Bombay High Court
Larsen & Toubro Limited vs Konkan Railway Corporation Limited on 23 December, 1998
Equivalent citations: 1999(2)BOMCR167, (1999)1BOMLR888, 1999(1)MHLJ905
ORDER Dr. B.P Saraf, J.
1. This is a petition under sub-section (6) of section 11 of the Arbitration and Conciliation Act, 1996, ("Act") for appointment of arbitrators to adjudicate the disputes and differences between the parties arising out of contract agreement dated 10th May 1991 for construction of major bridges.
2. The material facts, briefly stated, are as follows:
Under contract dated 10th May 1991 between the petitioner company and the respondent Konkan Railway Corporation Limited, the petitioner company was to undertake construction of the railway bridges set out therein. The case of the petitioners is that due to various circumstances, for which the respondent Corporation was solely responsible, there was delay in execution of the work. The further case of the petitioners is that several items of extra work were also carried out by the petitioners under instructions of the respondents. The petitioners claimed a sum of Rs. 38,17,795 on that account. This claim having not been settled and disputes and differences having arisen between the parties on that account, the petitioners, by their letter dated 19th February 1996, submitted their claim to the Chairman & Managing Director of the respondent Corporation in accordance with Clause 62 of the contract dated 10th May 1991 and requested him to take decision on those claims/disputes. No decision having been given by the Chairman & Managing Director of the respondent Corporation, the petitioners, by their letter dated 17th August 1996, informed the Chairman & Managing Director of the respondent Corporation that the disputes and differences arising between the parties were required to be referred for arbitration as per Clause 63(1) of the general conditions of the contract. The petitioners also requested the Chairman & Managing Director of the respondent Corporation, in accordance with sub-clause 63(3)(b) of the general terms and conditions of contract, to send a panel of names of independent persons of good standing within a reasonable time to enable them to choose an arbitrator. On the failure of the Chairman & Managing Director to forward the panel of names as required by Clause 63.3(b) of the general conditions of contract, the petitioners have filed this petition under sub-section (6) of section 11 of the Act for appointment of arbitrators to decide the disputes and differences arising between them.
3. Mr. A.S. Rajadhyaksha, learned Counsel for the petitioners, submits that the respondents having failed to send the panel of names of arbitrators as contemplated by Clause 63.3(b) of the general conditions of contract, I should appoint two independent and impartial arbitrators to decide the disputes and differences between the parties in exercise of the powers under sub-section (6) read with sub-section (8) of section 11 of the Act. There is no dispute in this case about the arbitration agreement between the parties, existence of disputes and differences and the failure of the appointing authority to appoint the arbitrators as required under the procedure agreed upon by the parties. Situated thus, Ms. Bhagalia, learned Counsel for the respondents, stated that the Chairman and Managing Director of the respondent Corporation was now prepared to appoint the arbitrators under the procedure set out in Clause 63.3(b) of the general terms and conditions of contract. In the circumstances, it was submitted, that in exercise of the power under sub-section (6) of section 11 of the Act, the Chairman and the Managing Director of the respondent Corporation, who is the appointing authority under the agreed procedure, should be directed to act under that procedure. According to her, under sub-section (6) of section 11 of the Act, the Chief Justice or the person designated by him cannot make the appointment of arbitrators himself. He can only direct the appointing authority, who failed to act, to act under the agreed procedure. Reliance is placed in support of this submission on the expression "to take necessary measure" appearing in subsection (6) of section 11 of the Act. The learned Counsel submits that on a reading of section 11 as a whole, it is clear that the power of the Chief Justice or the person designated by him under sub-section (6) of section 11 of the Act ("Chief Justice") is limited only to order the appointing authority, who has failed to act, to act. This construction of sub-section(6) of section 11 is vehemently opposed by the learned Counsel for the petitioners. He submits that on the failure of the appointing authority to act under the agreed procedure, the power of the Chief Justice or the person designated by him under sub-section(6) of section 11 of the Act is not to order the appointing authority to act but to appoint the arbitrator/ arbitrators himself. This interpretation, according to the learned Counsel, is obvious from a reading of section 11 of the Act as a whole which deals with the appointment of arbitrators. Reliance is also placed in support of this construction on sub-section (8) of section 11 of the Act which requires the Chief Justice or the person designated by him to have due regard in appointing an arbitrator of any qualifications required by the agreement of the parties and other consideration as are likely to secure the appointment of independent and impartial arbitrator. The learned Counsel submits that the Chief Justice or the person designated by him has to appoint arbitrator/arbitrators himself keeping in view the considerations set out in sub-section (8) of section 11 of the Act. The Chief Justice or the person designated by him cannot delegate that power to the appointing authority who has failed to perform his duty and pass only a formal order appointing the person / persons appointed or recommended by such appointing authority as arbitrator/arbitrators in complete disregard to the mandatory requirement of sub-section (8) of section 11 of the Act. The learned Counsel submits that this controversy stands concluded by the decision of this Court in B.T. Patil & Sons v. Konkan Railway Corpn., wherein this Court has held that sub-section(6) or (8) of section 11 does not provide that even if the parties have failed to abide by the agreement prescribing the procedure for appointment of an arbitrator, yet the Chief Justice or the person designated by him should appoint the arbitrator as per the agreed procedure. The learned Counsel submits that the above decision was in the case of the respondent Corporation itself. It has been categorically held in that case that the respondents cannot insist that the arbitrator should be appointed as per the machinery provided in the contract and not otherwise. The learned Counsel for the respondent, however, submits that the above decision requires reconsideration.
4. I have carefully considered the rival submissions. Section 11 of the Act provides the procedure for the appointment of arbitrators. It reads:
"11 Appointment of arbitrators-
(1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.
(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.
(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.
(4) If the appointment procedure in sub-section (3) applied and-
(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or
(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.
(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.
(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 to him or it under that procedure, a party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.
(7) A decision on a matter entrusted by sub-section (4) or subsection (5) or sub-section (6) to the Chief Justice or the person or institution designated by him is final.
(8) The Chief Justice or the person or institution designated by him, in appointing an arbitrator, shall have due regard to-
(a) any qualifications required of the arbitrator by the agreement of the parties; and
(b) other considerations as are likely to secure the appointment of an independent and impartial arbitrator.
(9) In the case of appointment of sole or third arbitrator in an international commercial arbitration, the Chief Justice of India or the person or institution designated by him may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities.
(10) The Chief Justice may make such scheme as he may deem appropriate for dealing with matters entrusted by sub-section (4) or sub-section (5) or sub-section (6) to him.
(11) Where more than one request has been made under sub-section (4) or sub-section (5) or sub-section(6) to the Chief Justices of different High Courts or their designates, the Chief Justice or his designate to whom the request has been first made under the relevant sub-section shall alone be competent to decide on the request.
(12) (a) Where the matter referred to in sub-sections (4), (5), (6) (7), (8) and (10) arise in an international commercial arbitration, the reference to "Chief Justice" in those sub-sections shall be construed as a reference to the "Chief Justice of India".
(b) Where the matters referred to in sub-sections (4), (5), (6), (7), (8), and (10) arise in any other arbitration, the reference to "Chief Justice" in those sub-sections shall be construed as a reference to the Chief Justice of the High Court within whose local limits the principal Civil Court referred to in Clause (e) of sub-section (1) of section 2 is situate and, where the High Court itself is the Court referred to in that clause, to the Chief Justice of that High Court."
It is clear from a plain reading of section 11 of the Act that there are essentially three methods to secure the appointment of arbitrator. First, the parties may agree on a procedure for appointing arbitrators. Second, if the parties do not reach such an agreement, sub-section (3) provides a mechanism for appointing a three-member arbitral tribunal without involvement of the Chief Justice or the person or institution designated by him. Third, subsections (4), (5) and (6) provide for appointment of arbitrator or arbitrators, in the circumstances set out therein, by the Chief Justice or the person or institution designated by him. Under sub-section (4) the Chief Justice or the person designated by him is empowered to appoint an arbitrator on the failure of one of the parties to appoint within thirty days from the receipt of the request to do so from the other party. The Chief Justice or the person designated by him is also empowered to appoint the third arbitrator on the failure of two arbitrators to agree on the third arbitrator within thirty days from the date of their appointment. Similarly, under sub-section (5) of section 11, the Chief Justice or the person designated by him is empowered to appoint a sole arbitrator if the parties fail to agree on the arbitrator within thirty days from the receipt of a request by one party from the other party. Sub-section (6) deals with the situation where a party fails to act as required under the appointment procedure agreed upon by the parties. In such a case, the party may request the Chief Justice or the person designated by him to take necessary measure, unless the agreement on the appointment procedure provides other means for securing appointment.
5. In the instant case, the arbitration clause in the agreement is Clause 63.3. This Clause, so far as relevant, reads as follows:
"63.3(a) Matters in question, dispute or difference to be arbitrated upon shall be referred for decision to :-
(i) A Sole Arbitrator who shall be an officer of the Corporation nominated by the Chairman & Managing Director of the Corporation in that behalf in cases where the claim in question is below Rupees Five Lakhs and where the issues involved are not of a complicated nature. The Chairman and Managing Director shall be the sole judge to decide whether or not the issues involved are of a complicated nature.
(iii) Two Arbitrators, who shall be Corporation Officers of equal status to be appointed in the manner laid down in Clauses 63.3 (b) for all claims of Rupees Five Lakhs and above, and for all claims irrespective of the amount or value of such claims if the issues involved are of a complicated nature. The Chairman & Managing Director shall be the sole judge to decide whether the issues are of a complicated nature or not. In the event of the two Arbitrators being divided in their opinions the matter under dispute will be referred to an Umpire to be appointed in the manner laid down in Clause 63.3 (b) for his decision.
63.3 (b). For the purposes of appointing two Arbitrators as referred to in Clause 63.3 (a) (ii) above, the Corporation will send a panel of more than three names of officers of the appropriate status of the Corporation to the Contractor, who will be asked to suggest a panel of three names out of the list so sent by the Corporation. The Chairman and Managing Director will appoint one Arbitrator out of this panel as the Contractor's nominee, and then appoint a second Arbitrator of equal status as the Corporation's nominee either from the panel or from outside the panel ensuring that one of the two Arbitrators so nominated is from the Accounts Department. Before entering upon the reference to two arbitrators shall nominate an Umpire who shall be an officer of the Corporation to whom the case will be referred to in the event of any differences between the two Arbitrators.
... ... ...
63.3 (f). It will be no objection that the person/persons appointed as Arbitrator/ Arbitrators/Umpire are Officer(s) of the Corporation. If, however, the Arbitrator/Arbitrators/Umpire is /are Officer(s) of the Corporation, he/they shall not be one of 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 Officer(s) of the Corporation has/have expressed views on all or any of the matters in dispute or difference. The award of the Arbitrator or Arbitrators or Umpire as the case may be final and binding on the parties to the contract.
63.3 (g). Subject as aforesaid, Arbitration Act, 1940 and the Rules thereunder and any statutory modification thereof shall apply to the Arbitration proceedings under this clause."
The case of the petitioners falls under Clause 63.3(a)(ii). The appointment procedure agreed upon by the parties is contained in Clause 63.3 (b). The petitioners made request to the respondent Corporation to appoint arbitrators as required under that procedure. Admittedly, the respondents failed to do so. The above clause does not provide other means for securing the appointment. The petitioners have, therefore, filed this petition under sub-section (6) of section 11 of the Act for appointment of arbitrators by the Chief Justice or the person designated by him.
6. There is no dispute between the parties on the factual matrix. The only controversy is about the scope and ambit of the powers of the Chief Justice or the person designated by him (Chief Justice") under sub-section (6) of section 11 of the Act. According to the petitioners, in exercise of powers under sub-section (6), the Chief Justice has to appoint the arbitrator/arbitrators himself. According to the respondents, no such power is vested in the Chief Justice. His power under sub-section (6) is only to direct the recalcitrant party or the appointing authority to act under the agreed procedure. The question that requires consideration, therefore, is whether in exercise of the power under sub-section (6) of section 11 of the Act, the Chief Justice or the person designated by him can appoint the arbitrators himself or he can merely order the appointing authority to act in terms of the agreed procedure and to appoint the arbitrators. On a careful consideration of the provisions of section 11 of the Act, I am of the clear opinion that under sub-section (6) of section 11 of the Act the Chief Justice should make the appointment himself. He cannot and should not order the recalcitrant appointing authority to act under the procedure provided in the agreement. The words "to take necessary measure" in sub-section (6) of section 11 of the Act mean that the Chief Justice should make the appointment himself.
7. I am supported in my above conclusion by the Fifth Report of the Working Group which considered paragraph 4 of Article 11 of the Draft Uncitral Model Law which is in exactly same terms as sub-section (6) of section 11 of the Act. Paragraph 4 of Article 11 of the Uncitral Model law reads as follows:
"(4) Where, under an appointment procedure agreed upon by the parties,
(a) a party fails to act as required under such procedure; or
(b) the parties, or two arbitrators, are unable to reach an agreement expected from them under such procedure; or
(c) an appointing authority fails to perform any function entrusted to it under such procedure, any party may request the Court specified in Article 6 to take the necessary measure instead, unless the agreement on -the appointment procedure provides other means for securing the appointment."
On consideration of the draft of above paragraph 4 of Article 11, the Working Group was agreed that the words "to take necessary measures" meant that the Court had to take the necessary measure itself (that is, to make the appointment) and not, for example, order an appointing authority, which failed to do so, to perform the function entrusted to that authority by the parties. The above report of the Working Group can be regarded as valuable aid in interpretation of sub-section (6) of section 11 of the Act because the Uncitral Model Law has been adopted by the Parliament by enactment of the Arbitration and Conciliation Act, 1996, and sub-section (6) of section 11 of the Act is verbatim reproduction of paragraph 4 of Article 11 of the Uncitral Model Law which was considered by the Fifth Working Group. Moreover, it is also clear on a conjoint reading of sub-sections (6) and (8) of section 11 of the Act that the power of the Chief Justice is to appoint arbitrator or arbitrators himself and not to direct the appointing authority to do so because while appointing the arbitrator/arbitrators, the Chief Justice has to have regard to the considerations as are likely to secure appointment of independent and impartial arbitrator/arbitrators. If the Chief Justice is merely to direct the appointing authority to appoint the arbitrator/arbitrators in accordance with the procedure agreed upon by the parties, there would be no occasion to have regard to the considerations set out in sub-section (8) of section 11 of the Act.
8. This interpretation also gets support from sub-section (7) of section 11 of the Act which says that a decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to the Chief Justice or the person or institution designated by him shall be final. The decision, obviously, is the decision of the Chief Justice to appoint the arbitrator/arbitrators.
9. I have perused the decision of this Court rendered by the Hon'ble Chief Justice Shri M.B. Shah (as His Lordship then was), in B.T. Patil & Sons v. Konkan Railway Corpn., (supra). In that case, after a careful consideration of the provisions of sub-section (6) and sub-section (8) of section 11, it was held (Paras 17 & 18, p. 122 Bom.C.R.):
"... Sub-sections (6) or (8) of section 11 does not provide that even if parties have failed to abide by the agreement prescribing the procedure for appointment of an Arbitrator, yet the Chief Justice or the person designated by him should appoint the Arbitrator as per the agreed procedure. At the same time, the Chief Justice or the person designated by him is required to bear in mind the qualifications of the Arbitrator as required under the Arbitration agreement and also to secure independent and impartial Arbitrator who can do justice between the parties.
Further, in a case where a party refuses to act or does not act as per the agreed procedure under the contract for referring the matter to arbitration, such a party cannot insist that Arbitrators should be appointed as per the machinery provided under the contract. This would result in giving premium to a defaulting party who may be interested only in delaying the proceedings. In my view, the agreed machinery gets exhausted on such refusal or inaction. Thereafter the only procedure which is required to be followed for appointment of Arbitrators would be under sub-section (6) read with sub-section (8) of section 11, subject to the other condition that agreement on the appointment procedure does not provide other means for securing the appointment of Arbitrators. Sub-section (6) or (8) of section 11 nowhere directs that the Chief Justice should appoint the Arbitrators mentioned in the agreement."
The learned Chief Justice also considered the provisions of section 8 of the repealed Act (Arbitration Act, 1940) and observed that the provisions of subsections (6) and (8) of section 11 of the Act give wider power to the Chief Justice than the provisions of section 8 of the repealed Act. It was observed :
"... At the same time, in appointing the Arbitrator it would be desirable that Court should consider the feasibility of appointing an Arbitrator according to the terms of the contract. If this aspect is road along with sub-section (8) of section 11, it would be clear that while appointing Arbitrator Court is required to take into consideration the qualifications of the Arbitrator as prescribed under the contract. Court is also required to see that independent and impartial Arbitrator is appointed. The legislature has specifically provided that the Chief Justice should take necessary measure of appointing Arbitrators and has not restricted the power of the Chief Justice to appoint Arbitrators only as agreed under the contract. The result would be that once the parties fail to act in accordance with the agreed procedure of appointing Arbitrators, the Chief Justice is required to appoint Arbitrators after taking into consideration the provisions of sub-section (8) of section 11."
I am in full agreement with the above decision of the learned Chief Justice Shri M.B. Shah (as His Lordship then was) in B.T. Patil & Sons v. Konkan Railway Corpn. (supra).
10. Reference may also be made in this connection to the decision of the Supreme Court in Nandlal Co-op. Spinning Mills v. K. V. Mohan Rao, . In that case, while discussing the power of the Court to appoint arbitrator under section 8 of the Arbitration Act, 1940, it was observed :
"It would thus be clear that if no arbitrator had been appointed in terms of the contract within 15 days from the date of receipt of the notice, the administrative head of the appellant had abdicated himself of the power to appoint arbitrator under the contract, The Court get Jurisdiction to appoint an arbitrator in place of the contract by operation of section 8(1)(a). The contention of Shri Rao, therefore, that since the agreement postulated preference to arbitrator appointed by the administrative head of the appellant and if he neglects to appoint, the only remedy open to the contractor was to have recourse to civil suit is without force. It is seen that under the contract the respondent contracted out from adjudication of his claim by a Civil Court. Had the contract provided for appointment of a named arbitrator and the named person was not appointed, certainly the only remedy left to the contracting party was the right to suit. That is not the case on hand. The contract did not expressely provide for the appointment of a named arbitrator. Instead power has been given to the administrative head of the appellant to appoint sole arbitrator. When he failed to do so within the stipulated period of 15 days enjoined under section 8(1)(a) then the respondent has been given right under Clause 65.2 to avail the remedy under section 8(1)(a) and request the Court to appoint an arbitrator. If the contention of Shri Rao is given acceptance, it would amount to putting a premium on inaction depriving the contract of the remedy of arbitration frustrating the contract itself."
11. From the above discussion, it is clear that when a party applies to the Chief Justice or the person designated by him under sub-section (6) of section 11 of the Act for appointment of arbitrator/arbitrators on the failure of the appointing authority to act as required under the agreed procedure, it is the duty of the Chief Justice or the person designated by him to appoint arbitrator/arbitrators himself having due regard to the considerations set out in sub-section (8) of section 11 of the Act which, inter alia, contemplates appointment of independent and impartial arbitrator. The power of the Chief Justice or the person designated by him under sub-section (6) of section 11 of the Act is to take the necessary measure himself, that is, to make the appointment and not merely order the recalcitrant party or the appointing authority to act.
12. Accordingly, I proceed to appoint the arbitrators. From Clause 63.3(b) it appears that one of the arbitrator should be a person who is well versed with accounting. Having due regard to the qualifications required of one of the arbitrator and considerations as are likely to secure the appointment of independent and impartial arbitrators, I appoint Shri M.V. Iyer, Partner, C.C. Chokshi and Company, Mafatlal House, VI floor, Backbay Reclamation, Mumbai - 400 020 and Shri Uttam Chand, C.E. Central Railway, Mumbai as arbitrators under subsection (6) of section 11 of the Act to decide the disputes and differences between the parties in this case. These two arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.
13. The arbitration petition is disposed of accordingly.
14. Prothonotary and Senior Master to communicate this order to the learned arbitrators.
15. The learned Counsel for the respondents prays for stay of this order. I do not find any cogent reason to grant such a prayer. The prayer is, therefore, rejected.
16. Petition allowed.