REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.  9486-9487  OF 2019 (Arising out of SLP(C) Nos.24173-74 of 2019)

CENTRAL ORGANISATION FOR  RAILWAY ELECTRIFICATION              ...Appellant

VERSUS

M/S ECI-SPIC-SMO-MCML (JV)  A JOINT VENTURE COMPANY                            …Respondent

J U D G M E N T

R. BANUMATHI, J.

Leave granted.

2. These  appeals  have  been  preferred  against  the  impugned

orders dated 03.01.2019 and 29.03.2019 passed by the High Court

of Judicature at Allahabad in Arbitration Application No.151 of 2018

in  and  by  which  the  High  Court  rejected  the  contention  of  the

appellant  that  the  arbitrator  is  to  be  appointed  as  per  General

Conditions 64 (3)(a)(ii) and 64 (3)(b) of the Contract and appointed

Shri Justice Rajesh Dayal Khare as the sole arbitrator for resolving

the dispute between the parties.

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3. The appellant awarded work contract of Rs.165,67,98,570/- to

the respondent-Company by an agreement dated 20.09.2010 which

contains  the  arbitration  clause.   Subsequently,  after  coming  into

force of Arbitration and Conciliation (Amendment) Act, 2015 (w.e.f.

23.10.2015), the Government of India, Ministry of Railways made a

modification to Clause 64 of the General Conditions of Contract and

issued  a  notification  dated  16.11.2016  for  implementation  of

modification. The modified Clause 64(3)(a)(ii) (where applicability of

Section 12(5) has been waived off) inter alia provided that in cases

where the total value of all claims exceeds Rs. 1 crore, the Arbitral

Tribunal shall consist of a panel of three gazetted Railway Officers

not below JA (Junior Administrative) Grade or two Railway Gazetted

Officers not below JA Grade and a retired Railway Officer, retired

not below the rank of Senior Administrative (SA) Grade officer as

arbitrators. The procedure for constitution of the Arbitral Tribunal is

provided  thereon.  Clause  64(3)(b)  deals  with  the appointment  of

arbitrator where applicability of Section 12(5) of the Arbitration and

Conciliation Act has not been waived off. Clause 64(3)(b) stipulates

that  the Arbitral  Tribunal  shall  consist  of  a  panel  of  three retired

railway officers not below the rank of Senior Administrative Officer

as the arbitrators as per the procedure indicated thereon.

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4. Since the respondent  did not  complete the work under  the

contract within the prescribed period, on 18.10.2017, the appellant

issued  “Seven  days”  notice  under  Clause  62  of  the  General

Conditions  of  Contract  to  the  respondent.   Thereafter  on

27.10.2017,  the  appellant  issued  a  “48  hours’  notice”  to  the

respondent calling upon the respondent to make good the progress

of work, failing which the contract will stand terminated.  Since the

respondent  did  not  make  adequate  progress  in  the  work,  on

01.11.2017, the contract was terminated as per Clause 62 of the

General  Conditions  of  the  Contract.   The  respondent  was  also

informed  that  their  security  deposit  has  been  forfeited  and  the

performance guarantee submitted by it shall also be encashed.

5. The respondent  filed  a  Petition  No.760 of  2017 before  the

High Court challenging the termination of the contract which came

to be dismissed by the High Court vide order dated 28.11.2017 and

the  High  Court  directed  the  respondent  to  avail  the  alternative

remedy  by  invoking  arbitration  clause.   The  respondent  vide  its

letter dated 27.07.2018 requested the appellant for appointment of

an Arbitral Tribunal for resolving the disputes between the parties

and  settle  the  claims  value  of  Rs.73.35  crores.   In  reply  dated

24.09.2018,  the  appellant  sent  a  list  of  four  serving  Railway

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Electrification  Officers  of  JA  Grade  to  act  as  arbitrators.   The

respondent was asked to select any two and communicate to the

appellant for formation of the arbitration tribunal panel. Vide letter

dated 25.10.2018, the respondent was sent a list of another panel

comprising four retired Railway officers. In terms of Clause 63(3)(b)

of  Railway’s General  Conditions of  Contract,  the respondent was

asked to select any two from this list and communicate them to the

appellant within thirty days for constitution of the arbitration tribunal.

6. The respondent did not send a reply to the above letters of the

appellant; but filed Arbitration Petition No. 151 of 2018 before High

Court  under  Section 11(6)  of  the Arbitration and Conciliation Act

seeking appointment of a sole arbitrator for resolution of differences.

In  its  petition,  the  respondent  suggested  the  name  of  one  Shri

Ashwani  Kumar  Kapoor,  retired  member  Electrical  from  Railway

Board to be appointed as an arbitrator in the matter. According to

the respondent, there exists a valid and binding arbitration clause

between the parties being clause 1.2.54 of Part I of Chapter 2 and

also 64 of the General Conditions of Contract; but since no neutral

arbitrator is contemplated to be appointed in the General Conditions

of Contract, the respondent has no other recourse except by filing

the petition under Section 11(6) of the Arbitration and Conciliation

Act, 1996.

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7. The High Court  vide the impugned order dated 03.01.2019

rejected the argument of the appellant that the arbitrator ought to be

appointed only  from the panel  of  arbitrators  in  terms of  General

Conditions of Contract.  The High Court observed that the powers of

the  Court  to  appoint  arbitrator  are  independent  of  the  contract

between the parties and no fetters could be attached to the powers

of the court.   With those findings, the High Court appointed Shri

Rajesh Dayal Khare, a retired judge of the Allahabad High Court as

the sole arbitrator subject to his consent, under Section 11(8) of the

Arbitration  and  Conciliation  Act.   Subsequently,  vide  order  dated

29.03.2019,  the  High  Court  noted  the  consent  of  the  arbitrator

appointed by the court and directed the Arbitrator to proceed with

the  arbitration  proceedings.  Being  aggrieved,  the  appellant  has

preferred these appeals.

8. Mr.  A.N.S.  Nadkarni,  learned  Additional  Solicitor  General

(ASG) appearing for the appellant submitted that in terms of Clause

64(3)(a)(ii)  of  the  General  Conditions  of  Contract  (where

applicability of Section12(5) of the Amended Act has been waived

off), the Arbitral Tribunal shall consist of a panel of three Gazetted

Railway  Officers  not  below  Junior  Administrative  Grade  or  two

Railway Gazetted Officers not  below Junior  Administrative Grade

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and a retired Railway Officer retired not below the rank of Senior

Administrative Grade Officer as the arbitrators.   It  was submitted

that as per Clause 64(3)(b) of the General Conditions of Contract

(where applicability of Section 12(5) of the Act has not been waived

off),  the Arbitral  Tribunal  shall  consist  of  a panel  of  three retired

Railway Officers retired not below the rank of Senior Administrative

Grade Officers as the arbitrators after compliance of the procedure

stipulated  in  Clause  64(3)(b).  It  was  contended  that  when  the

agreement  and  the  General  Conditions  of  Contract  provided  for

appointment of Arbitral Tribunal consisting of three arbitrators from

the Panel,  the High Court  erred in  appointing the sole  arbitrator

outside  the  panel  of  the  arbitrators.  The  learned  ASG  further

submitted that  the appointment of  an independent arbitrator  is in

contravention of Clauses 64(3)(a)(i), 64(3)(a)(ii) and 64(3)(b) of the

General  Conditions  of  Contract  and  the  impugned  judgment

appointing a former Judge of  the High Court  of  Allahabad is not

sustainable.  In support of the contention, the learned ASG inter alia

placed  reliance  upon  Union  of  India  v.  Parmar  Construction

Company (2019)  SCC  Online  SC  442 and  Union  of  India  v.

Pradeep Vinod Construction Company (2019) SCC Online SC 1467

and other judgments.

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9. Refuting the above contention, Mr. Sridhar Potaraju, learned

counsel appearing for the respondent submitted that the Arbitration

and  Conciliation  Act,  1996  was  amended  with  effect  from

23.10.2015 and in the present case, the demand for arbitration for

resolution of disputes was made by the respondent on 27.07.2018

and hence, the provisions of the amended Act applies to the present

case.  It was submitted that by virtue of the provisions of Section

12(5) read with Schedule VII to the Arbitration and Conciliation Act,

1996, the panel of arbitrators proposed by the appellant vide letter

dated 24.09.2018 were statutorily made ineligible to be appointed

as arbitrators since they were either serving or retired employees of

the appellant.  It was contended that as per the provisions of the

Amendment Act, 2015, all employees present or past are statutorily

made ineligibile for appointment as arbitrators.  The learned counsel

further  submitted  that  when  the  General  Manager  himself  being

ineligible to be appointed as an arbitrator under Section 12(5) read

with Schedule VII of the Act, the General Manager cannot nominate

any of the persons to be arbitrator.   The learned counsel for the

respondent  inter  alia  placed reliance upon  Voestalpine Schienen

Gmbh v. Delhi Metro Rail Corporation Limited  (2017) 4 SCC 665,

TRF Limited v. Energo Engineering Projects Limited (2017) 8 SCC

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377 and number of other judgments which would be referred to at

the appropriate place.

10. We have carefully considered the submissions and perused

the impugned judgment and materials on record.  The point falling

for consideration is whether the High Court was right in appointing

an independent arbitrator in contravention of the Clauses 64(3)(a)(ii)

and 64(3)(b) of the General Conditions of Contract.   

Appointment of an independent arbitrator without reference to the  Clauses  of  General  Conditions  of  Contract  (GCC)  – Whether correct?

11. Learned  counsel  for  the  respondent  submitted  that  being

serving  employees  of  the  appellant,  the  panel  of  arbitrators

proposed by the appellant  vide letter  dated 24.09.2018 were not

eligible  to  be  appointed  as  arbitrators  in  view  of  provisions  of

Section  12(5)  read  with  Schedule  VII  of  the  Arbitration  and

Conciliation Act. Learned counsel further submitted that the panel of

arbitrators proposed by the appellant vide letter dated 25.10.2018

comprising  of  retired  employees  of  the  appellant  were  also  not

eligible to be appointed as arbitrators under Section 12(5) read with

Schedule  VII  of  the  Act  as  the  employees  of  the  appellant  are

expressly made ineligible.

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12. In support of  the above contention, learned counsel for  the

respondent has placed reliance upon Voestalpine Schienen Gmbh

v. Delhi Metro Rail Corporation Limited (2017) 4 SCC 665 wherein,

the Supreme Court held as under:-

“24.  …….The amended provision puts an embargo on a person to act

as an arbitrator, who is the employee of the party to the dispute. It also

deprives a person to act as an arbitrator if he had been the consultant or

the  advisor  or  had  any  past  or  present  business  relationship  with

DMRC…….”.

13. On behalf of the respondent, reliance was also placed upon

Bharat  Broadband  Network  Limited  v.  United  Telecoms  Limited

(2019) 5 SCC 755 wherein, the Supreme Court held as under:-

“15. Section 12(5), on the other hand, is a new provision which relates

to  the  de  jure inability  of  an  arbitrator  to  act  as  such.  Under  this

provision, any prior agreement to the contrary is wiped out by the non

obstante  clause  in  Section  12(5)  the  moment  any  person  whose

relationship with the parties or the counsel or the subject-matter of the

dispute falls under the Seventh Schedule. The sub-section then declares

that such person shall be “ineligible” to be appointed as arbitrator. The

only way in which this  ineligibility  can be removed is  by the proviso,

which  again  is  a  special  provision  which  states  that  parties  may,

subsequent to  disputes  having  arisen  between  them,  waive  the

applicability of Section 12(5) by an express agreement in writing. What is

clear, therefore, is that where, under any agreement between the parties,

a  person  falls  within  any  of  the  categories  set  out  in  the  Seventh

Schedule, he is,  as a matter of  law, ineligible to be appointed as an

arbitrator. The only way in which this ineligibility can be removed, again,

in  law,  is  that  parties may  after disputes have arisen between them,

waive the applicability of this sub-section by an “express agreement in

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writing”. Obviously, the “express agreement in writing” has reference to a

person who is interdicted by the Seventh Schedule, but who is stated by

parties (after the disputes have arisen between them) to be a person in

whom  they  have  faith  notwithstanding  the  fact  that  such  person  is

interdicted by the Seventh Schedule.”

14. Per contra, on behalf  of the appellant, Mr. A.N.S. Nadkarni,

learned  ASG has  submitted  that  the  appointment  of  arbitrator  is

governed as per Clauses 64(3)(a)(i) and 64(3)(a)(ii)  of the General

Conditions of Contract (GCC) where applicability of Section 12(5) of

the Arbitration and Conciliation Act  has been waived off  and the

Arbitral Tribunal shall  consist of a panel of three serving Railway

Officers or two serving officers and one retired officer. Learned ASG

submitted that Clause 64(3)(b) of GCC deals with appointment of

arbitrator  where  applicability  of  Section  12(5)  of  the  Act  has  not

been waived off.  It  was further submitted that  Clause 64(3)(b)  of

GCC stipulates that the Arbitral Tribunal shall consist of a panel of

three  retired  railway  officers  not  below  the  rank  of  Senior

Administrative Officer and the Arbitral Tribunal to be constituted as

per the procedure indicated thereon. Placing reliance upon Union of

India v. Parmar Construction Company (2019) SCC Online SC 442

and Union of India v. Pradeep Vinod Construction Company (2019)

SCC Online SC 1467, learned ASG has submitted that when the

agreement  specifically  provides  for  appointment  of  panel  of

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arbitrators, the appointment should be in terms of the agreement

and  the  appointment  of  independent  sole  arbitrator  is  in

contravention of the General Conditions of Contract which govern

the parties for appointment of arbitrators.

15. Clause 64 of the General Conditions of Contract deals with

the  procedure  for  resolution  of  the  disputes  and  provides  for

“Demand for arbitration” and appointment of the arbitrators. Clause

64 of the General Conditions of Contract (GCC) reads as under:-

“64. (1): Demand for Arbitration:

64. (1) (i) In the event of any dispute or difference between the parties

hereto  as  to  the  construction  or  operation  of  this  contract,  or  the

respective rights and liabilities of the parties on any matter in question,

dispute or  difference on any account  or  as to  the withholding by the

Railway of any certificate to which the contractor may claim to be entitled

to, or if the Railway fails to make a decision within 120 days, then and in

any such case, but except in any of the "excepted matters" referred to in

Clause 63 of these Conditions, the contractor, after 120 days but within

180  days  of  his  presenting  his  final  claim on  disputed  matters  shall

demand in writing that the dispute or difference be referred to arbitration.

64. (1) (ii) (a) The demand for arbitration shall specify the matters which

are  in  question,  or  subject  of  the  dispute  or  difference  as  also  the

amount of claim item-wise. Only such dispute or difference, in respect of

which the demand has been made, together with counter claims or set

off,  given  by  the  Railway,  shall  be  referred  to  arbitration  and  other

matters shall not be included in the reference.

64. (1) (ii) (b)  The parties may waive of the applicability of sub-section

12(5)  of  Arbitration  and  Conciliation  (Amendment)  Act,  2015.  If  they

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agree or such waiver in writing after having arisen between them in the

formation under Annexure XII of these conditions.”

16. After  coming  into  force  of  Arbitration  and  Conciliation

(Amendment)  Act,  2015,  the  Government  of  India,  Ministry  of

Railways  made  a  modification  to  Clause  64  of  the  General

Conditions of Contract and the Railway Board issued a notification

dated 16.11.2016 in  this  regard.  The modified  Clause  64(3)(a)(i)

(where applicability of Section 12(5) of the Act has been waived off)

inter alia provided that in case where the total value of all claims in

question added together  does not  exceed rupees one crore,  the

arbitral  tribunal  shall  consist  of  a  sole  arbitrator  who  shall  be  a

Gazetted Officer of Railways not below JA Grade nominated by the

General Manager. In terms of Clause 64(3)(a)(i), the sole arbitrator

shall be appointed within sixty days from the day when a written and

valid demand for arbitration is received by the General Manager. In

the present case, since the value of the work contract is worth more

than Rs.165 crores, Clause 64(3)(a)(i) is not applicable.  

17. Clause 64(3)(a)(ii) of GCC deals with cases not covered by

Clause 64(3)(a)(i) where applicability of Section 12(5) of the Act has

been  waived  off.  Clause  64(3)(a)(ii)  of  General  Conditions  of

Contract reads as under:-

“64. (3) Appointment of Arbitrator:

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………..

64. (3) (a) (ii)  In case not covered by the Clause 64(3)(a)(i), the Arbitral

Tribunal shall consist of a Panel of three Gazette Railway Officers not

below JA Grade or two Railway Gazette Officers not below JA Grade

and a retired Railway Officer, retired not below the rank of SAG officer,

as the arbitrators. For this purpose, the railway will send a panel of at

least  four  (4)  names  of  Gazette  Railway  Officers  of  one  or  more

departments  of  the  Railway  which  may  also  include  the  name(s)  of

retired Railway Officer(s) empanelled to work as railway Arbitrator to the

contractor within 60 days from the day when a written and valid demand

for arbitration is received by the GM………”.

18. Clause 64(3)(b) of GCC deals with appointment of arbitrator

where applicability of Section 12(5) of the Act has not been waived

off. The modified Clause 64(3)(b) inter alia provided that the arbitral

tribunal shall consist of a panel of three retired railway officers not

below the rank of SAO officer as arbitrator. For this purpose, the

Railway will send a panel of at least four names of retired railway

officer(s) empanelled. The contractor will be asked to suggest to the

General  Manager  at  least  two  names  out  of  the  panel  for

appointment as the contractor’s nominee and the General Manager

shall appoint at least one out of them as the contractor’s nominee.

The General Manager will also simultaneously appoint the balance

number of arbitrators from the panel or from outside the panel. The

modified  Clause  64(3)(b)  of  the  General  Conditions  of  Contract

reads as under:-

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“64. (3)(b) Appointment of Arbitrator where applicability of Section

12(5) of A&C Act has not been waived off.

The Arbitrator Tribunal shall consist of a Panel of three retired Railway

Officer retired not below the rank of SAO officer, as the arbitrator. For

this purpose, the Railway will  send a panel of at least four names of

retired  Railway  Officer(s)  empanelled  to  work  as  Railway.  Arbitrator

indicating their retirement date to the contractor within 60 days from the

day when a written and valid demand for arbitrators is received by the

GM.

Contractor will  be asked to suggest to General  Manager at least two

names out of the panel for appointment as contractor’s nominee within

30  days  from  the  date  of  dispatch  of  the  request  by  Railway.  The

General  Manager  shall  appoint  at  least  one  out  of  them  as  the

contractor’s nominee and will, also simultaneously appoint the balance

number of arbitrators other from the panel or from outside the panel, duly

indicating the ‘presiding arbitrator’ from amongst the three arbitrators so

appointed  CM  shall  complete  tis  exercise  of  appointing  the  Arbitral

Tribunal  within  30  days  from  the  receipt  of  the  names  of  contract’s

nominees.  While  nominating  the  arbitrators,  it  will  be  necessary  to

ensure that one of them has served in the Accounts Department.”

19. After  coming  into  force  of  the  Arbitration  and  Conciliation

(Amendment) Act, 2015, when Clause 64 of the General Conditions

of Contract has been modified inter alia providing for constitution of

Arbitral  Tribunal  consisting  of  three  arbitrators  either  serving  or

retired railway officers, the High Court is not justified in appointing

an independent sole arbitrator without resorting to the procedure for

appointment of the arbitrator as prescribed under Clause 64(3)(b) of

the General Conditions of Contract.  

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20. It is pertinent to note that even in the application filed under

Section  11(6)  of  the  Arbitration  and  Conciliation  Act,  1996,  the

respondent prayed for appointment of a sole arbitrator in terms of

Clause  1.2.54(b)(i)  of  the  Tender  Agreement/Clause  64  of  the

General Conditions of Contract for adjudicating the disputes which

have arisen between the parties. In the petition filed under Section

11(6) of the Act, the respondent prayed for appointment of one Shri

Ashwani  Kumar  Kapoor  to  act  as  the  arbitrator.  Thus,  the

respondent  itself  sought  for  appointment  of  arbitrator  in  terms of

Clause 64 of the General Conditions of Contract. The appointment

of  Shri  Ashwani  Kumar  Kapoor  as  arbitrator,  of  course,  was not

agreeable to the appellant, since it was found that said Shri Ashwani

Kumar Kapoor  was not  in  the panel  of  arbitrators  and therefore,

could not be considered for appointment as arbitrator.  As the value

of  the  work  contract  was  worth  more  than  Rs.165  crores,  the

dispute can be resolved only by a panel of three arbitrators in terms

of  Clause  64(3)(b)  of  the  General  Conditions  of  Contract.  The

respondent  was  not  right  in  seeking  for  appointment  of  a  sole

arbitrator  in  terms  of  Clause  1.2.54(b)(i)  of  the  Tender

Agreement/Clause 64 of the General Conditions of Contract.   

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21. Considering  the  various  matters  of  railway  contracts  and

interference with the appointment of independent arbitrators, after

referring to Union of India and Another v. M.P. Gupta (2004) 10 SCC

504  and  Union of India and Another v.  V.S. Engineering (P) Ltd.

(2006)  13  SCC  240  and  other  judgments,  in  Union  of  India  v.

Parmar  Construction  Company  (2019)  SCC Online  SC 442,  the

Supreme  Court  set  aside  the  appointment  of  an  independent

arbitrator and directed the General Manager of Railways to appoint

arbitrator in terms of Clause 64(3) of the agreement. In Para (44) of

Parmar Construction Company, the Supreme Court held as under:-

“44.  To  conclude,  in  our  considered  view,  the  High  Court  was  not

justified in appointing an independent arbitrator without resorting to the

procedure for appointment of an arbitrator which has been prescribed

under  clause  64(3)  of  the  contract  under  the  inbuilt  mechanism  as

agreed by the parties.”

22. Applying  ratio  of  the  Parmar  Construction  Company,  in

Pradeep  Vinod  Construction  Company  (2019)  SCC  Online  SC

1467,  the Supreme Court  held that  the appointment  of  arbitrator

should be in terms of the agreement and the High Court was not

right in appointing an independent arbitrator ignoring Clause 64 of

the General Conditions of Contract. As held in Parmar Construction

Company  and  Pradeep  Vinod  Construction  Company,  the  High

Court  was  not  justified  in  appointing  an  independent  arbitrator

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without resorting to the procedure for appointment of the arbitrators

which  has  been  prescribed  under  the  General  Conditions  of

Contract.  

RE: Contention:- Retired Railway Officers are not eligible to be

appointed  as  arbitrators  under  Section  12(5)  read  with

Schedule VII of the Act and were statutorily made ineligible to

be appointed as an arbitrator.

23. Vide letter dated 27.07.2018, the respondent made a request

for  appointment  of  arbitrator/constitution  of  Arbitral  Tribunal.   In

response to the same, the appellant sent a letter dated 24.09.2018

nominating  the  names  of  four  serving  railway  officers  and  the

respondent was asked to select any two names from the list of the

four railway officers and communicate to the appellant.  It  is seen

from  the  record  that  the  respondent  vide  their  letter  dated

26.09.2018  expressed  their  disagreement  in  waiving  off  the

applicability of Section 12(5) of the Amendment Act, 2015. Referring

to  its  own  earlier  letter  dated  24.09.2018  and  letter  of  the

respondent  dated  26.09.2018,  the  appellant  had  sent  a

communication  dated  25.10.2018  nominating  the  panel  of  four

retired  railway  officers  to  act  as  arbitrators  and  requesting  the

respondent to select any two names from the list in terms of Clause

64(3)(b) of GCC and communicate to the appellant within thirty days

17

from  the  date  of  the  letter  for  formation  of  Arbitration  Tribunal.

According to the appellant, the respondent failed to select any of the

nominee from the panel within the stipulated time of thirty days. The

respondent  neither  responded  to  the  appellant’s  letter  dated

25.10.2018 not  suggested the names of  two arbitrators  from the

panel sent by the appellant. Instead the respondent approached the

High Court  under Section 11(6) of  the Act  for  appointment of  an

independent sole arbitrator by filing a petition on 17.12.2018.   

24. The contention of the learned counsel for the respondent is

that the panel of arbitrators proposed by the appellant vide letter

dated 25.10.2018 comprising of retired employees of the appellant

are not eligible to be appointed as arbitrators under Section 12(5)

read with Schedule VII of the Act. Further contention of the learned

counsel for the respondent is that the panel of arbitrators drawn by

the appellant consist of those persons who were railway employees

or Ex-railway employees and therefore,  they are statutorily  made

ineligible to be appointed as arbitrators.  

25. Contending  that  the  appointment  of  retired  employees  as

arbitrators  cannot  be  assailed  merely  because  an  arbitrator  is  a

retired employee of  one of  the parties,  learned ASG has placed

reliance  upon  Voestalpine  Schienen  Gmbh  v.  Delhi  Metro  Rail

18

Corporation Limited  (2017) 4 SCC 665.  After referring to various

judgments and also the scope of amended provision of Section 12

of  the  Amendment  Act,  2015  and  the  entries  in  the  Seventh

Schedule , the Supreme Court observed that merely because the

panel  of  arbitrators  drawn  by  the  respondent-Delhi  Metro  Rail

Corporation  are  the  Government  employees  or  Ex-Government

employees, that by itself may not make such persons ineligible to

act as arbitrators of the respondent-DMRC. It was observed that the

persons  who  have  worked  in  the  Railways  under  the  Central

Government  or  the  Central  Public  Works  Department  or  Public

Sector Undertakings cannot be treated as employee or consultant

or  advisor  of  the respondent-DMRC. In para (26)  of  Voestalpine

Schienen Gmbh, the Supreme Court held as under:-

“26. It cannot be said that simply because the person is a retired officer

who retired from the government or other statutory corporation or public

sector  undertaking  and  had  no  connection  with  DMRC (the  party  in

dispute), he would be treated as ineligible to act as an arbitrator. Had

this been the intention of the legislature, the Seventh Schedule would

have covered such persons as well. Bias or even real likelihood of bias

cannot be attributed to such highly qualified and experienced persons,

simply on the ground that they served the Central Government or PSUs,

even when they had no connection with DMRC.  The very reason for

empanelling these persons is  to  ensure that  technical  aspects of  the

dispute are suitably resolved by utilising their expertise when they act as

arbitrators. It may also be mentioned herein that the Law Commission

had proposed the incorporation of the Schedule which was drawn from

19

the  red  and  orange  list  of  IBA guidelines  on  conflict  of  interest  in

international  arbitration  with  the  observation  that  the  same would  be

treated as the guide “to determine whether circumstances exist which

give rise to such justifiable doubts”. Such persons do not get covered by

red or orange list of IBA guidelines either.” [Underlining added]

26. The  same  view  was  reiterated  in  Government  of  Haryana

PWD Haryana (B and R) Branch v. G.F. Toll Road Private Limited

and Others (2019) 3 SCC 505 wherein, the Supreme Court held that

the appointment of a retired employee of a party to the agreement

cannot  be  assailed  on  the  ground  that  he  is  a  retired/former

employee of one of the parties to the agreement. Absolutely, there is

no  bar  under  Section  12(5)  of  the  Arbitration  and  Conciliation

(Amendment) Act, 2015 for appointment of a retired employee to act

as an arbitrator.

27. By the letter dated 25.10.2018, the appellant has forwarded a

list of four retired railway officers on its panel thereby giving a wide

choice  to  the  respondent  to  suggest  any  two  names  to  be

nominated as arbitrators out of which, one will be nominated as the

arbitrator  representing  the  respondent-Contractor.   As  held  in

Voestalpine Schienen Gmbh (2017) 4 SCC 665, the very reason for

empanelling  the  retired  railway  officers  is  to  ensure  that  the

technical  aspects of  the dispute are suitably  resolved by utilising

their  expertise  when they act  as  arbitrators.  Merely  because the

20

panel of the arbitrators are the retired employees who have worked

in  the  Railways,  it  does  not  make  them ineligible  to  act  as  the

arbitrators.

RE: Contention:- Failure to act in terms of the Contract in not

responding within thirty days from the date of the request.

28. Learned counsel for the respondent has submitted that vide

letter dated 27.07.2018, the respondent requested for referring the

dispute  to  arbitration  but,  no  steps  were  taken  by  the  appellant

within thirty days from the date of request dated 27.07.2018. It was

submitted  that  on  17.12.2018,  respondent  filed  application  under

Section 11(6) of the Act before the High Court for appointment of a

sole arbitrator, by which time, no steps were taken by the appellant

under the Contract, except sending two lists of persons by letters

dated 24.09.2018 and 25.10.2018 who were de jure ineligible to be

appointed  as  the  arbitrators.  In  this  regard,  reliance  was  placed

upon  Punj  Lloyd  Ltd.  v.  Petronet  MHB Ltd.  (2006)  2  SCC 638.

Considering the applicability  of  Section 11(6)  of  the Act,  in  Punj

Lloyd Ltd., the Supreme Court held as under:-

“5. Having heard the learned counsel for the parties, we are satisfied

that  the appeal  deserves to  be allowed.  The learned counsel  for  the

appellant has placed reliance on the law laid down by this Court in the

case of Datar Switchgears Ltd. v. Tata Finance Ltd. (2000) 8 SCC 151,

wherein this Court has held as under:

21

“[S]o 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 seeking appointment of an arbitrator. Only then

the right of the opposite party ceases.”

As held in  Punj Lloyd Ltd., if the opposite party has not made any

application  for  appointment  of  the  arbitrator  within  thirty  days  of

demand,  the  right  to  make  appointment  is  not  forfeited  but

continues; but the appointment has to be made before the former

files application under Section 11 of the Act seeking appointment of

an arbitrator. Only then the right of the opposite party ceases.

29. In Union of India v. Bharat Battery Manufacturing Co. (P) Ltd.

(2007)  7  SCC 684,  on  30.03.2006,  the  respondent  thereon filed

petition under Section 11(6) seeking appointment of an arbitrator.

Union of India-the appellant thereon appointed Dr. Gita Rawat on

15.05.2006  as  a  sole  arbitrator  in  terms  of  Clause  24  of  the

agreement.  In  such  facts  and  circumstances  of  the  case,

considering the decision in Punj Lloyd Ltd., the Supreme Court held

22

that  “once a party files an application under Section 11(6) of the

Act, the other party extinguishes its right to appoint an arbitrator in

terms of the clause of the agreement thereafter. The right to appoint

arbitrator under the clause of agreement ceases after Section 11(6)

petition has been filed by the other party before the Court seeking

appointment of an arbitrator…..”.

30. As discussed earlier, as per the modified Clause 64(3)(b) of

GCC, when a written and valid demand for arbitration is received by

the General Manager, the Railway will send a panel of at least four

names of retired railway officers empanelled to work as arbitrators.

The contractor will be asked to suggest to the General Manager at

least two names out of the panel for appointment as contractor’s

nominee within thirty days from the date of dispatch of the request

by the Railway. Vide letter dated 27.07.2018, the respondent has

sought for appointment of an arbitrator for resolving the disputes.

The appellant by its letter dated 24.09.2018 (which is well within the

period  of  sixty  days)  in  terms  of  Clause  64(3)(a)(ii)  (where

applicability of Section 12(5) of the Act has been waived off) sent a

panel  of  four  serving  railway  officers  of  JA  Grade  to  act  as

arbitrators and requested the respondent to select any two from the

list  and communicate to the office at the earliest for formation of

Arbitration Tribunal. By the letter dated 26.09.2018, the respondent

23

conveyed their disagreement in waiving the applicability of Section

12(5) of the Amendment Act, 2015. By the letter dated 25.10.2018,

in terms of Clause 64(3)(b) of GCC (where applicability of Section

12(5) has not been waived off) the appellant has nominated a panel

of four retired railway officers to act as arbitrators and requested the

respondent to select any two from the list and communicate to the

appellant within thirty days from the date of the letter for formation of

Arbitration Tribunal. The respondent has neither sent its reply nor

selected  two  names  from  the  list  and  replied  to  the  appellant.

Without  responding  to  the  appellant,  the  respondent  has  filed

petition under Section 11(6) of the Arbitration and Conciliation Act

before the High Court on 17.12.2018. When the respondent has not

sent  any  reply  to  the  communication  dated  25.10.2018,  the

respondent  is  not  justified  in  contending that  the appointment  of

Arbitral Tribunal has not been made before filing of the application

under Section 11 of the Act and that the right of the appellant to

constitute Arbitral Tribunal is extinguished on filing of the application

under Section 11(6) of the Act.

RE: Contention:- General Manager himself becoming ineligible

by operation of law to be appointed as arbitrator, is not eligible

to nominate the arbitrator.

24

31. Stand of  the learned counsel  for  the respondent  is  that  by

virtue of Section 12(5) read with Schedule VII of the Act, General

Manager himself is made ineligible to be appointed as an arbitrator

and  hence,  he  cannot  nominate  any  other  person  to  be  an

arbitrator.  The essence of the submission is “that which cannot be

done  directly,  may  not  be  done  indirectly”.   In  support  of  his

contention, the learned counsel for the respondent placed reliance

upon TRF Limited v. Energo Engineering Projects Limited (2017) 8

SCC 377 wherein the Supreme Court held as under:-  

“54. In such a context, the fulcrum of the controversy would be, can an

ineligible arbitrator, like the Managing Director, nominate an arbitrator,

who  may  be  otherwise  eligible  and  a  respectable  person.  As  stated

earlier, we are neither concerned with the objectivity nor the individual

respectability. We are only concerned with the authority or the power of

the Managing Director. By our analysis, we are obligated to arrive at the

conclusion that once the arbitrator has become ineligible by operation of

law,  he  cannot  nominate  another  as  an  arbitrator.  The  arbitrator

becomes ineligible as per prescription contained in Section 12(5) of the

Act. It is inconceivable in law that person who is statutorily ineligible can

nominate a person. Needless to say, once the infrastructure collapses,

the  superstructure  is  bound to  collapse.  One cannot  have a  building

without  the  plinth.  Or  to  put  it  differently,  once  the  identity  of  the

Managing Director as the sole arbitrator is lost, the power to nominate

someone  else  as  an  arbitrator  is  obliterated.  Therefore,  the  view

expressed by the High Court is not sustainable and we say so.”

32. In  TRF  Limited,  though  the  court  observed  that  once  the

arbitrator  has  become  ineligible  by  operation  of  law,  he  cannot

25

nominate  another  as  an  arbitrator,  in  para  (50),  the  Court  has

discussed  about  another  situation  where  both  the  parties  could

nominate respective arbitrators of their choice and that it would get

counter-balanced by equal power with the other party.  In para (50)

of TRF Limited, the Supreme court held as under:-

“50.  …..We  are  singularly  concerned  with  the  issue,  whether  the

Managing Director, after becoming ineligible by operation of law, is he

still eligible to nominate an arbitrator.  At the cost of repetition, we may

state that when there are two parties, one may nominate an arbitrator

and  the  other  may  appoint  another.  That  is  altogether  a  different

situation.  If  there  is  a  clause  requiring  the  parties  to  nominate  their

respective arbitrator, their authority to nominate cannot be questioned.

What  really  in  that  circumstance  can  be  called  in  question  is  the

procedural  compliance and  the  eligibility  of  their  arbitrator  depending

upon the norms provided under the Act and the Schedules appended

thereto….” [Underlining added]

33. Considering the decision in TRF Limited, in Perkins Eastman

Architects DPC and another v. HSCC (India) Limited  (2019) SCC

Online SC 1517, the Supreme Court observed that there are two

categories of cases.  The first, similar to the one dealt with in TRF

Limited where  the  Managing  Director  himself  is  named  as  an

arbitrator with an additional power to appoint any other person as an

arbitrator.  In the second category, the Managing Director is not to

act as an arbitrator himself; but is authorized to appoint any other

person of his choice or discretion as an arbitrator. Observing that if

26

in the first category, the Managing Director was found incompetent

similar invalidity will  always arise even in the second category of

cases, in para (20) in Perkins Eastman, the Supreme Court held as

under:-  

“20. ….If, in the first category of cases, the Managing Director was found

incompetent, it was because of the interest that he would be said to be

having in the outcome or result of the dispute. The element of invalidity

would thus be directly relatable to and arise from the interest that he

would be having in such outcome or decision. If that be the test, similar

invalidity would always arise and spring even in the second category of

cases. If the interest that he has in the outcome of the dispute, is taken

to  be  the  basis  for  the  possibility  of  bias,  it  will  always  be  present

irrespective  of  whether  the  matter  stands  under  the  first  or  second

category of cases. We are conscious that  if  such deduction is drawn

from the decision of this Court in TRF Limited, all cases having clauses

similar to that with which we are presently concerned, a party to the

agreement would be disentitled to make any appointment of an Arbitrator

on its own and it would always be available to argue that a party or an

official or an authority having interest in the dispute would be disentitled

to make appointment of an Arbitrator.”

34. After referring to para (50) of the decision in TRF Limited, in

Perkins Eastman, the Supreme Court referred to a different situation

where both parties have the advantage of nominating an arbitrator

of  their  choice and observed that  the advantage of  one party  in

appointing an arbitrator would get counter-balanced by equal power

with the other party.  In para (21), it was held as under:-

“21. ….The next sentences in the paragraph, further show that cases

where  both  the  parties  could  nominate  respective  arbitrators  of  their

27

choice were found to be completely a different situation. The reason is

clear  that  whatever  advantage  a  party  may derive  by  nominating  an

arbitrator of its choice would get counter balanced by equal power with

the other party…..”  

35. As  discussed  earlier,  after  Arbitration  and  Conciliation

(Amendment) Act, 2015, the Railway Board vide notification dated

16.11.2016 has amended and notified Clause 64 of  the General

Conditions  of  Contract.   As  per  Clause  64(3)(a)(ii)  [where

applicability of Section 12(5) of the Act has been waived off], in a

case not covered by Clause 64(3)(a)(i),  the Arbitral Tribunal shall

consist of a panel of three Gazetted Railway Officers not below the

rank  of  Junior  Administrative  Grade  or  two  Railway  Gazetted

Officers not below the rank of Junior Administrative Grade and a

retired  Railway  Officer  retired  not  below  the  rank  of  Senior

Administrative Grade Officer, as the arbitrators.  For this purpose,

the General  Manager,  Railway will  send a panel  of  at  least  four

names of Gazetted Railway Officers of one or more departments of

the Railway within sixty days from the date when a written and valid

demand for arbitration is received by the General Manager.  The

contractor will be asked to suggest to General Manager at least two

names out of the panel for appointment as contractor’s nominees

within thirty days from the date of dispatch of the request from the

Railway.  The General  Manager shall  appoint at least one out of

28

them  as  the  contractor’s  nominee  and  will  also  simultaneously

appoint  balance  number  of  arbitrators  from  the  panel  or  from

outside  the  panel  duly  indicating  the  “Presiding  Officer”  from

amongst the three arbitrators so appointed.  The General Manager

shall complete the exercise of appointing the Arbitral Tribunal within

thirty days from the date of the receipt of the names of contractor’s

nominees.

36. Clause 64(3)(b) of GCC deals with appointment of arbitrator

where applicability of Section 12(5) of the Act has not been waived

off.  In terms of Clause 64(3)(b) of GCC, the Arbitral Tribunal shall

consist of a panel of three retired Railway Officers retired not below

the rank of Senior Administrative Grade Officers as the arbitrators.

For  this  purpose,  the  Railway  will  send  a  panel  of  at  least  four

names of retired Railway Officers empanelled to work as arbitrators

indicating their  retirement date to the contractor  within sixty days

from the date when a written and valid demand for  arbitration is

received by the General Manager.  The contractor will be asked to

suggest the General Manger at least two names out of the panel for

appointment  of  contractor’s  nominees  within  thirty  days from the

date  of  dispatch  of  the  request  of  the  Railway.   The  General

Manager shall appoint at least one out of them as the contractor’s

29

nominee and will  simultaneously appoint the remaining arbitrators

from  the  panel  or  from  outside  the  panel,  duly  indicating  the

“Presiding Officer” from amongst the three arbitrators.  The exercise

of appointing Arbitral Tribunal shall be completed within thirty days

from the receipt of names of contractor’s nominees.  Thus, the right

of the General Manager in formation of Arbitral Tribunal is counter-

balanced by respondent’s power to choose any two from out of the

four names and the General Manager shall appoint at least one out

of them as the contractor’s nominee.

37. In the present matter, after the respondent had sent the letter

dated 27.07.2018 calling upon the appellant  to  constitute  Arbitral

Tribunal,  the appellant  sent  the communication dated 24.09.2018

nominating  the  panel  of  serving  officers  of  Junior  Administrative

Grade to act as arbitrators and asked the respondent to select any

two  from the  list  and  communicate  to  the  office  of  the  General

Manager.  By the letter dated 26.09.2018, the respondent conveyed

their disagreement in waiving the applicability of Section 12(5) of the

Amendment Act, 2015.  In response to the respondent’s letter dated

26.09.2018, the appellant has sent a panel of four retired Railway

Officers  to  act  as  arbitrators  giving  the  details  of  those  retired

officers and requesting the respondent to select any two from the list

30

and communicate to the office of the General Manager. Since the

respondent has been given the power to select two names from out

of  the  four  names  of  the  panel,  the  power  of  the  appellant

nominating  its  arbitrator  gets  counter-balanced  by  the  power  of

choice given to  the respondent.  Thus,  the power  of  the General

Manager  to  nominate  the  arbitrator  is  counter-balanced  by  the

power of the respondent to select any of the two nominees from out

of the four names suggested from the panel of the retired officers.

In view of the modified Clauses 64(3)(a)(ii) and 64(3)(b) of GCC, it

cannot  therefore  be said  that  the General  Manager  has become

ineligible to act as the arbitrator.  We do not find any merit in the

contrary contention of the respondent. The decision in TRF Limited

is not applicable to the present case.  

38. There  is  an  express  provision  in  the  modified  clauses  of

General  Conditions  of  Contract,  as  per  Clauses  64(3)(a)(ii)  and

64(3)(b),  the  Arbitral  Tribunal  shall  consist  of  a  panel  of  three

Gazetted  Railway  Officers  [Clause  64(3)(a)(ii)]  and  three  retired

Railway Officers retired not below the rank of Senior Administrative

Grade Officers [Clause 64(3)(b)].  When the agreement specifically

provides  for  appointment  of  Arbitral  Tribunal  consisting  of  three

arbitrators from out of the panel serving or retired Railway Officers,

31

the  appointment  of  the  arbitrators  should  be  in  terms  of  the

agreement as agreed by the parties. That being the conditions in the

agreement between the parties and the General Conditions of the

Contract,  the  High  Court  was  not  justified  in  appointing  an

independent sole arbitrator ignoring Clauses 64(3)(a)(ii) and 64(3)

(b) of the General Conditions of Contract and the impugned orders

cannot be sustained.

39. In  the  result,  the  impugned  orders  dated  03.01.2019  and

29.03.2019 passed by the High Court of Judicature at Allahabad in

Arbitration  Application  No.151  of  2018  are  set  aside  and  these

appeals are allowed.  The appellant is directed to send a fresh panel

of four retired officers in terms of Clause 64(3)(b) of the General

Conditions  of  Contract  within  a  period  of  thirty  days  from today

under  intimation  to  the  respondent-contractor.   The  respondent-

contractor  shall  select  two  from  the  four  suggested  names  and

communicate to  the appellant  within thirty  days from the date  of

receipt  of  the  names  of  the  nominees.  Upon  receipt  of  the

communication from the respondent, the appellant shall constitute

the  Arbitral  Tribunal  in  terms  of  Clause  64(3)(b)  of  the  General

Conditions of Contract within thirty days from the date of the receipt

32

of the communication from the respondent.   Parties to bear their

respective costs.

………………………..J.                                                                         [R. BANUMATHI]

………………………..J.                                                                 [A.S. BOPANNA]

.………………………..J.                                                                  [HRISHIKESH ROY]

New Delhi; December 17, 2019.

33