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TMI Blog2009 (8) TMI 1075X X X X Extracts X X X X X X X X Extracts X X X X ..... rrant 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. Whether respondent herein had taken necessary steps for appointment of arbitrator in terms of the agreement, and the appellant had failed to act in terms of the agreed procedure, by not referring the dispute to its Director (Marketing) for arbitration? - Held that:- What is significant is that even subsequent to the order dated 20.1.2006 passed by the District Court, the respondent did not refer the disputes to the Director (Marketing) of the appellant nor called upon the appellant to refer to the disputes in terms of the arbitration agreement, nor withdraw its earlier letter dated 4.1.2006 demanding appointment of an independent arbitrator contrary to the agreed procedure under the arbitration agreement.In the circumstances, the third question is answered in the negative. - CIVIL APPEAL NO. 5760 OF 2009 - - - Dated:- 24-8-2009 - R.V. RAVEENDRAN AND JAIN, D.K., JJ. JUDGMENT R. V. Raveendran, J. Leave granted. This appeal by special leave is filed against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Junior Division, Rishikesh, Dehradun for a declaration that the order of termination of dealership dated 6.8.2005 was illegal and void and for a permanent injunction restraining the appellant from stopping supply of petroleum products to its retail outlet. 4. In the said suit, the appellant filed an application under section 8 of the Act read with Order VII Rule 11 of Civil Procedure Code, praying that the suit be rejected and the matter be referred to arbitration in terms of Clause 69 of the agreement. The learned Civil Judge, by order dated 16.11.2005 allowed the said application filed by the appellant directing the parties to refer the matter to arbitration within two months, with a further direction that appellant shall not stop supplies to the respondent for a period of two months. 5. Both appellant and respondent challenged the order dated 16.11.2005. Respondent filed Civil Appeal No.96/2005 being aggrieved by the restriction of supply for only two months from 16.11.2005. The appellant filed Civil Appeal No.214/2005, being aggrieved by the direction to continue the supply for a period of two months from 16.11.2005. The respondent also filed an application under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alling upon them to appoint an independent arbitrator, but in spite of expiry of reasonable time, no independent arbitrator has been appointed. The said petition was resisted by the appellant by contending that an arbitrator can be appointed only in terms or clause 69 of the agreement. The learned Chief Justice, after hearing the parties allowed the application by the impugned order dated 26.9.2008, and appointed a retired High Court Judge as sole arbitrator to decide the dispute. The learned Chief Justice assigned the following two reasons to appoint a retired Judge as Arbitrator, instead of the person named in the Arbitration Agreement :- (i) The Director (Marketing) of the appellant, being its employee, should be presumed not to act independently or impartially. (ii) The respondent had taken steps in accordance with the agreed appointment procedure contained in the arbitration agreement and the directions of the civil court, by issuing a notice dated 4.1.2006 calling upon the appellant to appoint an arbitrator. After the receipt of the notice dated 4.1.2006, the appellant had to refer matter for arbitration to its Director Marketing, but it did not do so. Nor did it tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn the parties etc. A party to the contract cannot claim the benefit of arbitration under the arbitration clause, but ignore the appointment procedure relating to the named Arbitrator contained in the arbitration clause. 10. It is now well settled by a series of decisions of this Court that arbitration agreements in government contracts providing that an employee of the Department (usually a high official unconnected with the work or the contract) will be the Arbitrator, are neither void nor unenforceable. We may refer to a few decisions on this aspect. 10.1) In Executive Engineer, Irrigation Division, Puri vs. Gangaram Chhapolia 1984 (3) SCC 627, this Court was considering the validity of appointment of the Arbitrator where the arbitration required that the disputes shall be referred to the sole arbitration of a Superintending Engineer of the Public Works Department unconnected with the work at any stage nominated by the concerned Chief Engineer. This Court held : The use of the expression "Superintending Engineer, State Public Works Department" in Clause 23 qualified by the restrictive words "unconnected with the work" clearly manifests an intention o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing that the Superintending Engineer will be the arbitrator. Disputes arising in respect of cancellation of the contract by the department were referred to the said Arbitrator. An application under section 5 of Arbitration Act, 1940 was filed by the contractor for removal of the arbitrator on the ground of apprehended bias on the part of the arbitrator as he was an employee of the State Government and was subordinate of the chief Engineer who took the decision to cancel the contract. This Court negatived the said contention and held :- When the parties entered into the contract, the parties knew the terms of the contract including arbitration clause. The parties knew the scheme and the fact that the Chief Engineer is superior and the Superintending Engineer is subordinate to the Chief Engineer of the particular Circle. In spite of that the parties agreed and entered into arbitration. .... Unless there is allegation against the named arbitrator either against his honesty or mala fide or interest in the subject matter or reasonable apprehension of the bias, a named and agreed arbitrator cannot and should not be removed in exercise of a discretion vested in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man and Managing Director of the appellant himself, respondents' case may not be fairly examined. He prays that any retired High Court Judge may be appointed as an arbitrator by us. We have not felt inclined to accept this submission, because arbitration clause states categorically that the difference/dispute shall be referred to an arbitrator appointed by the Chairman and Managing Director of IPDL (Indian Drugs Pharmaceutical Limited) who is the appellant. This provision in the arbitration clause cannot be given a go-bye merely at the askance of the respondent unless he challenged its binding nature in an appropriate proceeding which he did not do. 10.6) In Union of India v. M.P.Gupta (2004) 10 SCC 504, this Court was considering an arbitration agreement which provided for appointment of two Gazetted railway officers as arbitrators. But a learned Single Judge of the High Court while allowing an application under section 20 of the Arbitration Act, 1940, appointed a retired Judge as the sole arbitrator and a Division Bench affirmed the same. Reversing the said decision, this Court held that having regard to the express provision in the arbitration agreement that two Gazetted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-sections (1) and (3) of section 12 and Section 18 of the Act. 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 judged 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. 12. While the provisions relating to independence and impartiality are more explicit in the new Act, it does not mean that the old Act (Arbitration Act, 1940) enabled persons with bias to act as Arbitrators. What was implicit under the old Act is made explicit in the new Act in regard to impartiality, independence and freedom from bias. The decisions under the old Act on this issue are therefore not irrelevant when considering the provisions of the new Act. At all events, M. P. Gupta and Ace Pipeline are cases under the new Act. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtiality 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. Where however the named arbitrator though a senior officer of the government/statutory body/government company, had nothing to do with 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. 15. The position may be different where the person named as the Arbitrator is an employee of a company or body or individual other than the state and its instrumentalities. For example, if the Director of a private company (which is a party to the Arbitration agreement), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitration clause. It was held that normally the court should adhere to the terms of the arbitration agreement except in exceptional cases for reasons to be recorded or where both parties agree for a common name. 18.2) In Union of India v. Bharat Battery Manufacturing Company Pvt. Ltd. [2007 (7) SCC 684], another two-Judge Bench of this Court held that once the notice period provided for under the arbitration clause for appointment of an arbitrator elapses and the aggrieved party files an application under section 11(6) of the Act, the right of the other party to appoint an arbitrator in terms of the arbitration agreement stands extinguished. 18.3) The divergent views expressed in Ace Pipeline (supra) and Bharat Battery (supra) were sought to be harmonised by a three-Judge Bench of this Court in Northern Railway Administration v. Patel Engineering Co. Ltd. [2008 (11) SCALE 500]. After examining the scope of sub-sections (6) and (8) of section 11, this Court held : The crucial expression in sub-section (6) is a party may request the Chief Justice or any person or institution designated by him to take the necessary measures . This expression has to be read along w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r arbitration by a named Arbitrator, the courts should normally give effect to the provisions of the arbitration agreement. But as clarified by Northern Railway Administration, 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. 20. This takes us to the effect of the condition in the arbitration agreement that it is also a term of this contract that no person other than the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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) (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 Chief Justice or his designate exercising power under sub-section (6) does not arise. The condition precedent for approaching the Chief J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006, which directed reference of the dispute to arbitration as per the agreement, within two months. But there was no direction by the court to appoint an independent arbitrator contrary to the terms of the arbitration agreement. In view of the order dated 20.1.2006, the respondent ought to have referred the dispute to the Director (Marketing) of the appellant within two months from 20.1.2006. It failed to do so. Therefore, it was the respondent who failed to act in terms of the agreed procedure and not the appellant. In fact, as the Arbitrator was already identified, there was no need for the respondent to ask the appellant to act in accordance with the agreed procedure. On the other hand, the respondent ought to have directly referred the disputes to the Director (Marketing) of the appellant corporation in terms of the arbitration agreement. 24. We may now deal with the notice dated 4.1.2006 by which the respondent notified the appellant that it was not willing for appointment of arbitrator in terms of the agreement and that both should therefore hold discussions to decide upon an independent arbitrator. The letter dated 4.1.2006 cannot, be construed as a step taken by the res ..... 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