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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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 em- phasis 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 arbi- tration 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 agree- ment providing for an employee of a Government/statutory cor-

1  (2009) 8 SCC 520

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poration/public sector undertaking (which is a party to the con- tract), 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 ap- pointment 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 arbi- trator 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 op- portunity to present his case. Nothing in Sections 11, 12, 18 or other provisions of the Act suggests that any provision in an ar- bitration  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 em-

ployee 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

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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 indepen- dent and impartial and are not barred from functioning as arbi- trators 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 appoint-

ment 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 im-

partiality, 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

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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 rely-

ing on the provisions of the Amendment Act had also submitted, “…. al-

legedly appointed individual is the Chief Executive Officer of the Respon-

dent herein, who on account of such position also has the controlling   influ-

ence over the Respondent-Company”.   At the same time, the High Court ob-

served 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

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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

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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.”

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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

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(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

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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.”

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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.

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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