S.B.P. And Co. vs Patel Engineering Limited And ...
2003 Latest Caselaw 143 Bom

ORDER

H.L. Gokhale, J.

1. This Writ Petition seeks to challenge the order dated 18th November 2001 appointing the third Arbitrator passed by the learned designated Judge on the Arbitration Application moved by respondent No. 1 under Section 11 of the Arbitration and Conciliation Act, 1996 (for short, "the said Act").

2. Dr. Tulzapurkar has appeared for the petitioner and Mr. Chinoy for the respondents.

3. The facts leading to this petition are as follows:--

(a) Respondent No. 1 was awarded a contract by State of Maharashtra through its Irrigation Department for the construction of civil works pertaining to Stage IV of the Koyna Hydroelectric Project. Respondent No. 1 in turn entered into a sub-contract with the petitioner with respect to a piece work for that purpose. Clause 19 of the Agreement contained an arbitration clause which reads as follows :--

"The continuance of this piece work agreement/contract or at any time after the termination thereof, any difference or dispute shall arise between the parties hereto in regard to the interpretation of any of the provisions herein contained or act or thing relating to this agreement/contract, such difference or dispute shall be forthwith referred to two Arbitrators for Arbitration in Bombay one to be appointed by each party with liberty to the Arbitrators in case of differences or their failure to reach an agreement within one month of the appointment, to appoint an umpire residing in Bombay and the award which shall be made by two Arbitrators or umpire as the case may be shall be final, conclusive and binding on the parties hereto.

If either party to the difference or dispute shall fail to appoint an arbitrator within 30 calendar days after notice in writing having been given by the parties or shall appoint an arbitrator who shall refuse to act then the arbitrator appointed by the other party shall be entitled to proceed with the reference as a Sole Arbitrator and to make final decision on such difference or dispute and the award made as a result of such arbitration shall be a condition precedent to any right of action against any two parties hereto in respect of any such difference and dispute.

(b) It so happened that the petitioner appointed respondent No. 2 as its Arbitrator. Respondent No. 1 appointed one Shri S.N. Huddar to act as its Arbitrator. Shri Huddar, however, later on expressed his inability to act an Arbitrator in view of the fact that he was associated with the Koyna Project Work as Superintendent and Chief Engineer earlier. In view of Shri Huddar declining to act as an Arbitrator, respondent No. 1 appointed one Shri S.L. Jain as its Arbitrator in the matter. Respondent No. 1, by its letter dated 27th February 2002 addressed to respondent No. 2, pointed out that as per Section 15(2) of the said Act, it was entitled to appoint another Arbitrator within 30 days of Shri Huddar's declining to act and there is no question of respondent No. 2 acting as the Sole Arbitrator. Shri Jain suggested the names of three retired Judges of this Court to act as the Third Arbitrator. However, respondent No. 2, by his letter dated 25th March 2002, rejected the contention of respondent No. 1 that any such Third Arbitrator could be appointed. It was, in these circumstances, that respondent No. 1 moved an Application before the learned designated Judge to appoint the Third Arbitrator. The learned Judge accepted the submissions of respondent No. 1 that there was a need to appoint the Third Arbitrator since there was a vacancy and appointed a retired Judge of this Court as the Third Arbitrator. Being aggrieved by this order passed by the learned Single Judge under Section 11 of the said Act, this petition has been filed.

4. Dr. Tulzapurkar, learned Counsel appearing for the petitioner, principally submitted that under Section 15(2) of the said Act where the mandate of an Arbitrator terminated, the vacancy is to be filled in accordance with the rules which were applicable to the appointment of the Arbitrator being replaced. In the instant case, under Clause 19 of the Agreement, if the Arbitrator appointed by a party refuses to act, the Arbitrator appointed by the other party was entitled to function as the Sole Arbitrator and this aspect has been ignored by the learned Judge. The submission of Dr. Tulzapurkar is that under Section 15(2) itself the provision under Clause 19 of the present Agreement has been saved and thereunder the Arbitrator appointed was to act as the Sole Arbitrator. There was no occasion to appoint Shri Jain as the substitute Arbitrator by respondent No. 1 and, therefore, there was no further occasion to appoint the third Arbitrator or Umpire by moving an Application under Section 11(6) of the said Act. Dr. Tulzapurkar pressed into service the observations of the Apex Court in Para-23 of the judgment in the case of Datar Switchgears Ltd. v. Tata Finance Ltd. and Anr. wherein the Apex Court has observed that when the parties have entered into a contract and settled on a procedure, due importance has to be given to such procedure. In the present case, it had been clearly provided under Clause 19 of the Agreement that if the Arbitrator appointed by one party refused to act, the Arbitrator appointed by the other party was to function as the Sole Arbitrator had to be permitted to proceed further. He relied upon an order of a Single Judge of this Court (Coram: M.B. Shah, C. J. as he then was in this Court) in the case of Smt. Satya Kailashchandra Sahu and Ors. v. M/s Vidarbha Distillers, Nagpur and Ors. acting under Section 11 of the said Act and particularly the observations in Para 13 of this order wherein the learned Chief Justice has observed that when a named person refuses to act as Arbitrator, then the procedure, which is required to be followed, is provided in Section 11 of the said Act. It is thereafter stated that if the named person refuses to act as Arbitrator, the arbitration clause is not wiped out but what is exhausted is the authority of the named person to act as Arbitrator. In the submission of Dr. Tulzapurkar, the arbitration clause very much remained thereunder that only a sole Arbitrator could proceed. He emphasized the observations of the learned Chief Justice in Para 14 of this order that Sections 15 and 11(6) are to be read together. He then referred to a judgment of a learned Single Judge of this Court in the case of Open Sea Maritimes Inc. v. R. Pyarelal International Pvt. Ltd. reported in 1999(2) Mh.LJ. 1 = 1999(2) Arb. LR 383 (Bombay) and the judgment of a Division Bench of the Delhi High Court in the case of Talwar Brothers Pvt. Ltd. and ors. v. Punjab State Industrial Development Corporation Ltd. reported in 2002 Arb. W.L.J. 520 referring to the judgment in the case of Open Sea Maritimes Inc. with approval. The learned Single Judge of this Court as well as the Division Bench held that where there was an agreement on the appointment procedure providing other means, those had to be respected.

5. Mr. Chinoy, learned Counsel appearing for the respondents, on the other hand, drew our attention to the specific wording of Section 15(2) of the Arbitration and Conciliation Act, 1996 which reads as under :--

"15. Termination of mandate and substitution of arbitrator.-

(2) Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced."

He submitted that this section clearly provides that where the mandate of an Arbitrator terminates, the substitute Arbitrator shall be appointed. In his submission, that is the mandate of the Statute and it is in the light of this first part of Section 15(2) that the latter part thereof has to be read which provides that a substitute Arbitrator is to be appointed according to the rules that were applicable to the appointment of the Arbitrator being replaced. Mr. Chinoy emphasized the phraseology of this section and submitted that this being the provision of this section, the section clearly means that it is only a replacement which is permitted and if there are rules providing for such replacement in the arbitration Agreement, they will govern the field, though only for the purposes of replacement. The section does not contemplate a situation where the remaining Arbitrator would be the Sole Arbitrator and, therefore, Section 15(2) would override Clause 19 since it did not contain any replacement procedure. Mr. Chinoy secondly submitted that this was not a case where respondent No. 1 had not appointed an Arbitrator nor was it a case where the Arbitrator had refused to act. He had recused himself at the outset since he was earlier connected with the Koyna Project. He submitted that in view of this position, Clause 19 would otherwise also not apply.

6. That apart, Mr. Chinoy raised a preliminary objection to the maintainability of the petition itself. He took us through the judgment of the Apex Court in the case of Konkan Railway Corporation Ltd. and Ors. v. Mehul Construction Co. (hereinafter referred to as "the Mehul Construction judgment") which was subsequently approved by a Constitution Bench of the Apex Court in the case of Konkan Railway Corporation Ltd. and Anr. v. Rani Construction Pvt. Ltd. (hereinafter referred to as "the Rani Construction judgment"). In the Mehul Construction judgment (supra), the Apex Court has in terms observed on page 207 in Para-4 of (2000) 7 S.C.C. as follows:--

"Section 16 empowers the Arbitral Tribunal to rule on its own as well as on objections with respect to the existence or validity of the arbitration agreement. Conferment of such power on the arbitrator under the 1996 Act indicates the intention of the legislature and its anxiety to see that the arbitral process is set in motion. This being the legislative intent, it would be proper for the Chief Justice or his nominee just to appoint an arbitrator without wasting any time or without entertaining any contentious issues at that stage, by a party objecting to the appointment of an arbitrator."

The Apex Court has subsequently held that where the Chief Justice or his nominee refuses to make the appointment of an Arbitrator in such a case a party seeking appointment of an Arbitrator would not be said to be without any remedy. It is for that purpose that the Court ultimately held that in such a case a mandamus would lie. However, as far as the appointment of an Arbitrator is concerned, the Court in terms observed that it is expected that invariably the Chief Justice or his nominee would make an appointment. In the Rani Construction judgment (supra) in Para-18, the Apex Court has gone to the extent of saying that; "There is nothing in Section 11 that requires the party other than the party making the request to be noticed. It does not contemplate a response from that other party. It does not contemplate a decision by the Chief Justice or his designate on any controversy that other party may raise, even in regard to its failure to appoint an Arbitrator within the period of thirty days." Thereafter in Para-19, the Apex Court has said that the only function of the Chief Justice or his designate under Section 11 is to fill the gap left by a party to the arbitration agreement or by the two arbitrators appointed by the parties and nominate an arbitrator.

7. Thereafter in Para-20 of this Judgment, the Apex Court has dealt with the objection with regard to bias and has observed that it would be open to a party raising the question of bias to challenge the Arbitrator appointed under Section 12 by adopting the procedure under Section 13. In Para-21 while dealing with an erroneous exercise of the jurisdiction although the period of thirty days had not expired, the Court observed that in such a situation, it would be open to the aggrieved party to require the Arbitral Tribunal to rule on its jurisdiction. Section 16 provides for this. At the end of Para-21, the Court specifically stated as follows :--

"There would, therefore, be no impediment in contending before the Arbitral Tribunal that it had been wrongly constituted by reason of the fact that the Chief Justice or his designate had nominated an arbitrator although the period of thirty days had not expired and that, therefore, it had no jurisdiction."

8. Mr. Chinoy, therefore, submitted that first, there was no occasion to invoke Clause 19 and the appointed Arbitrator could not proceed as a Sole Arbitrator contrary to the provisions of Section 13(2) of the said Act. But, in any case, whatever be the objection of the petitioner, the same can be raised under the law as declared by the Apex Court before the Arbitral Tribunal itself under Section 16 of the said Act. That being the Forum, and as seen from the tenor of the two judgments of the Apex Court, that is a question which should be left to that Forum.

9. Dr. Tulzapurkar appearing for the petitioner, on the other hand, submitted that the nominee of the Chief Justice exercising the jurisdiction which he did not have, is a situation different from nominee exercising the jurisdiction although a period of 30 days had not expired. The latter was a situation considered in Para-21 of the Rani Construction judgment. He further submitted that an error on the part of the nominee that he exercised the jurisdiction which he did not have is not an issue which could be raised before the Arbitral Tribunal under Section 16 of the said Act and the same had to be raised before the High Court itself. If a petition could lie when an Arbitrator is not appointed, similarly a petition can certainly lie if such an error is committed by the nominee of the Chief Justice. He, therefore, submitted that the present petition was fully maintainable.

10. Having considered the submissions of both the learned Counsel, we find that Para-21 of the Rani Construction judgment deals with a species of lack of jurisdiction in the appointing authority and such an objection is directed to be raised before the Arbitral Tribunal under Section 16 of the said Act. This paragraph also deals with an error going to the root of the matter on the par! of the nominee of the Chief Justice and for that, the answer of the Apex Court is to raise the issue before the Arbitral Tribunal. In our view, Mr. Chinoy is right in submitting that the present objection is of a similar type and should also be raised before the Forum which is constituted under the said Act. This is particularly clear from the tenor of the two judgments. In fact, the Apex Court has in terms stated in Para-18 of the Rani Construction judgment that even a notice need not be given to any such respondent and no response may be called from such a party. As pointed out earlier, in Para-19 of this judgment, the Apex Court has observed that the only function of the Chief Justice or his nominee is to fill the gap left by the party to the Arbitration Agreement so that the Arbitral Tribunal is expeditiously constituted. In the Mehul Construction judgment (supra), the Apex Court has specifically referred to the curtailment of the powers of the Courts in the matter of interference. Mr. Chinoy has pressed into service Section 5 of the said Act which in terms states that notwithstanding anything contained in any other law, no judicial authority shall intervene except where so provided in the first part of the said Act. In the Mehul Construction judgment, the Apex Court in terms stated that the legislative intent is clear that the Chief Justice or his nominee has just to appoint an Arbitrator without wasting any time or without entertaining any contentious issues at that stage. The decision is an administrative decision and it is in a situation where an Arbitrator is not appointed that the Apex Court has held that the writ of mandamus would lie.

11. Dr. Tulzapurkar has drawn our attention to an earlier judgment of a Division Bench of the Bench of this Court at Aurangabad in the case of Chief Engineer, Western Zone-II, Central Public Works Dept., Nagpur and Ors. v. Pandit Shankarrao Kulkarni reported in 2000 (4) Mh.LJ. 267 where there was almost an identical situation as in the present matter and the Division Bench has taken a view that a Writ Petition would lie. The Division Bench, however, did not have the advantage of the two judgments of the Konkan Railway Corporation (supra) and which were, therefore, not considered by the Division Bench. It is therefore, not possible to accept the submission of the petitioner that the present petition can lie.

12. Inasmuch as we are holding that this petition is not maintainable, we are not expressing any opinion one way or the other on the first point raised by Dr. Tulzapurkar that the Sole Arbitrator could continue and that the learned designated Judge was in error in exercising jurisdiction that he did not have. It would be open to the petitioner to raise this issue by making an appropriate application before the Arbitral Tribunal.

13. For the reasons stated above, the petition is dismissed. Parties will bear their own costs.

14. Authenticated copy of this order may be made available to the parties.