The legislative scheme of Section 11 is clear. If the parties have agreed on a procedure for appointing the arbitrator as contemplated by Sub-section (2) thereof, then the dispute between the parties has to be decided in accordance with the said procedure and recourse to the Chief Justice or his designate cannot be taken straightaway. A party can approach the Chief Justice or his designate in such a case only if the various contingencies provided for in Sub-section (6) have arisen. (The Iron and Steel Co. Ltd. v. Tiwari Road Lines 2007 AIR SCW 3172). While the expression "take the necessary measure", in Section 11(6), may include the power to appoint an arbitrator, it would encompass within its fold other measures to secure the appointment including, if need be, a direction to the respondents to comply with the requirement in the arbitration clause of the agreement for appointment of the arbitrator within a specified time frame. In Datar Switchgears Ltd.13, the Supreme Court held:
...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....
In the matter of settlement of disputes by arbitration, the agreement executed by the parties has to be given primacy and an agreed procedure for appointing the arbitrator should be placed on a higher pedestal and given preference over any other mode for securing the appointment of an arbitrator. It is for this reason that, in Clause (a) of Sub-section (8) of Section 11 of the Act, it is specifically provided that the Chief Justice or the person or institution designated by him, in appointing an arbitrator, shall have due regard to any qualifications required of the arbitrator by the agreement of the parties. (The Iron and Steel Company Ltd17). Ordinarily, the Chief Justice's designate, while exercising jurisdiction under Section 11(6) of the Act, should require the parties to abide/adhere to such a procedure. Parties should be permitted and, if need be, persuaded to do so. It is only in exceptional circumstances, and as a last resort, would exercise of jurisdiction, under Section 11(6) of the Act, for appointment of an arbitrator by the Chief Justice's designate be justified. Appointment of arbitrators by the parties themselves should be the norm, and a statutorily imposed arbitrator the exception.
13. Now the judgments on this aspect.
14. In Dattar Switchgears Ltd. , certain disputes arose between the parties. The 1st respondent, in his notice to the appellant demanding payment of certain amounts, also informed that, in case of failure to make payment, the notice should be treated as having been issued under the arbitration clause of the agreement. The 1st respondent appointed a sole arbitrator in terms of the arbitration clause of the agreement and in turn the arbitrator issued a notice to the appellant asking them to appear before him. It is at this stage that the appellant filed an arbitration application before the Chief Justice of the Bombay High Court seeking appointment of another arbitrator in the place of the one appointed by the 1st respondent. On the petition being rejected by the Chief Justice, holding that an arbitrator had already been appointed by the 1st respondent, and that the petition was not maintainable, the matter was carried in appeal to the Supreme Court. It is in this context that the Supreme Court observed:
...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....
...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 an 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 settling 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....
...In all the above case, 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....
...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 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....
In Punj Lloyd Ltd15, the arbitration agreement conferred power on the functional director of the owner to either act as the sole arbitrator or nominate some other officer of the unit to act as an arbitrator to adjudicate the disputes. Despite service of notice the respondent failed to act and, on expiry of 30 days, the appellant moved the Chief Justice of the High Court whose designate refused to appoint the arbitrator holding that the remedy of the appellant was only to move in accordance with Clause 14.1 of the agreement whereunder the functional director was required to adjudicate upon the dispute. In appeal, the Supreme Court, following its earlier judgment in Datar Switchgears Ltd. (2000)8 SCC 151, restored the application dismissed by the High Court and directed the Chief Justice of the High Court to consider the matter, regarding appointment of an arbitrator, afresh in accordance with Section 11(6) of the Arbitration and Conciliation Act, 1996.
In Shin Satellite Public Co. Ltd. (2006) 2 SCC 628, the Supreme Court held that the respondent could not be permitted to take advantage of its own default and, since there was failure on the part of the respondent in making appointment of an arbitrator in accordance with the agreement, their request that they now be permitted to appoint an arbitrator could not be acceded to.
Reference can also be usefully made to the judgment of this Court in Deepak Galvanising & Engineering Industries Pvt. Ltd. v. Govt. of India 1997(Supl.) Arb. L.R 635, the Madhya Pradesh High Court in Subhash Projects & Marketing Ltd. v. South Eastern Coalfields Ltd. , the Kerala High Court in Bell House Associates Pvt. Ltd. v. the General Manager, Southern Railway, Madras AIR 2001 Kerala 163 and National Thermal Power Corporation Ltd. v. Reghul Constructions Pvt. Ltd. and the Calcutta High Court in Shankar Traders v. Union of India 2007(1) Arb.L.R. 10.
15. In Bharat Battery Manufacturing (2007) 7 SCC 684, notices for appointment of an arbitrator were issued, on 7.6.2005 and 2.1.2006, despite which the Union of India failed to appoint an arbitrator within 30 days from the date of receipt of the request to do so. Thereafter, on 30.3.2006, the respondent filed an application under Section 11(6) and the High Court, by order dated 26.5.2006, appointed a retired Judge of the High Court as the arbitrator. When the application was pending before the High Court, the Central Government appointed a sole arbitrator, in terms of the arbitration agreement, on 15.5.2006. The Division Bench of two Judges of the Supreme Court, following the earlier Division Bench judgment of three Judges, in Punj Lloyd Ltd15 and relying on Datar Switchgears Ltd. (2000)8 SCC 151, held:
...As already noticed, the respondent filed Section 11(6) petition on 30.3.2006 seeking appointment of an arbitrator. The appellant, thereafter, said to have appointed one Dr. Gita Rawat on 15.5.2006 as a sole arbitrator, purportedly in terms of Clause 24 of the agreement. Once a party files an application under Section 11(6) of the Act, the other party extinguishes its right to appoint an arbitrator in terms of the clause of the agreement thereafter. The right to appoint arbitrator under the clause of agreement ceases after Section 11(6) petition has been filed by the other party before the Court seeking appointment of an arbitrator.
We are, therefore, of view that the order of appointment of Dr. Gita Rawat by the appellant as a sole arbitrator dated 15.5.2006 was passed without jurisdiction. Once Section 11(6) petition is filed by one party seeking appointment of an arbitrator, the other party cannot resurrect the clause of the agreement dealing with the appointment of the arbitrator, in this case Clause 24 of the agreement....
16. It is necessary to note that the attention of the Division Bench in Bharat Battery Manufacturing (2007) 7 SCC 684 was not drawn to its earlier judgment in Ace Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corporation Ltd. . In Ace Pipeline Contracts (P) Ltd. , the earlier judgments in Punj Lloyd Ltd. (2006) 2 SCC 638 and Datar Switchgears Ltd . were considered and the Supreme Court held:
...The observations made by their Lordships are very clear and their Lordships negatived the contention that 30 days should not be read in Sub-section (6) of Section 11 of the Act; if the opposite party has not made an appointment within 30 days of demand, the right to make appointment is not forfeited but continues. Their Lordships in para 20 have also very categorically held that 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, the appointment of the arbitrator by the respondent was valid and it cannot be said that the right was forfeited after expiry of 30 days from the date of demand. Their Lordships were also very clear in their mind in para 21 and observed (Datar Switchgears Ltd. ):
21. We need not decide whether for purposes of Sub-sections (4) and (5) of Section 11, which expressly prescribe 30 days, the period of 30 days is mandatory or not.
We are only concerned with reading of 30 days within Sub-section (6) of Section 11. So far as the period of 30 days with regard to Section 11(6) is concerned, there is no manner of doubt that their Lordships had not invoked 30 days as mandatory period under Section 11(6) and beyond that it cannot be invoked by the appointing authority. Therefore, it is totally a misnomer to read 30 days in Section 11(6) of the Act, though Shri Sorabjee, learned Senior Counsel appearing for the appellant tried to emphasize that the decision in Dattar has been affirmed by a three-Judge Bench and therefore, that 30 days should be read in Section 11(6) of the Act is also not correct.
In Punj Lloyd Ltd. (2006) 2 SCC 638) their Lordships only quoted para 19 in part and not in full. Full para 19 of the judgment in Dattar has been reproduced above. In fact subsequent observation (at SCC p.158 para 19) of their Lordships, We do not, therefore, agree with the observations 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.
this portion of order was not reproduced. Therefore, it is not a case that the decision given by two-Judge Bench in Dattar has been reaffirmed and this is binding on us. We regret to say this is not correct. In Punj Lloyd Ltd. (2006)2 SCC 638) their Lordships only set aside the order and remitted the matter back to the High Court for appointment of arbitrator by the Chief Justice. But the ratio laid down in Dattar holds good and it is not negatived, the period of 30 days cannot be read in Section 11(6) of the Act. The relevant portion of Punj Lloyd case reads as under: (SCC p.640, para5):
5. Having heard the learned Counsel for the parties, we are satisfied that the appeal deserve to be allowed. The learned Counsel for the appellant placed reliance on the law laid down by this Court in Datar Switchgears Ltd. v. Tata Finance Ltd. (SCC p.158. para 19) wherein this Court has held as under:
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 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.
The aforesaid quotation would clearly reveal that the crucial words in para 5 were not quoted in the aforesaid case which has been reproduced above....
17. Thereafter the Supreme Court observed:
...It may also not be out of place to mention that we are aware of the departmental lethargy in making appointment of arbitrators in terms of the arbitration clause. Therefore, mandamus can be issued by the court in exercise of powers under Section 11(6) of the Act but the demand should be in the event of failure by the authorities to appointment arbitrator within the reasonable time. Courts are not powerless to issue mandamus to the authorities to appointment arbitrators as far as possible as per the arbitration clause. But in large number of cases if it is found that it would not be conducive in the interest of parties or for any other reasons to be recorded in writing, choice can go beyond the designated persons or institutions in appropriate cases. But it should normally be adhered to the terms of arbitration clause and appoint the arbitrator/arbitrators named therein except in exceptional cases for reasons to be recorded or where both parties agree for common names....
18. A party who has, with his eyes open, entered into an arbitration agreement with another should not, ordinarily, be permitted to resile therefrom merely because the other party has not adhered to its obligations, under the agreement, in appointing an arbitrator. Primacy is given to the procedure agreed upon by the parties, to appoint an arbitrator, failing which alone does the Act permit judicial interference. In exercising its jurisdiction under Section 11(6) to take "the necessary measure" the Court should, as far as possible, act in such a manner as to effectuate the arbitration agreement entered into by the parties. Deviating from the arbitration clause cannot be justified on the specious plea that it would result in encouraging parties to ignore their obligations, under the arbitration clause of the agreement, and permit them to appoint the arbitrator, as and when they choose. Even if the contention of Sri N. Subba Reddy, learned Counsel for the applicant, is accepted and this Court is held to have the discretion to appoint the arbitrator, on the respondent's failure to appoint an arbitrator in accordance with the arbitration clause of the agreement prior to an application having been filed before the Chief Justice's designate for appointment of an arbitrator, exercise of discretion must, ordinarily, be only in accordance with the arbitration agreement and not contrary thereto. Clause 31.2 prescribes the procedure for appointment of an arbitrator and requires the appointing authority to send, within 90 days of receipt of the notice of the claim, a panel of three persons, not directly connected with the work, to the contractor who is entitled to select any one of these three to be appointed as the sole arbitrator within thirty days of receipt of the names. Failure on the part of the respondent authority to send the said panel within the period stipulated would enable the contractor, in turn, to send to the respondent authority a panel of three persons who shall also be unconnected with the organization by which the work is executed, and the respondent authority is required, on receipt of the names, to select any one of them and appoint him as the sole arbitrator. If the appointing authority fails to appoint him as the sole arbitrator within twenty days of receipt of the panel, the contractor is entitled to invoke the provisions of the Act.
In the case on hand, on the grounds that the claim with regards escalation in the cost of petrol and diesel is contractually barred, that the applicant contractor had already received the amounts due to them in full and final settlement of their claims, that there was accord and satisfaction between the parties and that, as a result, there were no disputes in existence necessitating reference to the arbitrator, the respondent had chosen not adhere to Clause 31.2 i.e., the arbitration clause of the agreement. It is not as if the respondents had, without rhyme or reason, failed to appoint the arbitrator. In the facts and circumstances of the present case it cannot be said that, despite a request being made by the applicant-contractor to refer its claims for arbitration, the appointing authority had deliberately failed to send a panel of three names to the applicant-contractor to enable the latter to choose one of them as the sole arbitrator. I am satisfied that the respondents have neither neglected to act nor can they be said to have, deliberately and consciously, chosen not to comply with their obligations under Clause 31.2 of the agreement. Even if the right of the respondents to appoint an arbitrator, in terms of the arbitration agreement, is held to have ceased on an application under Section 11(6) being filed, this Court, while "taking the necessary measure", would still have the discretion to issue a mandamus directing the respondents to comply with their obligations, under Clause 31.2 of the agreement, and send a panel of three names, to the applicant-contractor, to enable one, from amongst them, to be appointed as the arbitrator. As held by the Supreme Court in Ace Pipeline Constructions (P) Ltd. , ordinarily, the terms of the arbitration clause should be adhered to and the arbitrator, in terms thereof, appointed except in exceptional circumstances, and for reasons to be recorded in writing, or where both parties agree on a common name. There are no exceptional circumstances in the present case which would justify appointment of an arbitrator other than in accordance with the arbitration clause of the agreement.
Respondents shall, within thirty days from the date of receipt of a copy of this order, act in accordance with Clause 31.2 of the General conditions of contract and forward a panel of three persons, not directly connected with the work, to the applicant-contractor who will select, any one of the said three persons to be the sole arbitrator within thirty days of receipt of the panel of names. In case either of the parties fail to abide by these directions, the consequences, as stipulated in Clause 31.2 of the arbitration agreement, shall then follow. The arbitration application is, accordingly, disposed of.