MUNICIPAL CORPORATION, JABALPUR & ORS Vs. M/S RAJESH CONSTRUCTION CO
 INSC 404 (13 April 2007)
TARUN CHATTERJEE & P.K. BALASUBRAMANYAN
[ Arising out of S.L.P. (C) Nos.19332-33 of 2005 ] TARUN CHATTERJEE,J.
This appeal is directed against the judgments and final orders dated 29th July 2004 and 8th April, 2005 passed by a learned Judge of the High Court of Madhya
Pradesh at Jabalpur in M.C.C. No. 3295 of 2003 and M.C.C. No. 1579 of 2004. By
the order dated 29th July 2004, learned Judge of the High Court appointed Mr.
Justice B.C. Verma, a retired Chief Justice of the Punjab and Haryana High
Court, as sole arbitrator to adjudicate upon disputes between the appellants
and the respondent herein. The order dated 8th April, 2005 passed in MCC No. 1579 of 2004 is under challenge as the application for review and/or
recall of the order dated 29th July 2004 at the instance of the appellants was
Notice was issued on the application for condonation of delay and also on
the special leave petitions by this court on 12th September 2005. After exchange of affidavits an order was passed by this court on 5th January 2007 in which one of us was a party. The said order of this court may be relevant for
our decision which is as follows:- "Having regard to the facts of the
case, we suggested to the parties that the Municipal Corporation may be
directed by this Court to constitute a Board of Arbitrators under Clause 29 of
the Agreement without any preconditions. Such an appointment should be made
within three weeks from this Court's order and the Board of Arbitrators will
take up the matter from the stage at which it has reached before the Arbitrator
appointed by the High court. The Board of Arbitrators shall thereafter conclude
the proceedings within six months."
However, this suggestion of this court made on 5th January 2007 was not accepted by the respondent and for that reason, we heard the appeal on merits.
The appellants floated a notice inviting tender for construction of a road.
Finally, half of the job was awarded to the respondent by entering into a
contract on the same terms and conditions as contained in the tender. The
tender contained various clauses; one amongst the same being Clause 29 which
pertained to arbitration in case any dispute arose between the parties and
reads thus:- "Except as otherwise provided in this contract all questions
and disputes relating to the meaning of the specifications, drawing and
instructions herein before mentioned and as to thing whatsoever, in any way
arising out or relating to the contract, designs, drawings, specifications,
estimates concerning the works or the execution or failure to execute the same,
whether arising during the progress of the work or after the completion or abandonment
there of shall be referred to the City Engineer in writing for his decision,
within a period of 30 days of such occurrence. Thereupon the City Engineer
shall give his written instructions and/or decisions within a period of 60 days
of such request. This period can be extended by mutual consent of the parties.
Upon receipt of written instructions of decisions, the parties shall
promptly proceed without delay to comply such instructions or decisions. If the
City Engineer fails to give his instructions or decisions in writing within a
period of 60 days or mutually agreed time after being requested if the parties
are aggrieved against the decision o f the C. E., the parties may within 30
days prefer an appeal of the M.P.L., Com. who shall afford an opportunity to
the parties of being heard and to offer evidence in support of his appeal. The
Com will, give his decision within 90 days. If any party is not satisfied
with the decision of the M.P.L. Com, he can refer such disputes for arbitration
by an Arbitration Board to be constituted by the Corporation which, shall
consist of three members of whom one shall be chosen from among the officers
belonging to be Urban Administration and Development Department not below the
rank of B.E. one Retired Chief Engineer of any Technical Department and City
Engineer Nagar Nigam Jabalpur, The following are also the terms of this
contract, namely, :
a) No person other than the aforesaid Arbitration Board constituted by the
Corporation (to handle cases of all Technical Departments) shall act as
Arbitrator and it for any reason that is not possible the matter shall not be
referred to Arbitration at all.
b) The Corporation may at any time effect any change in the personnel of the
Board and the new members or members appointed to the Arbitration Board shall
be entitled to proceed with the reference from the stage it was left by his or
c) The party invoking arbitration shall specify the dispute or disputes to
be referred to arbitration under this clause together with the amount or
amounts claimed in respect of each such dispute(s).
d) Where the party invoking arbitration is the contractor no reference for
arbitration shall be maintainable, unless the contractor furnishes a security
deposit of a sum determined according to the table given below, and the sum so
deposited shall on the determination of arbitration proceeding, be adjusted
against the cost, if any awarded by the Board against the party and the balance
remaining after such adjustment or in the absence of the such cost being
awarded the whole of the sum shall be refunded to him within one month from the
date of the award.
Amount of Claim Rate of Security Deposits For claim below Rs.10000/-.
5% of amount claimed For claim of Rs.10000/- and above but below Rs.1 ,00
,000/- 3% of amount claimed subject to minimum of Rs. 500/- For claims of
Rs.1,00,000/- and above 2% o f the amount claimed subject to a minimum o f Rs.
3000/ e) f) g) h) "
(Underlining is ours) Reference to sub-clauses (e) to (h) of the Arbitration
Clause 29 would not be necessary in view of the fact that the said sub-clauses
are not required to be considered for decision and accordingly are omitted.
In 2002, the respondent filed an application under Section 11(6)(c) of the
Arbitration and Conciliation Act 1996 (hereinafter called the "Act")
in the High Court of Madhya Pradesh at Jabalpur seeking appointment of an
arbitrator to adjudicate upon disputes between it and the appellants, which
came to be registered as M.C.C No. 285/2002. By an order dated 7th May 2003, a learned Judge of the High Court allowed the application directing the
appellant, Municipal Corporation, to invoke the arbitration clause and appoint
an arbitrator in compliance with Clause 29 of the contract at the earliest to
resolve the disputes between the parties. The learned Judge directed:
"In view of the aforesaid circumstances, the application filed by the
applicants under Section 11(6)(c) of the Act is hereby allowed. The respondents
are directed to invoke the arbitration clause 29 and it is directed that as
early as possible the arbitrator be appointed to resolve the dispute between
the applicant and the respondent nos. 1 and 2."
(Underlining is ours) A bare perusal of this direction made by the High Court,
while allowing the application under Section 11(6)(c) of the Act, would clearly
indicate that the Corporation was directed to invoke the arbitration clause and
appoint an Arbitration Board in compliance with Clause 29 of the contract. In
that view of the matter, we examined Clause 29 of the contract and its sub
clauses in detail from which the followings emerge:
[I] No reference for arbitration shall be maintainable unless the contractor
furnishes the security deposit of a sum determined as per the table given in
sub-clause (d) of the contract by the Corporation.
[II] Obligation of the Corporation would arise to constitute an Arbitration
Board only after the security deposit is determined by the Corporation and
deposited by the contractor.
[III] The Corporation shall constitute a Board called 'Arbitration Board'
for arbitration which shall consist of three members of whom one shall be
chosen from among the officers belonging to the Urban Administration and
Development Department not below the rank of B.E., one Retired Chief Engineer
of any Technical Department and City Engineer, Nagar Nigam, Jabalpur; subject
to compliance of (I) and (II) as noted herein above.
At the risk of repetition, we may reiterate that the High Court while
allowing the application under Section 11(6)(c) of the Act directed appointment
of the Arbitrator in terms of Clause 29 of the contract, which contained the
It may be kept on record that, on instruction, Mr. Ranjan Mukherjee,
appearing on behalf of the Corporation, submitted that the Corporation was
ready and willing to constitute an Arbitration Board in compliance with Clause
29 of the contract without any reference being made to the Chief Engineer, or
in case of failure of the Chief Engineer to take decision or give instruction
in writing to file an appeal before MPL Com and that the Arbitration Board
shall proceed from the stage at which the learned Arbitrator, appointed by the
High Court, had already reached.
Keeping in mind the aforesaid stand taken by the Corporation, we shall now
consider whether the High Court was justified in appointing a retired Chief
Justice of a High Court as the sole arbitrator to resolve the disputes raised
by the parties.
Seeking enforcement of the order of the High Court dated 7th May 2003,
invoking Clause 29 for appointment of an arbitrator, the respondent filed
another application being M.C.C.No. 3295/2003. By the impugned order, as noted
herein earlier, Mr. B.C Verma, retired Chief Justice of Punjab and Haryana High
Court was appointed by a learned Judge to act as an arbitrator to adjudicate
upon the disputes between the parties.
Aggrieved by the aforesaid order of the learned Judge of the High Court, the
appellants filed a review application before the High Court, which by the
subsequent order dated 8th April, 2005 passed in M.C.C. No. 1579 of 2004, which
is impugned in Special Leave Petition No.19333 of 2005, was rejected. Feeling
aggrieved by the aforesaid orders, this appeal has been filed by the
We have heard the learned counsel for the parties and gone through the
material put on record in detail. At the outset, it is necessary for us to
examine Section 11(6)(c) of the Act, which reads as under:
"11. Appointment of arbitrators. (1).
(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 Chief Justice or any person or institution
designated by him to take the necessary measure, unless the agreement on the
appointment procedure provides other means for securing the appointment."
[Underlining is ours) Section 11(6)(c) says that in case one of the parties to
the arbitration agreement fails to perform any function entrusted to it, the
other party shall have the right to approach the appropriate forum to take
necessary measure in that regard.
However, this provision also says that in a situation where the arbitration
agreement provides for other measures for securing the appointment of an
arbitrator, the same shall be followed.
It was contended by Mr. Ranjan Mukherjee, learned counsel appearing for the
appellants, that it was not open to the High Court to appoint an arbitrator
without complying with Clause 29 of the contract. According to him, as noted
herein earlier, the High Court by its own order dated 7th May 2003 directed
appointment of an arbitrator in compliance with Clause 29 of the contract which
clearly provides a procedure for appointment of an arbitrator and also
indicates who shall be appointed arbitrator and how he shall be appointed.
Mr. Mukherjee had brought to our notice that Clause 29 of the contract
clearly stipulated that no person other than the Arbitration Board constituted
by the Corporation would act as arbitrator provided that the party invoking
arbitration clause furnishes a security deposit of a sum determined according
to the table given in the contract itself. After such determination and on
deposit of the said sum by the party invoking arbitration clause, it would
become the duty and obligation of the Corporation to constitute an Arbitration
Board as provided in Clause 29 of the contract. Accordingly, Mr. Mukherjee
contended that since the High Court by its earlier order dated 7th of May,
2003, having directed the parties to invoke arbitration clause in compliance
with Clause 29 of the contract, it was not open to the High Court to appoint a
retired Chief Justice of a High Court as an Arbitrator before the respondent
had furnished security and before determination of the amount of security by
the Corporation, as provided in Clause 29 (d) of the contract, which clearly
says, as noted herein earlier, that no reference for arbitration shall be
maintainable unless the contractor furnishes the security deposit of a sum
determined by the Corporation. Mr. Mukherjee, therefore, contended that the
High Court was not justified in appointing a retired Chief Justice of a High
Court to act as an Arbitrator over looking Clause 29(d) of the contract and
also without considering the fact that obligation of the Corporation to appoint
an arbitrator to resolve a dispute between the parties would only arise when
the contractor had furnished security which was to be determined by the
This submission of Mr. Mukherjee was seriously contested by Mr. Amit Sharma,
learned counsel appearing for the respondent. According to him, no interference
can be made with the impugned order since the High Court was fully justified in
appointing an arbitrator in the manner it had done. In this connection reliance
was placed on the case of Datar Switchgears Ltd. v. Tata Finance Ltd [2000(8)
Reliance was also placed by Mr. Sharma on the case of Punj Llyods Ltd v.
Petronet MHB Ltd. [2006(2) SCC 638]. Relying on the aforesaid two decisions,
Mr. Sharma invited us to re- consider the submission of Mr. Mukherjee and to
dismiss the present appeal.
Having heard the learned counsel for the parties and after considering the
rival submissions made on their behalf and examining Clause 29 of the contract
in detail, we are of the view that the High Court was not justified in
appointing a retired Chief Justice of a High Court to act as sole arbitrator as
the same is contrary to Clause 29 of the contract. As noted earlier, the High
Court, by its earlier order dated 7th May 2003 directed the parties to invoke
the arbitration clause and to appoint an arbitrator in compliance with Clause
29 of the contract entered into between the parties.
Clause 29 specifically stipulates, as indicated herein earlier, that if any
dispute arises between the parties, the party seeking invocation of the
arbitration clause, shall first approach the Chief Engineer and on his failure
to arbitrate the dispute, the party aggrieved may file an appeal to MPL Com,
failing which, the Corporation shall constitute an Arbitration Board to resolve
the disputes in the manner indicated in Clause 29.
However, before doing so, the party invoking arbitration clause is required
to furnish security of a sum to be determined by the Corporation.
In this case, admittedly, the security has not been furnished by the
respondent to the Corporation. We, in fact, asked Mr. Sharma, appearing on
behalf of the respondent to ascertain on the date of the hearing of the appeal,
whether the security deposit was made or not. On instruction, Mr. Sharma
informed us that such security has not yet been deposited.
Such being the position even today, we hold that the obligation of the
Corporation to constitute an Arbitration Board to resolve disputes between the
parties could not arise because of failure of the respondent to furnish
security as envisaged in Clause 29(d) of the contract. Therefore, we are of the
opinion, that on account of non-furnishing of security by the respondent, the
question of constituting an Arbitration Board by the Corporation could not
arise at all. Accordingly, we hold that the High Court was not justified in
appointing a retired Chief Justice of a High Court as Arbitrator by the
It is not disputed before us that the learned Arbitrator appointed by the
High Court has already commenced the arbitration proceeding. Mr. Mukherjee,
appearing on behalf of the Corporation, on instruction, had submitted before us
that they shall constitute an Arbitration Board as soon as the respondent
furnishes security in terms of Clause 29(d) of the contract and if any
direction is given to the Arbitration Board to proceed from the stage the
learned Arbitrator had already reached, that would not be objected to. That is
to say, Mr.
Mukherjee contended that the Arbitration Board may be directed to take over
the arbitration proceedings from the stage the learned Arbitrator had already
Such being the stand taken by the Corporation, we direct the respondent to
furnish the security of a sum to be determined by the Corporation within six
weeks from this date and in the event security determined by the Corporation is
furnished within the time mentioned herein earlier, the Corporation shall
constitute an Arbitration Board in compliance with Clause 29 of the contract.
It is directed that the Arbitration Board shall proceed from the stage the
learned Arbitrator appointed by the High Court had already reached.
That apart, it has to be kept in mind that it is always the duty of the
court to construe the arbitration agreement in a manner so as to uphold the
same. Therefore we must hold that the High Court ought not to have appointed an
arbitrator in a manner, which was inconsistent with the arbitration agreement.
Before parting with this judgment, we will be failing in our duty if we do
not consider and deal with the decisions cited by Mr. Sharma appearing on
behalf of the respondent. First decision relied on by him was Datar Switchgears
Ltd. case (supra). It is difficult to understand how the said decision would be
of assistance to Mr. Sharma. In this decision, this Court was dealing with a
case falling under Section 11(6) of the Act where no time limit is prescribed,
whereas time limit of 30 days is prescribed under Section 11(4) and (5) of the
Act. In that context, it was held by this court that if one party makes a
demand for appointment of an arbitrator to the opposite party and the latter
does not make an appointment within 30 days of demand, the right of appointment
of arbitrator does not get automatically forfeited after expiry of 30 days.
This Court held that 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 still continues. However, the right of the opposite party ceases
when an application under Section 11 seeking appointment of an arbitrator is
filed. This is not the factual situation in the present case, nor are we
concerned with this aspect in the present case.
So far as the case of Punj Llyods Ltd (supra) is concerned, it is true that
this decision of this Court was rendered by a bench of three Judges which
affirmed the decision in the case of Datar Switchgears Ltd. (supra). Since we
are not concerned in the facts and circumstances of the present case with the
question decided by this Court in the aforesaid two decisions, we are unable to
rely on those decisions.
For the reasons aforesaid, the order dated 29th July 2004 which has given
rise to Civil Appeal arising out of Special Leave Petition No.19332 of 2005 is
set aside and we direct the Corporation to constitute an Arbitration Board in
terms of Clause 29 within a period of three months from this date, provided the
respondent furnishes security in terms of the table provided in Clause 29(d) of
the contract, as determined by the Corporation within a period of six weeks
from this date. We, however, make it clear that in view of the stand taken by
the Corporation, as noted herein earlier, the Arbitration Board shall commence
their proceedings from the stage the arbitrator appointed by the High Court had
Since we have set aside the order dated 29th July 2004, Civil Appeal arising out of Special Leave petition No. 19333 of 2005 filed against the order
dated 8th April, 2005 has become infructuous.
The Appeal is disposed of in the manner indicated above.
There will be no order as to costs.