Limited) Vs. Govt. of India, Ministry of Defense
Jurisdiction Arbitration Petition No.11 of 2011]
O R D E R
petitioner has filed the present application under Sections 11(4) and (6) of the
Arbitration and Conciliation Act, 1996 (hereinafter referred to as the `Act')
read with paragraph 2 of the appointment of the Arbitrators by the Chief Justice
of India Scheme, 1996. It is stated that a contract was entered into between the
parties for the supply of Base Bleed Units. Initially the quantity to be supplied
was 42,000 units.
Later on, the quantity
was increased to 52,000 units as per Clause 20 of the agreement. By 5th January,
2005, the petitioner had supplied substantial quantity of the goods. However,
some of the goods supplied by the petitioner were rejected by the respondent.
The petitioner, thereafter, informed the respondent that two more lots were
ready for discharge on 17th March, 2005. However, Union of India never
responded to the letter, hence, loss and damage has been caused to the
In April, 2005, after
various discussions, the petitioner came to know that improper fuzes were used by
the Union of India which led to the problem that occurred in the lots which were
rejected. Thereafter, on 21st April, 2005, Union of India put on hold all contracts.
Further, on 14th May, 2008, Union of India sent a notice seeking refund of
amount of US $ 23,20,240, failing which legal action was to issue.
disputes having arisen between the parties, efforts were made to resolve the same.
The details of the efforts made are narrated in the petition. Since the disputes
could not be resolved through mutual discussions, the DGOF appointed one Mr. A.K.
Jain, Additional General Manager, Ordnance Factory, Ambajhari, Nagpur as an arbitrator
in terms of Clause 19(F) of the contract, which reads as under:-
disputes and difference arising out of or in any way touching or concerning the
agreement (matters for which the decision of a specific authority as specified
in the contract shall be final under this agreement, shall not be subject to
arbitration) shall be referred to the sole arbitration of the Director General,
Ordnance Fys. Govt. of India for the time being or a Government servant appointed
The appointee shall not
be a Govt. Servant who had dealt with the matters to which this agreement
relates and that in the course of his duties as Govt. Servant has had not
expressed views on all or any of the matter is in dispute or difference. In case
the appointed Govt. Servant in place of the incumbents."
petitioner objected to the appointment of the Arbitrator. The petitioner apprehended
that the arbitrator would be favorably inclined towards the employer.
Therefore, on 23rd January,
2009, the petitioner issued a notification under Section 14 of the Arbitration
Act stating that the mandate of the arbitrator had been terminated. Since inspite
of the aforesaid notification, the arbitrator continued with the arbitration
proceedings, the petitioner moved the Principal District Court, Chandrapur and
filed Civil Misc. Application No. 45 of 2009 under Section 14(2) of the Act.
On 21st December, 2010,
the Principal District Court, Chandrapur terminated the mandate of the Sole
Arbitrator with the observation that the arbitrator has been biased in favour
of respondent No.1. A direction was also issued in the following terms:- "Director
General, Ordnance Factory, Government of India, is appointed as an Arbitrator or
he may appoint Government servant as an Arbitrator , as per Clause 19(F) of February
2004 contract and 19(E) of November 2004 contract, after following due
is an admitted fact that pursuant to the aforesaid directions, within 30 days, DGOF
did not himself commence the arbitration proceedings; nor did he appoint any Government
servant as an arbitrator. The petitioner has, therefore, moved the present
petition under Section 11(6) of the Act on 2nd of March, 2011 seeking appointment
of an independent arbitrator. The petitioner claims that the directions issued by
the District Court are without any authority or jurisdiction and as such void
According to the petitioner,
the direction of the learned District Judge is based upon an incorrect interpretation
of Section 15 of the Act, whereby the learned Judge assumed the authority to appoint
an arbitrator, which is beyond her jurisdiction. The Act does not make
provision for the appointment of an arbitrator other than in accordance with the
arbitration agreement and in the limited circumstances provided for in Section
The petitioner also
claims that the DGOF would be disqualified to act as an arbitrator as the dispute
is against the Government of India and particularly against the Ordnance Factory,
Ministry of Defence. If the Director General, Ordnance Factory, Government of India
(DGOF) or a Government servant is appointed as an arbitrator, he shall always
be bound by the directions/instructions issued by his superior authorities and,
therefore, such an arbitrator would not be in a position to independently
decide the dispute between the parties.
According to the petitioner,
such an appointment would be contrary to the provisions of Section 12 of the Act.
The petitioner further claims that the DGOF has already through his actions in the
dispute between the parties demonstrated his lack of independence and impartiality.
The learned District Judge in her judgment alluded to the fact that the DGOF
without receiving any request for referral of the dispute between the petitioner
and the respondent colluded with the previous arbitrator to appoint him as an
arbitrator without any notice to the petitioner.
The petitioner further
claims that the DGOF has been directly involved in the dispute as would be
evident from the correspondence between the petitioner and the respondent. The
petitioner thereafter makes a reference to the letter dated 30th June, 2008 wherein
the DGOF took the view that the petitioner is liable to replace the rejected Base
Bleed units, as alleged by the respondent, making specific reference to the correspondence
in which respondent stated its claim against the petitioner and cancelled the contract
with the petitioner.
The petitioner further
claims that the DGOF has failed to appoint the arbitrator either as directed by
the learned District Judge or in accordance with Section 15 of the Act within 30
days of the order dated 21st December, 2010. Therefore, the respondent has
forfeited the right to make an appointment from the date of the filing of the
respondent has controverted the plea put forward by the petitioner by way of a
detailed counter affidavit. It is claimed by the respondent that the petition under
Section 11(6) of the Act is not maintainable, as Mr. Satyanarayana has been appointed
as a substitute arbitrator on 16th March, 2011. The petitioner was duly notified
about the appointment of the arbitrator in its letter dated 26th March, 2011.
The petitioner was
requested to forward its claim within 10 days. The petitioner was informed that
if such a claim does not reach by 8th April, 2011, the arbitrator will presume that
the petitioner did not have any further claim.
Upon receipt of that letter,
the petitioner objected to the appointment of a new arbitrator by its letter dated
15th April, 2011, as being contrary to clause 19(F). The petitioner has wrongly
claimed that since the appointment of the arbitrator was not made prior to the
filing of the petition under Section 11(6), the respondent has forfeited the
right to make the appointment.
have heard the learned counsel for the parties.
the basis of facts narrated above, Mr. Naphade submits that the petitioner has forfeited
its right to appoint the arbitrator. In support of the submission, he relied on
the judgments of this Court in the case of Datar Switchgears Ltd. Vs. Tata
Finance Ltd. & Anr.
1 , Punj Lloyd Ltd. Vs.
Petrone t MHB Ltd.
2 and Yashwith Constructions
(P) Ltd. Vs. Simplex Concrete Piles India Ltd. & Anr.
the other hand, Mr. Raval, appearing for the Union of India has submitted that
the petitioner has failed to make out a case for not appearing before the
arbitrator appointed pursuant to the order 1 2000 (8) SCC 151 2 2006 (2) SCC
638 3 2006 (6) SCC 204 of the Principal District Court, Chandrapur on 21st
December, 2010. He submits that the respondents have willingly accepted the appointment
of the earlier arbitrator in accordance with the arbitration clause.
Therefore, they can have
no justification to challenge the appointment of the present arbitrator, who has
only been appointed as the mandate of the earlier arbitrator had been terminated
by the orders of the Court. The petitioner was duly informed about the appointment
of the arbitrator on 16th March, 2011. The arbitrator had intimated both the parties
about the appointment and had requested them to submit their respective claims
within a period of 10 days.
It was only at that
stage that the petitioner wrote a letter dated 15th April, 2011 stating that the
appointment of the arbitrator was in violation of arbitration clause. Mr. Raval
further submitted that in the present circumstances, the matter is squarely
covered against the petitioner by the judgment in the case of Indian Oil Corporation
Limited & Ors. Vs. Raja Transport Private Limited . On the basis of the aforesaid
judgment, the learned counsel submitted that the present petition 4 (2009) 8
SCC 520 under Section 11(6) is misconceived, as the Sole Arbitrator has been appointed
in terms of the agreed procedure contained in Clause 19 (F) and (E).
have considered the submissions made by the learned counsel. In my opinion, Mr.
Naphade is correct in his submission that the matter is squarely covered by the
judgment in Datar Switchgears Ltd. (supra), wherein this Court has observed as follows:-
"19. 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, which 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." The aforesaid
ratio has been reiterated in Punj Lloyd Ltd. (supra).
the facts and circumstances of this case, it would not be possible to accept the
submission of Mr. Raval that the present petition filed by the petitioner under
Section 11(6) of the Act is not maintainable. On the admitted facts, it is
evident that the mandate of the earlier arbitrator Mr. Arun Kumar Jain was
terminated by the orders passed by the Principal District Court, Chandrapur in
Civil Misc. Application No. 45 of 2009 by order dated 21st December, 2010.
A perusal of the aforesaid
order would show that the petitioner had challenged the validity of Clause
19(F). The aforesaid submission was rejected by the Court with the observation
that the same cannot be the subject matter which could be resolved in a petition
under Section 14(2) of the Act. The petitioner was given an opportunity to
challenge the clauses in an appropriate forum. The District Judge, however, accepted
the submission of the petitioner that there are justifiable reasons to indicate
that the arbitrator has not acted fairly.
Hence the mandate of Mr.
A.K. Jain as the Sole Arbitrator was terminated. In accordance with Section
15(2) of the Act, DGOF was appointed as an arbitrator. He was also given an option
to appoint Government servant as an arbitrator as per the arbitration clause. It
is a matter of record that DGOF did not act himself as an arbitrator, pursuant to
the aforesaid order of the Principal District Judge, Chandrapur dated 21st December,
Mr. Satyanarayana, the
subsequent arbitrator, had not been appointed till 16th March, 2011. The
present petition was moved on 2nd March, 2011. Therefore, the respondents had clearly
forfeited their right to make the appointment of an arbitrator. Consequently, the
appointment of Mr. Satyanarayana, as an arbitrator, by letter dated 16th March,
2011 cannot be sustained.
Naphade then submits that in the peculiar facts and circumstances of this case,
the respondent cannot now be permitted to insist that the Court should appoint
an arbitrator only in terms of the agreed procedure. In support of this
submission, he emphasised that DGOF can not act as an arbitrator as the same will
be against the principles of natural justice, as no one can be a judge in his own
He further submitted that
even if any government employee is appointed as an arbitrator, he will not be
in a position to act against the Union of India as he will be obliged to follow
the instructions of the superiors. He placed reliance on Bharat Sanchar Nigam Limited
& Anr. Vs. Motorola India Priva te Limited. It is not possible to accept the
submissions of Mr. Naphade. This Court in the case of Indian Oil Corporation Limited
(supra) has considered such a submission and observed that :- "Arbitration
is a binding voluntary alternative dispute resolution process by a private forum
chosen by the parties.
If a party, with open
eyes and full knowledge and comprehension of the relevant provision enters into
a contract with a Government/statutory 5 2009 (2) SCC 337 corporation/public sector
undertaking containing an arbitration agreement providing that one of its Secretaries/Directors
shall be the arbitrator, he cannot subsequently turn around and contend that he
is agreeable for settlement of the disputes by arbitration, but not by the named
arbitrator who is an employee of the other party.
It is now well settled
by a series of decisions that arbitration agreements in government contracts
providing that an employee of the Department (usually a high official
unconnected with the work of the contract) will be the arbitrator, are neither
void nor unenforceable.
All the decisions
proceed on the basis that when senior officers of Government/statutory corporations/public
sector undertakings are appointed as arbitrators, they will function independently
and impartially, even though they are employees of such
institutions/organizations." In my opinion, the aforesaid observations are
a complete answer to the submission made by Mr. Naphade.
senior counsel then submitted that even if the arbitration clause is held to be
valid, Mr. Satyanarayana still can not be permitted to continue with
arbitration as the petitioner has a strong apprehension that he is biased in
favour of the respondents.
In support of the
submission, the learned senior counsel has relied on the various notices issued
by the arbitrator which were invariably received after the expiry of the time fixed
by the arbitrator. In support of his submission, he relied on a judgment of this
Court in the case of Denel (Proprietary) Limited Vs. Bharat Electronics Limited
to the apprehension of bias pleaded by Mr. Naphade, it is submitted by Mr.
Raval that non-receipt of the letters in time can not possibly give rise to an apprehension
that Mr. Satyanarayana is in any manner biased against the petitioner.
He submits that the
reliance of the petitioner on the judgment in Denel (Proprietary) Limited
(supra) is also misconceived as the aforesaid judgment was confined to the facts
of that particular matter. He, therefore, submits that the Court ought to follow
the agreed procedure and not to interfere with the appointment of Mr. Satyanarayana
as the arbitrator. In the alternative, he submits that even if the appointment
of Mr. Satyanarayana is held to be invalid, the matter has to be left to the
DGOF to either act as an arbitrator himself or to appoint an officer appointed
by him. 6 2010 (6) SCC 394
is true that in normal circumstances while exercising jurisdiction under Section
11(6), the Court would adhere to the terms of the agreement as closely as possible.
But if the circumstances warrant, the Chief Justice or the nominee of the Chief
Justice is not debarred from appointing an independent arbitrator other then
the named arbitrator.
Three Judge Bench of this Court in the case of Northern Railway Administration,
Ministry of Railway, New Delhi Vs. Patel Engineering Company Limited considered
the scope and ambit of Section 11(6) of the Act, as divergent views were taken
in two decisions of this Court in Ace Pipeline Contracts (P) Ltd. Vs. Bharat Petroleum
Corpn. Ltd. and Union of India Vs. Bharat Battery Manufacturing Co. (P) Ltd.
(supra). Upon consideration of the relevant provisions it was inter-alia
observed as follows:-
"A bare reading of
the scheme of Section 11 shows that the emphasis is on the terms of the agreement
being 7 2008 (10) SCC 240 8 2007 (5) SCC 304 adhered to and/or given effect as
closely as possible. In other words, the Court may ask to do what has not been done.
The Court must first ensure that the remedies provided for are exhausted. It is
true as contended by Mr. Desai, that it is not mandatory for the Chief Justice or
any person or institution designated by him to appoint the named arbitrator or arbitrators.
But at the same time, due regard has to be given to the qualifications required
by the agreement and other considerations."
in view the observations made above, I have examined the facts pleaded in this case.
I am of the opinion that in the peculiar facts and circumstances of this case,
it would be necessary and advisable to appoint an independent arbitrator. In this
case, the contract is with Ministry of Defence. The arbitrator Mr. Satyanarayana
has been nominated by DGOF, who is bound to accept the directions issued by the
Union of India. Mr. Satyanarayana is an employee within the same organization.
The attitude of the
respondents towards the proceeding is not indicative of an impartial approach. In
fact, the mandate of the earlier arbitrator was terminated on the material produced
before the Court, which indicated that the arbitrator was biased in favour of the
Union of India. In the present case also, Mr. Naphade has made a reference to
various notices issued by the arbitrator, none of which were received by the petitioner
within time. Therefore, the petitioner was effectively denied the opportunity
to present his case before the Sole Arbitrator. Therefore, the apprehensions of
the petitioner can not be said to be without any basis.
must also be remembered that even while exercising the jurisdiction under
Section 11(6), the Court is required to have due regard to the provisions
contained in Section 11(8) of the Act. The aforesaid section provides that apart
from ensuring that the arbitrator possesses the necessary qualifications required
of the arbitrator by the agreement of the parties, the Court shall have due regard
to other considerations as are likely to ensure the appointment of an independent
and impartial arbitrator.
Keeping in view the
aforesaid provision, this Court in the case of Indian Oil Corporation Limited
(supra), whilst emphasizing that normally the Court shall make the appointment
in terms of the agreed procedure has observed that the Chief Justice or his designate
may deviate from the same after recording reasons for the same.
In paragraph 45 of
the aforesaid judgment, it is observed as follows:- "45. If the
arbitration agreement provides for arbitration by a named arbitrator, the courts
should normally give effect to the provisions of the arbitration agreement.
But as clarified by
Northern Railway Admn.10, where there is material to create a reasonable apprehension
that the person mentioned in the arbitration agreement as the arbitrator is not
likely to act independently or impartially, or if the named person is not available,
then the Chief Justice or his designate may, after recording reasons for not following
the agreed procedure of referring the dispute to the named arbitrator, appoint
an independent arbitrator in accordance with Section 11(8) of the Act.
In other words, referring
the disputes to the named arbitrator shall be the rule. The Chief Justice or his
designate will have to merely reiterate the arbitration agreement by referring the
parties to the named arbitrator or named Arbitral Tribunal. Ignoring the named arbitrator/Arbitral
Tribunal and nominating an independent arbitrator shall be the exception to the
rule, to be resorted for valid reasons." (emphasis supplied)
material placed before the Court by the petitioner would indicate that it would
not be unreasonable to entertain the belief that the arbitrator appointed by the
respondent would not be independent. That being so, the appointment of Mr.
Satyanarayana can not pass the test under Section 11(8) of the Act.
applying the test laid down in Indian Oil Corporation Ltd. (supra), this Court in
the case of Denel (Proprietary) Limited (supra) also observed that the Managing
Director, Bharat Electronics Limited, which is a Government company is bound by
the directions/instructions issued by his superior authority.
The Court also
observed that according to the pleaded case of the respondents, though it was liable
to pay the amount due under the purchase order, it was not in a position to supply
the dues only because of the direction issued by the Ministry of Defence, Government
of India. Therefore, the Court concluded that the Managing Director may not be in
a position to independently decide the dispute between the parties. Consequently,
the Court proceeded to appoint an independent arbitrator.
my opinion, the circumstances in the present case are similar and a similar course
needs to be adopted. In view of the above, the petition is allowed.
exercise of my powers under Section 11(4) and (6) of the Arbitration and
Conciliation Act, 1996 read with Paragraph 2 of the Appointment of Arbitrator by
the Chief Justice of India Scheme, 1996, I hereby appoint Hon. Mr. Justice Ashok
C. Agarwal, Retd. Chief Justice of the Madras High Court, R/o No. 20, Usha
Kiran, 2nd Pasta Lane, Colaba, Mumbai-400 005, as the Sole Arbitrator, to adjudicate
the disputes that have arisen between the parties, on such terms and conditions
as the learned Sole Arbitrator deems fit and proper. Undoubtedly, the learned Sole
Arbitrator shall decide all the disputes arising between the parties without being
influenced by any prima facie opinion expressed in this order, with regard to
the respective claims of the parties.
registry is directed to communicate this order to the Sole Arbitrator forthwith
to enable him to enter upon the reference and decide the matter as
expeditiously as possible.
[Surinder Singh Nijjar]