Dbm Geotechnics And ... vs Bharat Petroleum Corporation ...
2017 Latest Caselaw 2636 Bom

   DBM Geotechnics & Constructions Pvt Ltd v Bharat Petroleum Corporation Ltd
                            901-CARAP65-16.DOC




 Atul



                                                             REPORTABLE


        IN THE HIGH COURT OF JUDICATURE AT BOMBAY
           ORDINARY ORIGINAL CIVIL JURISDICTION
                     IN ITS COMMERCIAL DIVISION
           ARBITRATION APPLICATION NO.65 OF 2016


 DBM GEOTECHNICS &
 CONSTRUCTIONS PVT LTD
 401, Grande Palladium 175 CST Road,
 Kalina, Santacruz (East), Mumbai - 400 098                       ...Applicant
                       ~ versus ~
 BHARAT PETROLEUM
 CORPORATION LTD,
 a company incorporated under the provisions
 of the Companies Act, 1956 and having its
 registered office at 'Bharat Bhawan' 4 & 6
 Currimbhoy Road, Ballard Estate, Mumbai
 400 038                                                       ...Respondent

A PPEARANCES FOR THE APPLICANT Mr Mustafa Doctor, Senior Advocate, with Vishal Shriyan, Jaideep Singh Khattar & Rohan Marne, i/b Khaitan & Co..

FOR THE RESPONDENT Mr Gaurav Joshi, Senior Advocate, with Sandeep Aole, Vishesh Kalra, & Subit Chakrabarti, i/b Vidhii Partners.

26th May 2017

DBM Geotechnics & Constructions Pvt Ltd v Bharat Petroleum Corporation Ltd 901-CARAP65-16.DOC

CORAM: G.S. PATEL, J DATED: 26th May 2017 ORAL JUDGMENT:-

1. The Respondent to this Application under Section 11 of the Arbitration & Conciliation Act, 1996 ("the Arbitration Act"), Bharat Petroleum Corporation Ltd ("BPCL") issued a e-tender on 6th August 2003 for certain construction works at its installation at Irimpanam. On 30th January 2014, BPCL issued a Letter of Intent to the Applicant, DBM Geotechnics & Constructions Pvt Ltd. ("DBM"). There followed an Agreement dated 30th January 2014. This contains the arbitration clause to which I will presently turn.

2. On 3rd October 2015, for reasons that are not immediately germane, BPCL terminated the Agreement. Alleging performance delays DBM, it invoked clauses 4, 5 and 7 of the Agreement and appointed another contractor. On 20th June 2016, BPCL invoked the arbitration clause in the Agreement and initiated arbitration proceedings.

3. In terms of the Arbitration Agreement, the Director (Marketing) of BPCL ("DM") was to either serve as an arbitrator or to appoint a BPCL employee as an arbitrator. On 29th July 2016, the DM asked DBM to waive the provisions of Section 12(5) of the Arbitration Act, and to consent to his appointment. DBM refused by its letter of 20th August 2016. DBM proposed instead the names of three counsel of this Court and asked the BPCL's DM to nominate

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any one of them. In response, on 9th September 2016, BPCL rejected all three names. It took the stand that the DM continued to retain the sole authority to nominate an arbitrator of its choice. At this stage, it also contended that the arbitration proceedings should be held in Kochi, nothing having happened in Mumbai, despite the agreement saying that courts in Mumbai alone would have jurisdiction. On 21st September 2016 the DM appointed Mr Justice CN Ramachandran Nair, retired Judge of the Kerala High Courtm as the sole arbitrator. On 12th October 2016, DBM objected to this appointment and now challenged the authority of DM to appoint an arbitrator at all. By this time, on 21st September 2016 the DM and BPCL had intimated Mr Justice Nair of his appointment. On 26th October 2016, the DM wrote to DBM stating that the appointment of Mr Justice Nair was valid. On 5th November 2016 Mr Justice Nair entered upon the reference and scheduled his first sitting on 26th November 2016.

4. There then followed some entirely unfortunate correspondence, the sum and substance of which is this. The present Application was filed on 25th November 2016, and it seems that in correspondence the Advocates on both sides initially agreed that BPCL would not proceed before Mr Justice Nair. The Arbitrator grew increasingly concerned about the lapse of time, given the time limit now specified under the amended provisions of the Arbitration Act. At some stage, BPCL seems to have informed the learned Sole Arbitrator that there being no order specifically staying the arbitration proceedings, he should continue with the reference. DBM objected, and this correspondence went back and forth. It seems that the learned Sole Arbitrator finally issued

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directions to DBM to file its response to the Statement of Claim filed by BPCL. The question of delay is not determinative to the issue at hand.

5. The short question before me is whether in view of the provisions of the arbitration clause 19(a), read with the amended provisions of the Arbitration Act, and, specifically, Section 12(5) and the Seventh Schedule, the DM of BPCL entirely lost his power to nominate an arbitrator or whether he could continue to nominate a person even outside the limits of the choices specified in the clause.

6. This is how clause 19(a) reads:

"19. Arbitration (a)--Any dispute or difference of any nature whatsoever any claim, cross claim, counter claim or set of to the Corporation against the Contractor or regarding an right, liability, act, omission or account of any of the parties hereto arising out of or in relation to this Agreement shall be referred to the Sole Arbitration of the Director (Marketing Division) of the Corporation or of some officer of the Corporation who may be nominated by the Directors (Marketing Division). The contractor will not be entitled to raise any objection to any such arbitrator on the ground that the Arbitrator is an Officer of the Corporation or that he has dealt with the matters to which the contracts relates or that in the course of his duties as an Officer of the Corporation or that he has dealt with the matters to which the contracts relates or that in the course of his duties as an Officer of the Corporation he had expressed views on all or any matters in dispute or difference. In the event of the Arbitrator to

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whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason, the Director (Marketing Division) as aforesaid at the time of such transfer, vacation of office or inability to act may in the discretion of the Director (Marketing Division) designate another person to act as an Arbitrator in accordance with the terms of the Agreement to the end and intent that the original Arbitrator shall be entitled to continue the arbitration proceedings notwithstanding his transfer or vacation of office as an Officer of the Corporation if the Director (Marketing Division) does not designate another person to act as Arbitrator on such transfer, vacation of office or inability of original Arbitrator. Such person shall be entitled to proceed with the reference from the point at which it was left by his predecessor. It is also the term of this contract that no person other than the Director (Marketing Division) or a person nominated by such Director (Marketing Division) of the Corporation aforesaid shall act as Arbitrator hereunder. The award of the Arbitrator so appointed shall be final conclusive and binding on all parties to the agreement subject to the provisions of the Arbitration Act, 1996 or any statutory modification or re-enactment thereof and the rules made thereunder for the time being in force shall apply to the arbitration proceedings under this clause."

(Emphasis added)

7. Before proceeding further I must note that it is not DBM's case, and Mr Doctor on behalf of DBM, the Applicant, made this clear, that there is no Arbitration Agreement at all. He only questions the survival of the DM's authority to nominate.

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8. Clearly, clause 19(a) has several distinct constituent elements:

(a) only the DM has the power to nominate an arbitrator;

(b) The clause specifies the persons who can be nominated, i.e., it identifies the 'pool' of eligible persons from whom the DM may appoint his nominee. The first choice is the DM himself. Alternatively, he may nominate another BPCL employee. If the nominee is transferred, vacates office or is 'unable to act', the DM may designate another arbitrator, but this must be from the same 'pool', for the clause says this further or subsequent choice must be in accordance with the terms of the Agreement.

(c) Finally, there is the last portion which says that it is a term of the contract that "no person other than the Director (Marketing Division) or a person nominated by such Director (Marketing Division) of the Corporation as aforesaid shall act as an Arbitrator hereunder".

9. Mr Doctor submits that the remit of the DM's power to nominate or designate an arbitrator is limited, and is constrained by these terms. He may serve as an Arbitrator himself or he may appoint another BPCL employee. He cannot nominate, designate or appoint an outsider. This is clear from the latter portion of the clause, which, even if seen as a clarification, says in no uncertain terms that only the DM or a BPCL employee he nominates can serve as an arbitrator. The phrase "inability to act", one that gives

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the DM the power to re-nominate, in Mr Doctor's submission, (a) is necessarily predicated on there being, to begin with, a previous appointment properly made of an arbitrator in terms of the clause; and (b) is, in any case, itself constrained to the two choices (the DM himself or a BPCL officer). There is, he submits, no scope at all for the DM to nominate an outsider. If, therefore, the DM cannot appoint either himself or a nominee, the nomination clause 19(a) fails entirely. BPCL's only option then is to move court in an application under Section 11. Neither BPCL nor the DM can invoke the nomination clause and stretch it to include the power to nominate a person not specified in the clause itself. Therefore, the DM's nomination of Mr Justice Nair is improper, not in terms of clause 19(a) and is entirely void.

10. The amended provisions of the Arbitration Act now ensure greater independence and neutrality of an Arbitral Tribunal. To this end Section 12(5) has been introduced, as have two Schedules. Section 12(5) reads thus:

12. Grounds for challenge

(5) Notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject-matter of the dispute falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.

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11. The Seventh Schedule sets out several circumstances of ineligibility:

THE SEVENTH SCHEDULE

[See section 12 (5)]

Arbitrator's relationship with the parties or counsel

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

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

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

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

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

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

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

8. The arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither

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the arbitrator nor his or her firm derives a significant financial income therefrom.

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

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

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

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

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

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

Relationship of the arbitrator to the dispute

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

16. The arbitrator has previous involvement in the case.

Arbitrator's direct or indirect interest in the dispute

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

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

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

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

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

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

12. It is common ground that Mr Justice Nair's appointment is covered by none of these, and that he is not otherwise ineligible. Mr Doctor and Mr Joshi for BPCL both agree that absent DBM's specific consent, the DM and any BPCL employee would be rendered ineligible. With both the DM and every BPCL employee rendered ineligible, Mr Doctor submits, the DM lost all authority to nominate.

13. Mr Joshi submits that this formulation and interpretation is wholly incorrect. There is, Mr Joshi says, a clear distinction

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between the power to nominate, one that vests in the DM, and the eligibility or ineligibility of those in the pool of potential nominees. The power to nominate must be separated from the choice of nominee. The fact that every person within that pool of potential nominees is ineligible does not invalidate or take away the power to nominate. The parties' contractual intentions were two-fold: first, vesting the power to nominate in the DM; and, second, specifying or defining the pool from which a selection could be made. A failure of the second cannot and should not, Mr Joshi submits, be read as an automatic failure of the first. If, by operation of statute, the choices that were available to the DM at the time when the contract was executed were no longer available when the time came to exercise that power, he would nonetheless retain the power to nominate in accordance with law. In any case, the two powers can be severed and, in an appropriate case should, in his submission, be so severed.

14. In any event, the present application does not lie under Section 11 of the Arbitration Act at all. Once a nomination has been made, the correct course for DBM is to move either under Section 13 or Section 14 (or both) of the Arbitration Act at an appropriate time.

15. Mr Doctor clarifies that there is no grievance or complaint against Mr Justice Nair at all. The question that is raised is only about the correctness or validity of the initial appointment in the first place. In Mr Doctor's submission, Section 11(6) will squarely apply because BPCL has 'failed to act' in accordance with the

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procedure stipulated by Clause 19(a). Section 11(6) of the Arbitration Act reads thus:

11. Appointment of arbitrators

(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 Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measures, unless the agreement on the appointment procedure provides other means for securing the appointment.

(Emphasis added)

16. According to Mr Doctor, therefore, the combination of the amended statutory provisions (Section 12(5) and the Seventh Schedule) and DBM declining to consent resulted in a situation where the DM's power to nominate stood entirely ousted. Since he had no pool from which to draw, he had no power to nominate at all;

his power of nomination was constrained by, and limited to, the defined pool of potential nominees. The DM could not, therefore, lawfully exercise any power at all under clause 19(a). He had no

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power to nominate anyone -- those he could have nominated were ineligible, and he had no power to travel outside that pre-defined set. Had the clause contained another provision saying, for instance, that if the DM could not appoint himself or any BPCL employee for any reason, he would be entitled to nominate a third party, then of course the DM would continue to retain that power of nomination. Absent such a provision, the power to nominate could not be assumed by the DM as he purported to do. If there is any doubt about this, Mr Doctor says it is eliminated by the penultimate provision I have set out earlier, viz., that no person other than the DM or a BPCL employee could act as an arbitrator.

17. Mr Joshi relies on the decision of the Supreme Court in Antrix Corporation Ltd v Devas Multimedia Pvt Ltd1 for the proposition that once there is a nomination made, no question arises of invoking Section 11(6). Where one of the parties has, in terms of the Agreement, made a nomination or appointment, it is not open to the other side to file an Application under Section 6. It is true that this decision is prior to the amendment of the Arbitration Act. It is also true that a question arose about the jurisdiction of the Court under Section 11. In that case, one of the parties unilaterally (i.e. without the concurrence of the other) approached the ICC for the appointment of an Arbitrator. There is also no doubt that the opposite party appointed an Arbitrator of its own choice. In paragraph 33, the Supreme Court said:

"33. Sub-section (6) of Section 11 of the 1996 Act, quite categorically provides that where the parties fail to act in terms of a procedure agreed upon by them, the provisions

1 (2014) 11 SCC 560.

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of sub-section (6) may be invoked by any of the parties. Where in terms of the agreement, the arbitration clause has already been invoked by one of the parties thereto under the ICC Rules, the provisions of sub-section (6) cannot be invoked again, and, in case the other party is dissatisfied or aggrieved by the appointment of an arbitrator in terms of the agreement, his/its remedy would be by way of a petition under Section 13, and, thereafter, under Section 34 of the 1996 Act."

(Emphasis added)

18. Perhaps the distinction here is to be found in the second sentence of this paragraph. The Supreme Court said that where there is a nomination "in terms of the agreement" then there can be no recourse by the other party to Section 11(6). The question, therefore, is whether the appointment of Mr Justice Nair can be said to be "in terms of the Agreement", i.e., in terms of Clause 19(a) of the present arbitration clause.

19. The limited point for decision, therefore, is whether, faced with this situation where neither the DM himself nor any BPCL employee could possibly serve as an Arbitrator, the entire nomination procedure was set at naught and BPCL would be forced to come to Court under Section 11.

20. I must also refer to the decision cited by Mr Joshi in M/s Voestalpine Schienen GMBH v Delhi Metro Rail Corporation Ltd. 2 This decision sets out comprehensively the purpose and ambit of

2 2017 SCC OnLine SC 172.

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Section 12(5) and the emphasis in the amended Act on arbitral independence and neutrality.

21. I believe Mr Joshi's submission must be accepted and in doing so I must read not just Antrix v Devas but read it along with Delhi Metro Rail Corporation Ltd. The parties before me had, as I have pointed out earlier, clearly agreed that the power to nominate would vest in BPCL's DM alone. It is true too that the clause also said that the DM, in exercising that power, was to draw from a specified class of persons (himself or a BPCL employee). It just so happens that because of the operation of the amended statute combined with a want of consent from DBM, the eligibility of both those sets of persons was rendered impossible. In fact, as Mr Joshi says, the DM's 'power to nominate' cannot be dependent on the DBM's granting or not granting consent, and this is what the Applicant's argument amounts to: had DBM consented, there would have been no question of the BPCL's DM being divested of his power to nominate. I believe Mr Joshi is correct in saying that by withholding consent and then relying on the statutory bar, DBM cannot argue that the power to nominate itself has completely gone. The DM does not, for want of DBM's consent, stand stripped of all his nominating power. He must exercise that power in the manner that the law requires, i.e., by appointing an independent and neutral Arbitrator. It is perhaps true that as a result of this, the latter portion of clause 19(a) may require to be severed, but there is no difficulty in doing this, nor is this impermissible. In any case this is a situation that is almost wholly occasioned by the refusal of DBM's consent -- and that refusal itself arises from a newly introduced statutory amendment. But for that amendment, DBM itself did not have the

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latitude of consenting or not consenting. Its consent was not required.

22. In a nutshell, therefore, the case plays out like this: at the time of the Agreement, DBM agreed that BPCL's DM or another BPCL employee he nominated would serve as arbitrator, and no question arose of DBM consenting or not consenting separately to this; the agreement itself was DBM's consent. The DM alone could nominate the arbitrator. The 2016 Amendment to the Arbitration Act introduced an ineligibility provision that rendered the DM and any employee of BPCL ineligible but now without the further consent of DBM. That consent was refused. But that refusal of consent was to the nominee not to the person authorised and empowered by the contract to make the nomination. The power to make the nomination never required DBM's consent. DBM's refusal to consent would, therefore, at best, eliminate the possible choices of arbitrator stipulated in the contract; that lack of consent could not, directly or indirectly, divest the DM of his power to nominate.

23. In my view, the appointment by BPCL's DM of Mr Justice Nair cannot be invalidated on the basis of a lack of power to nominate.

24. Mr Joshi is also correct in pointing out that as late as on 20th August 2016,3 DBM itself did not question the continuance of the DM's power to nominate. DBM suggested three counsel of this

3 Application, Exhibit "I", pp. 637-643.

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Court and asked the DM to nominate one. It is hardly reasonable to suppose that the DM could nominate one of three counsel suggested by DBM, all three outside the contractual 'pool' of those eligible, but could not nominate a person of his own choice. These two stands are inconsistent. DBM's assertion of a complete loss of the DM's power to nominate came much later on 12th October 2016 and was very possibly as an afterthought.

25. I think there is also some substance to Mr Joshi's submission that to accept DBM's contentions might conceivably result in any number of arbitrations being imperilled. It should not, as a matter of law, happen that an interpretation of a contract leads to such consequences.

26. There remains the question of the delay. I can fully understand the Arbitral Tribunal's concern about the time-frame, and, as I said, there has been some regrettable correspondence between the parties' advocates. I do not think it is appropriate to discuss this in any great detail, nor should the learned Sole Arbitrator be put to any embarrassment by it. The Petition was filed on 25th November 2016. Mr Justice Nair held his first meeting on 26th November 2016. I will, in fairness to both sides, exclude the period from the date of filing of this Petition (25th November 2016) till the date this order is uploaded from the period available to the learned Arbitrator to complete the arbitration proceedings. I have no doubt that the learned Sole Arbitrator will also consider any application DBM makes for a reasonable extension of time to complete its filings. Mr Joshi assures me that such an application will not unreasonably be opposed. This statement is noted.

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27. There is perhaps one final issue, and this is in regard to the seat of arbitration as against jurisdiction of courts. The arbitration clause says that courts in Mumbai alone shall have jurisdiction. In view of the decision of the Supreme Court in Indus Mobile Distribution Pvt Ltd v Datawind Innovations Pvt Ltd & Ors,4 it will be open to DBM to canvass the question of the correct seat of arbitration before the learned Sole Arbitrator. All contentions on both sides are specifically left open in that regard.

28. The Application is dismissed. The amendments to the Code of Civil Procedure, 1908 introduced by the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 require that, as a general rules, costs must follow the event, and that reasons must be given if costs are not awarded against the party that fails. I decline to award costs in this case having regard to the fact that the issue raised was limited, and since Mr Doctor very fairly did not suggest that the entire arbitration clause was ousted. No costs.

                                                            (G. S. PATEL, J.)




 4        2017 SCC OnLine 442.



                                   26th May 2017