Denel (Proprrietory Limited) vs Govt.Of India Min.Of Defence

Denel (Proprietary Limited) ...Petitioner

VERSUS

Govt. of India, Ministry of Defence ...

Respondent

O R D E R

SURINDER SINGH NIJJAR, J.

1. The 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

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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 petitioner. 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.

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2. The 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:-

"All the 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 by him. 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."

3. The 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

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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 procedure."

4. It 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

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that the directions issued by the District Court are without any

authority or jurisdiction and as such void ab initio. 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 11. 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

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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

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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 petition.

5. 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

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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.

6. I have heard the learned counsel for the parties.

7. On 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.

3 8. On 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

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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 Limited4 . On the basis of the aforesaid

judgment, the learned counsel submitted that the present petition

4 (2009) 8 SCC 520

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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).

9. I 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, that 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

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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).

10. In 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

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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, 2010.

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.

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11. Mr. 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 cause. 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 Limited5 . 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

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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.

12. Learned 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

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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 & Anr.6 .

13. Replying 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

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14. 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 then the named arbitrator.

15. A Three Judge Bench of this Court in the case of Northern

Railway Administration, Ministry of Railway, New Delhi Vs.

Patel Engineering Company Limited7 , 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.8 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

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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."

16. Keeping 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

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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.

17. 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 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

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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)

18. The 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

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independent. That being so, the appointment of Mr. Satyanarayana

can not pass the test under Section 11(8) of the Act.

19. Similarly, 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.

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20. In 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.

21. In 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.

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22. The 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.

...............................J.

[Surinder Singh Nijjar]

New Delhi;

January 09, 2012.

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