Datar Switchgears Ltd vs Tata Finance Ltd. & Anr on 18 October, 2000

    CASE NO.:

Special Leave Petition (civil) 13812 of 2000

PETITIONER:

DATAR SWITCHGEARS LTD.

 Vs.

RESPONDENT:

TATA FINANCE LTD. & ANR.

DATE OF JUDGMENT: 18/10/2000

BENCH:

K.G.Balakrishnaan, M.J.Rao

JUDGMENT:

Balakrishnan, J.

Leave granted.

L.....I.........T.......T.......T.......T.......T.......T..J

      The appellant challenges an order passed by the Chief Justice of Bombay
High Court, under Section 11 of the Arbitration and Conciliation Act, 1996 [for
short, "the Act"]. The appellant had entered into a lease agreement with the 1st
respondent in respect of certain machineries. Dispute arose between the parties
and the 1st respondent sent a notice to the appellant on 5.8.1999 demanding
payment of Rs. 2,84,58,701 within fourteen days and in the notice it was
specifically stated that in case of failure to pay the amount, the notice be
treated as one issued under Clause 20.9 (Arbitration clause) of the Lease
Agreement. The appellant did not pay the amount as demanded by the 1st
respondent. The 1st respondent did not appoint an Arbitrator even after the
lapse of thirty days, but filed Arbitration Petition No. 405/99 on 26.10.99
under Section 9 of the Act for interim protection. On 25.11.99, the 1st
respondent appointed the 2nd respondent as the sole Arbitrator by invoking
clause 20.9 of the Lease Agreement and the Arbitrator in turn issued a notice to
the appellant asking them to make their appearance before him on 13th March,
2000. Thereafter, the appellant filed Arbitration Application No. 2/2000 before
Hon'ble the Chief Justice of Bombay and prayed for appointment of another
Arbitrator and the 1st respondent opposed this application. This petition was
rejected by the Chief Justice holding that as the Arbitrator had already been
appointed by the first respondent, the Lessor, the petition was not
maintainable. This order is challenged before us.

      We heard the appellant's Counsel Mr. V.A. Mohta and respondent's Counsel
Mr. R.F. Nariman. The appellant's Counsel questioned the authority of the 1st
respondent in appointing an Arbitrator after the long lapse of the notice period
of 30 days. According to the appellant, the power of appointment should have
been exercised within a reasonable time. The appellant's Counsel also urged that
unilateral appointment of Arbitrator was not envisaged under the Lease Agreement
and the 1st respondent should have obtained the consent of the appellant and the
name of the Arbitrator should have been proposed to the appellant before
appointment. On the other hand, the Counsel for the 1st respondent supported the
impugned order.

      Learned counsel for the appellant , Shri V.A. Mohta argued that the order
passed by the Chief Justice is amenable to Article 136 of the Constitution of
India. Even if it is an administrative order as decided by a three Judge Bench
in Konkan Railway Corporation Ltd. Vs. M/s Mehul Construction Co. 2000(6) SCALE
71, it is amenable to Article 136. Learned Senior Counsel for the 1st
respondent, Shri R.F. Nariman, however, stated that in this case we need not go
into this controversy and we may decide the matter on merits on the assumption
that Article 136 is attracted. In view of the above stand taken for the
respondents, we are not deciding the question of maintainability.

      The Arbitration and Conciliation Act, 1996 made certain drastic changes in
the Law of Arbitration. This Act is codified in tune with the Model Law on
International Commercial Arbitration as adopted by the United Nations Commission
on International Trade Law (UNCITRAL). Section 11 of the Act deals with the
procedure for appointment of Arbitrator. Section 11(2) says that the parties are
free to agree to any procedure for appointing the Arbitrator. If only there is
any failure of that procedure, the aggrieved party can invoke sub-clause (4),
(5) or (6) of Section 11, as the case may be. In the instant case, the
Arbitration clause in the Lease Agreement contemplates appointment of a sole
Arbitrator. If the parties fail to reach any agreement as referred to in Sub-
Section (2), or if they fail to agree on the Arbitrator within thirty days from
receipt of the request by one party, the Chief Justice can be moved for
appointing an Arbitrator either under sub-clause (5) or sub-clause (6) of
Section 11 of the Act.

      Sub-clause (5) of Section 11 can be invoked by a party who has requested
the other party to appoint an Arbitrator and the latter fails to make any
appointment within thirty days from the receipt of the notice. Admittedly, in
the instant case, the appellant has not issued any notice to the 1st respondent
seeking appointment of an Arbitrator. An application under sub-clause (6) of
Section 11 can be filed when there is a failure of the procedure for appointment
of Arbitrator. This failure of procedure can arise under different
circumstances. It can be a case where a party who is bound to appoint an
Arbitrator refuses to appoint the Arbitrator or where two appointed Arbitrators
fail to appoint the third Arbitrator. If the appointment of Arbitrator or any
function connected with such appointment is entrusted to any person or
institution and such person or institution fails to discharge such function, the
aggrieved party can approach the Chief Justice for appointment of Arbitrator.

      The appellant in his application does not mention under which sub- section
of Section 11 the application was filed. Evidently it must be under Sub-section
(6) (a) of Section 11, as the appellant has no case that a notice was issued but
an Arbitrator was not appointed or that there was a failure to agree on certain
Arbitrator. The contention of the appellant might be that the first respondent
failed to act as required under the procedure.

      Therefore, the question to be considered is whether there was any real
failure of the mechanism provided under the Lease Agreement. In order to
consider this, it is relevant to note the Arbitration clause in the Agreement.

      Clause 20.9 of the Agreement is the Arbitration clause, which is to the
following effect:-

      20.9 " It is agreed by and between the parties that in case of any dispute
under this Lease the same shall be referred to an Arbitrator to be nominated by
the Lessor and the award of the Arbitrator shall be final and binding on all the
parties concerned. The venue of such arbitration shall be in Bombay. Save as
aforesaid, the Courts at Bombay alone and no other Courts whatsoever will have
jurisdiction to try suit in respect of any claim or dispute arising out of or
under this Lease or in any way relating to the same."

      The above clause gives an unfettered discretion to the 1st respondent-
lessor to appoint an Arbitrator. The 1st respondent gave notice to the appellant
and later appointed the 2nd respondent as the Arbitrator. It is pertinent to
note that no notice period is prescribed in the above arbitration clause and it
does not speak about any concurrence or consent of the appellant being taken in
the matter of the choice of Arbitrator.

      The question then arises whether for purposes of Section 11(6) the party
to whom a demand for appointment is made, forfeits his right to do so if he does
not appoint an arbitrator within 30 days. Learned Senior counsel for the
appellant contends that even though Section 11(6) does not prescribe a period of
30 days, it must be implied that 30 days is a reasonable time for purposes of
Section 11(6) and thereafter, the right to appoint is forfeited. Three judgments
of the High Courts from Bombay, Delhi and Andhra Pradesh are relied upon in this
connection.

      Learned Senior counsel for the respondents submits that the Bombay, Delhi
and Andhra pradesh cases relied upon are distinguishable. It is also contended
that under Section 11(6) no period of time is prescribed and hence the opposite
party can make an appointment even after 30 days, provided it is made before the
application is filed under Section 11.

      The appellant contended that the 1st respondent did not appoint the
Arbitrator within a reasonable period and that amounts to failure of the
procedure contemplated under the Agreement. Our attention was drawn to a
decision of the Bombay High Court reported in 1999(2) Bombay CR. 189 (Naginbhai
C. Patel Vs. Union of India). There, the petitioner, a Govt. Contractor, as per
the form of the Arbitration clause requested the Secretary P.W.D to appoint the
arbitrator. The Secretary, P.W.D. did not take any action and the petitioner
filed an application under Section 11(6) of the Act. After the filing of this
application, the respondent appointed an Arbitrator and urged before the Chief
Justice that application under Section 11(6) filed by the petitioner became
infructuous. It was held that the petitioner had waited for 30 days for
appointment of the arbitrator and as the respondent had failed to appoint the
arbitrator the objection was not sustainable and the appointment of arbitrator
made by the respondent was not valid in the eye of law.

      The above decision has no application to the facts of this case as in the
present case, the Arbitrator was already appointed before the appellant invoked
Section 11 of the Act. The Counsel for the appellant contended that the
Arbitrator was appointed after a long lapse of time and that too without any
previous consultation with the appellant and therefore it was argued that the
Chief Justice should have appointed a fresh arbitrator. We do not find much
force in this contention, especially in view of the specific words used in the
Arbitration clause in the Agreement, which is extracted above. This is not a
case where the appellant requested and gave a notice period for appointment of
arbitrator and the latter failed to comply with that request. The 1st respondent
asked the appellant to make payment within a stipulated period and indicated
that in the event of non-payment of the amount within fourteen days, the said
notice itself was to be treated as the notice under the Arbitration clause in
the Agreement. The amount allegedly due from the appellant was substantial and
the 1st respondent cannot be said to be at fault for having given a larger
period for payment of the amount and settling the dispute. It is pertinent to
note that the appellant did not file an application even after the 1st
respondent invoked Section 9 of the Act and filed a petition seeking interim
relief. Under such circumstances, it cannot be said that there was a failure of
the procedure prescribed under the contract.

      The decision of the Delhi High Court in B.W.L. Ltd. Vs. MTNL & Ors.
[2000(2) Arb. LR 190 (Del.)] decided on 23.2.2000 is also distinguishable
inasmuch as the respondent, in spite of being given opportunity on 11.10.99 by
the Court after filing of the application under Section 11 to appoint an
arbitrator, failed to do so and the Court felt that it was a fit case for
appointment of an arbitrator under Section 11. This case is also distinguishable
as the appointment was not made before the filing of the application under
Section 11.

      In Sharma & Sons vs. Engineer-in-Chief, Army Headquarters, New Delhi &
Ors. [2000 (2) Arb.LR 31 (AP)], the respondents were requested on 26.6.95,
6.8.95 and other dates in 1997 to appoint an arbitrator. Application under
Section 11 was filed after nearly 4 years on 21.4.99. Only thereafter the
respondent appointed an arbitrator on 13.5.99, but only in respect of some of
the disputes. The respondent felt that the other disputes were outside the ambit
of the arbitration clause. The High Court of Andhra pradesh held that in view of
Section 11(6) read with Section 11(8) the respondent had forfeited his right to
appoint an arbitrator after the expiry of 30 days from the date of demand for
arbitrator. Even in the above case, the appointment was not made before the
application under Section 11 was filed. Hence, the case is not applicable to the
facts of this case.

      In all the above cases, therefore, the appointment of the arbitrator was
not made by the opposite party before the application was filed under Section
11. Hence, all the above cases are not directly in point.

      In the present case, the respondent made the appointment before the
appellant filed the application under Section 11 but the said appointment was
made beyond 30 days. Question is whether in a case falling under Section 11(6),
the opposite party cannot appoint an arbitrator after the expiry of 30 days from
the date of demand?

      So far as cases falling under Section 11(6) are concerned -- such as the
one before us -- no time limit has been prescribed under the Act, whereas a
period of 30 days has been prescribed under Section 11(4) and Section 11(5) of
the Act. In our view, therefore, so far as Section 11(6) is concerned, if one
party demands the opposite party to appoint an arbitrator and the opposite party
does not make an appointment within 30 days of the demand, the right to
appointment does not get automatically forfeited after expiry of 30 days. If the
opposite party makes an appointment even after 30 days of the demand, but before
the first party has moved the Court under Section 11, that would be sufficient.
In other words, in cases arising under Section 11(6), if the opposite party has
not made an appointment within 30 days of demand, the right to make appointment
is not forfeited but continues, but an appointment has to be made before the
former files application under Section 11 seeking appointment of an arbitrator.
Only then the right of the opposite party ceases. We do not, therefore, agree
with the observation in the above judgments that if the appointment is not made
within 30 days of demand, the right to appoint an arbitrator under Section 11(6)
is forfeited.

      In the present case the respondent made the appointment before the
appellant filed the application under Section 11(6) though it was beyond 30 days
from the date of demand. In our view, the appointment of the arbitrator by the
respondent is valid and it cannot be said that the right was forfeited after
expiry of 30 days from the date of demand.

      We need not decide whether for purposes of sub-clauses (4) and (5) of
Section 11, which expressly prescribe 30 days, the period of 30 days is
mandatory or not.

      While interpreting the power of the Court to appoint arbitrator under
Section 8 of the Arbitration Act, 1940, this Court in Bhupinder Singh Bindra Vs.
Union of India and Another (1995) 5 SCC 329, in para 3 held as under:-

      "It is settled law that court cannot interpose and interdict the
appointment of an arbitrator, whom the parties have chosen under the terms of
the contract unless legal misconduct of the arbitrator, fraud, disqualification
etc. is pleaded and proved. It is not in the power of the party at his own will
or pleasure to revoke the authority of the arbitrator appointed with his
consent. There must be just and sufficient cause for revocation."

      When parties have entered into a contract and settled on a procedure, due
importance has to be given to such procedure. Even though rigor of the doctrine
of "freedom of contract" has been whittled down by various labour and social
welfare legislation, still the court has to respect the terms of the contract
entered into by parties and endeavor to give importance and effect to it. When
the party has not disputed the arbitration clause, normally he is bound by it
and obliged to comply with the procedure laid down under the said clause.

      Therefore, we do not think that the first respondent, in appointing the
second respondent as the Arbitrator, failed to follow the procedure contemplated
under the Agreement or acted in contravention of the Arbitration clause.

      Lastly, the appellant alleged that "nomination" mentioned in the
arbitration clause gives the 1st respondent a right to suggest the name of the
Arbitrator to the appellant and the appointment could be done only with the
concurrence of the appellant. We do not find any force in the contention.

      In P. Ramanatha Aiyar's Law Lexicon (2nd Edition) at page 1310, the
meaning of the word 'Nomination" is given as follows:- "The action, process or
instance of nominating;

2. The act, process or an instrument of nominating; an act or right of
designating for an office or duty.

      "Nominations" is equivalent to the word "appointments", when used by a
mayor in an instrument executed for the purpose of appointing certain persons to
office."

      Nomination virtually amounts to appointment for a specific purpose and the
1st respondent has acted in accordance with Section 20.9 of the Agreement. So
long as the concurrence or ratification by the appellant is not stated in the
arbitration clause, the nomination amounts to selection of the Arbitrator.

      Hence, the appellant, while filing the application under Section 11 of the
Act had no cause of action to sustain the same as there was no failure of the
agreement or that the 1st respondent failed to act in terms of the agreement.
The application was rightly rejected. The appeal deserves to be and is
accordingly dismissed, however, without any order as to costs.

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