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Section 11 in The Arbitration Act, 1940
Section 2(e) in The Arbitration Act, 1940
Section 34 in The Arbitration Act, 1940
Section 9 in The Arbitration Act, 1940
Article 45 in The Constitution Of India 1949

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Andhra High Court
Paramita Constructions Pvt. ... vs Ue Devlopment India (P) Ltd. on 27 March, 2008
Equivalent citations: 2008 (3) ALT 440
Author: V Rao
Bench: V Rao

ORDER V.V.S. Rao, J.

1. Paramita Constructions Private Limited (PCPL), Hyderabad (Andhra Pradesh) filed the instant application under Sections 11(2), and (6) of the Arbitration and Conciliation Act, 1996 (the Act, for brevity), read with Scheme to Appointment of Arbitrators 2002. They seek appointment of sole arbitrator to adjudicate disputes between applicant and UE Development India (P) Limited (UDIPL), Bangalore (Kamataka).

2. The brief fact of the matter is that the Government of Andhra Pradesh awarded the work of Tuni-Anakapalli Road Project (TARP) to GMR Tuni Anakapalli Expressways Private Limited, the employer, who in turn on 10-1-2002 entered into contract for the construction of strengthening of existing 4 lanes from KM 28/0 to KM 67/0 and widening of the existing 2 lanes from KM 67/0 to KM 121/0 to 4 lane dual carriageway and strengthening thereof, known as TARP. In turn, the main contractor entered into the main subcontract with UDIPL. They in turn, entered into a further subcontract with PCPL for bridge works and road works separately on the stretch of TARP i.e., NH 5 KM 300 + 000 KM 359 + 200, under bridge works agreement dated 25-06-2002. PCPL completed works by 30-10-2006. It is alleged that disputes arose with regard to payment of amounts. Even after expiry of defect liability period of ten months, UDIPL did not pay amounts claimed by applicant, in the bills.

3. Clause 20 of Subcontract Agreement provides that disputes or differences arising between UDIPL and PCPL shall be referred to arbitrator in accordance with Clause 45 of PCPL contract. These two clauses read as below.

20. Arbitration

(i) If any dispute or difference arises between the Contractor and the Subcontractor arising out or in connection with this Agreement of the carrying out the subcontract works (including but not limited to any dispute as to payment) the same shall subject to the following sub clauses, be referred to the arbitration and final decision as agreed in the LOA and Main Subcontract.

45. Dispute Resolution Procedure 45.1 Amicable Resolution 45-1-1 Save where expressly stated to the contrary in this Agreement, any dispute, difference or controversy of whatever nature between the Parties, howsoever, arising under, out of or in relation to this Agreement including disputes, if any, with regard to any acts, decision or opinion of the Project Company Representative and so notified in writing by either Party to the other (the "Dispute") shall in the first instance be attempted to be resolved amicably in accordance with the procedure set out in Article 45.1.2 below.

45.1.2 Either Party may require such Dispute to be referred to a director of each Party for amicable settlement. Upon such reference, the two shall meet at the earliest mutual convenience and in any event within 15 days of such reference to discuss and attempt to amicably resolve the Dispute. If the Dispute is not amicably settled within 15 (fifteen) days of such meeting between the two, either Party may refer the dispute to a Mediator pursuant to Article 45.2.

45.2 (omitted in this order) 45.3 Arbitration Procedure Subject to the provisions of Article 45.1 and 45.2, any dispute which is not resolved by amicable resolution between the Parties or by a reference to mediation, shall be finally settled by binding arbitration under the Arbitration Act. The arbitration shall be by a panel of three arbitrators, one to be appointed by each Party and the third to be appointed by the two arbitrators appointed by the Parties. The Party requiring arbitration shall appoint an arbitrator in writing, inform the other Party about such appointment and call upon the other Party to appoint its arbitrator. If within 15 days of receipt of such intimation the other Party fails to appoint its arbitrator, the Party seeking appointment of arbitrator may take further steps in accordance with Arbitration Act.

45. 4 Place of Arbitration The place of arbitration shall be:

45.4.1 New Delhi for all Disputes arising out of or relating to Concession Agreement Events;

45.4.2 Bangalore for all other Disputes including related disputes.

4. In purported invocation of arbitration clause, PCPL addressed a letter dated 03-4-2006 to UDIPL raising as many as eleven claims amounting to Rs. 6,22,76,839/- due to them with a request to settle them. PCPL also sent two more such letters on 18-6-2006 and 01-7-2006. Reacting thereto, UDIPL sent series of letters dated 11-6-2006, 19-6-2006 and 17-8-2006. In sum and substance, UDIPL pointed out that PCPL is not entitled for various additional payments and that PCPL already issued "no claim certificate" and signed Statement of Final Account (SoFA). Then PCPL invoked mediation as per Clause 45.2 and issued a letter dated 28-3-2006 pointing out three retired Chief Engineers (CEs) as "third party mediator". PCPL also requested UDIPL to release bank guarantees.

5. They allegedly insisted on PCPL issuing no claim certificate as a pre-condition for such release. In spite of the same, PCPL pursued with the efforts for amicable settlement and requested Indian Road Congress to appoint third party arbitrator. Mr. R.H. Sarma, Retired CE, was appointed as third party mediator. This is informed to UDIPL, in vain. Ultimately by notice dated 30-5-2007, PCPL purporting to invoke Clause 45.3, appointed a Retired CE as member of Arbitrary Tribunal requesting UDIPL to appoint their arbitrator. It was informed that sub-contract has been fully discharged by both parties, that entire outstanding amount was paid to PCPL, that PCPL issued no claim certificate and signed SoFA, that contractual issues are deemed to be fully and finally settled and that invocation of Clause 45.3 has no legal/contractual basis. Therefore, present application is filed.

6. Respondent filed counter affidavit. Two objections are raised. First, Hon'ble Chief Justice (CJ) of High Court of Karnataka at Bangalore has jurisdiction under Section 11(6) of the Act and CJ of High Court of Andhra Pradesh is not the forum. In terms of Clause 45.4.2 of main contract, Bangalore is designated by parties as place of arbitration and hence CJ of Karnataka alone has jurisdiction to hear matter pertaining to appointment of arbitrator. Secondly, PCPL voluntarily issued SoFA dated 05-12-2005, declaring that there are no further claims under sub-contract. Arbitral dispute does not exist as PCPL issued "no claim certificate" accepting satisfaction of entire claim. Other allegations regarding completion of works, expiry of defect liability period etc., are denied.

7. Learned Counsel for applicant submits that contract between parties enables applicant to approach CJ of Andhra Pradesh for appointment of arbitrator and Clause 45.4.2, which provides for place of arbitration, does not bar the same. He placed reliance on Section 11(11) of the Act to sustain the argument. Nextly he contends that mere signing of SoFA or certificate of payment cannot lead to an inference that an arbitral dispute does not exist and even where such no claim is recorded party to the contract can still seek arbitration. According to learned Counsel, SoFA and certificate of payment were issued while making part payments during execution of works and it is common practice in the accounting procedures followed by UDIPL. Learned Counsel placed reliance on Bharat Heavy Electricals Ltd. v. Amar Nath Bhan Prakash , Jayesh Engineering Works v. New India Assurance Co. Ltd. , Chairman and MD, NTPC Ltd. v. Reshmi Constructions , SBP and Co v. Patel Engineering Ltd. 205 (7) SCJ 461 : 2005 (6) ALT 37.1 (DN SC) : (2005) 8 SCC 618 and Shree Ram Mills Ltd. v. Utility Premises (P) Ltd. 2007 (6) SCJ 171 : (2007) 4 SCC 599.

8. Learned Counsel for respondent submits that when parties choose place of arbitration, it would give clear indication as to the authority competent to appoint an arbitrator under Section 11(6) of the Act. He relies on the Law and Practice of Arbitration and Conciliation by O.P. Malhotra (Second edition), Comparative International Commercial Arbitration by Julian DM Lew QC, Loukas A Mistelis and Stefan M Kroll and Law and Practice of International Commercial Arbitration by Redfern and Hunter. He nextly contends that when no claim certificate was given without coercion and unequivocally satisfaction of claim has to be readily presumed, in which event an arbitral dispute does not exist for the purpose of Section 11(6) of the Act. He placed reliance on State of Maharashtra v. Nav Bharat Builders 1994 Supp. (3) SCC 83, P.K. Ramaiah v. Chairman and MD, NTPC 1984 Supp. (3) SCC 126, Nathani Steels Ltd. v. Associated Constructions 1995 Supp. (3) SCC 324, Reshmi Constructions and Patel engineering Ltd. 2005 (7) SCJ 461 : 2005 (6) ALT 37.1 (DN SC) : (2005) 8 SCC 618.

9. First question is with regard to jurisdiction of Hon'ble CJ of Andhra Pradesh or person designated to entertain application under Section 11(6) of the Act. Consideration of this requires reference to Section 2(e) and Sub-sections (2), (5), (11), and 12(a) and (b) of Section 11 of the Act. They read as below.

Section 2(e) "Court" means the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any civil court of a grade inferior to such principal Civil Court, or any Court of Small Causes.

Appointment of arbitrators.

11. (2) Subject to Sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

(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.

(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 matters referred to in Sub-sections (4), (5), (6), (7) 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.

10. Before attempting a conspectus of the extracted provisions9, it is necessary to refer to the scheme of the Act in Chapters II and VII. The former provides for arbitration agreement and power of parties to refer to arbitration. Section 8 of the Act lays down that 'judicial authority' before which application is moved, may refer the matter to arbitration where there is an agreement. Section 9 of the Act speaks of power of "a Court" to grant interlocutory order before or during arbitral proceedings. Such power, however, is not available when proceedings are taken out for enforcing arbitral award as per Section 36 of the Act. Be that as it is, Chapter VII contains Section 34 and provides for setting aside aw; rd by "the Court" for the grounds provided therein. Section 37 (Chapter IX) provides for an appeal against original orders of "the Court" to such Court authorized by law. Read with Section 96 and Order XLIII of Code of Civil Procedure 1908 (CPC), it means against any order of "the Court" under the Act either in an application under Section 9 (non-set aside application) or any application under Section 34 (set aside application) of the Act, an appeal would lie to High Court.

11. An analysis of provisions extracted hereinabove would show the following. "The Court" means, Principal Civil Court of original jurisdiction in a District in exercise of its ordinary original jurisdiction, having jurisdiction to decide questions forming the subject matter of arbitration, if the same had been subject matter of a suit. However, any Civil Court of grade inferior to Principal Civil Court or Court of Small Causes is excluded. As per Section 2(e) of the Act, High Court in exercise of its ordinary original jurisdiction having jurisdiction to decide questions regarding subject matter, if the same had been subject matter of suit, is held "the Court" for the purpose of the Act.

12. Definition of "the Court" as contained in Section 2(e) of the Act can be split into three parts: main part, inclusionery part and exclusionary part. Main part defines "the court" as Principal Court of original jurisdiction in a District, which has jurisdiction to decide subject matter of arbitration. Inclusionery part specifically includes High Court having original jurisdiction over subject matter. Exclusionary part excludes any Civil Court of a grade inferior to Principal Civil Court or any Court of Small Causes. Understanding Section 2(e) is very important for two reasons. Any award can be set aside, on an application, only by a Principal Civil Court i.e., Principal District Court, and against such award appeal would lie to High Court within whose jurisdiction such District Court is situated. Therefore, Principal District Court having jurisdiction over subject matter of a suit is alone "the Court" for the purpose of the Act.

13. There is no dispute or denial that parties are at liberty to agree on the place of arbitration in the absence of which it is for arbitral tribunal to determine the place of arbitration. Is it always necessary for the parties to agree on the place of arbitration by indicating in the agreement or can it be derived from other clauses of agreement? The place of arbitration and subject matter of arbitration are not one and the same.

14. The parties to the agreement may accept arbitration to be held at a place or at a country other than place where subject matter is situated. In such an event, it is only the Court where subject matter is situated, which has jurisdiction, and it is only that "the High Court" which exercises control over such Principal Civil Court. Visualizing such situations, Legislature has drafted Section 11 of the Act comprehensively. Under Section 11(2) of the Act, freedom of parties to agree on a procedure for appointing arbitrators is recognized. Read with Section 20(1) of the Act, the parties are free to agree on a procedure for appointing arbitrators and also choose place of arbitration. In case parties fail to agree to arbitrator/arbitrators, either of them can move CJ of High Court for appointment of arbitrator.

15. A reading of Section 11(11) and 11(12)(b) of the Act would lead to following. If more than one application for appointment of arbitrator is made for appointment of arbitrator to CJs of different High Courts or persons designated, CJ or any person designated, to whom the request is made first, shall alone be competent to decide request. On its own, Section 11(11) of the Act is not conclusive regarding territorial supremacy. Reading of Section 11(11) with Section 11(12)(b)of the Act shows that 'CJ' in Sub-sections (4), (5), (6), (7), (8) and (10) of Section 11 of the Act, means CJ of High Court within whose local limits Principal Civil Court is situated. Therefore if place of arbitration is indicated in agreement, Principal Civil Court situated at agreed place of arbitration shall be Court for the purpose of filing of set aside or non-set aside application. If this is not adopted, in a given situation, parties would be without any remedy under Section 34 of the Act to seek setting aside award. Thus the place of arbitration assumes significance.

16. In their book Comparative International Commercial Arbitration, learned Authors, Julian DM Lew QC, Loukas A Mistelis and Stefan M Kroll, explain importance of place of arbitration as under.

The Seat of Arbitration 8-24 The choice of the place or seat of arbitration is one of the key issues in drafting an arbitration agreement. First, it may influence which law governs the arbitration. Second, it has a bearing on the issue which courts can exercise supervisory and supportive powers in relation to the arbitration. Third, the place of arbitration determines the nationality of the award which is relevant for the ultimate enforcement of the award.

8-25 For these reasons parties should check that the arbitration law and its application by the courts of the place of arbitration are supportive to the arbitration process. It is also important that the place of arbitration is in a state party to the New York Convention. Non-legal factors such as available facilities, transportation, accommodation and telecommunication also influence the choice of place of arbitration.

8-26 If the parties cannot or do not agree on the place of the arbitration the decision will be taken by the institution or the tribunal.

8-27 The seat of the arbitration must be distinguished from the place where the actual hearings take place. It may not be convenient for legal and practical reasons for the hearings to be held at the seat of the arbitration. For the avoidance of doubt parties can agree that hearings may be held elsewhere than at the place of arbitration. This is important if they subsequently wish to hold hearings in another country where, e.g., most of the witnesses and the evidence are located. Equally witnesses may be unable or unwilling to travel to the place of the arbitration or a site visit may be appropriate.

(Emphasis supplied) To the same effect are the observations of Redfern and Hunder in 'Law and Practice of International Commercial Arbitratiorl.

17. The law, therefore, is that when parties choose a particular State/City, as place of arbitration, it is an important factor in deciding "the Court" for the purpose of Section 9 and Section 34 of the Act. A reading of Section 31(4) of the Act would show that arbitrator shall state the date and place of arbitration in the award and it shall be deemed to be made at that place. Therefore, place of award is crucial in determining jurisdiction of the Court and High Court at the pre and post arbitration proceedings. When once the parties chose the place of arbitration, Section 11(11) of the Act has no application and only Section 11(12)(b) of the Act applies because an Award passed by an arbitrator at one place is only subject to territorial jurisdiction of Principal Civil Court of that place and not a different Court where in a given case either party to proceedings, may have place of business.

18. There is no dispute that in terms of Clauses 45.4.2 of Main contract, which forms part of subcontract, the parties agreed to "Benguluru" as place of arbitration for all other/related disputes, other than the disputes arising out of concession agreement. When the parties agreed Benguluru as a place of arbitration, impliedly parties also agreed Principal Civil Court of Benguluru as "the Court" for the purpose of Section 9 and Section 34 read with Section 2(e) of the Act. Therefore, Hon'ble CJ of A.P. High Court or any person designated by him, has no jurisdiction to entertain application. Furthermore, respondent's registered office is situated in Bangalore, the contract was entered into, correspondence made, payments and execution of other documents like certificate of payment, Statement of Final Account etc., were all at Benguluru. The application therefore is not maintainable before this Court.

19. In view of the finding on the first question holding Hon'ble CJ of Andhra Pradesh has no jurisdiction to entertain application for appointment of sole arbitrator to adjudicate claims and disputes between applicant and respondent, second question as to whether the application is barred, and that applicant allegedly executed Statement of Final Account and certificate of no claim, need not be gone into.

20. The Arbitration Application is accordingly dismissed.