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Himachal Pradesh High Court

M/S Victory Oil Gram Udyog Association vs The Managing Director And Another on 9 January, 2018

Author: Sandeep Sharma

Bench: Sandeep Sharma

IN THE HIGH COURT OF HIMACHAL PRADESH AT SHIMLA Arb. Case No. 74 of 2017 Decided on: January 9, 2018 ________________________________________________________________ .

M/s Victory Oil Gram Udyog Association ...Petitioner Versus The Managing Director and another ...Respondents ________________________________________________________________ Coram:

Hon'ble Mr. Justice Sandeep Sharma, Judge. ________________________________________________________________ Whether approved for reporting? 1 Yes.
For the Petitioner r : Mr. Atul Jhingan, Advocate.
For the Respondents : Mr. Arvind Sharma, Advocate. ________________________________________________________________ Justice Sandeep Sharma, Judge.
By way of instant petition filed under Section 11 (4) of the Arbitration & Conciliation Act, 1996, prayer has been made on behalf of the petitioner for appointment of an arbitrator, in terms of Clause 14 as contained in the tender document, (Annexure P-1) and Clause 13 of the purchase orders dated 7.2.2015, 10.3.2015 and 10.4.2015, (Annexures P-2 to P-4, respectively.)

2. Averments contained in the petition suggest that respondents floated an open tender for the supply of mustard oil and petitioner being the lowest bidder came to be awarded purchase order for supply of mustard oil. Since petitioner was 1 Whether reporters of the local papers may be allowed to see the judgment?

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lowest bidder, respondent No. 1 issued various orders for supply of mustard oil to be supplied at various destinations/godowns.

3. It also emerges from the averments contained in the .

petition and documents annexed therewith that the petitioner supplied certain quantities of mustard oil pursuant to purchase orders placed by the respondents, but for one reason or the other, respondent-Corporation withheld some amount payable to the petitioner. Since, respondents failed to release the amounts due to the petitioner despite several requests, petitioner invoked Clause 14 of the tender document, (Annexure P-1) as well as Clause 13 of purchase orders, (annexure P-2 to P-4), requesting the respondent-Corporation to appoint an impartial arbitrator.

4. Mr. Atul Jhingan, learned counsel representing the petitioner, while referring to the aforesaid Clauses contained in tender document and purchase orders, fairly contended that though a reference was made by the petitioner to the named arbitrator i.e. Secretary (Food, Civil Supplies and Consumer Affairs) to the Government of Himachal Pradesh, but petitioner has serious objections to his being appointed as an arbitrator to adjudicate the dispute inter se parties. While inviting attention of this Court to the amended provisions of Section 12(5) of Arbitration and Conciliation (Amendment) Act, 2015, learned counsel contended that despite there being prior agreement, if any, between the parties, no person, whose relationship with the ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP 3 parties or counsel or subject matter of dispute falls within categories as specified in the Seventh Schedule, shall be appointed as an arbitrator. Amended Section 12(5) of the .

Arbitration and Conciliation (Amendment) Act, 2015 provides as under:

"(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub- section by an express agreement in writing."

5. Mr. Atul Jhingan, learned counsel representing the petitioner further contended that in the case at hand, person as named in the agreement arrived inter se parties i.e. Secretary (Food, Civil Supplies and Consumer Affairs) can not be appointed as an arbitrator in terms of specific bar contained in Clauses 9 to 14 of Seventh Schedule as specified in Section 12 (5) of the amended Section 12 of the Arbitration and Conciliation (Amendment) Act, 2015. He specifically invited attention of this Court to Clauses No. 9 to 14 of the Seventh Schedule of the Act ibid, which are reproduced as under:

"9. The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and controlling the company.
10. A close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate of one of the parties.
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11. The arbitrator is a legal representative of an entity that is a party in the arbitration.
12. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.
.
13. The arbitrator has a significant financial interest in one of the parties or the outcome of the case."

14. The arbitrator regularly advises the appointing party or an affiliate of the appointing party, and the arbitrator or his or her firm derives a significant financial income therefrom. Relationship of the arbitrator to the dispute

6. Mr. Jhingan, further contended that Secretary (Food, Civil Supplies and Consumer Affairs) to the Government of Himachal Pradesh is ex-officio Director of the respondent-Corporation and he has direct control over the respondent-Corporation. Mr. Jhingan further contended that although a notice was received by petitioner from the above named arbitrator i.e. Secretary (Food, Civil Supplies and Consumer Affairs) to the Government of Himachal Pradesh, but, petitioner at the time of causing his appearance before him on 17.5.2017, expressed his unwillingness to subject himself to his arbitration, as a consequence of which, dispute has arisen between the parties and this Court needs to appoint an independent and impartial arbitrator to adjudicate upon the dispute inter se parties.

7. Mr. Arvind Sharma, learned counsel representing the respondents, while inviting attention of this Court to the reply filed on behalf of his clients, contended that present petition deserves to be dismissed because same has been filed merely on presumptions. Mr. Sharma, further contended that petitioner ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP 5 himself requested the respondents for appointment of an arbitrator and accordingly, Secretary (Food, Civil Supplies and Consumer Affairs) to the Government of Himachal Pradesh was .

appointed as an arbitrator. Mr. Sharma, further contended that as per agreed terms inter se parties, i.e. Clause 14 of the terms and conditions of the tender document, only Secretary (Food, Civil Supplies and Consumer Affairs) can be appointed as an arbitrator, as such, there is no illegality or infirmity in the action of the respondents in appointing aforesaid person as an arbitrator to adjudicate the dispute inter se parties. Mr. Sharma, further contended that since petitioner by making itself present before learned arbitrator, pursuant to notice issued by him, has subjected itself to the jurisdiction of the arbitrator appointed in terms of agreement arrived inter se parties as such, objections, if any at this stage, as raised by it placing reliance upon amended Section 12(5) of the Arbitration and Conciliation (Amendment) Act, 2015 are not tenable and present petition deserves to be dismissed.

8. I have heard the learned counsel for the parties and gone through the record carefully.

9. In the case at hand, as has been discussed herein above, though petitioner had made a reference to the named arbitrator i.e. Secretary (Food, Civil Supplies and Consumer Affairs) in terms of agreement/purchase order, but since above named ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP 6 arbitrator exercises direct control over the respondent-

Corporation, he can not be appointed as an arbitrator despite there being specific agreement arrived inter se parties. It would .

be appropriate to reproduce amended Section 12 (5) of the Act herein below:

"12 Grounds of challenge (1) x x x x (2) xxxx (3) xxxx (4) xxxx (5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub- section by an express agreement in writing."

10. After having carefully perused amendment made in Section 12 reproduced supra, this court finds considerable force in the argument of learned counsel for the petitioner that the Secretary (Food, Civil Supplies and Consumer Affairs) could not be appointed as an Arbitrator for the reason that he exercises direct control over day-to-day affairs/working of the respondent-

corporation.

11. Having carefully perused the aforesaid provision of law, this Court is persuaded to agree with the contention of learned ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP 7 counsel for the petitioner that Secretary (Food, Civil Supplies and Consumer Affairs), can not be appointed as an Arbitrator in the instant case and some independent person, who has no direct or .

indirect control over the affairs of the respondent-Corporation ought to have been appointed as an Arbitrator to adjudicate the dispute inter-se parties.

12. Hon'ble Apex Court in Volestalpine Schienen GMBH v.

Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665, has held as under:- r "14. From the stand taken by the respective parties and noted above, it becomes clear that the moot question is as to whether panel of arbitrators prepared by the Respondent violates the amended provisions of Section 12 of the Act. Subsection (1) and Sub-section (5) of Section 12 as well as Seventh Schedule to the Act which are relevant for our purposes, may be reproduced below:

8. (i) for sub-section (1), the following Sub-section shall be substituted, namely (1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances--
(a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and
(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months.

Explanation 1.--The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.

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Explanation 2.--The disclosure shall be made by such person in the form specified in the Sixth Schedule.;

(ii) after Sub-section (4), the following Subsection shall be inserted, namely--

.

(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator: Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this Sub-section by an express agreement in writing. (emphasis supplied) THE SEVENTH SCHEDULE Arbitrator's relationship with the parties or counsel

1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.

2. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.

3. The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.

4. The arbitrator is a lawyer in the same law firm which is representing one of the parties.

5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.

6. The arbitrator's law firm had a previous but terminated involvement in the case without the arbitrator being involved himself or herself.

7. The arbitrator's law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties.

8. The arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom.

9. The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and controlling the company.

10. A close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate of one of the parties.

11. The arbitrator is a legal representative of an entity that is a party in the arbitration.

12. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.

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13. The arbitrator has a significant financial interest in one of the parties or the outcome of the case.

14. The arbitrator regularly advises the appointing party or an affiliate of the appointing party, and the arbitrator or his or her firm derives a significant financial income .

therefrom. Relationship of the arbitrator to the dispute

15. The arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties.

16. The arbitrator has previous involvement in the case. Arbitrator's direct or indirect interest in the dispute.

17. The arbitrator holds shares, either directly or indirectly, in one of the parties or an affiliate of one of the parties that is privately held.

18. A close family member of the arbitrator has a significant financial interest in the outcome of the dispute.

19. The arbitrator or a close family member of the arbitrator has a close relationship with a third party who may be liable to recourse on the part of the unsuccessful party in the dispute.

Explanation 1.---The term "close family member" refers to a spouse, sibling, child, parent or life partner.

Explanation 2.--The term "affiliate" encompasses all companies in one group of companies including the parent company.

Explanation 3.--For the removal of doubts, it is clarified that it may be the practice in certain specific kinds of arbitration, such as maritime or commodities arbitration, to draw arbitrators from a small, specialized pool. If in such fields it is the custom and practice for parties frequently to appoint the same arbitrator in different cases, this is a relevant fact to be taken into account while applying the Rules set out above. (emphasis supplied)

15. It is a well known fact that the Arbitration and Conciliation Act, 1996 was enacted to consolidate and amend the law relating to domestic arbitration, inter alia, commercial arbitration and enforcement of foreign arbitral awards etc. It is also an accepted position that while enacting the said Act, basic structure of UNCITRAL Model Law was kept in mind. This became necessary in the wake of globalization and the adoption of policy of liberalisation of Indian economy by the Government of India in the early 90s. This model law of UNCITRAL provides the framework in order to achieve, to the maximum possible extent, uniform approach to the international commercial arbitration. Aim is to achieve ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP 10 convergence in arbitration law and avoid conflicting or varying provisions in the arbitration Acts enacted by various countries. Due to certain reasons, working of this Act witnessed some unpleasant developments and need was felt to smoothen out the rough edges encountered .

thereby. The Law Commission examined various shortcomings in the working of this Act and in its first Report, i.e., 176th Report made various suggestions for amending certain provisions of the Act. This exercise was again done by the Law Commission of India in its Report No. 246 in August, 2004 suggesting sweeping amendments touching upon various facets and acting upon most of these recommendations, Arbitration Amendment Act of 2015 was passed which came into effect from October 23, 2015.

16. Apart from other amendments, Section 12 was also amended and the amended provision has already been reproduced above. This amendment is also based on the recommendation of the Law Commission which specifically dealt with the issue of 'neutrality of arbitrators' and a discussion in this behalf is contained in paras 53 to 60 and we would like to reproduce the entire discussion hereinbelow:

NEUTRALITY of ARBITRATORS
53. It is universally accepted that any quasi-judicial process, including the arbitration process, must be in accordance with principles of natural justice. In the context of arbitration, neutrality of arbitrators, viz. their independence and impartiality, is critical to the entire process. 54. In the Act, the test for neutrality is set out in Section 12(3) which provides 12(3) An arbitrator may be challenged only if--
(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality..."

55. The Act does not lay down any other conditions to identify the "circumstances" which give rise to "justifiable doubts", and it is clear that there can be many such circumstances and situations. The test is not whether, given the circumstances, there is any actual bias for that is setting the bar too high; but, whether the circumstances in question give rise to any justifiable apprehensions of bias.

56. The limits of this provision has been tested in the Indian Supreme Court in the context of contracts with State entities naming particular persons/designations (associated with that entity) ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP 11 as a potential arbitrator. It appears to be settled by a series of decisions of the Supreme Court (See Executive Engineer, Irrigation Division, Puri v. Gangaram Chhapolia MANU/SC/0001/1983 : 1984 (3) SCC 627; Secretary to Government Transport .

Department, Madras v. Munusamy Mudaliar MANU/SC/0435/1988 : 1988 (Supp) SCC 651; International Authority of India v. K.D. Bali and Anr. MANU/SC/0197/1988 : 1988 (2) SCC 360; S. Rajan v. State of Kerala MANU/SC/0371/1992 :

1992 (3) SCC 608; Indian Drugs & Pharmaceuticals v. IndoSwiss Synthetics Germ Manufacturing Co. Ltd. MANU/SC/0139/1996 : 1996 (1) SCC 54; Union of India v. M.P. Gupta (2004) 10 SCC 504; Ace Pipeline Contract Pvt. Ltd. v. Bharat Petroleum Corporation Ltd. MANU/SC/7273/2007 : 2007 (5) SCC 304) that arbitration agreements in government contracts which provide for arbitration by a serving employee of the department, are valid and enforceable. While the Supreme Court, in Indian Oil Corporation Ltd. v. Raja Transport (P) Ltd. MANU/SC/1502/2009 : 2009 8 SCC 520 carved out a minor exception in situations when the arbitrator "was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject matter of the dispute", and this exception was used by the Supreme Court in Denel Proprietary Ltd. v. Govt. of India, Ministry of Defence MANU/SC/0010/2012 : AIR 2012 SC 817 and Bipromasz Bipron Trading SA v. Bharat Electronics Ltd. MANU/SC/0478/2012 : (2012) 6 SCC 384, to appoint an independent arbitrator Under Section 11, this is not enough.

57. The balance between procedural fairness and binding nature of these contracts, appears to have been tilted in favour of the latter by the Supreme Court, and the Commission believes the present position of law is far from satisfactory. Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the arbitral tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles-even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP 12 parties' apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, even if this is what the parties agreed. The .

Commission hastens to add that Mr. PK Malhotra, the ex officio member of the Law Commission suggested having an exception for the State, and allow State parties to appoint employee arbitrators. The Commission is of the opinion that, on this issue, there cannot be any distinction between State and non State parties. The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes.

In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous-and the right to natural justice cannot be said to have been waived only on the basis of a "prior" agreement between the parties at the time of the contract and before arising of the disputes.

58. Large scale amendments have been suggested to address this fundamental issue of neutrality of arbitrators, which the Commission believes is critical to the functioning of the arbitration process in India. In particular, amendments have been proposed to Sections 11, 12 and 14 of the Act.

59. The Commission has proposed the requirement of having specific disclosures by the arbitrator, at the stage of his possible appointment, regarding existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts. The Commission has proposed the incorporation of the Fourth Schedule, which has drawn from the Red and Orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration, and which would be treated as a "guide" to determine whether circumstances exist which give rise to such justifiable doubts. On the other hand, in terms of the proposed Section 12(5) of the Act and the Fifth Schedule which incorporates the categories from the Red list of the IBA Guidelines (as above), the person proposed to be appointed as an arbitrator shall be ineligible to be so appointed, notwithstanding any prior agreement to the contrary. In the event such an ineligible person is purported to be appointed as an arbitrator, he shall be de jure deemed to be unable to perform his functions, in terms of the proposed explanation to ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP 13 Section 14. Therefore, while the disclosure is required with respect to a broader list of categories (as set out in the Fourth Schedule, and as based on the Red and Orange lists of the IBA Guidelines), the ineligibility to be appointed as an arbitrator (and .

the consequent de jure inability to so act) follows from a smaller and more serious sub-set of situations (as set out in the Fifth Schedule, and as based on the Red list of the IBA Guidelines).

60. The Commission, however, feels that real and genuine party autonomy must be respected, and, in certain situations, parties should be allowed to waive even the categories of ineligibility as set in the proposed Fifth Schedule. This could be in situations of family arbitrations or other arbitrations where a person commands the blind faith and trust of the parties to the dispute, despite the existence of objective "justifiable doubts"

regarding his independence and impartiality. To rdeal with such situations, the Commission has proposed the proviso to Section 12(5), where parties may, subsequent to disputes having arisen between them, waive the applicability of the proposed Section 12(5) by an express agreement in writing. In all/all other cases, the general Rule in the proposed Section 12(5) must be followed. In the event the High Court is approached in connection with appointment of an arbitrator, the Commission has proposed seeking the disclosure in terms of Section 12(1) and in which context the High Court or the designate is to have "due regard" to the contents of such disclosure in appointing the arbitrator. (emphasis supplied)
17. We may put a note of clarification here. Though, the Law Commission discussed the aforesaid aspect under the heading "Neutrality of Arbitrators", the focus of discussion was on impartiality and independence of the arbitrators which has relation to or bias towards one of the parties. In the field of international arbitration, neutrality is generally related to the nationality of the arbitrator. In international sphere, the 'appearance of neutrality' is considered equally important, which means that an arbitrator is neutral if his nationality is different from that of the parties. However, that is not the aspect which is being considered and the term 'neutrality' used is relatable to impartiality and independence of the arbitrators, without any bias towards any of the parties. In fact, the term 'neutrality of arbitrators' is commonly used in this context as well.
18. Keeping in mind the afore-quoted recommendation of the Law Commission, with which spirit, Section 12 has been ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP 14 amended by the Amendment Act, 2015, it is manifest that the main purpose for amending the provision was to provide for neutrality of arbitrators. In order to achieve this, Sub-section (5) of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with .
the parties or counsel or the subject matter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator. In such an eventuality, i.e., when the arbitration Clause finds foul with the amended provisions extracted above, the appointment of an arbitrator would be beyond pale of the arbitration agreement, empowering the court to appoint such arbitrator(s) as may be permissible. That would be the effect of non-obstante Clause contained in Sub-section (5) of Section 12 and the other party cannot insist on appointment of the arbitrator in terms of arbitration agreement."

13. In the aforesaid judgment, it has been categorically held by the Hon'ble Apex Court that main purpose for amending the provision was to provide for neutrality of arbitrators. Hon'ble Apex Court has further held that in order to achieve the neutrality, as referred above, Sub-section (5) of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person, whose relationship with the parties or counsel or subject matter of dispute falls under any of the categories specified in the schedule, he shall be ineligible to be appointed as an arbitrator.

14. In the case at hand, respondent has nowhere disputed the claim of the petitioner that Secretary (Food, Civil Supplies and Consumer Affairs) has direct control over the day-to-day affairs of the respondent-Corporation as such, in view of amended provisions of law, i.e. amended Section 12(5) of the Act ibid, he ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP 15 can not be appointed as an arbitrator, as such, his appointment deserves to be quashed and set aside.

15. Consequently, in view of detailed discussion made herein .

above and law laid down by Hon'ble Apex Court, notice dated 15.7.2017, annexure R-6 issued by the named arbitrator i.e. Secretary (Food, Civil Supplies and Consumer Affairs) is quashed and set aside and with the consent of the learned counsel representing the parties, Shri Suneet Goel, Advocate, HP High Court, Shimla, is appointed as an arbitrator to adjudicate the dispute inter se parties. His consent/declaration under Section 11(8) of the Arbitration & Conciliation Act has been obtained. He has no objection to his appointment as an arbitrator in the present matter. He is requested to enter into reference within a period of two weeks from the date of receipt of a copy of this order. Thereafter, petitioner is directed to file claim petition within a period of three weeks. Reply be filed by the respondents within a further period of three weeks. Pleadings, including rejoinder and counter-claims shall also be completed by the parties within a period of eight weeks after entering into reference by the Arbitrator. It shall be open to the Arbitrator to determine his own procedure with the consent of the parties. It shall also be open to the Arbitrator to fix his fee. Award shall be made strictly as per the provisions of Arbitration & Conciliation ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP 16 Act, within six months. Needless to add that the Arbitrator shall pass a speaking order.

16. A copy of this order shall be made available to the .

Arbitrator, named above, by the Registry of this Court, within a period of two weeks, enabling him to take steps for commencement of the arbitration proceedings.

17. The petition is disposed of.

(Sandeep Sharma) Judge January 9, 2018 vikrant ::: Downloaded on - 11/01/2018 23:04:43 :::HCHP