Shankar Traders vs Union Of India (Uoi) And Ors. on 10 July, 2006

    Shankar Traders vs Union Of India (Uoi) And Ors. on 10/7/2006

JUDGMENT

   V.S. Sirpurkar, C.J.

   1. This is an application under Section 11 of the Arbitration & Conciliation
Act, 1996 (hereinafter referred to as the Act), for appointment of an
arbitrator. There was a contract between the petitioners herein and the Union of
India, represented by Divisional Engineer (Co-ordination), Eastern Railway
Sealdah. The petitioner company Was awarded a contract of lifting of track from
km 5/25 to km 8/21 all four lines, and PQS station limit for provision of
ballast cushion with other ancillary works at a cost of Rs. 12,33,968/- This
contract was awarded to the petitioner company vide letter dated 14th April,
2004. The work was to be completed within four months from the date of issue of
the contract. In pursuance of this offer an agreement was executed on 13th
September, 2004. It seems that the petitioner company's claim is that due to
default and breaches on the part of the respondents the execution of the work
was prolonged and the extensions were also granted by the respondents without
any penalty and when the work in question was successfully executed to the
extent of 90% before the expiry of the extended period, a notice was sent to the
petitioner company making some allegations. The petitioner company had given
reply to the notice. However, it seems that the petitioner company has not been
paid for the financial losses suffered by it on account of breach of contract by
the respondents. The petitioner company by its letter dated 22nd February, 2005
claimed that its dues should be paid. However, no reply was ever received by the
petitioner company.

   2. Thus since this contract took place within the local Jurisdiction of this
Court, this Court has the territorial jurisdiction to try and entertain this
application and there is also a live issue in between the parties. Clause
63(1)(i) of the agreement provides for the arbitration clause, which is as
under:

     63(1)(i) Demand for Arbitration.

     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
'excepted matters' referred to in Clause 62 of these conditions, the contractor,
after 120 days but within 180 days of his presenting his final claim on disputed
matters, shall demand in writing that the dispute or difference be referred to
arbitration.

   3. Thus, there is a valid arbitration clause in the agreement between the
parties. The petitioner company's case is that in pursuance of this clause, the
petitioner company sent a letter dated 22nd February, 2005 mentioning therein
that in case nothing was heard or the letter was not complied with, the
petitioner company would be compelled to invoke the arbitration agreement. It is
an admitted position that the Divisional Railway Manager, to whom this letter
was sent, received this letter and in that letter the petitioner company had
claimed a sum of Rs. 22,03,317/- However, there was no decision taken even
within 120 days, as provided in the arbitration agreement, and the petitioner
company therefore by letter dated 11th July, 2005 invoked the arbitration clause
and requested the General Manager to refer the dispute to the arbitration as per
the arbitration clause quoted above. It is apparent that no action was taken and
therefore the petitioner company filed the present application.

   4. It is the case of the respondent that after this application was filed the
Railway went on to appoint an arbitrator. However, as per the law settled by the
Supreme Court in the case of Datar Switchgears Limited v. Tata Finance Ltd.
there will

   be no question of now the Railway appointing any arbitrator. It is clearly
held in that case that the right comes to an end once the party demanding
arbitration moves an application under Section 11 of the Act before the Chief
Justice to appoint an arbitrator. Accordingly the matter has now come up before
me to appoint an arbitrator.

   5. The learned Counsel appearing on behalf of the Railways insists that even
if the Railway has lost the right to appoint arbitrator on account of the right
not having been exercised before filing of the present application, still I
should appoint an arbitrator in terms of the arbitration agreement between the
parties whereunder the Railways officials could be appointed as arbitrator. The
petitioner company is now opposed to the appointment of any railway officials as
an arbitrator. The advocate appearing for the Railways mainly bases his argument
on the principle that even if the Railway administration has lost its right yet
considering the language of Section 11(6) of the Act in contradistinction to
Sub-section (4) and (5) thereof the agreement should still be honoured and
therefore I should appoint an arbitrator only in terms of the arbitration
agreement whereunder a panel of three gazetted Railway officials could act as
arbitral tribunal, more particularly because of Clause 63(3)(a)(ii). Learned
advocate suggests that the procedure under Clause 63(3)(a) and the various sub-
clauses there under should be adhered to by me and the appointment of the
arbitrator should be made only in terms of such procedure. In support of his
argument, learned Counsel for the respondent has relied on few reported cases,
namely, Kamala Solvent v. Manipal Finance Corporation Limited Bel House
Associate Pvt. Ltd. v.

   GM Southern Railway reported in AIR 2001 Ker 163 and Subhas Projects and
Marketing Ltd. v. South Eastern Coal Fields Ltd. . Besides these rulings the
other ruling relied upon by the learned Counsel for the petitioner company are
Central Bank of India v. Hart Ford Fire Insurance

   International Airport Authority of India v. K. D. Bali Secretary to the Govt.
Transport Dept Madras v. Munuswamy and A. Mohammed Yunus v. FCI

   reported in 2000 (7) Supreme Today 722. The other cases barring the first lot
of cases are all relating to the Arbitration Act, 1940 and, therefore, they
would be of no consequence.

   5.1 Learned Counsel for the petitioner, however, opposes this and claims that
it would be for me now to appoint an arbitrator. As against these judgment Smt.
Kumkum Das, learned Counsel for the petitioner, has relied upon the latest
decisions of the Apex Court in the cases of Pan) Lloyd Ltd. v. Petronet MHB
Ltd., reported in (2006) 2 SCC 638 and Shin Satellite Public Co. Ltd. v. Jain
Studio Ltd. reported in who says that the question is no more res integra and it
will be for the Chief Justice to make an appointment as per his choice, of
course taking into consideration the various principles for appointment of the
arbitrator. It will be seen the question is answered in the above cases.

   5.2 In the Punj Lloyd Ltd. v. Petronet MHB Ltd. (supra) it is apparent that
the decision in Datar Switchgears Limited v. Tata Finance Ltd. (supra) has been
relied upon. It is no test therein that in spite of service of notice demanding
appointment of arbitrator the respondent had failed to act and therefore the
appellant had moved the Chief Justice's Court for appointment of an arbitrator
under Section 11(6) of the Act and even till the date of moving the application
the respondent had not made appointment of the arbitrator in terms of the
arbitration agreement. However, the Learned Judge designated by the Chief
Justice of High Court refused to appoint arbitrator holding that the only remedy
available to the appellant was to move in accordance with Clause 14.1 of the
agreement. The said Clause 14.1 is as under:

     14.1 Disputes or differences arising out of or in relation to
agreement/contract shall be referred to the Functional Director of the owner who
may either act himself as sold arbitrator or nominate some officer of the owner
to act as an arbitrator to adjudicate the disputes and differences between the
parties (except those in respect of which the decision of any person is by the
contract expressed to be final and binding).

   5.3 Accordingly, it seems that the Learned Judge directed the parties to get
the arbitrator appointed in terms of the agreement. This was disapproved by the
Supreme Court relying upon the case of Datar Switchgrars Limited v. Tata Finance
Ltd. (supra) and the Chief Justice of the High Court was directed to make
appointment of an arbitrator in accordance with Section 11(6). The decision does
suggest that if after receipt of the notice the respondent fails to make
appointment of the arbitrator within the life and in the meantime an application
is already made then the right to make appointment of arbitrator is lost on the
part of the respondent. Further it is obvious that then even the recourse to the
clauses of the agreement in respect of the procedure for appointing the
arbitrator cannot be taken. At least in this reported decision such recourse was
not taken and the view of the High Court to that effect was not found to be
correct by the Supreme Court. What follows from this judgment is once there is a
default on the part of the respondent to appoint an arbitrator in terms of the
agreement and once that right is lost then there will be no question of again
falling back on the agreement for appointment of an arbitrator.

   5.4 In the other decision also in the case of Shin Satellite Public Co. Ltd.
v. Jain Studio Ltd. (supra) relied upon by Smt. Das, the Supreme Court has
expressed in paragraph 30 in the similar terms as in Punj Lloyd Ltd. v. Petronet
MHB Ltd. (supra). In Shin Satellite Public Co. Ltd. v. Jain Studio Ltd. (supra)
the main question was as to whether the arbitration clause on account of some
recitals therein was a valid arbitration clause or not. One party was contending
that the said clause was not valid on account of those recitals, while the
contentions of other party was that the offending part of the arbitration clause
was severable and therefore there was nothing wrong in appointing an arbitrator.
It was an admitted position therein that a notice as contemplated by Section 11
of the Act was given for appointment of the arbitrator by the first party and it
had also appointed his arbitrator and called upon the other contracting party to
appoint its arbitrator as per Clause 23 which provided the arbitration clause.
However, in spite of naming its own arbitrator, the other party raised an
objection on the validity of the arbitration clause i.e. Clause 23 of the
agreement and refused to call it an arbitration clause. In short, it had not
made any appointment as per Clause 23. The Supreme Court went into the validity
of the arbitration clause and held that the offending portion of the clause was
clearly severable and therefore ignoring that portion the rest of the
arbitration clause could be worked by appointing the arbitrator. Thus, the
Supreme Court held the arbitration clause to be valid. However, it was submitted
that if the Court was not upholding the objection to the arbitration clause and
was inclined to grant prayers of the petitioner to appoint the arbitrator then
falling back on the same clause, that is Clause 23, some time should be granted
to the respondent to name his arbitrator. According to the respondents the
appointment of arbitrator on its part was not made because it had reservation
about the validity of the arbitration clause itself. The Supreme Court did not
accept this plea and rejected it in the following words:

     The learned Counsel for the petitioner objects to such a prayer. According
to him, a letter/notice was issued and in spite of request by the petitioner,
the respondent had failed to exercise his right to appoint an arbitrator. At
this belated stage, now, the respondent cannot be permitted to take advantage of
its own default. In my opinion, since there is a failure on the part of the
respondent in making appointment of an arbitrator in accordance with the
agreement, the prayer cannot be granted.

   5.5 In short, the Supreme Court rejected the request on behalf of the
respondent to fall back upon the arbitration clause in the agreement for
appointment of the arbitrator. The situation is no different here. Here, also
the petitioner had approached the Railway officials by a proper notice whereupon
the Railways could have proceeded in terms of the agreement and more
particularly Clause 63 whereunder a panel of Railway officials of certain
standards could have been suggested and could have been considered for
appointment of an arbitrator or arbitral tribunal as the case may be, that was
not done in time, instead the petitioner company was driven to file this
application before this Court. It is only after this application was filed that
the machinery of the Railways moved to take steps for appointment of the
arbitrator which action was clearly barred by time. However, now the Railway
administration is insisting to fall back upon the procedure as emerges from
Clause 63 of the agreement. In my opinion such a course cannot be taken in view
of the aforementioned judgments of the Supreme Court. It is not possible now for
the respondent to contend that the agreement should still be adhered to an the
appointment of the arbitrator should be made in accordance with that agreement.

   6. On this backdrop, it would be necessary to examine the rulings relied upon
by the respondent. In a Ruling of the Madras High Court in Kamala Solvent v.
Manipal Finance Corporation Limited (supra) the Learned Single Judge of that
Court took a view that under Section 11(6) of the Act the Chief Justice is not
to make any appointment but to enforce or direct the parties to appoint in terms
of the agreement entered into between them. For this view, the Learned Single
Judge has relied on the observation in paragraph 5 of the off quoted decision in
Konkan Railway Corporation Limited v. Mehul Construction Co. . In my opinion
those

   observations do not pertain to the situation covered in the present case. In
my opinion, the decision is not applicable. It is not even suggested in
paragraph 5 that the Chief Justice would have to revert back to the appointment
procedure. In my opinion, the words "party may request the Chief Justice or any
person or institution designated by him to take necessary measure" suggest a
wider discretion in the Chief Justice. He has to use his judicial discretion for
taking measures. The situation is now settled that the act of the Chief Justice
in appointing an arbitrator under Section 11 is not an administrative act, but a
Judicial function. If that is so, a wider discretion has to be read in the Chief
Justice for taking the necessary measures and such measures could be even an
appointment of an arbitrator, independent of the appointment procedure agreed
upon by the parties.

   6.1 In the decision of the Kerala High Court in the case of Bel House
Associate Pvt. Ltd. v. GM. Southern Railway AIR 2001 Ker 163 (supra) the Learned
single Judge of that Court took the view that where the procedure for
appointment has been agreed upon by the parties, the Chief Justice has to take
necessary measures for securing the appointment in terms of the arbitration
agreement. The Learned Judge had taken a view that while Sub-section (4) and (5)
of Section 11 of the Act authorise the Chief Justice to appoint an arbitrator.
The wording of Section 11(6) was different where-under the Chief Justice had to
take measures for securing the appointment and therefore when the procedure has
been agreed upon between the parties for appointment of an arbitrator, the Court
has only to implement the above procedure and there was no scope for appointing
any independent arbitrator at the first instance. In taking this view the
Learned Judge dissented from the views taken by the Andhra Pradesh High Court in
the case of Deepak Galvanising and Engg. Industries P. Ltd. v. Govt. of India
reported in (1997) (30) Arbi LR 635 Delhi High Court in the case of Continental
Construction Limited v. N.H.P.C. Ltd. reported in (1998) 1 Arbi LR 534 and R. P.
Souza & Co. v. Chief Engineer P.W.D. The Bombay decision is irrelevant. Learned
Counsel very heavily relied on this Kerala High Court judgment to suggest that
even if there was a default on the part of the Railways, I should again revert
back to the procedure stipulated in Clause 63 of the agreement and not to
appoint an independent arbitrator. It has already been shown that this case is
no different from the case of Punj Lloyd Ltd. v. Petronet MHB Ltd. (supra).
There also a specific procedure vide Clause 14.1 in the agreement was
contemplated for appointment of the arbitrator. However the Supreme Court did
not allow the parties to revert back to that procedure and also disapproved of
the view taken by the High Court to that effect. The High Court had also asked
the parties to act in terms of Clause 14.1 and, thus, had directed the parties
to act as required under the procedure agreed upon. In short, therefore, the
High Court had taken the necessary measure, which was not approved by the
Supreme Court.

   7. In view of this it would not be possible for me to accept the contention
that now the appointment of the arbitrator should be made in terms of the
procedure agreed upon between the parties. In my view there has to be an
independent arbitrator particularly because the opposite party would be deemed
to have abdicated their authority and have forfeited their right to appoint the
arbitrator as per the arbitration clause and therefore the Court would be
entitled to appoint an independent arbitrator of its choice to decide the
dispute. In my view the wording of Section 11(6) of the Act cannot be narrowly
interpreted and secondly. I would hold that the Chief Justice would have the
discretion to appoint the arbitrator as per his own choice in his own
discretion.

   7.1 There would be one other way of looking at this problem. If the
interpretation as suggested by the counsel for the railways is accepted and if
it is to be held that the Chief Justice has no discretion in the matter and has
to stick to the arbitration agreement then the party to the agreement would not
be required to act at all in pursuance of the notice sent to it for appointment
of an arbitrator because even if the other party is required to go on account of
the default of the other party to the Chief Justice under Section 11(6) of the
Act, the same results would have to ensure. Then the Chief Justice would have to
again direct the parties to act in terms of the agreement. One party to the
agreement would in such case have an unfair advantage on the other in the sense
that it would be possible for such a party to take advantage of its own default.
The defaulting party is likely to perpetrate the dispute or gain the time and
thus would be able to steal an unfair advantage over the other sheerly by
committing default by not acting in terms of the notice sent to it by the
opposite party. Such cannot be the interpretation of Section 11(6). The learned
Judges of the Madras High Court Kamala Solvent v. Manipal Finance Corporation
Ltd. (supra)] Kerala High Court Bel House Associate Pvt. Ltd. v. GM, Southern
Railway AIR 2001 Ker 163 (supra) and Madhya Pradesh High Court Subhas Projects &
Marketing Ltd. v. South Eastern Coal Fields Ltd. (supra) have not considered
this

   particular angle. It would be for the Chief Justice to consider as to whether
the party which was supposed to take action as per the notice has gained unfair
advantage over the other sheerly by committing default in spite of services of
notice by the other party. The Chief Justice may feel that way and would be
perfectly within his right to appoint an independent arbitrator ignoring the
procedure in the agreement.

   8. There is nothing in the language of Section 11(6) to suggest that the
Chief Justice has to only enforce agreement. The words 'a party may request the
Chief Justice or any person or institution designated by him to take necessary
measure' would have to be read broadly to include the discretion in the Chief
Justice appoint an independent arbitrator of his choice. Taking this view it has
to be held that the submission on the part of the counsel for the Railways to
fall back on the agreement would be of no consequence and is to be rejected.

   9. I, therefore, hold that the view expressed by the Madras High Court in
Kamala Solvent v. Manipal Finance Corporation Ltd. (supra), Kerala High Court in
Bel House Associate Pvt. Ltd. v. GM, Southern Railway AIR 2001 Ker 163 (supra)
and Madhya Pradesh High Court in Subhas Projects & Marketing Ltd. v. South
Eastern Coal Fields Ltd. (supra) is not the correct view. I therefore, choose to
agree with the view expressed by the Andhra Pradesh High Court in the case of
Deepak Galvanising and Engg. Industries P. Ltd. v. Govt. of India (supra) Delhi
High Court in the case of Continental Construction Limited v. N.H.P.C. Ltd.
(supra).

   10. Accordingly, I hold that there has been a default on the part of the
respondent which would require appointment of an arbitrator. In my opinion, the
arbitrator would have to be a person who is conversant with the Railway laws and
contracts and an experienced High Court Judge would be a proper person to act as
an independent arbitrator. I accordingly proceed to appoint Hon'ble Justice D.
P. Kundu, a retired Judge of this Court as the sole arbitrator in the matter on
such terms as would be decided by the Arbitrator.

   11. At this stage Sri Mukherjee, learned Counsel for the respondent, sought
for stay of operation of the order. It will not be fair to stay the operation of
the order now as considerable time has elapsed since the petitioner approached
the Railways for appointment of arbitrator. The request is, therefore, rejected.

   12. The Arbitrator and all parties are to act on a xerox signed copy of this
judgment.