Corporate laws – arbitration – Objection as to appointment of arbitrator not raised earlier – after participation – objection not tenable =no bar under the new Act, for an arbitration agreement providing for an employee of a Government/statutory cor- poration/public sector undertaking (which is a party to the contract), acting as an arbitrator.The fact that the named arbitrator happens to be an employee of one of the parties to the Arbitration Agreement has not by itself, before the Amendment Act came into force, rendered such appointment invalid and unenforceable. In the circumstances, the High Court was clearly in error in exercising jurisdiction in the present case and it ought not to have interfered with the process and progress of arbitration. We therefore accept the challenge raised by the Appellant and reject that raised by the Respondent.

1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 12627-12628 OF 2017@
(SPECIAL LEAVE PETITION (CIVIL) NOS.25206-25207 OF 2016)
ARAVALI POWER COMPANY PVT. LTD. .………APPELLANT(S)
VERSUS
M/S. ERA INFRA ENGINEERING LTD. ..……RESPONDENT(S)
WITH
CIVIL APPEAL NOS. 12629-12630 OF 2017@
(SPECIAL LEAVE PETITION (CIVIL) NOS.503-504 OF 2017)
JUDGMENT
Uday Umesh Lalit, J.
1. Leave granted. These appeals challenge the common judgment and order
dated 29.07.2016 passed by the High Court of Delhi at New Delhi in
O.M.P. (T) (Comm.) No.13/2016 and Arbitration Petition No.136/2016.
2
2. Construction work of permanent township for Indira Gandhi Super
Thermal Power Project at Jhajjar, Haryana was awarded to the
Respondent- M/s Era Infra Engineering Ltd. on 20.05.2009 and contract
dated 17.11.2009 signed thereafter broadly consisted of General
Conditions of Contract (GCC) and Special Conditions of Contract (SCC).
Clause 56 of the GCC stipulated arbitration between the parties in
following terms:-
“56. ARBITRATION:-
Except where otherwise provided for in the contract all
questions and disputes relating to the meaning of the
specifications, designs, drawings and instructions herein before
mentioned and as to the quality of workmanship or materials
used on the work or as to any other questions, claim, rights,
matter or thing whatsoever in any way arising out of or relating
to the contract, design, drawing, specifications, estimates,
instructions, orders or these conditions of otherwise concerning
the works, or the executions or failures to execute the same
whether arising during the progress of the work or after the
completion or abandonment thereof shall be referred to the Sole
Arbitration of the Project In-charge of the Project concerned of
the owner, and if the Project In-charge is unable or unwilling to
act, to the sole arbitration of some other persons appointed by
the Chairman and Managing Director, NTPC limited (Formerly
National Thermal Power Corporation Ltd) willing to act as such
Arbitrator. There will be no objections, if the Arbitrator so
appointed is an employee of NTPC Limited (Formerly National
Thermal Power Corporation Ltd), and that he had to deal with
the matters to which the contract relates and that in the course
of his duties as such he had expressed views on all or any of the
matters in disputes or difference. The Arbitrator to whom the
matter is originally referred being transferred or vacating his
office or being unable to act for any reason as aforesaid at the
time of such transfer, vacations of office or inability to act,
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Chairman and Managing Directors, NTPC limited (Formerly
National Thermal Power Corporation Ltd.), shall appoint
another person to act as Arbitrator in accordance with the terms
of the contract……”
3. According to the Appellant-Aravali Power Company Pvt. Ltd.,
scheduled date of completion of work was 19.05.2011 but the progress of
work was quite slow which compelled the Appellant to cancel certain
remaining works by its letters dated 18.07.2014, 24.10.2014, 30.06.2015 and
08.07.2015. By its letter dated 29.07.2015 the Respondent alleged that the
delays in the project were not attributable to the Respondent and after setting
out certain grievances, the letter thereafter sought to invoke arbitration
submitting further that arbitration be through a retired Judge of the High
Court, the relevant portion of the letter being:-
“In view of the above circumstances and inaction of APCPL
towards settlement of our claims/payments, we hereby invoke
Arbitration Clause of the Contract Agreement request your
good self to appoint Arbitrator for settlement of our claims
according to Clause 56 of GCC of the Contract Agreement.
However, we want to draw your attention to the legal point that
once the order of part cancellation has been passed at the
Highest Level of the Owner/Employer, hence, any forum for
resolution of dispute constituted by the said authority &
particularly its subordinate is of no legal consequence. It is a
well settled proposition of law that nobody can be judge in its
own cause. Therefore, in light of the aforesaid settled position
of law, we seek an independent arbitration, through a retired
Hon’ble Judge of the Hon’ble High Court so as to seek
vindication of our grievance as mentioned in foregoing paras.
Since the matter is utmost important, we hereby request that a
4
panel of independent Arbitrators may kindly be made available
to us so that we can choose from the panel. We would also be
agreeable to the constitution of an Arbitral Tribunal comprising
of nominee of your company; our nominee and both the
nominee arbitrators appointing the Presiding/Umpire Arbitrator.
We request that an early action in this regard may kindly be
taken, in accordance with law.”
4. In response, while refuting the allegations in the letter under reply, the
Appellant proceeded to appoint its Chief Executive Officer as the sole
Arbitrator on 19.08.2015 and intimated the respondent on the same day in
following terms:
“Please note that in terms of the Arbitration Clause 56 of the
GCC there is no provision for selection by you of Arbitrator
from any panel of Arbitrators to be offered by us. There is also
no provision for formation of an Arbitral Tribunal as suggested
by you. Clause 56 of the GCC envisaged the appointment of
the designated officers as Arbitrator and accordingly the Chief
Executives Officer APCPL on your request, has been
designated as the Sole Arbitrator. The Learned Arbitrator shall
inform you of the Arbitral proceedings in time.”
By further communication dated 26.09.2015 the Appellant reiterated
its stand taken in letter dated 19.08.2015.
5. In the meanwhile, the Arbitrator so appointed fixed the first hearing in
arbitration on 07.10.2015. The parties appeared on 07.10.2015 and the
proceedings show that the hearing was fixed on 09.04.2016 by which time
there was to be completion of filing of statement of response to counter
claim etc. The proceedings do not show any objection having been raised by
5
the Respondent regarding continuation of the arbitration proceedings. On
04.12.2015 a letter was addressed by the Respondent to the
Arbitrator seeking extension of time to file its statement of claim. It was
stated, inter alia:
“In the last-hearing held on 07.10.2015 the Claimant was given
60 days’ time to file its Statement of Claim. In this connection
it is to state that we need to collect some more data and files
from our other offices to make the Statement of Claim. For that
purpose, we need about one month further time to submit our
Statement of Claim.
It is therefore, requested that the Ld. Sole Arbitrator may kindly
grant one month further time to the Claimant to file its
Statement of Claim.”
According to the record, the Arbitrator granted one month’s time, as
prayed for.
6. On 01.01.2016, the Arbitration and Conciliation (Amendment) Act,
2015 (hereinafter referred to as “the Amendment Act”) was gazetted and
according to Section 1(2), the Amendment Act was deemed to have come
into force on 23rd October, 2015.
7. For the first time on 12.01.2016, the Respondent sought to challenge
the Arbitrator and raised objection regarding constitution of the arbitral
tribunal as under:
“In reference to the above referred communications addressed
by us, we hereby state that the constitution of the present
arbitral tribunal is wholly invalid/void & against the settled
principles of law, and on account of which Era Infra
Engineering Ltd. is seeking appropriate legal remedies by
6
approaching the Hon’ble High Court for appointment of an
Independent Arbitral Tribunal. Accordingly, we hereby request
your good self to kindly restrain yourself from assuming
reference and seeking to proceed with the present alleged
proceedings, till the final outcome of the above referred legal
proceedings, sought to be immediately & urgently
filed/preferred by Era Infra Engineering Ltd.”
8. The objection was rejected by the Arbitrator on 22.01.2016 on the
ground that the Respondent had participated in the arbitral proceedings on
07.10.2015 without raising any protest. The Respondent was then intimated
to attend proceedings in arbitration scheduled to be held on 16.02.2016. The
Respondent however, approached the High Court of Delhi by filing petition
under Section 14 of the Arbitration and Conciliation Act, 1996 (hereinafter
referred to as “1996 Act”), registered as OMP(T)(Comm.) No.13/2016,
seeking termination of the mandate of the Arbitrator. Grounds I, IV, VI, VII
and VIII raised in the petition were:-
I It is submitted that it is a settled principle of law that
nobody can be a judge in his own cause. In other words, a party
to the Agreement cannot be an arbiter in his own cause. It is
submitted that interest of justice and equity require that where a
party to the contract disputes the committing of any breach of
the condition, the adjudication should be by an independent
person or body and not by the other party to the contract.
IV That without prejudice to the above, it would also be
relevant to mention herein that the allegedly appointed
Arbitrator namely, Shri S.K. Sinha, would also be otherwise
unable to perform the functions of an independent Arbitrator, in
as much as, he has himself, in his official capacity in the
respondent-company, dealt with contracts of nature similar to
7
the contract works in question herein (including the present
contract works), on behalf of the respondent-company.
VI That it would also be worth mentioning that the Hon’ble
Courts have consistently held and observed that the policy of
the Government/Statutory Authorities/Pubic Sector
undertakings, to provide/appoint for arbitration by an Employee
Arbitrator is a vexed problem which requires reconsideration,
which is more so in deference to the specific provisions of the
new Act reiterating the need for an independent and impartial
Arbitrator.
VII That in furtherance of the aforementioned spirit as
reiterated by the Hon’ble Courts, the Act has also been suitably
amended by the Legislature, whereby, inter alia, it has been
expressly provided that an Arbitrator who is an Employee,
Manager, Director or part of the Management or has a similar
controlling influence in one of the parties to the arbitration, is a
valid ground giving rise to justifiable doubts as to the
independence or impartiality of an Arbitrator. Furthermore, it
has also been provided that an Arbitrator’s previous
involvement in the case/subject matter would also be a valid
ground giving rise to justifiable doubts as to the independence
or impartiality of an Arbitrator.
VIII That in the present case, as brought out above, the
alleged Arbitrator so appointed by the respondent herein is an
employee of the respondent herein itself. In fact, the allegedly
appointed individual is the Chief Executive Officer (CEO) of
the respondent herein, who on account of such position also has
a controlling influence over the respondent-company, against
whom the petitioner herein seeks to assert its claims. In such
circumstances, the said allegedly appointed arbitrator would
both in law and fact be unable to perform his functions as an
Arbitrator in an independent or impartial manner.
9. On the same day, another petition being Arbitration Petition No.136 of
2016 was filed by the Respondent under Section 11(6) of 1996 Act for
8
appointing an independent arbitrator for adjudicating disputes between the
parties. The cause of action, as pleaded, in the said petition was:-
“That the cause of action for filing the present petition
arose on the various dates when requests were made by the
petitioner to the respondent for issuance of long outstanding
payments. The cause of action further arose on 29.07.2015
when arbitration was invoked by the petitioner. The cause of
action further arose, when the respondent erroneously and
illegally rejected the petitioner’s request for appointment of an
independent Arbitral Tribunal, which cause of action is still
subsisting and continuing since the respondent has failed to
make the outstanding payment and to so appoint an independent
Arbitral Tribunal.”
10. On 01.03.2016 the High Court issued notice and stayed further
proceedings in arbitration. The matter was contested by the Appellant
submitting, inter alia, that the petition under Section 14 of 1996 Act was not
maintainable; that the Arbitrator was appointed strictly in terms of Clause 56
of the GCC; and that though the Respondent was informed about
appointment of the Arbitrator on 19.08.2015, no steps to challenge the
appointment were undertaken within the time specified and in the manner
prescribed under 1996 Act.
11. The High Court by its judgment and order under Appeal set aside the
appointment of the Arbitrator and directed the Appellant to suggest names of
three panel Arbitrators from different departments to the Respondent who
could thereafter choose any one of them to be the Arbitrator in the matter. It
9
was directed that in the event of failure by the Appellant, the Respondent
would be at liberty to revive the petitions, in which case the Court would
appoint a sole Arbitrator from the list maintained by Delhi International
Arbitration Centre. It was also observed that the Arbitrator was CEO of the
Appellant and was previously involved in cases/contract works similar to the
one involved in the present case and it could not be disputed that the
decisions of part cancellation were taken at the highest level of the
Appellant. In the circumstances, the High Court found that the apprehension
entertained by the Respondent was reasonable and not a vague or general
objection. The observations of the High Court were:-
“13. The Arbitrator, though the CEO of the
respondent-Company and the Project In-charge of the Indira
Gandhi Super Thermal Power Project, P.O. Jharii, Distt. Jhajjar,
Haryana, was not the Engineer In-charge or the day-to-day
In-charge of the work, which was to be performed by the
petitioner under the contract in question. In fact, the Engineer
In-charge for this project is AGM (CCD-Township) who is
supported by Group of Engineers (Dy. Managers, Managers &
Sr. Managers) working under him for execution of the work.
Further, the AGM (CCD-Township) reports to AGM
(ME/CCD) who in turn reports to CEO (APCPL).
37. It is common parlance oft-quoted aphorism “Not only
must Justice be done; it must also be seen to be done.” The
reason is that rules are moral constructs that are meant to serve
higher value. The amendment of 2015 emphasize that the
existence of any relationship or interest of any kind is likely to
give rise to justifiable doubts as to his neutrality is to be
avoided or any employee, manager, director, or has past or
present business or has a controlling influence, relationship
10
with a party to the dispute should not be appointed as an
Arbitrator. Similarly, it is rightly mandated in the Fifth
Schedule of the Amended Act, 2015 (3 of 2016) that if the
Arbitrator has within the past three years been appointed on
two or more occasions by one of the parties and the
Arbitrator has served within the three years in another
arbitration on a related issue involving one of the parties, his
appointment would give rise to justifiable doubts as to the
independence or impartiality of arbitrators. No doubt, the
invocation was about three months prior to amendment. But
the Court has to keep in mind about the purpose and scope
of the Act.
38. In the present case, no doubt, the invocation was on the
basis of un-amended Act but still under Section 12 of the Act
would give the similar indication. The sole Arbitrator
appointed by the respondent admittedly is CEO and Executive
of the respondent-Company who is also from the same
office/department. In order to maintain the neutrality, or to
avoid any doubt in the mind of the petitioner and the reasons
given in the petition, it would be appropriate that independent
sole Arbitrator should be appointed as ultimately neutral person
has merely to decide the dispute between the parties. Even, the
object and scope of the Act says so, that an arbitration
procedure should be fair and unbias. Thus, the appointment of
Mr. S.K. Sinha, CEO of the respondent Company is terminated
and once the Arbitrator’s appointment is terminated, the Court
can consider the prayer of the petitioner.”
12. The decision of the High Court is challenged by the Appellant and Mr.
Vikas Singh, learned Senior Advocate submitted, inter alia, that as the
appointment of the Arbitrator was completely in tune with Clause 56 of the
GCC there was no occasion for the High Court to exercise any power or
jurisdiction and that 1996 Act contemplated clear and definite procedure for
11
challenging the Arbitrator, and even if such challenge were to fail the
remedy under Section 13 was specific and of different nature. In either case,
according to him, the Respondent could not have approached the High Court
and both the petitions ought not to have been entertained.
13. To the extent the High Court had directed the Appellant to submit
three names from its panel of Arbitrators from which list the Respondent
was to select the sole Arbitrator, the Respondent challenged that part of the
Judgment by filing SLP (Civil) Nos.503-504 of 2017. Appearing for the
Respondent, Mr. Manoj K. Singh, learned Advocate relied upon some
decisions of this Court and submitted that an Officer who had either dealt
with the project or was directly subordinate to the Authority whose decision
was the subject matter of dispute could not be an arbitrator in the matter.
14. At the outset, it must be stated that the invocation of arbitration in the
present case was on 29.07.2015, the Arbitrator was appointed on 19.08.2015
and the parties appeared before the Arbitrator on 07.10.2015, well before
23.10.2015 i.e. the date on which the Amendment Act was deemed to have
come into force. The statutory provisions that would therefore govern the
present controversy are those that were in force before the Amendment Act
came into effect. We must mention here that both the parties have addressed
their submissions on this premise.
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15. Before we consider the present controversy, we may quote, for
facility, Sections 12, 13 and 14 of 1996 Act as they stood before the
Amendment Act came into force:-
“12. Grounds for challenge.—
(1) When a person is approached in connection with his
possible appointment as an arbitrator, he shall disclose in
writing any circumstances likely to give rise to justifiable
doubts as to his independence or impartiality.
(2) An arbitrator, from the time of his appointment and
throughout the arbitral proceedings, shall, without delay,
disclose to the parties in writing any circumstances referred to
in sub-section (1) unless they have already been informed of
them by him.
(3) An arbitrator may be challenged only if—
(a) circumstances exist that give rise to justifiable doubts
as to his independence or impartiality, or
(b) he does not possess the qualifications agreed to by the
parties.
(4) A party may challenge an arbitrator appointed by him, or in
whose appointment he has participated, only for reasons of
which he becomes aware after the appointment has been made.
13. Challenge procedure.—
(1) Subject to sub-section (4), the parties are free to agree on a
procedure for challenging an arbitrator.
(2) Failing any agreement referred to in sub-section (1), a party
who intends to challenge an arbitrator shall, within fifteen days
after becoming aware of the constitution of the arbitral tribunal
or after becoming aware of any circumstances referred to in
13
sub-section (3) of section 12, send a written statement of the
reasons for the challenge to the arbitral tribunal.
(3) Unless the arbitrator challenged under sub-section (2)
withdraws from his office or the other party agrees to the
challenge, the arbitral tribunal shall decide on the challenge.
(4) If a challenge under any procedure agreed upon by the
parties or under the procedure under sub-section (2) is not
successful, the arbitral tribunal shall continue the arbitral
proceedings and make an arbitral award.
(5) Where an arbitral award is made under sub-section (4), the
party challenging the arbitrator may make an application for
setting aside such an arbitral award in accordance with section
34.
(6) Where an arbitral award is set aside on an application made
under sub-section (5), the Court may decide as to whether the
arbitrator who is challenged is entitled to any fees.
14. Failure or impossibility to act-
(1) The mandate of an arbitrator shall terminate if—
(a) he becomes de jure or de facto unable to perform his
functions or for other reasons fails to act without undue
delay; and
(b) he withdraws from his office or the parties agree to
the termination of his mandate.
(2) If a controversy remains concerning any of the grounds
referred to in clause (a) of sub-section (1), a party may, unless
otherwise agreed by the parties, apply to the Court to decide on
the termination of the mandate.
(3) If, under this section or sub-section (3) of section 13, an
arbitrator withdraws from his office or a party agrees to the
termination of the mandate of an arbitrator, it shall not imply
acceptance of the validity of any ground referred to in this
section or sub-section (3) of section 12.”
14
16. In the present case Clause 56 of the GCC provides for arbitration by
the Project In-charge of the concerned Project, and in case such Project
In-charge were to be unable or unwilling to act, arbitration by any person
appointed by the Chairman and Managing Director. It further provides inter
alia that there would be no objection even if the Arbitrator had dealt with the
matters to which the contract related in the course of his duties or had
expressed views on all or any of the matters in dispute or difference.
17. The fact that the named arbitrator happens to be an employee of one
of the parties to the Arbitration Agreement has not by itself, before the
Amendment Act came into force, rendered such appointment invalid and
unenforceable. The observations of this Court in Indian Oil Corporation
Ltd. and Others v. Raja Transport Private Ltd.1
in paragraphs 28, 30, 31
and 32 are quite clear. Said paragraphs were as under:
“28. It is contended by the respondent that in view of the emphasis
on the independence and impartiality of an arbitrator in
the new Act and having regard to the basic principle of natural
justice that no man should be judge in his own cause, any arbitration
agreement to the extent it nominates an officer of one of
the parties as the arbitrator, would be invalid and unenforceable.
30. We find no bar under the new Act, for an arbitration agreement
providing for an employee of a Government/statutory cor-
1
(2009) 8 SCC 520
15
poration/public sector undertaking (which is a party to the contract),
acting as an arbitrator. Section 11(8) of the Act requires
the Chief Justice or his designate, in appointing an arbitrator, to
have due regard to:
“11. (8)(a) any qualifications required of the arbitrator by
the agreement of the parties; and
(b) other considerations as are likely to secure the appointment
of an independent and impartial arbitrator.”
31. Section 12(1) requires an arbitrator, when approached in
connection with his possible appointment, to disclose in writing
any circumstances likely to give rise to justifiable doubts as to
his independence or impartiality. Section 12(3) enables the arbitrator
being challenged if
(i) the circumstances give rise to justifiable doubts as to
his independence or impartiality, or
(ii) he does not possess the qualifications agreed to by the
parties.
32. Section 18 requires the arbitrator to treat the parties with
equality (that is to say without bias) and give each party full opportunity
to present his case. Nothing in Sections 11, 12, 18 or
other provisions of the Act suggests that any provision in an arbitration
agreement, naming the arbitrator will be invalid if
such named arbitrator is an employee of one of the parties to
the arbitration agreement.”
18. In the same decision, this Court in paragraphs 34 and 35 dealt with
“justifiable apprehension about the independence or impartiality” of an employee
arbitrator in following terms:-
“34. The fact that the named arbitrator is an employee of one of
the parties is not ipso facto a ground to raise a presumption of
16
bias or partiality or lack of independence on his part. There can
however be a justifiable apprehension about the independence
or impartiality of an employee arbitrator, if such person was the
controlling or dealing authority in regard to the subject contract
or if he is a direct subordinate (as contrasted from an officer of
an inferior rank in some other Department) to the officer whose
decision is the subject-matter of the dispute.
35. Where however the named arbitrator though a senior officer
of the Government/statutory body/government company, had
nothing to do with the execution of the subject contract, there
can be no justification for anyone doubting his independence or
impartiality, in the absence of any specific evidence. Therefore,
senior officer(s) (usually Heads of Department or equivalent) of
a Government/statutory corporation/public sector undertaking,
not associated with the contract, are considered to be independent
and impartial and are not barred from functioning as arbitrators
merely because their employer is a party to the contract.”
19. Section 12(1) as it then stood before the Amendment Act came into
force, obliged the person approached in connection with possible appointment
as an arbitrator, to disclose in writing any circumstances likely to give
rise to justifiable doubts as to his independence or impartiality. In the
present case, the Arbitrator undoubtedly is an employee of the Appellant but
so long as there is no justifiable apprehension about his independence or impartiality,
the appointment could not be rendered invalid and unenforceable.
As held in the case of Indian Oil Corporation Ltd. (supra) mere fact that the
arbitrator is an employee is not ipso facto a ground to raise any presumption
of bias or partiality. It is not the case that there had not been any fair and
17
correct disclosure. All that the Respondent alleged in its petition seeking
termination of the mandate of the Arbitrator was, “…..he has himself in his
official capacity in the Respondent-Company dealt with contracts of nature
similar to the contract works in question….” The Respondent, while relying
on the provisions of the Amendment Act had also submitted, “…. allegedly
appointed individual is the Chief Executive Officer of the Respondent
herein, who on account of such position also has the controlling influence
over the Respondent-Company”. At the same time, the High Court observed
in Paragraph 13 of the judgment under appeal that the Arbitrator was
not the Engineer In-charge or the day-to-day In-charge of the work and as a
matter of fact, the Engineer In-charge was AGM (CCD-Township) who had
a team of other Engineers working under him a n d t h a t AG M ( C C D –
Tow n s h i p ) r e p o r t e d t o AG M ( M E – C C D ) w h o i n t u r n r e –
p o r t e d t o C E O (APCPL) i.e. the Arbitrator. The facts on record and the
hierarchy as mentioned do not show that the Arbitrator in the present matter
was either the Dealing Authority in regard to the Contract or was directly
sub-ordinate to the Officer(s) whose decision is the subject matter of dispute.
In fact, the decision, which could be subject matter of dispute, was that of
his subordinates. He may have dealt with contracts of nature similar to the
contract works in question but that by itself does not render the appointment
18
invalid. Since there is nothing on record which could raise justifiable doubts
about the independence or impartiality of the named Arbitrator, in the light
of the observations of this Court in Indian Oil Corporation Ltd. (supra) the
appointment of the Arbitrator could not in any way be termed to be illegal or
unenforceable.
20. However, number of decisions of this Court were relied upon by the
Respondent in support of its submission that interference in the present case
was called for. We may therefore deal with those decisions.
A. In Northern Railway Administration, Ministry of Railway,
New Delhi v. Patel Engineering Company Ltd2
., a Bench consisting
of three learned Judges of this Court was called upon to consider the
apparent conflict between two Judgments of this Court in “ACE
Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd.3
and
Union of India v. Bharat Battery Manufacturing Co. (P) Ltd.4
”. The
submission made on behalf of the appellant therein as quoted in
paragraph 5 was:-
“5.…………..It is, therefore, submitted that before the
alternative is resorted to, agreed procedure has to be
exhausted. The agreement has to be given effect and the
contract has to be adhered to as closely as possible.
Corrective measures have to be taken first and the Court
is the last resort.”
2
(2008) 10 SCC 240
3
(2007) 5 SCC 304
4
(2007) 7 SCC 684
19
The discussion in paragraphs 12, 13 and 14 of the decision was as under:-
“12. A bare reading of the scheme of Section 11 shows
that the emphasis is on the terms of the agreement being
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.
13. The expression “due regard” means that proper
attention to several circumstances have been focused.
The expression “necessary” as a general rule can be
broadly stated to be those things which are reasonably
required to be done or legally ancillary to the
accomplishment of the intended act. Necessary measures
can be stated to be the reasonable steps required to be
taken.
14. In all these cases at hand the High Court does not
appear to have focused on the requirement to have due
regard to the qualifications required by the agreement or
other considerations necessary to secure the appointment
of an independent and impartial arbitrator. It needs no
reiteration that appointment of the arbitrator or arbitrators
named in the arbitration agreement is not a must, but
while making the appointment the twin requirements of
sub-section (8) of Section 11 have to be kept in view,
considered and taken into account. If it is not done, the
appointment becomes vulnerable. In the circumstances,
we set aside the appointment made in each case, remit the
matters to the High Court to make fresh appointments
keeping in view the parameters indicated above.”
20
B. In Union of India v. Singh Builders Syndicate5
, an arbitral
tribunal consisting of three serving Officers was constituted but no
proceedings were actually undertaken. Thereafter, on an application
preferred under Section 11, the High Court appointed a Former Judge
of that High Court as the sole arbitrator. Paragraph 11 of the decision
set out the question which arose for consideration and Paragraph 14
was as under:-
“14. It was further held in Northern Railway case that
the Chief Justice or his designate should first ensure that
the remedies provided under the arbitration agreement
are exhausted, but at the same time also ensure that the
twin requirements of sub-section (8) of Section 11 of the
Act are kept in view. This would mean that invariably the
court should first appoint the arbitrators in the manner
provided for in the arbitration agreement. But where the
independence and impartiality of the arbitrator(s)
appointed/nominated in terms of the arbitration
agreement is in doubt, or where the Arbitral Tribunal
appointed in the manner provided in the arbitration
agreement has not functioned and it becomes necessary
to make fresh appointment, the Chief Justice or his
designate is not powerless to make appropriate
alternative arrangements to give effect to the provision
for arbitration.”
C. After dealing with cases on the point including Northern
Railway Administration (supra), this Court in Indian Oil
Corporation Ltd. (supra) summed up the legal position as under:-
45. If the arbitration agreement provides for arbitration
by a named arbitrator, the courts should normally give
5
(2009) 4 SCC 523
21
effect to the provisions of the arbitration agreement. But
as clarified by Northern Railway Admn., 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.
48. In the light of the above discussion, the scope of
Section 11 of the Act containing the scheme of
appointment of arbitrators may be summarised thus:
(i) Where the agreement provides for arbitration with
three arbitrators (each party to appoint one arbitrator and
the two appointed arbitrators to appoint a third
arbitrator), in the event of a party failing to appoint an
arbitrator within 30 days from the receipt of a request
from the other party (or the two nominated arbitrators
failing to agree on the third arbitrator within 30 days
from the date of the appointment), the Chief Justice or his
designate will exercise power under sub-section (4) of
Section 11 of the Act.
(ii) Where the agreement provides for arbitration by a
sole arbitrator and the parties have not agreed upon any
appointment procedure, the Chief Justice or his designate
will exercise power under sub-section (5) of Section 11,
if the parties fail to agree on the arbitration within thirty
22
days from the receipt of a request by a party from the
other party.
(iii) Where the arbitration agreement specifies the
appointment procedure, then irrespective of whether the
arbitration is by a sole arbitrator or by a three-member
Tribunal, the Chief Justice or his designate will exercise
power under sub-section (6) of Section 11, if a party fails
to act as required under the agreed procedure (or the
parties or the two appointed arbitrators fail to reach an
agreement expected of them under the agreed procedure
or any person/institution fails to perform any function
entrusted to him/it under that procedure).
(iv) While failure of the other party to act within 30
days will furnish a cause of action to the party seeking
arbitration to approach the Chief Justice or his designate
in cases falling under sub-sections (4) and (5), such a
time-bound requirement is not found in sub-section (6) of
Section 11. The failure to act as per the agreed procedure
within the time-limit prescribed by the arbitration
agreement, or in the absence of any prescribed time-limit,
within a reasonable time, will enable the aggrieved party
to file a petition under Section 11(6) of the Act.
(v) Where the appointment procedure has been agreed
between the parties, but the cause of action for invoking
the jurisdiction of the Chief Justice or his designate under
clauses (a), (b) or (c) of sub-section (6) has not arisen,
then the question of the Chief Justice or his designate
exercising power under sub-section (6) does not arise.
The condition precedent for approaching the Chief
Justice or his designate for taking necessary measures
under sub-section (6) is that
(i) a party failing to act as required under the agreed
appointment procedure; or
23
(ii) the parties (or the two appointed arbitrators)
failing to reach an agreement expected of them under the
agreed appointment procedure; or
(iii) a person/institution who has been entrusted with
any function under the agreed appointment procedure,
failing to perform such function.
(vi) The Chief Justice or his designate while
exercising power under sub-section (6) of Section 11
shall endeavour to give effect to the appointment
procedure prescribed in the arbitration clause.
(vii) If circumstances exist, giving rise to justifiable
doubts as to the independence and impartiality of the
person nominated, or if other circumstances warrant
appointment of an independent arbitrator by ignoring the
procedure prescribed, the Chief Justice or his designate
may, for reasons to be recorded ignore the designated
arbitrator and appoint someone else.”
Thus, as laid down in sub-para (v) of para 48, unless the cause
of action for invoking jurisdiction under Clauses (a), (b) or (c) of
sub-section (6) of Section 11 of 1996 Act arises, there is no question
of the Chief Justice or his designate exercising power under
sub-section (6) of Section 11.
D. In Denel (Proprietary) Limited v. Bharat Electronics Limited
and Another6
, though the arbitration agreement provided that all
disputes be referred to the Managing Director or his nominee for
6
(2010) 6 SCC 394
24
arbitration, this Court appointed retired Judge of this Court as the sole
arbitrator. The reason as is clear from paras 19 to 21 of the decision
was; while invoking arbitration the appellant therein had requested the
respondent for an appointment of a mutually agreed independent
arbitrator but the respondent had plainly refused to refer the disputes
to arbitration. Para 20 of the decision is noteworthy:-
“20. In Datar Switchgears Ltd. v. Tata Finance Ltd.7
this
Court while considering the powers of the Court to
appoint an arbitrator under Section 8 of the Arbitration
Act, 1940, cited the decision of this Court in Bhupinder
Singh Bindra v. Union of India8
. It was held in that case
that:
“3. 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.”
The said principle has to abide in the normal course.”
E. Similarly, in Denel (Proprietary) Limited v. Ministry of
Defence9
, the relevant clause provided for sole arbitration of the
Director General, Ordnance Factory, Government of India or a
7
(2000) 8 SCC 151
8
(1995) 5 SCC 329
9
(2012) 2 SCC 759
25
Government Servant appointed by him. It was observed that since no
arbitrator was appointed in terms of the governing clause within the
stipulated period the respondent had forfeited the right to make an
appointment of an arbitrator. Paragraphs 21 and 24 of the decision
were:-
“21. It 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
than the named arbitrator.
24. It 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 Indian Oil Corpn. Ltd, 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……..”
F. In Union of India and Others v. Uttar Pradesh State Bridge
Corporation Limited10
, an arbitral tribunal consisting of three
10 (2015) 2 SCC 52
26
Gazetted Railway Officers was constituted in the year 2007 and
despite four years having passed, the matter was not getting
concluded. In the circumstances, while accepting the petition for
setting aside the mandate of the tribunal the High Court had appointed
a retired Chief Justice as the sole arbitrator. While considering the
grievance that such appointment was beyond the concerned arbitration
clause, this Court observed:-
“12. As is clear from the reading of Section 14, when
there is a failure on the part of the Arbitral Tribunal to act
and it is unable to perform its function either de jure or
de facto, it is open to a party to the arbitration
proceedings to approach the court to decide on the
termination of the mandate. Section 15 provides some
more contingencies when mandate of an arbitrator can
get terminated. In the present case, the High Court has
come to a categorical finding that the Arbitral Tribunal
failed to perform its function, and rightly so. It is a clear
case of inability on the part of the members of the
Tribunal to proceed in the matter as the matter lingered
on for almost four years, without any rhyme or justifiable
reasons. The members did not mend their ways even
when another life was given by granting three months to
them. Virtually a peremptory order was passed by the
High Court, but the Arbitral Tribunal remained
unaffected and took the directions of the High Court in a
cavalier manner. Therefore, the order of the High Court
terminating the mandate of the Arbitral Tribunal is
flawless. This aspect of the impugned order is not even
questioned by the appellant at the time of hearing of the
present appeal. However, the contention of the appellant
is that even if it was so, as per the provisions of Section
15 of the Act, substitute arbitrators should have been
appointed “according to the rules that were applicable to
27
the appointment of the arbitrator being replaced”. On this
basis, it was the submission of Mr. Mehta, learned ASG,
that the High Court should have resorted to the provision
contained in Clause 64 of GCC.
13. No doubt, ordinarily that would be the position. The
moot question, however, is as to whether such a course of
action has to be necessarily adopted by the High Court in
all cases, while dealing with an application under Section
11 of the Act or is there room for play in the joints and
the High Court is not divested of exercising discretion
under some circumstances? If yes, what are those
circumstances? It is this very aspect which was
specifically dealt with by this Court in Tripple Engg.
Works.
11 Taking note of various judgments, the Court
pointed out that the notion that the High Court was bound
to appoint the arbitrator as per the contract between the
parties has seen a significant erosion in recent past. In
paras 6 and 7 of the said decision, those judgments
wherein departure from the aforesaid “classical notion”
has been made are taken note of……………….”
G. In Voestalpine Schienen GMBH v. Delhi Metro Rail
Corporation Limited12
, the relevant clause contemplated that the
disputes be settled by three arbitrators from and out of a list of five
engineers supplied by the respondent therein. The appellant had
invoked arbitration on 14.06.2016 i.e. after the amending Act. When
the list of five persons comprising of serving officers was supplied by
the respondents, an objection was taken that such procedure would
lead to appointment of “illegal persons” in view of Section 12(5) read
11 (2014) 9 SCC 288
12 (2017) 4 SCC 665
28
with Clause 1 of Schedule 7 of the Act. This Court considered that
Section 12 of the Act was amended pursuant to the recommendations
by the Law Commission which specifically dealt with the issue of
“neutrality of arbitrators”, and observed that if the arbitration clause
finds foul with the amended provisions, the appointment of the
Arbitrator even if apparently in conformity with the arbitration clause
in the agreement, would be illegal and thus the Court would be within
its powers to appoint such arbitrator(s) as may be permissible.
Paragraph 18 sums up this aspect of the matter:-
“18. Keeping in mind the afore-quoted recommendation
of the Law Commission, with which spirit, Section 12
has been amended by the Amendment Act, 2015, it is
manifest that the main purpose for amending the
provision was to provide for neutrality of arbitrators. In
order to achieve this, sub-section (5) of Section 12 lays
down that notwithstanding any prior agreement to the
contrary, any person whose relationship with the parties
or counsel or the subject-matter of the dispute falls under
any of the categories specified in the Seventh Schedule,
he shall be ineligible to be appointed as an arbitrator. In
such an eventuality i.e. when the arbitration clause finds
foul with the amended provisions extracted above, the
appointment of an arbitrator would be beyond pale of the
arbitration agreement, empowering the court to appoint
such arbitrator(s) as may be permissible. That would be
the effect of non obstante clause contained in sub-section
(5) of Section 12 and the other party cannot insist on
appointment of the arbitrator in terms of the arbitration
agreement.”
29
21. Except the decision of this Court in Voestalpine Schienen GMBH
(supra) referred to above, all other decisions arose out of matters where
invocation of arbitration was before the Amendment Act came into force.
Voestalpine Schienen GMBH (supra) was a case where the invocation was
on 14.6.2016 i.e. after the Amendment Act and the observations in Para 18
clearly show that since “the arbitration clause finds foul with the amended
provisions”, the Court was empowered to appoint such arbitrator(s) as may
be permissible. The ineligibility of the arbitrator was found in the context of
amended Section 12 read with Seventh Schedule (which was brought in by
Amendment Act) in a matter where invocation for arbitration was after the
Amendment Act had come into force. It is thus clear that in pre-amendment
cases, the law laid down in Northern Railway Administration (Supra), as
followed in all the aforesaid cases, must be applied, in that the terms of the
agreement ought to be adhered to and/or given effect to as closely as
possible. Further, the jurisdiction of the Court under Section 11 of 1996 Act
would arise only if the conditions specified in clauses (a), (b) and (c) are
satisfied. The cases referred to above show that once the conditions for
exercise of jurisdiction under Section 11(6) were satisfied, in the exercise of
consequential power under Section 11(8), the Court had on certain occasions
gone beyond the scope of the concerned arbitration clauses and appointed
30
independent arbitrators. What is clear is, for exercise of such power under
Section 11(8), the case must first be made out for exercise of jurisdiction
under Section 11(6).
22. The principles which emerge from the decisions referred to above are:-
A. In cases governed by 1996 Act as it stood before the Amendment
Act came into force:-
(i) The fact that the named arbitrator is an employee of one of
the parties is not ipso facto a ground to raise a presumption of
bias or partiality or lack of independence on his part. There can
however be a justifiable apprehension about the independence
or impartiality of an employee arbitrator, if such person was the
controlling or dealing authority in regard to the subject contract
or if he is a direct subordinate to the officer whose decision is
the subject-matter of the dispute.
(ii) unless the cause of action for invoking jurisdiction under
Clauses (a), (b) or (c) of sub-section (6) of Section 11 of 1996
Act arises, there is no question of the Chief Justice or his
designate exercising power under sub-section (6) of Section 11.
(iii) The Chief Justice or his designate while exercising power
under sub-section (6) of Section 11 shall endeavour to give
effect to the appointment procedure prescribed in the arbitration
clause.
(iv) While exercising such power under sub section (6) of
Section 11, If circumstances exist, giving rise to justifiable
doubts as to the independence and impartiality of the person
nominated, or if other circumstances warrant appointment of an
independent arbitrator by ignoring the procedure prescribed, the
Chief Justice or his designate may, for reasons to be recorded
ignore the designated arbitrator and appoint someone else.
31
B. In cases governed by 1996 Act after the Amendment Act has come
into force:-
If the arbitration clause finds foul with the amended
provisions, the appointment of the Arbitrator even if apparently
in conformity with the arbitration clause in the agreement,
would be illegal and thus the Court would be within its powers
to appoint such arbitrator(s) as may be permissible.
23. The observations of the High Court in paragraphs 37-38 as quoted
above show that the exercise was undertaken by the High Court, “in order to
make neutrality or to avoid doubt in the mind of the petitioner” and ensure
that justice must not only be done and must also be seen to be done. In
effect, the High Court applied principles of neutrality and impartiality which
have been expanded by way of Amendment Act, even when no cause of
action for exercise of power under Section 11(6) had arisen. The procedure
as laid down in unamended Section 12 mandated disclosure of
circumstances likely to give rise to justifiable doubts as to independence and
impartiality of the arbitrator. It is not the case of the Respondent that the
provisions of Section 12 in unamended form stood violated on any count. In
any case the provision contemplated clear and precise procedure under
which the arbitrator could be challenged and the objections in that behalf
under Section 13 could be raised within prescribed time and in accordance
32
with the procedure detailed therein. The record shows that no such challenge
was raised within the time and in terms of the procedure prescribed. As a
matter of fact, the Respondent had participated in the arbitration and by its
communication dated 04.12.2015, had sought extension of time to file its
statement of claim.
24. In the circumstances, the High Court was clearly in error in
exercising jurisdiction in the present case and it ought not to have interfered
with the process and progress of arbitration. We therefore accept the
challenge raised by the Appellant and reject that raised by the Respondent.
Consequently, appeals arising out of Special Leave Petition (Civil)
Nos.25206-25207 of 2016 are allowed while those arising from Special
Leave Petition (Civil) Nos.503-504 of 2017 stand dismissed. The
arbitration, in pursuance of the appointment of the Arbitrator on 19.08.2015,
shall proceed in accordance with law.
25. The appeals are disposed of in aforesaid terms, without any order as to
costs.
…….………………….J.
(Adarsh Kumar Goel)
…………….………….J.
(Uday Umesh Lalit)
New Delhi
September 12, 2017