Limited Vs. Sterlite Industries (India) Ltd.  INSC 1445 (18 November 1996)
Verma, B.N. Kirpal J.S. Verma,J.:
point involved for decision is, the effect of The Arbitration and Conciliation
Acts 1996 (for short "New Act") in the present case on the
arbitration agreement made prior to the commencement of the New Act. Clause VII
of the agreement dated December
14, 1993 between the
parties is, as under:
In the event of any question or dispute arising under or out of or relations to
the construction, meaning and operation or effect of this agreement or breach
thereof, the matter in dispute shall be referred to arbitrator. Both the
parties shall nominate one Arbitrator each and the arbitrators shall appoint an
umpire before proceeding with the reference. The decision of arbitrators or in
the event of their not agreeing the decision of the umpire will be final and
binding on the parties.
provisions of the Indian Arbitration Act and Rules made thereunder shall apply for
proceedings. The arbitrators or the umpire, as the case may, shall be entitled
with the consent of the parties to enlarge the time, from time to time, for
making the award.
arbitrators/umpire shall give a reasoned award. The venue of the arbitration
shall be Bombay." (Emphasis supplied) Sterlite
Industries (India) Ltd., - respondent, claimed that it had not received certain
dues under the contract from the appellant - MMTC Ltd. and, therefore, it
invoked the above arbitration clause in the agreement between them by a letter
dated January 19,1996 which was received by the MMTC Ltd. on January 31, 1996
On February 7, 1996 the respondent appointed Shri M.N. Chandurkar, a former
Chief Justice of Madras High Court, as its arbitrator. The MMTC Ltd. claimed
that arbitration could not be resorted to and, therefore, it did not name its
arbitrator. The Sterlite Industries (India) Ltd. filed an application in the Bombay High Court for appointing an
arbitrator in accordance with the New Act.
the High Courts learned counsel for the MMTC Ltd.. contended that the
arbitration clause was not attracted but this objection was rejected. The other
contention on behalf of the MMTC Ltd. was that the arbitration agreement
provided for the appointment of two arbitrators while Section 10 (l) of the New
Act does not envisage the appointment of an even number of arbitrators.
High Court by its order dated 28.6.1996 rejected the contention and gave time
to the MMTC Ltd. till July
5, 1996 to appoint an
arbitrator. It further held that in the event of the MMTC Ltd. failing to name
its arbitrator, the arbitrator appointed by Sterlite Industries (India) Ltd. would be the sole arbitrator
under Section 10 (2) read with Section ll (5) of the New Act. Time for
appointment of the arbitrator was later extended. The MMTC Ltd. has in the
meantime appointed Shri S.N. Sapra. a former Judge of the Delhi High Court as
its arbitrator. Hence this appeal by special leave.
contention of the learned Attorney General on behalf of the appellant is that
an arbitration agreement providing for the appointment of an even number of
arbitrators is not a valid agreement because of Section 10(1) of the New Act;
and, therefore the only remedy in such a case is by a suit and not by
arbitration. For this reason, he urged, that sub-section (2) of Section 10 is
not attracted since there is no failure to deter-mine the number of arbitrators
according to sub-section (1) Another argument of the learned Attorney General
was that Section 10 is a departure from para 2 of the First Schedule of the
Arbitration Act, 1940 (for short 1940 Act), which reads as under:
If the reference is to an even number of arbitrators the arbitrators shall
appoint an umpire not later than one month from the latest date of their
respective appointments." In reply Shri Dave, learned counsel for the
respondent contended that there is no such inconsistency between Section 10 of
the New Act and the corresponding provision in the 1940 Act, both being
substantially the same. Learned counsel contended that the provisions of the
New Act must be construed to promote the object of implementing the scheme of
alternative dispute reso- lution; and the New Act must be construed to enable
the enforcement of the earlier arbitration agreements. It was urged that each
of the parties having nominated its arbitrator, the third arbitrator was
required to be appointed according to Section 11 (3) and the failure to do so
attracts the consequential results under the New Act. Learned counsel contended
that the provision for number of arbitrators is a machinery prevision and does
not affect the validity of the arbitration agreement which is to be determined
according to Section 7 of the New Act.
provisions of the New Act may now be referred.
2 (b) defines the 'arbitration agreement' to mean an agreement referred to in
section 7. Section 7 deals with arbitration agreement, Section 10 with the
number of arbitrators and Section 11 with the appointment of arbitrators.
Sections 7, 10 and the relevant part of the Section 11 are as under:
this Part, "arbitration agreement" means an agreement by the parties
to submit to arbitration all or certain disputes which have arisen or which may
arise between them in respect of a defined legal relationship, whether
contractual or not."
arbitration agreement may be in the form of an arbitration clause in a contract
or in the form of a separate agreements.
arbitration agreement shall be in writing.
arbitration agreement is in writing if it is contained in –
document signed by the parties;
exchange of letters, telex, telegrams or other means of telecommunication which
provide a record of the agreement; or
exchange of statements of claim and defence in which the existence of the
agreement is alleged by one party and not denied by the other.
The reference in a contract to a document containing an arbitration clause
constitutes an arbitration agreement if the contract is in writing and the
reference is such as to make that arbitration clause part of the
contract." Section 10:
Number of arbitrators.-
The parties are free to determine the number of arbitrators, provided that such
number shall not he an even number.
Failing the determination referred to in sub-section (1), the arbitral tribunal
shall consist of a sole arbitrator." Section 11:
of arbitrators,-(1) A person of any nationality may be an arbitrator, unless
otherwise agreed by the parties.
Subject to sub-section (6), the parties are free to agree on a procedure for
appointing the arbitrator or arbitrators.
Failing any agreement referred to in sub-section (2), in an arbitration with
three arbitrators, each party Shall appoint one arbitrator, and the two
appointed arbitrators shall appoint the third arbitrator who shall act as the
the appointment procedure in sub-section (3) applies and- (a) a party fails to
appoint an arbitrator within thirty days form the receipt of a request to do so
from the other party; or (b) The two appointed arbitrators fail to agree on the
third arbitrator within thirty days from the date of their appointment, the
appointment shall be made, upon request of a party, by the Chief Justice or any
person or institution designated by him.
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.
Where, under an appointment procedure agreed upon by the parties,-
party fails to act as required under that procedure; or
parties, or the two appointed arbitrators, fail to reach an agreement expected
of them under that procedure; or
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
decision on a matter entrusted by sub-section (4) or sub-section (5) or
sub-section (6) to the Chief Justice or the person or institution designated by
him is final.
xxx" Chapter II of the New Act contains Sections 7 to 9 under the heading
"Arbitration Agreement" Chapter III under the heading
"Composition of Arbitral Tribunal" contains Sections 10 to 15.
(3) of Section 7 requires an arbitration agreement to be in writing and
sub-section (4) describe the kind of that writing. There is nothings in Section
7 to indicate the requirement of the number of arbitrators as a part of the
arbitration agreement. Thus the validity of an arbitration agreement does not
depend on the number of arbitrators specified therein. The number of
arbitrators is dealt with separately in Section 10 which is a part of machinery
provision for the working of the arbitration agreement. It is, therefore clear
that an arbitration agreement specifying an even number of arbitrators cannot
be a ground to render the arbitration agreement invalid under the New Act as
contended by the learned Attorney General.
10 deals with the number of arbitrators. Sub- section (1) says that the parties
are free to determine the number of arbitrators, provided that such number
shall not be an even number. Sub-section (2) then says that failing the
determination referred to in sub-section (1), the arbitral tribunal shall
consist of a sole arbitrator.
11 provides for appointment of arbitrators. This is how arbitral tribunal is
arbitration clause provides that each party shall nominate one arbitrator and
the two arbitrators shall then appoint an umpire before proceeding with the
reference. The arbitration agreement is valid as it satisfies the requirement
of Section 7 of the New Act . Section 11 (3) requires the two arbitrators to
appoint the third arbitrator or the umpire. There can be no doubt that the
arbitration agreement in the present case accords with the implied condition
contained in para 2 of the First Schedule to the Arbitration Act, 1940
requiring the two arbitrators, one each appointed by the two sides, to appoint.
an umpire not later than one month from the latest date of their respective
question is: whether there is anything in the New Act to make such an agreement
unenforceable? We do not find any such indication in the New Act. There is no
dispute that the arbitral proceeding in the present case commenced after the
New Act came into force and, therefore, the New Act applies. In view of the
term in the arbitration agreement that the two arbitrators would appoint the
umpire or the third arbitrator before proceeding with the reference, the
requirement of Sub-section (1) of Section 10 is satisfied and sub-section (2)
thereof hes no application. As earlier stated the agreement satisfies the
requirement of Section 7 of the Act and therefore, is a valid arbitration
appointment of arbitrators must, therefore, be governed by Section 11 of the
view of the fact that each of the two parties have appointed their own
arbitrators, namely, Justice M.N. Chandurkar (Retd.), and Justice S.P Sapra (Retd.)
Section 11 (3) was attracted and the two appointed arbitrators were required to
appoint a third arbitrator to act as the presiding arbitrator failing which the
Chief Justice of the High Court or any person or institution designated by him
would be required to appoint the third arbitrator at required by section 11 (4)(b)
of the New Act Since the procedure prescribed in Section 11 (3) his not been
followed the further consequences Provided in section 11 must follow.
we direct that the Chief Justice of the High Court is to appoint the third
arbitrator under Section (4)(b) of the New Act in view of the failure of the two
appointed arbitrators to appoint the third arbitrator within thirty days from
the date of their appointments. Direction given by the Chief Justice of the
High Court is substituted to this effect.
appeal is disposed of accordingly. No costs.
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