Karnataka High Court
M/S Apr Constructions Ltd. vs Union Of India Rep By on 23 August, 2018
Author: S.Sujatha
Bench: S.Sujatha
-1-
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 23RD DAY OF AUGUST, 2018
BEFORE:
THE HON'BLE MRS. JUSTICE S.SUJATHA
C.M.P. No.60/2015
BETWEEN:
M/s APR CONSTRUCTIONS LTD.,
REP. BY ITS AUTHORISED SIGNATORY
SRI PRABHAKAR YADAV,
404, 5TH FLOOR, BHANU ENCLAVE,
SUNDAR NAGAR, ERRAGADDA,
HYDERABAD-500038. ... PETITIONER
[BY SRI V. PRASAD RAO, FOR
SRI. SAMPATH BAPAT, ADV.,]
AND:
1. UNION OF INDIA REP BY
THE CHIEF ADMINISTRATIVE OFFICER (CONST.)
SOUTH WESTERN RAILWAY,
18, MILLER ROAD,
BENGALURU-560046.
2. THE CHIEF ENGINEER (CONST)
SOUTH WESTERN RAILWAY
18, MILLER ROAD
BANGALORE - 560 046
3. THE GENERAL MANAGER
SOUTH WESTERN RAILWAY,
CLUB ROAD, HUBLI-580023. ...RESPONDENTS
[BY SRI N.S. SANJAY GOWDA, ADV.]
THIS CMP IS FILED UNDER SECTION 11[6] OF THE
ARBITRATION & CONCILIATION ACT, 1996 PRAYING TO
RESOLVE THE DISPUTES AND OUTSTANDING ISSUES
-2-
BETWEEN THE PARTIES IN RESPECT OF AGREEMENT BEARING
NO.CAO/CN/BNC/73610/A/19/II/2013 DATED 19/02/2013
WHICH WILL BE IN CONSONANCE WITH SUBSECTION (8)(B) OF
SECTION 11 OF ARBITRATION AND CONCILIATION ACT, 1996,
IN THE INTEREST OF JUSTICE.
THIS PETITION HAVING BEEN HEARD AND RESERVED
ON 03.08.2018, COMING ON FOR PRONOUNCEMENT OF ORDER
THIS DAY, S.SUJATHA J., PASSED THE FOLLOWING:
ORDER
This petition is filed by the petitioner/contractor under Section 11(6) of the Arbitration and Conciliation Act, 1996 ('Act' for short) seeking for appointment of a sole arbitrator to resolve the disputes and outstanding issues between the parties in respect of the agreement bearing No.CAO/CN/BNC/73610/A/19/11/2013 dated 19.2.2013. The petitioner, a limited Company registered under the Companies Act, 1956 was awarded with the work "Bagalkot-Kudachi New BG Line- Earthwork and construction of Bridges between KM 10.0 to 16.70 KM including shifting of electrical lines etc, (Reach-II)" by the 1st respondent through Acceptance letter No.W.496/BKKD/02 with a completion period of 12 months reckoned from -3- 15.11.2012. An agreement entered into by the parties on 19.02.2013 governs various conditions appended to it in addition to the general conditions of contract [GCC] governing the South Western Railway. Clause (63) of the GCC marked at Annexure-D to the petition deals with settlement of disputes. All disputes and differences of any kind whatsoever arising out of or in connection with the contract shall be referred by contractor to the General Manager and the General Manager shall within 120 days after the receipt of the contractor's representation make and notify decisions for referring the matter to the Arbitrator. However, certain matters are categorized as "excepted matters" specifically excluded from the purview of the arbitration clause. It was alleged by the petitioner that when he entered proposed site to carry out the work along with men and machinery, the land owners did not permit the petitioner to proceed with the work on the ground that they were not paid the compensation and hence, the -4- petitioner addressed a letter to the respondents to attend the matter and to take remedial measures which was not responded to. The dispute arose between the parties relating to the agreement dated 19.02.2013, subsequent to which the petitioner invoked arbitration clause and demanded the dispute to be referred to the Arbitral Tribunal in terms of the arbitral clause as agreed. As per the application dated 30.7.2014 (Annexure-W), six claims were made by the petitioner which are as under:
"Claim No.1: Payment of idle charges of Men and Machinery:
As per the admission of the department, the work could not start till 6.6.2013 though the work was awarded to us on 15.11.2012. We were waiting at the site for the instructions of the department till 06-06-2013 for a period of 7 months suffering idle charges of men and machinery to start the work. So we incurred a sum of Rs.1,87,75,000/- towards idle charges of men and machinery at site for no fault of us. Hence we request the department for payment -5- of Rs.1,87,75,000/- towards idle charges of men and machinery suffered during the period of contract Claim No.2: Payment of overhead charges in the extended period of contract:
As per the admission of the department the work could not be started till 6.6.2013 and hence could not be completed within the agreement period of 15.11.2013 due to delays and defaults and breach of contract committed by the department as enumerated in preamble of this letter. So we have incurred additional monthly overhead charges in extended period of contract a sum of Rs.2,55,000/- per month for no fault of us from 15.11.2013 to 19.6.2014 till the rescission of the contract. So the department has to pay a sum of Rs.2,55,000/- per month towards overhead charges from 15.11.2013 to 19.06.2014. Hence we request the department for payment of additional overhead charges of Rs.17,85,000/-.
Claim No.3: Rescission of contract dated 19.6.2014 is illegal and we are entitled for consequential damages:-6-
During the execution of the work the department suddenly in its letter dated 19.6.2014 rescinded the contract without risk and cost though the department has admitted that the work could not be started for 7 months due to non handing over of land and bridge drawing several times we had requested to resolve land problems and handover bridge drawings. But the department has rescinded the contract which was illegal and we are entitled for consequential damages for their illegal action. Hence we submit that the rescission of the is illegal and we are entitled for consequential damages of Rs.25,00,000/-.
Claim No.4: Payment of loss of profit:
Due to illegal action of the department we are not able to execute the balance work due to rescission of the contract. Because of this we are deprived of the payment of revised rates by the department without a valid reason. So we request that we may be paid loss of profit at 10% on the balance work of Rs.13,90,85,518/- amounting to Rs.1,39,08,551/-. Hence we request the department to pay a sum of Rs.1,39, 08,551/- towards loss of profit suffered by us.-7-
Claim No.5: Settlement of final bill:
Though we have requested for settlement of the above pending claims the department could not settle the pending claims in the last bill. Unless and until the department settle the pending claims there is no full and final settlement of accounts. Hence we request the department to settle the above pending claims along with settlement of the final accounts.
Claim No.6: Payment of interest charges on all claims claimed herein:
We request the department for payment of interest at 18% p.a. on all the claims claimed herein above from the date of the due, to the date of payment."
2. On the demand made by the petitioner, Respondent No.3 constituted Arbitral Tribunal with the sole Arbitrator and referred the claim Nos. 5 and 6 for adjudication as per the letter dated 27.11.2014 (Annexure-Y) to which petitioner requested to include -8- claim Nos.1 to 4 and to refer the matter to the Arbitral Tribunal in terms of clause 63 and 64 of the GCC.
Respondent No.3 rejected the request of the petitioner to include claims No.1 to 4 in terms of reference for the reason that the said claims (1) to (4) are covered under clause (2) of SCC and clause 62(1) of GCC, classified as 'excepted matters'. Aggrieved by the same, petitioner has preferred this petition.
3. Learned Senior counsel Sri.V.Prasad Rao, appearing for the petitioner would contend that the petition has been filed under Section 11[6] of the Act for appointing Sole Arbitral Tribunal to resolve the dispute and outstanding issues between the parties in respect of the agreement dated 19.02.2013, owing to failure of the General Manager i.e., respondent No.3 to act as required under appointment procedure prescribed under the GCC, which squarely falls under Clause [a] of Sub-section [6] of Section 11. Elaborating the -9- arguments on this point, learned counsel submitted that in terms of Clause 64[3] [a] [i] of the GCC, in cases where the total value of all claims in question added together does not exceed Rs.10,00,000/- [Rupees Ten Lakh Only], the Arbitral Tribunal shall consist of a sole arbitrator who shall be a gazetted officer of Railway not below JA grade nominated by the General Manager in that behalf. The sole arbitrator shall be appointed within 60 days from the day when a written and valid demand for arbitration is received by the General Manager. In terms of Clause [ii] of 64[3][a], in cases not covered by Clause 64[3][a][i], the Arbitral Tribunal shall consist of a panel of three Gazetted Railway officers not below JA grade or two Railway Gazetted Officers not below JA grade and a retired Railway officer, retired, not below the rank of SAG officer, as the arbitrators. For this purpose, the Railway will send a panel of more than 3 names of Gazetted Railway officers of one or more departments, of the Railway, which may also include
- 10 -
the name[s] of retired Railway officer[s] empanelled to work as Railway Arbitrator to the Contractor within 60 days from the day when a written and valid demand for arbitration is received by the General Manager. The Contractor will be asked to suggest to the General Manager up to 2 names out of the panel for appointment as the Contractor's nominee within 30 days from the date of dispatch of the request by Railway. The General Manager shall appoint at least one out of them as the Contractor's nominee and will also simultaneously appoint the balance number of arbitrators either from the panel or from outside the panel, duly indicating the "Presiding Arbitrator" from amongst the 3 arbitrators so appointed. The claims made by the Contractor was 6 in number which establishes that the value of all claims in question required to be referred to the Arbitral Tribunal is more than Rs.10,00,000/-. It was mandatory on the part of the respondent No.3 to invoke Clause 64[3][a][ii] of the
- 11 -
GCC and to appoint the Arbitral Tribunal consisting of panel of 3 Arbitrators. These claims were referred to the respondent No.3 vide letter of the petitioner dated 27.06.2014 [Annexure-T]. However, surprisingly, respondent No.3 constituted Arbitral Tribunal, appointing the sole Arbitrator.
4. Arbitral Tribunal constituted with the sole Arbitrator was objected by the petitioner as per their letter dated 02.02.2015 [Annexure-Z2], the third respondent was requested to re-constitute the Arbitral Tribunal in terms of Clause 64 [3] [a] [ii] of the GCC. Learned counsel argued that though in the reference sought, 6 claims were raised, reference claims No.1 to 4 were not referred to the Arbitral Tribunal by the third respondent on the ground that they are excepted matters. The Appointing Authority cannot be an adjudicator of a dispute and the same requires to be decided by the Arbitral Tribunal. Violating the principles
- 12 -
of natural justice, the third respondent ventured to decide whether the claims made by the petitioner are excepted matters.
5. It was submitted that during the pendency of this petition proceedings, the Act was amended by Amended Act, 2015. By virtue of Section 12[5] of the said Amendment Act of 2015, 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 Arbitrator. However, in terms of the Proviso, the parties may, subsequent to dispute having arisen between them, waive the applicability of the said Section 12[5] by an express agreement in writing. Clause [1] of Seventh Schedule contemplates that the Arbitrator if an employee, consultant, advisor or has
- 13 -
any other past or present business relationship with a party, is ineligible to be appointed as an Arbitrator.
6. Section 26 of the Amended Act provides that nothing contended in the Act 2015 shall apply to the Arbitral proceedings commenced, in accordance with the provisions of Section 21 of the Principal Act, before the commencement of this Act unless the parties otherwise agree. Attention of the Court was drawn to the Clause 64 [7] of the GCC which contemplates that subject to the provisions of the Clauses mentioned in GCC, Arbitration and Conciliation Act, 1996 and the Rules there under and any statutory modifications thereof shall apply to the Arbitration Proceedings under this Clause. Referring to the said Clause 64[7], Learned Senior Counsel submitted that by virtue of Section 26 of the Amended Act, 2015, Amended Section 12 [5] read with Seventh Schedule shall apply. Hence, on this ground, appointment of sole Arbitrator who is none
- 14 -
other than employee of the Railway, is not in consonance with the Amended Act, 2015. In support of his contentions, learned counsel placed reliance on the following judgments:
1. Judgment of this Court in the case of Sri Mohan Babu V/s. Union of India and others, in Civil Miscellaneous Petition No.149/2013 [D.D. 02.09.2014];
2. Deep Trading Company V/s. Indian Oil Corporation and Others - [2013] 4 SCC 35;
3. Arasmeta Captive Power Company Private Limited and Another Vs. Lafarge India Private Limited - [2013] 15 SCC 414; and
4. Bharat Sanchar Nigam Limited and Another Vs. Motorola India Private Limited - [2009] 2 SCC 337.
7. Learned counsel Sri.N.S.Sanjay Gowda, appearing for the respondents submitted that the petition filed under Section 11[6] of the Act to appoint a sole Arbitrator to resolve the disputes and outstanding
- 15 -
issues between the parties in respect of agreement dated 19.02.2013 is not maintainable, in view of the appointment of Sole Arbitrator on 27.11.2014. Elaborating the arguments on this point, learned counsel argued that unless the Arbitral Tribunal constituted on 27.11.2014 is annulled, no fresh petition under Section 11[6] of the Act can be entertained for the appointment of Sole Arbitrator. The attention of the Court was drawn to Sections 12 and 13 of the Act. No proceedings were initiated under Section 13 challenging the appointment of the Arbitral Tribunal constituted. No two parallel appointments of the Arbitrators can be made to adjudicate the dispute between the parties. Section 11[6] of the Act cannot be invoked to determine the validity of the appointment of the Arbitrator. Thus, the petition requires to be rejected at the threshold as not maintainable.
- 16 -
8. Secondly, it was argued that in terms of the GCC, the matters for which provision has been made in Clauses 8, 18, 22[5], 39, 43[2], 45[a], 55, 55-A[5], 57, 57-A, 61[1], 61[2] and 62[1] to [xiii][B] of the General Conditions of Contract or in any Clause of the special conditions of contract shall be deemed as "excepted matters" [matters not arbitrable]. Except the claims No.5 and 6 made by the petitioner, all other claims being excepted matters, respondent No.3 rightly refused to refer the same to the Arbitral Tribunal. Appointment of sole Arbitrator is in terms of the GCC agreed upon between the parties which do not call for any interference by this Court.
9. Thirdly, it was argued that this Court cannot embark upon an enquiry as to whether the claims are excepted matters or not, it is the power vested with the respondent No.3 to take a decision in terms of the GCC
- 17 -
which has been acted upon judiciously by the respondent No.3.
10. Fourthly, it was argued that Section 26 of the Amended Act, 2015 is not applicable to the facts of the present case for the reason that the Arbitral proceedings were commenced in accordance with the provisions of Section 21 of the Principal Act on 27.11.2014 much prior to the Amendment Act, 2015 coming into force. Section 26 of the Amended Act, 2015 provides that the Arbitral proceedings commenced before the commencement of Amendment Act on 23.10.2015 shall be applicable unless the parties otherwise agree. No rights are accrued to the petitioner/contractor to seek for the application of Amendment Act, 2015, merely for the reason of the Clause 64[7] referring to Arbitration and Conciliation Act, 1996 and the Rules there-under and any statutory modification thereof. The words "any statutory
- 18 -
modification thereof" cannot be construed as an agreement between the parties to be governed by the Amendment Act, 2015. Hence, the Arbitral Tribunal constituted is justifiable, Amended provisions of Section 12[5] read with Seventh Schedule is not and cannot be made applicable to the present case. In support of his contention, learned counsel placed reliance on the following judgments:
1. Oriental Insurance Company Limited Vs. M/s.
Narbheram Power and Steel Pvt. Ltd., - AIR 2018 SC 2295; and
2. Aravali Power Company Pvt. Ltd., Vs. M/s.
Era Infra Engineering Ltd., - AIR 2017 SC 4450.
11. I have carefully considered the arguments advanced at the bar and perused the material on record.
12. The questions that arise for consideration of this Court are:
- 19 -
1. Whether the petition under Section 11[6] of the Act is maintainable for appointing a sole Arbitrator dehors the Arbitral Tribunal constituted on 27.11.2014?
2. Whether the Amended Act, 2015 is applicable to the facts of the present case wherein Arbitral proceedings commended prior to 23.10.2015 with reference to the GCC contemplating a Clause that the parties would be governed by Arbitration and Conciliation Act, 1996 and the Rules there-under and any statutory modification thereof?
3. Whether the third respondent is competent to decide as to the claim is an excepted matter and beyond the jurisdiction of the Arbitral Tribunal to adjudicate the same?
13. In order to answer these questions, it is apt to scrutinize the Arbitration Clause i.e., Clauses 63 and 64 of the GCC which is quoted hereunder for ready reference:
- 20 -
"63. Matters finally determined by the Railway All disputes and differences of any kind whatsoever arising out of or in connection with the contract, whether during the progress of the work or after its completion and whether before or after the determination of the contract, shall be referred by the Contractor to the General Manager and the General Manager shall within 120 days after receipt of the Contractor's representation make and notify decisions on all matters referred to by the Contractor in writing provided that matters for which provision has been made in Clauses 8, 18, 22[5], 39, 43[2], 45[a], 55, 55-A[5], 57, 57-A, 61[1], 61[2] and 62[1] to [xiii][B] of the General Conditions of Contract or in any clause of the special conditions of contract shall be deemed as "excepted matters" [matters not aribtrable] and decisions of the Railway authority, thereon shall be final and binding on the Contractor; provided further that "excepted matters" shall stand specifically excluded from the purview of the arbitration clause.
- 21 -
64. [1] Demand for Arbitration [i] In the event of any dispute or difference between the parties hereto as to the construction or operation of this contract, or the respective rights and liabilities of the parties on any matter in question, dispute or difference on any account, or as to the withholding by the Railway of any certificate to which the contractor may claim to be entitled to, or if the Railway fails to make a decision within 120 days, then and in any such case, but except in any of the "expected matters" referred to in clause 63 of these condition, the contractor after 120 days but within 180 days of his presenting his final claim on disputed maters, shall demand in writing that the dispute or difference be referred to arbitration.
[ii] The demand for arbitration shall specify the matters, which are in question or subject of the dispute or difference as also the amount of claim/item wise. Only such dispute
(s) or difference (s) in respect of which the
- 22 -
demand has been made together with counter claims or set off, given by the Railway, shall be referred to arbitration and other matters shall not be included in the reference.
[a] The Arbitration proceedings shall be assumed to have commenced from the day, a written and valid demand for arbitration is received by the Railway.
[b] The Claimant shall submit his claim stating the facts supporting the claims along with all relevant documents and the relief or remedy sought against each claim within a period of 30 days from the date of appointment of the Arbitral Tribunal.
[c] The Railway shall submit its defence statement and encounter claims (s), if any, within a period of 60 days of receipt of copy of claims from tribunal thereafter, unless otherwise extension has been granted by the Tribunal.
[iii] No new claim shall be added during proceedings by either party. However
- 23 -
a party may amend or supplement the original claim or defence thereof during the course of arbitration proceedings subject to acceptance by the tribunal having due regard to the delay in making it.
[iv] If the Contractor (s) does/do not prefer his/their specific and final claims in writing within a period of 90 days of receiving the intimation from the Railway that the final bill is ready for payment, he/they will be deemed to have waived his/their claim(s) and the Railway shall be discharged and released of all liabilities under the contract in respect to these claims.
64. [2] Obligation during pendency of arbitration Work under the contract shall, unless otherwise directed by the engineer, continued during the arbitration proceedings, and no payment due or payable by the Railway shall be withheld on account of such proceedings provided however, it shall be open for Arbitral Tribunal to consider and decide whether or
- 24 -
not such work should continue during arbitration proceedings.
64. [3] Appointment of Arbitration Tribunal
(a)(i) In cases where the total value of all claims in question added together does not exceed Rs.10,00,000/- (Rupees ten lakhs only), the Arbitral Tribunal shall consist of a sole arbitrator who shall be a gazetted officer of Railway not be low JA grade nominated by the General manager in that behalf. The sole arbitrator shall be appointed within 60 days from the day when a written and valid demand for arbitration is received by the General Manager.
[ii] In cases not covered by Clause 64(3)(a)(i), the Arbitral Tribunal, shall consist of panel of three Gazetted Railway officers not below JA Grade or two Railway gazetted officers not below JA grade and retired railway officer, retired not below the rank of SAG officer, as the arbitrators. For this
- 25 -
purpose, the railway will send a panel of more than 3 names of Gazetted Railway officers of one or more departments, of the railway which may also include the name (s) of retired railway officer(s) empanelled to work as Railway arbitrator to the contractor within 60 days from the day when a written and valid demand for arbitration is received by the General Manager, contract or will be asked to suggest to the General Manager at least 2 names out of the panel appointment as the contractor's nominee within 30 days from the date of dispatch of the request by Railway. The General Manager shall appoint at least one out of them as the contractor's nominee and will also simultaneously appoint the balance number of arbitrators either from the panel of from outside the panel duly indicating the Signature of Tenderer "Presiding Arbitrator" from amongst the 3 Arbitrators so appointed. General Manager shall complete the
- 26 -
exercise of appointing the Arbitral Tribunal within 30 days from the receipt of the names of contractor's nominees. While nominating the arbitrators it will be necessary to ensure that one of them is from Accounts departments. An officer of selection grade of the accounts department shall be considered of equal status to the officers in SA grade of other departments of the railways for the purpose of appointment of arbitrators.
[iii] If one or more of the arbitrators appointed as above refuses to act as arbitrator, withdraws from his office as arbitrator, or vacates his/their office/offices of is/are unable or unwilling to perform his functions as arbitrator for any reason whatsoever of dies of in the opinion of the General Manager fails to act without undue delay, the General Manager shall appoint new arbitrator/arbitrators to act in his/their place in the same manner in
- 27 -
which the earlier arbitrator/arbitrators had been appointed. Such reconstituted tribunal may, at its discretion, proceed with the reference from the stage at which it was left by the previous arbitrator(s).
[iv] The Arbitral tribunal shall have power to call for such evidence by way of affidavits or otherwise as the Arbitral Tribunal shall think proper and it shall be the duty of the parties hereto do or cause to be done all such things as may be necessary to enable the Arbitral tribunal to make award without any delay.
[v] While appointing arbitrator(s) under Sub-Clause (i),(ii) and (iii) above, due care shall be taken that he/they is/are not the one/those who had an opportunity to deal with the matters to which the contract relates or who in the course of his/their duties as railway servant (s) expressed views on all or any of the matters under dispute or
- 28 -
differences. The proceedings of the Arbitral tribunal or the award made by such tribunal will however, not be invalid merely for the reason that one or mote arbitrator had in the course of his service, opportunity to deal with the matters to which the contract relates or who in the course of his/their duties expressed views on all or any of the matters under dispute.
[b][i] The arbitral award shall state item wise, the sum and reasons upon which it is based.
[ii] A party may apply for corrections of any computational errors, any typographical of clerical errors or any other error of similar nature occurring in the award and interpretation of a specific point of award to Tribunal within 30 days of receipt of the award.
[iii] A party may apply to Tribunal within 30 days of receipt of award to make an additional award as to claims
- 29 -
presented in the arbitral proceedings but omitted from the arbitral award. [4] In case of the Tribunal, comprising of three members, any ruling or award shall be made by a majority of members of the tribunal in the absence of such a majority the views of the presiding arbitrator shall prevail.
[5] Where the arbitral award is for the payment of money no interest shall be payable on whole or any part of the money for any period till the date on which the award is made.
[6] The cost of arbitration shall be borne by the respective parties. The cost shall inter-alia include fee of the arbitrator(s) as per the rates fixed by the railway Administration from time to time.
[7] Subject to the provisions of the aforesaid, Arbitration & Conciliation Act, 1966 and the rules there under and any statutory modification there of shall
- 30 -
apply to the arbitration proceedings under this clause."
14. Before addressing the impact of these Clauses, it is apt to discuss the Authorities cited by the learned counsel for the parties. In the case of Sri. Mohan Babu [supra], this Hon'ble Court while considering the petition filed under Section 11[6] of the Act seeking for appointment of Arbitrator for resolution/adjudication of the dispute against the very same respondent herein referring to the identical Clauses of Arbitration, has observed thus:
"17. In the instant case, the contention of the petitioner is that the question in controversy is not an 'excepted matter' falling under Section 22(5) of the General Conditions of Contract. On the other hand, learned counsel for the respondents submits that since it is an 'excepted matter', it is not arbitral under Clause 63 of the General Conditions of Contract. This question has also to be decided by the Arbitral Tribunal.
- 31 -
18. As noticed above, the petitioner has issued a notice calling upon the respondents to appoint an arbitrator for resolution of the dispute by his notice at Annexure-T dated 17.6.2013. The respondents have failed to appoint an arbitrator in response to the said notice till the filing of this civil miscellaneous petition and even till this day. Thus, it is clear that the respondents have forfeited their right to appoint and arbitrator (see Deep Trading Company .v. Indian Oil Corporaton and others - (2013) 4 SCC 35). Therefore, it is just and proper to appoint an arbitrator to resolve the dispute between the parties.
19. In the result, Civil Miscellaneous Petition is allowed-in-part. Hon'ble Sri. Justice Mohammed Anwar, a former Judge of this Court, is requested to enter upon the reference and arbitrate over the dispute and conduct arbitration proceedings at Arbitration Centre in terms of the Arbitration Centre - Karnataka (Domestic and International) Rules, 2012."
- 32 -
15. SLP filed against this judgment has been rejected by the Hon'ble Apex Court. This Hon'ble Court, in the said judgment has placed reliance on the judgment of the Hon'ble Apex Court in the case of National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. - (2009) 1 SCC 267, wherein it has been held thus:
"22. Where the intervention of the court is sought for appointment of an Arbitral Tribunal under Section 11, the duty of the Chief Justice or his designate is defined in SBP & Co. This Court identified and segregated the preliminary issues that may arise for consideration in an application under Section 11 of the Act into three categories, that is (i)issues which that Chief Justice or his designate is bound to decide; (ii) issues which he can also decide, that is, issues which he may choose to decide; and (iii) issues which should be left to the Arbitral Tribunal to decide.
- 33 -
22.1 The issues (first category) which the Chief Justice/his designate will have to decide are:
(a) Whether the party making the application has approached the appropriate High Court.
(b) Whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement.
22.2 The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are:
(a) Whether the claim is a dead (long- barred) claim or a live claim.
(b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.
22.3. The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are:
- 34 -
(i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration.
(ii) Merits or any claim involved in the arbitration."
16. In the case of Deep Trading Company [supra], the Hon'ble Apex Court considering whether the respondent [IOC] has forfeited its rights to appoint the Arbitrator having not done so after the demand was made and till the appellant had moved the Court under Section 11[6] and if the answer is in the Affirmative, whether the appointment of Arbitrator by respondent No.1 in the course of the proceedings under Section 11[6] is of any legal consequence and the Chief Justice of the High Court ought to have exercised the jurisdiction and appointed an arbitrator, held as under:
"22. We are afraid that what has been stated above has no application to the present fact situation. In Newton Engineering, this
- 35 -
Court was not concerned with the question of forfeiture of right of the Corporation for appointment of an arbitrator. No such argument was raised in that case. The question raised in Newton Engineering4 was entirely different. In the present case, the Corporation has failed to act as required under the procedure agreed upon by the parties in Clause 29 and despite the demand by the dealer to appoint the arbitrator, the Corporation did not make appointment until the application was made under Section 11(6). Thus, the Corporation has forfeited its right of appointment of an arbitrator. In this view of the matter, the Chief Justice ought to have exercised his jurisdiction under Section 11(6) in the matter for appointment of an arbitrator appropriately. The appointment of the arbitrator by the Corporation during the pendency of proceedings under Section 11(6) was of no consequence."
17. Reference has been made to the judgment of the Hon'ble Apex Court in the case of Datar
- 36 -
Switchgears Ltd., Vs. Tata Finance Ltd., reported in [2008] 8 SCC 151, it is observed thus:
"15. In Datar Switchgears, a two- Judge Bench of this Court considered the scheme of Section 11, noted the distinguishing features between Section 11(5) and Section 11(6) and then considered the question whether in a case falling under Section 11(6), the opposite party cannot appoint an arbitrator after the expiry of thirty days from the date of demand. This Court held that in cases arising under Section 11(6), if the opposite party has not made an appointment within thirty days of the demand, the right to make appointment is not forfeited but continues, but such an appointment has to be made before the first party makes application under Section 11 seeking appointment of an arbitrator. If no appointment has been made by the opposite party till application under Section 11(6) has been made, the right of the opposite party to make appointment ceases and is forfeited."
- 37 -
18. Reference is also made to the judgment of the Hon'ble Apex Court in the case of Punj Lloyd Ltd., Vs. Petronet MHB Ltd., reported in [2006] 2 SCC 638, it is observed thus:
"16. In Punj Lloyd, the agreement entered into between the parties contained arbitration clause. The disputes and differences arose between the parties. Punj Lloyd (appellant) served a notice on Petronet (respondent) demanding appointment of an arbitrator and reference of disputes to him. Petronet failed to act. On expiry of thirty days, Punj Lloyd moved the Chief Justice of the High Court for appointment of the arbitrator under Section 11(6). Petronet had not made appointment till the date of moving the application. The designate Judge refused to appoint the arbitrator holding that the remedy available to it was to move in accordance with the agreement. Aggrieved by the said order, a writ petition was filed which was dismissed and the matter reached this Court. A three- Judge Bench of this Court referred to Datar Switchgears and held that the matter was
- 38 -
covered squarely by that judgment and the view taken by the designate Judge in dealing with the application under Section 11(6) and the Division Bench was not right. This Court restored the application under Section 11(6) before the Chief Justice of the High Court for fresh consideration and appointment of the arbitrator in accordance with Section 11(6)."
19. The Hon'ble Apex Court in DEEP TRADING COMPANY [supra], referring to these Judgments, has held in Paragraph-17 as under:
"We are in full agreement with the legal position stated by this Court in Datar Switchgears which has also been followed in Punj Lloyd."
20. In ARASMETA CAPTIVE POWER COMPANY case [supra], the Hon'ble Apex Court has observed thus:
"42. We will be failing in our duty if we do not take note of another decision in Booz Allen and Hamilton Inc. v. SBI Home Finance Limited on which Mr. Ranjit Kumar has heavily relied
- 39 -
upon. He has drawn our attention to paragraph 34 where the Court has dealt with the meaning of the term "arbitrability" and stated that arbitrability has different meanings in different contexts. The Court enumerated three facets which relate to the jurisdiction of the Arbitral Tribunal. In sub-para (ii) of the said paragraph it has been stated that one facet of arbitrability is whether the disputes are enumerated or described in the arbitration agreement as matters to be decided by arbitration or whether the disputes fall under the "excepted matters"
excluded from the purview of the arbitration agreement. On a careful reading of the said judgment we find that the learned Judges have referred to para 19 of SBP and thereafter referred to Section 8 of the Act and opined what the judicial authority should decide. Thereafter the Court proceeded to deal with nature and scope of the issues arising for consideration in an application under Section 11 of the Act for appointment of the arbitrator and, in that context, it opined thus: -
"32. ......While considering an application under Section 11 of the Act, the Chief Justice or his designate would not embark upon an examination of the issue
- 40 -
of "arbitrability" or appropriateness of adjudication by a private forum, once he finds that there was an arbitration agreement between or among the parties, and would leave the issue of arbitrability for the decision of the Arbitral Tribunal. If the arbitrator wrongly holds that the dispute is arbitrable, the aggrieved party will have to challenge the award by filing an application under Section 34 of the Act, relying upon sub-section (2)(b)(i) of that section."
The said ruling is absolutely in consonance with the principle laid down in SBP. The meaning given to arbitrability thereafter has been restricted to the adjudication under Section 8 and not under Section 11 of the Act. Thus, the reliance on the said decision further reflects how the court has consistently understood the principles laid down in SBP.
43. In view of our foregoing analysis we sum up our conclusions as follows: -
43.1. The decisions rendered in Boghara Polyfab Private Limited and Chloro Controls India Private
- 41 -
Limited are in accord with the principles of law stated in SBP.
43.2. The designated Judge, as perceived from the impugned order, while dealing with an application under Section 11(6) of the Act, on an issue raised with regard to the excepted matters, was not justified in addressing the same on merits whether it is a dispute relating to excepted matters under the agreement in question or not. 43.3. The designated Judge has fallen into error by opining that the disputes raised are not "billing disputes", for the same should have been left to be adjudicated by the learned Arbitrator. 43.4. The part of the order impugned that reflects the expression of opinion by the designate of the Chief Justice on the merits of the disputes, being pregnable, deserves to be set aside and is hereby set aside."
21. In BSNL case [supra], the Hon'ble Apex Court has observed thus:
"17. In order to satisfy us in the aforesaid contentions, the learned Additional Solicitor General, Mr. Gopal Subramanium placed strong
- 42 -
reliance in the case of Food Corporation of India Vs. Sreekanth Transport, which has given the following principles relating to "Excepting matters"
as under :- (SCC p.493, paras 1-3) "1. These appeals by the grant of Special Leave pertains to the effect of the usual `excepted clause' vis-a-vis the arbitration clause in a Government contract. While it is true and as has been contended, that the authorization of the arbitrators to arbitrate, flows from the agreement but the High Court in the judgment impugned thought it fit to direct adjudication of `excepted matters' in the agreement itself by the arbitrators and hence these appeals before this Court.
2. At the outset, it is pertinent to note that in the usual Government contracts, the reference to which would be made immediately hereafter, there is exclusion of some matters from the purview of arbitration and a senior officer of the Department usually is given the authority and power to adjudicate the same. The clause itself records that the decision of the senior officer, being the adjudicator, shall be final and binding between the parties -
- 43 -
this is what popularly known as `excepted matters' in a Government or Governmental agencies' contract.
3. `Excepted matters' obviously, as the parties agreed, do not require any further adjudication since the agreement itself provides a named adjudicator - concurrence to the same obviously is presumed by reason of the unequivocal acceptance of the terms of the contract by the parties and this is where the courts have found our lacking in its jurisdiction to entertain an application for reference to arbitration as regards the disputes arising therefrom and it has been the consistent view that in the event the claims arising within the ambit of excepted matters, question of assumption of jurisdiction of any arbitrator either with or without the intervention of the court would not arise; the parties themselves have decided to have the same adjudicated by a particular officer in regard to these matters; what are these exceptions however are questions of fact and usually mentioned in the contract documents and forms part of the agreement as such there is no ambiguity in the matter of adjudication of
- 44 -
these specialized matters and termed in the agreement as the excepted matters....." Keeping the aforesaid principles in mind, let us proceed further"
22. In ARAVALI POWER case [supra], while considering the amended provisions of the amended Act 2015, the Hon'ble Apex Court has held thus:
"22. The principles which emerge from the decisions referred to above are:-
A. In cases governed by 1996 Act as it stood before the Amendment Act came into force:-
(i) The fact that the named arbitrator is an employee of one of the parties is not ipso facto a ground to raise a presumption of bias or partiality or lack of independence on his part. There can however be a justifiable apprehension about the independence or impartiality of an employee arbitrator, if such person was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate to the officer whose decision is the subject-matter of the dispute.
(ii) unless the cause of action for invoking jurisdiction under Clauses (a), (b) or (c) of sub-
- 45 -
section (6) of Section 11 of 1996 Act arises, there is no question of the Chief Justice or his designate exercising power under sub-section (6) of Section 11.
(iii) The Chief Justice or his designate while exercising power under sub-section (6) of Section 11 shall endeavour to give effect to the appointment procedure prescribed in the arbitration clause.
(iv) While exercising such power under sub section (6) of Section 11, If circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore the designated arbitrator and appoint someone else.
B. In cases governed by 1996 Act after the Amendment Act has come into force:-
If the arbitration clause finds foul with the amended provisions, the appointment of the Arbitrator even if apparently in conformity with
- 46 -
the arbitration clause in the agreement, would be illegal and thus the Court would be within its powers to appoint such arbitrator(s) as may be permissible.
23. The observations of the High Court in paragraphs 37-38 as quoted above show that the exercise was undertaken by the High Court, "in order to make neutrality or to avoid doubt in the mind of the petitioner" and ensure that justice must not only be done and must also be seen to be done. In effect, the High Court applied principles of neutrality and impartiality which have been expanded by way of Amendment Act, even when no cause of action for exercise of power under Section 11(6) had arisen. The procedure as laid down in unamended Section 12 mandated disclosure of circumstances likely to give rise to justifiable doubts as to independence and impartiality of the arbitrator. It is not the case of the Respondent that the provisions of Section
12 in unamended form stood violated on any count. In any case the provision contemplated clear and precise procedure under which the arbitrator could be challenged and the objections in that behalf under Section 13 could be raised within prescribed time and in accordance with the
- 47 -
procedure detailed therein. The record shows that no such challenge was raised within the time and in terms of the procedure prescribed. As a matter of fact, the Respondent had participated in the arbitration and by its communication dated 04.12.2015, had sought extension of time to file its statement of claim."
As enunciated by the Hon'ble Apex Court in Aravali [supra] while exercising the power under Section 11[6] of the Act, 1996, endeavour shall be to give effect to appointment procedure prescribed in the Arbitration Clause.
23. In ORIENTAL INSURANCE CO., LTD., case [supra], it is held by the Hon'ble Apex Court as under:
"Arbitration clause is required to be strictly construed. Any expression in the clause must unequivocally express the intent of arbitration. It can also lay postulate in which situations the arbitration clause cannot be given effect to. If clause stipulates that under certain circumstances there can be no arbitration, and they are demonstrably clear then the controversy pertaining to the appointment of arbitrator has to
- 48 -
be put to rest. In present case, Cl.13 of policy categorically lays postulate that if insurer has disputed or not accepted liability, no difference or dispute shall be referred to arbitration. Rejection of claim of respondent-communicated through letter on various reasons. On reading communication, it could be said that disputation squarely comes within Part II of Clause 13. Said Part of Clause clearly spells out that parties have agreed and understood that no differences and disputes shall be referable to arbitration if company has disputed or not accepted liability. Communication ascribes reasons for not accepting claim at all. It is nothing else but denial of liability by insurer in toto. It is not disputation pertaining to quantum. Insurance-company has, on facts, repudiated claim by denying to accept liability on basis of aforesaid reasons. No inference can be drawn that there is some kind of dispute with regard to quantification. It is denial to indemnify loss as claimed by respondent. Such a situation, falls on all fours within concept of denial of disputes and non-acceptance of liability. It is not one of the arbitration clauses which can be interpreted in way that denial of a claim would itself amount to dispute and, therefore, it has to be referred to arbitration. Parties are bound by
- 49 -
terms and conditions agreed under policy and arbitration clause contained in it. It is not a case where mere allegation of fraud is leaned upon to avoid the arbitration. It is not a situation where stand is taken that certain claims pertain to excepted matters and are, hence, not arbitrable. Language used in second part is absolutely categorical and unequivocal inasmuch as it stipulates that it is clearly agreed and understood that no difference or disputes shall be referable to arbitration if company has disputed or not accepted the liability. Therefore, only remedy which respondent can take recourse to is to institute civil suit for mitigation of grievances. If civil suit is filed within two months hence, benefit of Section 14 of Limitation Act, 1963 will enure to its benefit."
24. Hon'ble Bombay High Court in the case of 'GLOBAL AVIATION SERVICES PRIVATE LIMITED v. AIRPORT AUTHORITY OF INDIA' reported in 2018 SCC Online Bom 233, has framed the questions for consideration as under:
"2. The questions that arise for consideration of this Court are :-
- 50 -
i). If the notice invoking arbitration agreement is issued prior to 23rd October, 2015, whereas the impugned award is rendered after 23rd October, 2015 and if the arbitration agreement contemplate that the parties would be governed not only by the provisions of the Arbitration & Conciliation Act, 1996, but also any statutory modification thereof or repeal thereto, the carbp434-17 provisions inserted by the Arbitration & Conciliation (Amendment) Act, 2015 would apply to such proceedings filed after 23rd October, 2015 or not ?
ii). If there was no agreement between the parties that that the parties would be governed by not only the provisions of the Arbitration & Conciliation Act, 1996 but also any statutory amendment thereto or repeal thereto and the notice was issued prior to 23rd October, 2015 but the arbitral award is rendered after 23rd October, 2015, whether provisions of the Arbitration & Conciliation (Amendment) Act, 2015 would apply to such arbitral proceedings commenced prior to 23rd October, 2015 ?
iii). If the arbitral notice was issued prior to 23rd October, 2015 and the the arbital
- 51 -
award was rendered prior to 23rd October, 2015 however the arbitration petition is filed after 23rd October, 2015 whether the provisions of the Arbitration & Conciliation (Amendment) Act, 2015 would apply to such pending petitions ?
iv) Even if the parties would be governed by the provisions of the Arbitration & Conciliation (Amendment) Act, 2015 depending upon the facts and circumstances of each case, whether issuance of prior notice under section 34(5) by the petitioner upon the respondent before filing the arbitration petition under section 34 is mandatory or directory and the consequence, if any, for non-compliance of such prior notice ?"
25. The Question No.1 is addressed by the Hon'ble Bombay High Court in Paragraphs-72 to 78 of the Judgment. Placing reliance on the Judgment of 'PADMINI C. MENON v. VIJAY C. MENON' in Arbitration Petition No.9/2015, delivered on 10.01.2018 [Bombay] considering the existence of an agreement between the parties to the effect that the parties would
- 52 -
be governed not only by the Arbitration & Conciliation Act, 1996 but also statutory amendment or repeal thereto, though the arbitration proceedings had commenced prior to 23.10.2015, the amendment inserted in Section 11[6-A] is held to be applicable. The said agreement between the parties in as much as the applicability of the statutory amendment to the Act, Section 26 of the amendment Act is held to be applicable. The Arbitral proceedings contemplated under section 21 if commenced prior to the amendment Act of 2015 coming into force, the party will be governed by not only the provisions of the Act 1996, but also by the statutory amendments thereto or repeal thereto, provided the parties agree which would depend on the agreement entered into between the parties, is the view taken by the Hon'ble Bombay High Court. Learned Senior Counsel appearing for the Petitioner placing reliance on DEEP TRADING COMPANY [supra], as well as the decision of this Court in MOHAN BABU [supra],
- 53 -
had vehemently argued that the amended Section 12[5] read with Schedule-VII is applicable to the facts of the present case by virtue of Section 26 of the amended Act.
26. Regarding Question No.1:
Section 11(6) of the Act reads thus:
" 6. Where, under an appointment procedure agreed upon by the parties,-
a. a party fails to act as required under that procedure; or b. the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or c. a person, including an institution, fails to perform any function entrusted him or it under that procedure, a party may request the Chief Justice or any person or institution designated by him take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment."
- 54 -
27. Clause 64(3) of GCC provides for appointment of Arbitral Tribunal. The dispute arising between the parties in respect of the agreement dated 19.2.2013 governing the conditions appended in the GCC is not in dispute. In terms of clause 64(3)(a)(i) of GCC, sole Arbitrator shall be appointed only in cases where total value of all claims in question added together does not exceed Rs.10,00,000/- (Rs. Ten lakhs only). Admittedly the six claims made by the petitioner exceeds Rs.10,00,000/- (Rs. Ten lakhs only) which would attract clause 64(3)(a)(ii) of the GCC empowering the 3rd respondent to appoint Arbitral Tribunal consisting of three gazetted officers as provided in the said clause. The reasons assigned by the 3rd respondent is that the claims (i) to (iv) in question relates to the exception clause under 63 as 'excepted matters'. The Co-ordinate Bench of this Court in Sri.Mohan Babu's case (supra), placing reliance on the Judgment of the Hon'ble Apex Court has observed that
- 55 -
the question whether the claim made by the contractor is an 'excepted matter' or not, disputed by the parties also requires to be decided by the Arbitral Tribunal. Hence, this court appointed a sole Arbitrator exercising the powers under Section 11(6) of the Act since the respondents had forfeited their right to appoint an Arbitrator pursuant to the demand made by the petitioner therein. However, in the present case, sole Arbitrator has been appointed on 27.11.2014 who is none other than related party-South Western Railway.
28. The primary grouse of the petitioner at the time of filing the petition was that the said appointment is not in conformity with clause 64(3)(a)(ii) of the GCC and hence, this petition is maintainable under Section 11(6) of the Act. Now, amended provision of Section 12(5) read with VII Schedule and Section 26 of the Amended Act, 2015 are also relied upon. This submission appears to have some force for the reason
- 56 -
that Section 11(6)(1)(a) provides for an appointment of Arbitrator if a party fails to act as required under the procedure agreed upon by the parties.
29. In the case of Deep Trading Company's case (supra), the Hon'ble Apex Court observed that the appointment of Arbitrator by the Corporation during the pendency of the proceedings under Section 11(6) of the Act was of no consequence where the Hon'ble High Court of Allahabad had dismissed the application in view of the appointment of the Arbitrator during the pendency of the proceedings under Section 11(6).
30. In the case of 'UNION OF INDIA v. SINGH BUILDERS SYNDICATE' reported in '2009 [4] SCC 523, the Arbitral Tribunal consisting of three serving Officers was constituted, but no proceedings were actually undertaken on an application preferred under Section 11, subsequent to the constitution of the Arbitral Tribunal, the Hon'ble High Court appointed a
- 57 -
former Judge of that Court as the sole Arbitrator. In that context, the Hon'ble Apex Court held that the Court should first appoint the Arbitrators in the manner provided for in the arbitration agreement. But where the independence and impartiality of the Arbitrator/s appointed/nominated in terms of the arbitration agreement is in doubt, or where the Arbitral Tribunal appointed in the manner provided in the arbitration agreement has not functioned and it becomes necessary to make fresh appointment, the Chief Justice or his designate is not powerless to make appropriate alternative arrangements to give effect to the provision for arbitration. The decision set out in Paragraph-14 is extracted hereunder:
"It was further held that in Northern Railway case that the Chief Justice or his designate should first ensure that the remedies provided under the arbitration agreement are exhausted, but at the same time also ensure that the twin requirements of
- 58 -
sub-section (8) of section 11 of the Act are kept in view. This would mean that invariably the court should first appoint the Arbitrators in the manner provided for in the arbitration agreement. But where the independence and impartiality of the Arbitrator/s appointed/nominated in terms of the arbitration agreement is in doubt, or where the Arbitral Tribunal appointed in the manner provided in the arbitration agreement has not functioned and it becomes necessary to make fresh appointment, the Chief Justice or his designate is not powerless to make appropriate alternative arrangements to give effect to the provision for arbitration."
31. The Hon'ble Apex Court in the case of 'TRF LIMITED v. ENERGO ENGINEERING PROJECTS LIMITED' reported in [2017] 8 SCC 377, while examining the issue whether the High Court, while dealing with the applications under Section 11(6) of the Act, is justified to repel the submissions of the appellants-TRF Ltd., that once the person who was
- 59 -
required to arbitrate upon the disputes arisen under the terms and conditions of the contract becomes ineligible by operation of law, he would not be eligible to nominate a person as an arbitrator, and second, a plea that pertains to statutory disqualification of the nominated arbitrator can be raised before the court in application preferred under Section 11(6) of the Act, for such an application is not incompetent, has held that if the nomination of an arbitrator by an ineligible arbitrator is allowed, it would tantamount to carrying on the proceeding of arbitration by himself. Once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. In Paragraphs-54 and 55, the Hon'ble Apex Court has observed thus:
"54. In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be
- 60 -
otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so.
- 61 -
58. Another facet needs to be addressed. The Designated Judge in a cryptic manner has ruled after noting that the petitioner therein had no reservation for nomination of the nominated arbitrator and further taking note of the fact that there has been a disclosure, that he has exercised the power under Section 11(6) of the Act. We are impelled to think that is not the right procedure to be adopted and, therefore, we are unable to agree with the High Court on that score also and, accordingly, we set aside the order appointing the arbitrator. However, as Clause (c) is independent of Clause (d), the arbitration clause survives and hence, the Court can appoint an arbitrator taking into consideration all the aspects. Therefore, we remand the matter to the High Court for fresh consideration of the prayer relating to appointment of an arbitrator."
32. It is true that in the said case, the arbitral proceedings had commenced on 28.12.2015, subsequent to Amendment Act, 2015, the appellant
- 62 -
therein, invoking the arbitration clause, seeking reference of the disputes that had arisen between the parties to an Arbitrator, had objected to the procedure for appointment of arbitrator provided under the purchase order and communicated to the Respondent- Energo Engg. Projects Limited. Rejecting the suggestion given by TRF Limited, a sole arbitrator was nominated by Energo Engg. Projects Ltd., vide letter dated 27.01.2016 in terms of the clauses of the purchase order. After the appointment was made, the Appellant- TRF Limited had preferred an application under Section 11(5) read with Section 11(6) of the Act for appointment of an arbitrator under Section 11(2) of the Act mainly on the ground that by virtue of the amended Section 12(5) of the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) read with the Fifth and the Seventh Schedules to the amended Act, the Managing Director has become ineligible to act as the arbitrator and further, he had no power to nominate. The
- 63 -
appointment of the sole Arbitrator in the present case being made on 27.11.2014 prior to coming into effect of the Amendment Act 2015, the applicability of the Amendment Act, 2015 to the present case has to be examined in the light of the terms of agreement between the parties. In other words, there is no prohibition for invoking Section 11[6] of the Act for appointment of the sole Arbitrator if the procedure prescribed in the agreement is not acted upon, squarely falling under Section 11[6] [i][a] of the Act, subject to fulfillment of the conditions stipulated in Section 26 of the Amendment Act, 2015.
33. In the case of Aravali Power Company's case (supra), the Hon'ble Apex Court in the context of the petitioner not challenging the appointment of the Arbitrator within the time and in terms of the procedure prescribed, having participated in the arbitration, subsequently challenging the appointment of Arbitrator on the ground of ineligibility provided under the
- 64 -
amended Section 12(5) held that it is not the case of the respondent therein, that the provisions of Section 12 unamended form stood violated on any count. The procedure as laid down in unamended Section 12 mandated disclosure of circumstances likely to give rise to justifiable doubts as to independence and impartiality of the arbitrator which not being established, interference by the High court with the process and progress of arbitration is held to be unsustainable. This Judgment is distinguishable from the present set of facts as the contractor-petitioner has objected to the appointment of the sole Arbitrator vide its communication dated 02.02.2015 Annexure-Z2 and had not participated in any of the proceedings before the Arbitral Tribunal. The very appointment of the Arbitral Tribunal is disputed on the ground that the respondents failed to act as required under the appointment procedure agreed upon by the parties. All the claims whether 'excepted matter' or not has to be
- 65 -
decided by the Arbitral Tribunal. It is to be inferred that respondent No.3 forfeited the right to appoint the Arbitral Tribunal for contravening the terms of the procedure agreed upon by the parties in failing to refer the matter to the Arbitral Tribunal consisting of panel of three Arbitrators and in deciding the issue of 'excepted matter'. In such circumstances, appointment of the sole Arbitrator is of no consequence which is not acted upon. Hence, petition under Section 11(6) of the Act is maintainable.
34. Now the next question would be whether a sole Arbitrator has to be appointed in terms of the Amendment Act, 2015 or in other words, applicability of the amended Act 2015 to the proceedings commenced prior to 23.10.2015. The Hon'ble Apex Court in Aravali Power Company, supra referring to Voestalpine Schiemen GMBH V Delhi Metro Rail Corporation Limited, [(2017) 4 SCC 665] has observed thus:
- 66 -
"G. In Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited, the relevant clause contemplated that the disputes be settled by three arbitrators from and out of a list of five engineers supplied by the respondent therein. The appellant had invoked arbitration on 14.06.2016 i.e. after the amending Act. When the list of five persons comprising of serving officers was supplied by the respondents, an objection was taken that such procedure would lead to appointment of "illegal persons" in view of Section 12(5) read with Clause 1 of Schedule 7 of the Act. This Court considered that Section 12 of the Act was amended pursuant to the recommendations by the Law Commission which specifically dealt with the issue of "neutrality of arbitrators", and observed that if the arbitration clause finds foul with the amended provisions, the appointment of the Arbitrator even if apparently in conformity with the arbitration clause in the agreement, would be illegal and thus the Court would be within its powers to appoint such arbitrator(s) as may be permissible. Paragraph 18 sums up this aspect of the matter:-
- 67 -
"18. Keeping in mind the afore-quoted recommendation of the Law Commission, with which spirit, Section 12 has been 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
- 68 -
on appointment of the arbitrator in terms of the arbitration agreement."
21. Except the decision of this Court in Voestalpine Schienen GMBH [AIR 2017 SC 939] (supra) referred to above, all other decisions arose out of matters where invocation of arbitration was before the Amendment Act came into force. Voestalpine Schienen GMBH (supra) was a case where the invocation was on 14.6.2016 i.e. after the Amendment Act and the observations in Para 18 clearly show that since "the arbitration clause finds foul with the amended provisions", the Court was empowered to appoint such arbitrator(s) as may be permissible. The ineligibility of the arbitrator was found in the context of amended Section 12 read with Seventh Schedule (which was brought in by Amendment Act) in a matter where invocation for arbitration was after the Amendment Act had come into force. It is thus clear that in pre-amendment cases, the law laid down in Northern Railway Administration [AIR 2009 SC [Supp] 839] (Supra), as followed
- 69 -
in all the aforesaid cases, must be applied, in that the terms of the agreement ought to be adhered to and/or given effect to as closely as possible. Further, the jurisdiction of the Court under Section 11 of 1996 Act would arise only if the conditions specified in clauses (a), (b) and (c) are satisfied. The cases referred to above show that once the conditions for exercise of jurisdiction under Section 11(6) were satisfied, in the exercise of consequential power under Section 11(8), the Court had on certain occasions gone beyond the scope of the concerned arbitration clauses and appointed independent arbitrators. What is clear is, for exercise of such power under Section 11(8), the case must first be made out for exercise of jurisdiction under Section 11(6)."
35. Clause 64(7) of the GCC agreed upon by the parties establishes that subject to the provisions of the clauses mentioned in the GCC, Arbitration and Conciliation Act, 1996 and the Rules thereunder and any statutory modifications thereof shall apply to the
- 70 -
arbitration proceedings under the said clause. The specific clause as aforesaid, indicates the parties agreeing to the statutory modifications of the Act, 1996. As per the amended Section 12(5) of the Act r/w Schedule-VII, the employee, consultant, advisor or has any other past or present business relationship with the party is not qualified to be appointed as an Arbitrator.
36. It is beneficial to refer to the judgment of the Hon'ble Apex Court in the case of Thyssen Stahlunion GMBH V/s. Steel Authority of India Ltd., reported in [1999] 9 SCC 334, whereby Section 85 [2][a] of the Act 1996 was considered by the Hon'ble Apex Court. Section 85[2][1] of the Act 1996 is almost in paramateria with the present Section 26 of the Amended Act, 2015, the same reads as under:
"85. Repeal and saving. -
[1]. xxxxx [2]. Notwithstanding such repeal, -
- 71 -
[a] the provisions of the said enactments shall apply in relation to arbitral proceedings which commenced before this Act came into force unless otherwise agreed by the parties but this Act shall apply in relation to arbitral proceedings which commenced on or after this Act comes into force;"
In paragraphs 35 to 38, the Hon'ble Apex Court has observed thus:
"35. Parties can agree to the applicability of the new Act even before the new Act comes into force and when the old Act is still holding the field. There is nothing in the language of Section 85(2)(a) which bars the parties from so agreeing. There is, however, a bar that they cannot agree to the applicability of the old Act after the new Act has come into force when arbitral proceedings under the old Act have not commenced though the arbitral agreement was under the old Act. Arbitration clause in the contract in the case of Rani Constructions (Civil Appeal 61 of 1999) uses the expression "for the time being in force" meaning thereby that provision of
- 72 -
that Act would apply to the arbitration proceedings which will be in force at the relevant time when arbitration proceedings are held. We have been referred to two decisions - one of Bombay High Court and the other of Madhya Pradesh High Court on the interpretation of the expression "for the time being in force" and we agree with them that the expression aforementioned not only refers to the law in force at the time the arbitration agreement was entered into but also to any law that may be in force for the conduct of arbitration proceedings, which would also include the enforcement of the award as well. Expression "unless otherwise agreed" as appearing in Section 85(2)(a) of the new Act would clearly apply in the case of Rani Constructions in Civil Appeal No. 61 of 1999. Parties were clear in their minds that it would be the old Act or any statutory modification or re-enactment of that Act which would govern the arbitration. We accept the submission of the appellant Rani Construction that parties could anticipate that the new enactment may come into operation at the time the disputes
- 73 -
arise. We have seen Section 28 of the Contract Act. It is difficult for us to comprehend that arbitration agreement could be said to be in restraint of legal proceedings. There is no substance in the submission of respondent that parties could not have agreed to the application of the new Act till they knew the provisions thereof and that would mean that any such agreement as mentioned in the arbitration clause could be entered into only after the new Act had come into force. When the agreement uses the expressions "unless otherwise agreed" and "law in force" it does give option to the parties to agree that new Act would apply to the pending arbitration proceedings. That agreement can be entered into even before the new Act comes into force and it cannot be said that agreement has to be entered into only after coming into force of the new Act.
36. Mr. Desai had referred to a decision of the Bombay High Court (Goa Bench), rendered by single Judge in Reshma Constructions v. State of Goa, (1999) 1 MLJ
- 74 -
462. In that case arbitration clause in the contract provided as under :
"Subject as aforesaid, the provisions of the Arbitration Act, 1940 or any statutory modification or re- enactment thereof and the rules made thereunder and for the time being in force shall apply to the arbitration proceeding under this clause."
37. The Court held that these terms in the clause disclosed that the parties had agreed to be governed by the law which was in force at the time of execution of the arbitration agreement as well as by any further statutory changes that may be brought about in such law. This is how the High Court considered the issue before it :
"Considering the scheme of the Act, harmonious reading of the said provision contained in sub-section (2) of Sec. 85 thereof would disclose that the reference "otherwise agreed" necessarily refers to the intention of the parties as regards the
- 75 -
procedure to be followed in the matter of arbitration proceedings and not to the time factor as regards execution of the agreements. It provides that though the law provides that the provisions of the old Act would continue to apply to the pending proceedings by virtue of the said saving clause in Sec. 85, it simultaneously provides that the parties can agree to the contrary. Such a provision leaving it to the discretion of the parties to the proceedings to decide about the procedure to be followed - other in terms of the new Act or the old Act - is certainly in consonance with the scheme of the Act, whereunder most of the provisions of the new Act, the procedure regarding various stages of the arbitration proceedings is made subject to the agreement to the contrary between the parties, thereby giving ample freedom to the parties to decide about the procedure to be followed in such proceedings; being so, it is but natural that the legislature in its wisdom has left it to the option of the parties in the pending proceedings to
- 76 -
choose the procedure for such pending proceedings. The reference "otherwise agreed by the parties" in Sec. 85(2)(c) of the new Act, therefore, would include an agreement already entered into between the parties even prior to enforcement of the new Act as also the agreement entered into after enforcement of the new Act. Such a conclusion is but natural since the expression "otherwise agreed" do not refer to the time factor but refers to the intention of the parties regarding applicability of the provisions of the new or old Act."
We agree with the High Court on interpretation put to the arbitration clause in the contract.
38. Section 28 of the Contract Act contains provision regarding agreements in the restraint of legal proceedings. Exception 1 to Section 28 of the Contract Act does not render illegal a contract by which the parties agree that any future dispute shall be referred to arbitration. That being so parties can also agree that the provisions of the
- 77 -
arbitration law existing at that time would apply to the arbitral proceedings. It is not necessary for the parties to know what law will be in force at the time of the conduct of arbitration proceedings. They can always agree that provisions that are in force at the relevant time would apply. In this view of the matter, if the parties have agreed that at the relevant time provisions of law as existing at that time would apply, there cannot be any objection to that. Thus construing the clause 25, in Rani Constructions (CA 61/99) new Act will apply."
37. Section 26 of the amended Act, 2015, reads thus:-
"26. Act not to apply to pending arbitral proceedings. - Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral
- 78 -
proceedings commenced on or after the date of commencement of this Act."
38. Section 26 of the Amendment Act is identical to Section 85[2][a] of the Act, 1996, which has two parts. First part deals with the arbitral proceedings commenced in accordance with the provisions of Section 21 of the Principal Act, before the commencement of the Amended Act unless the parties otherwise agree. First part can be bifurcated into two. [i] Provisions of the unamended Act shall apply in relation to arbitral proceedings commenced before the amendment Act came into force; [ii] Unamended Act shall not apply in such cases where the parties agree that it will not apply in relation to arbitral proceedings which commenced before the amendment came into force. The second part contemplates that the Amendment Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of the Amendment Act.
- 79 -
39. As could be seen from the Clause 64(7) of GCC agreed upon by the parties before the commencement of the Amendment Act, 2015, Arbitration and Conciliation Act, 1996 and the Rules thereunder and, any statutory modification thereof being applicable to the arbitration proceedings, the amended Act 2015 shall apply unless the proviso to Section12(5) of the amended Act is invoked by the parties to waive of the applicability of amended Section 12(5) by an expressed agreement in writing.
40. Indisputably, no agreement has been entered into between the parties to waive of the applicability of the proviso to Section 12[5] of the Amended Act. For the reasons aforesaid, this Court is not prohibited in appointing the sole arbitrator to resolve the dispute between the parties as prayed for.
41. As regards the third question, the issue is covered by the judgment of this Hon'ble Court in
- 80 -
Sri.Mohan Babu [Supra], wherein it is held that the controversy relating to an 'excepted matter' has also to be decided by the Arbitral Tribunal.
42. In the result, the Civil Miscellaneous Petition is allowed. Hon'ble Sri. Justice M.P.Chinnappa, Former Judge of this Court is requested to enter upon the reference and arbitrate over the dispute and conduct arbitration proceedings at Arbitration Centre in terms of the Arbitration Centre - Karnataka [Domestic and International] Rules, 2012.
43. Registry is directed to send a copy of this order to the Arbitration Centre, Bengaluru, forthwith. No costs.
Sd/-
JUDGE ln, NC, AN/-