REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL ORIGINAL JURISDICTION

ARBITRATION PETITION NO.11 OF 2011

Denel (Proprietary Limited)                  ...Petitioner

VERSUS

Govt. of India, Ministry of Defence               …

Respondent

O R D E R

SURINDER SINGH NIJJAR, J.

1. The petitioner has filed the present application under Sections  

11(4)  and  (6)  of  the  Arbitration  and  Conciliation  Act,  1996  

(hereinafter referred to as the ‘Act’) read with   paragraph 2 of the  

appointment  of  the  Arbitrators  by  the  Chief  Justice  of  India  

Scheme, 1996. It is stated that a contract was entered into between  

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the parties for the supply of Base Bleed Units. Initially the quantity  

to  be  supplied  was  42,000  units.  Later  on,  the  quantity  was  

increased to 52,000 units as per Clause 20 of the agreement.   By  

5th January, 2005, the petitioner had supplied substantial quantity  

of the goods. However, some of the goods supplied by the petitioner  

were rejected by the respondent. The petitioner, thereafter, informed  

the respondent that two more lots were ready for discharge on 17th  

March, 2005. However, Union of India never responded to the letter,  

hence, loss and damage has been caused to the petitioner. In April,  

2005, after various discussions, the petitioner came to know that  

improper fuzes were used by the Union of India which led to the  

problem that occurred in the lots which were rejected. Thereafter,  

on  21st April,  2005,  Union  of  India  put  on  hold  all  contracts.  

Further, on 14th May, 2008, Union of India sent a notice seeking  

refund of amount of US $ 23,20,240, failing which legal action was  

to issue.  

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2. The disputes having arisen between the parties, efforts were  

made  to  resolve  the  same.  The  details  of  the  efforts  made  are  

narrated in the petition. Since the disputes could not be resolved  

through  mutual  discussions,  the  DGOF  appointed  one  Mr.  A.K.  

Jain,  Additional  General  Manager,  Ordnance  Factory,  Ambajhari,  

Nagpur as an arbitrator in terms of Clause 19(F) of the contract,  

which reads as under:-

“All the disputes and difference arising out of or in any  way touching or concerning the agreement (matters for  which the decision of a specific authority as specified in  the contract  shall  be final  under  this  agreement,  shall  not be subject to arbitration) shall be referred to the sole  arbitration of the Director General, Ordnance Fys. Govt.  of  India  for  the  time  being  or  a  Government  servant  appointed  by  him.  The  appointee  shall  not  be  a  Govt.  Servant  who had dealt  with the  matters  to which this  agreement relates and that in the course of his duties as  Govt. Servant has had not expressed views on all or any  of  the  matter  is  in  dispute  or  difference.  In  case  the  appointed Govt. Servant in place of the incumbents.”  

3. The petitioner objected to the appointment of the Arbitrator.  

The petitioner apprehended that the arbitrator would be favorably  

inclined towards the employer.  Therefore, on 23rd January, 2009,  

the  petitioner  issued  a  notification  under  Section  14  of  the  

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Arbitration Act stating that the mandate of the arbitrator had been  

terminated.    Since  inspite  of  the  aforesaid  notification,  the  

arbitrator continued with the arbitration proceedings, the petitioner  

moved the Principal District Court, Chandrapur and filed Civil Misc.  

Application No. 45 of 2009 under Section 14(2) of the Act.  On 21st  

December,  2010,  the  Principal  District  Court,  Chandrapur  

terminated the mandate of the Sole Arbitrator with the observation  

that the arbitrator has been biased in favour of respondent No.1.  A  

direction was also issued in the following terms:-

“Director  General,  Ordnance  Factory,  Government  of  India, is appointed as an Arbitrator  or he may appoint  Government  servant  as  an  Arbitrator  ,  as  per  Clause  19(F) of February 2004 contract and 19(E) of November  2004 contract, after following due procedure.”  

4. It is an admitted fact that pursuant to the aforesaid directions,  

within 30 days,  DGOF did not himself  commence the arbitration  

proceedings;  nor  did  he  appoint  any  Government  servant  as  an  

arbitrator. The petitioner has, therefore, moved the present petition  

under  Section  11(6)  of  the  Act  on  2nd of  March,  2011  seeking  

appointment  of  an  independent  arbitrator.  The  petitioner  claims  - 4 -

that  the  directions issued by the  District  Court  are  without any  

authority or jurisdiction and as such void ab initio. According to the  

petitioner, the direction of the learned District Judge is based upon  

an incorrect interpretation of Section 15 of the Act,  whereby the  

learned  Judge  assumed  the  authority  to  appoint  an  arbitrator,  

which is beyond her jurisdiction. The Act does not make provision  

for the appointment of an arbitrator other than in accordance with  

the  arbitration  agreement  and  in  the  limited  circumstances  

provided for in Section 11. The petitioner also claims that the DGOF  

would  be  disqualified  to  act  as  an  arbitrator  as  the  dispute  is  

against  the  Government  of  India  and  particularly  against  the  

Ordnance  Factory,  Ministry  of  Defence.  If  the  Director  General,  

Ordnance Factory, Government of India (DGOF) or a Government  

servant is appointed as an arbitrator, he shall always be bound by  

the directions/instructions issued by his superior authorities and,  

therefore,  such  an  arbitrator  would  not  be  in  a  position  to  

independently decide the dispute between the parties. According to  

the  petitioner,  such  an  appointment  would  be  contrary  to  the  

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provisions of Section 12 of the Act.  The petitioner further claims  

that  the  DGOF  has  already  through  his  actions  in  the  dispute  

between  the  parties  demonstrated  his  lack  of  independence  and  

impartiality. The learned District Judge in her judgment alluded to  

the fact that the DGOF without receiving any request for referral of  

the  dispute  between  the  petitioner  and  the  respondent  colluded  

with the previous arbitrator to appoint him as an arbitrator without  

any notice to the petitioner. The petitioner further claims that the  

DGOF has been directly involved in the dispute as would be evident  

from  the  correspondence  between  the  petitioner  and  the  

respondent. The petitioner thereafter makes a reference to the letter  

dated 30th June, 2008 wherein the DGOF took the view that the  

petitioner  is  liable  to  replace  the  rejected  Base  Bleed  units,  as  

alleged  by  the  respondent,  making  specific  reference  to  the  

correspondence in which respondent stated its  claim against the  

petitioner  and  cancelled  the  contract  with  the  petitioner.  The  

petitioner further claims that the DGOF has failed to appoint the  

arbitrator  either  as  directed  by  the  learned  District  Judge  or  in  

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accordance with Section 15 of the Act within 30 days of the order  

dated                   21st December, 2010. Therefore, the respondent  

has forfeited the right to make an appointment from the date of the  

filing of the petition.

5. The respondent has controverted the plea put forward by the  

petitioner by way of a detailed counter affidavit. It is claimed by the  

respondent that the petition under Section 11(6) of the Act is not  

maintainable,  as  Mr.Satyanarayana  has  been  appointed  as  a  

substitute arbitrator on 16th March, 2011. The petitioner was duly  

notified about the appointment of the arbitrator in its letter dated  

26th March, 2011. The petitioner was requested to forward its claim  

within 10 days. The petitioner was informed that if such a claim  

does not reach by 8th April, 2011, the arbitrator will presume that  

the petitioner did not have any further claim. Upon receipt of that  

letter, the petitioner objected to the appointment of a new arbitrator  

by  its  letter  dated  15th April,  2011,  as  being  contrary  to  clause  

19(F).  The  petitioner  has  wrongly  claimed  that  since  the  

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appointment of the arbitrator was not made prior to the filing of the  

petition under Section 11(6), the respondent has forfeited the right  

to make the appointment.

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

7. On the basis of facts narrated above, Mr.  Naphade submits  

that the petitioner has forfeited its right to appoint the arbitrator.  

In support of the submission, he relied on the judgments of this  

Court in the case of Datar Switchgears Ltd. Vs. Tata Finance Ltd.  

& Anr.  1  ,   Punj Lloyd Ltd. Vs.  Petronet MHB  Ltd.  2   and Yashwith  

Constructions (P) Ltd. Vs.  Simplex Concrete Piles India Ltd. &  

Anr.  3     

8. On the other hand, Mr. Raval, appearing for the Union of India  

has submitted that the petitioner has failed to make out a case for  

not appearing before the arbitrator appointed pursuant to the order  

1 2000 (8) SCC 151 2 2006 (2) SCC 638 3 2006 (6) SCC 204

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of the Principal District Court, Chandrapur on 21st December, 2010.  

He  submits  that  the  respondents  have  willingly  accepted  the  

appointment  of  the  earlier  arbitrator  in  accordance  with  the  

arbitration  clause.   Therefore,  they  can  have  no  justification  to  

challenge the appointment of the present arbitrator, who has only  

been appointed as the mandate of the earlier arbitrator had been  

terminated by the  orders of  the  Court.   The petitioner  was duly  

informed about the appointment of the arbitrator on 16th March,  

2011.   The  arbitrator  had  intimated  both  the  parties  about  the  

appointment  and had requested them to  submit  their  respective  

claims within a period of 10 days.  It was only at that stage that the  

petitioner  wrote  a  letter  dated  15th April,  2011  stating  that  the  

appointment of the arbitrator was in violation of arbitration clause.  

Mr. Raval further submitted that in the present circumstances, the  

matter is squarely covered against the petitioner by the judgment in  

the  case  of  Indian  Oil  Corporation  Limited  &  Ors. Vs.  Raja  

Transport  Private  Limited  4  .  On  the  basis  of  the  aforesaid  

judgment, the learned counsel submitted that the present petition  4 (2009) 8 SCC 520

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under Section 11(6) is misconceived, as the Sole Arbitrator has been  

appointed in terms of the agreed procedure contained in Clause 19  

(F) and (E).   

9. I  have  considered  the  submissions  made  by  the  learned  

counsel.  In my opinion, Mr. Naphade is correct in his submission  

that  the  matter  is  squarely  covered  by  the  judgment  in  Datar  

Switchgears  Ltd.  (supra),  wherein  this  Court  has  observed  as  

follows:-

“19.  So  far  as  cases  falling  under  Section  11(6)  are  concerned — such as the one before us — no time limit  has been prescribed under the Act, whereas a period of  30  days  has  been prescribed under  Section  11(4)  and  Section 11(5) of the Act. In our view, therefore, so far as  Section  11(6)  is  concerned,  if  one  party  demands  the  opposite party to appoint an arbitrator and the opposite  party does not make an appointment within 30 days of  the  demand,  the  right  to  appointment  does  not  get  automatically  forfeited  after  expiry  of  30  days.  If  the  opposite party makes an appointment even after 30 days  of the demand, but  before the first party has moved the  court under Section 11, that would be sufficient. In other  words,  in  cases  arising  under  Section  11(6),  if  the  opposite party has not made an appointment within 30  days of demand, the right to make appointment is not  forfeited but continues,  but  an appointment  has to  be  made before the former files application under Section 11  

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seeking appointment of an arbitrator. Only then the right  of the opposite party ceases. We do not, therefore, agree  with the observation in the above judgments that if the  appointment is not made within 30 days of demand, the  right  to  appoint  an  arbitrator  under  Section  11(6)  is  forfeited.”

The  aforesaid  ratio  has  been reiterated  in  Punj  Lloyd Ltd.  

(supra).   

10. In the facts and circumstances of this case, it would not be  

possible  to  accept  the  submission of  Mr.  Raval  that  the  present  

petition filed by the petitioner under Section 11(6) of the Act is not  

maintainable. On the admitted facts, it is evident that the mandate  

of the earlier arbitrator Mr. Arun Kumar Jain was terminated by the  

orders passed by the Principal District Court, Chandrapur in Civil  

Misc.  Application  No.  45 of  2009 by  order  dated 21st December,  

2010.   A  perusal  of  the  aforesaid  order  would  show  that  the  

petitioner had challenged the validity of Clause 19(F). The aforesaid  

submission was rejected by the Court with the observation that the  

same cannot be the subject matter which could be resolved in a  

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petition under Section 14(2) of the Act.  The petitioner was given an  

opportunity to challenge the clauses in an appropriate forum.  The  

District Judge, however, accepted the submission of the petitioner  

that there are justifiable reasons to indicate that the arbitrator has  

not acted fairly.  Hence the mandate of Mr. A.K. Jain as the Sole  

Arbitrator was terminated.  In accordance with Section 15(2) of the  

Act, DGOF was appointed as an arbitrator.  He was also given an  

option to appoint Government servant as an arbitrator as per the  

arbitration clause.  It is a matter of record that DGOF did not act  

himself  as  an  arbitrator,  pursuant  to  the  aforesaid  order  of  the  

Principal District Judge, Chandrapur dated 21st December, 2010.  

Mr.  Satyanarayana,  the  subsequent  arbitrator,  had  not  been  

appointed till 16th March, 2011.  The present petition was moved on  

2nd March, 2011.  Therefore, the respondents had clearly forfeited  

their right to make the appointment of an arbitrator. Consequently,  

the appointment of                       Mr. Satyanarayana, as an  

arbitrator, by letter dated 16th March, 2011 cannot be sustained.  

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11. Mr.  Naphade  then  submits  that  in  the  peculiar  facts  and  

circumstances  of  this  case,  the  respondent  cannot  now  be  

permitted to insist that the Court should appoint an arbitrator only  

in terms of the agreed procedure. In support of this submission, he  

emphasised that DGOF can not act as an arbitrator as the same  

will be against the principles of natural justice, as no one can be a  

judge  in his  own cause.   He  further  submitted  that  even if  any  

government employee is appointed as an arbitrator, he will not be in  

a position to act against the Union of India as he will be obliged to  

follow  the  instructions  of  the  superiors.   He  placed  reliance  on  

Bharat  Sanchar  Nigam  Limited  &  Anr. Vs.  Motorola  India  

Private Limited  5  .    It is not possible to accept the submissions of  

Mr. Naphade.  This Court in the case of  Indian Oil Corporation  

Limited (supra) has considered such a submission and observed  

that :-

“Arbitration  is  a  binding  voluntary  alternative  dispute  resolution  process  by  a  private  forum  chosen  by  the  parties.   If  a party,  with open eyes and full  knowledge  and comprehension of the relevant provision enters into a  contract  with  a  Government/statutory  

5 2009 (2) SCC 337

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corporation/public  sector  undertaking  containing  an  arbitration  agreement  providing  that  one  of  its  Secretaries/Directors shall  be the arbitrator,  he cannot  subsequently  turn  around  and  contend  that  he  is  agreeable  for  settlement of  the disputes by arbitration,  but not by the named arbitrator who is an employee of  the other party.   

It  is  now  well  settled  by  a  series  of  decisions  that  arbitration agreements in government contracts providing  that  an  employee  of  the  Department  (usually  a  high  official unconnected with the work of the contract) will be  the arbitrator, are neither void nor unenforceable.  All the  decisions proceed on the basis that when senior officers  of  Government/statutory  corporations/public  sector  undertakings  are  appointed  as  arbitrators,  they  will  function independently and impartially, even though they  are employees of such institutions/organizations.”   

In my opinion, the aforesaid observations are a complete answer to  

the submission made by Mr. Naphade.

12. Learned  senior  counsel  then  submitted  that  even  if  the  

arbitration clause is held to be valid, Mr. Satyanarayana still can  

not be permitted to continue with arbitration as the petitioner has a  

strong apprehension that he is biased in favour of the respondents.  

In support of the submission, the learned senior counsel has relied  

on  the  various  notices  issued  by  the  arbitrator  which  were  

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invariably  received  after  the  expiry  of  the  time  fixed  by  the  

arbitrator.  In support of his submission, he relied on a judgment of  

this Court in the case of  Denel (Proprietary) Limited Vs.  Bharat  

Electronics Limited & Anr.  6  .   

13. Replying  to  the  apprehension  of  bias  pleaded  by    Mr.  

Naphade, it is submitted by Mr. Raval that non-receipt of the letters  

in  time  can  not  possibly  give  rise  to  an  apprehension  that  Mr.  

Satyanarayana is in any manner biased against the petitioner.  He  

submits that the reliance of the petitioner on the judgment in Denel  

(Proprietary) Limited (supra) is also misconceived as the aforesaid  

judgment was confined to the facts of that particular matter.  He,  

therefore,  submits  that  the  Court  ought  to  follow  the  agreed  

procedure  and  not  to  interfere  with  the  appointment  of  Mr.  

Satyanarayana as the arbitrator. In the alternative, he submits that  

even if the appointment of Mr. Satyanarayana is held to be invalid,  

the matter has to be left to the DGOF to either act as an arbitrator  

himself or to appoint an officer appointed by him.   6 2010 (6) SCC 394

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14. It  is  true  that  in  normal  circumstances  while  exercising  

jurisdiction  under  Section  11(6),  the  Court  would  adhere  to  the  

terms  of  the  agreement  as  closely  as  possible.  But  if  the  

circumstances  warrant,  the  Chief  Justice  or  the  nominee  of  the  

Chief  Justice  is  not  debarred  from  appointing  an  independent  

arbitrator other then the named arbitrator.    

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

Railway  Administration,  Ministry  of  Railway,  New  Delhi Vs.  

Patel Engineering Company Limited  7  , considered the scope and  

ambit of Section 11(6) of the Act, as divergent views were taken in  

two decisions of this Court in Ace Pipeline Contracts (P) Ltd. Vs.  

Bharat Petroleum Corpn. Ltd.  8   and  Union of India Vs.  Bharat  

Battery Manufacturing Co. (P) Ltd. (supra). Upon consideration of  

the relevant provisions it was inter-alia observed as follows:-

“A bare reading of the scheme of Section 11 shows that  the  emphasis  is  on  the  terms  of  the  agreement  being  

7 2008 (10) SCC 240 8 2007 (5) SCC 304

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adhered to and/or given effect as closely as possible. In  other words, the Court may ask to do what has not been  done.  The  Court  must  first  ensure  that  the  remedies  provided for are exhausted. It is true as contended by Mr.  Desai, that it is not mandatory for the Chief Justice or  any person or institution designated by him to appoint  the  named  arbitrator  or  arbitrators.  But  at  the  same  time,  due  regard  has  to  be  given  to  the  qualifications  required by the agreement and other considerations.”

16. Keeping in view the observations made above, I have examined  

the  facts  pleaded  in  this  case.  I  am  of  the  opinion  that  in  the  

peculiar facts and circumstances of this case, it would be necessary  

and advisable to appoint an independent arbitrator.  In this case,  

the  contract  is  with  Ministry  of  Defence.   The  arbitrator  Mr.  

Satyanarayana  has  been nominated  by  DGOF,  who is  bound to  

accept  the  directions  issued  by  the  Union  of  India.   Mr.  

Satyanarayana is an employee within the same organization.  The  

attitude of the respondents towards the proceeding is not indicative  

of  an  impartial  approach.   In  fact,  the  mandate  of  the  earlier  

arbitrator  was  terminated  on  the  material  produced  before  the  

Court, which indicated that the arbitrator was biased in favour of  

the Union of India.  In the present case also,       Mr. Naphade has  - 17 -

made a reference to various notices issued by the arbitrator, none of  

which were received by the petitioner within time.  Therefore, the  

petitioner was effectively denied the opportunity to present his case  

before  the  Sole  Arbitrator.  Therefore,  the  apprehensions  of  the  

petitioner can not be said to be without any basis.  

17. It  must  also  be  remembered that  even while  exercising  the  

jurisdiction under Section 11(6), the Court is required to have due  

regard to the provisions contained in Section 11(8) of the Act.  The  

aforesaid  section  provides  that  apart  from  ensuring  that  the  

arbitrator  possesses  the  necessary  qualifications  required  of  the  

arbitrator by the agreement of the parties, the Court shall have due  

regard  to  other  considerations  as  are  likely  to  ensure  the  

appointment of an independent and impartial arbitrator.  Keeping  

in view the aforesaid provision, this Court in the case of Indian Oil  

Corporation Limited (supra), whilst emphasizing that normally the  

Court shall make the appointment in terms of the agreed procedure  

has observed that the Chief Justice or his designate may deviate  

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from the same after recording reasons for the same.  In paragraph  

45 of the aforesaid judgment, it is observed as follows:-

“45. If the arbitration agreement provides for arbitration  by a named arbitrator, the courts should normally give  effect to the provisions of the arbitration agreement. But  as clarified by Northern Railway Admn.10, where there is  material  to  create  a  reasonable  apprehension  that  the  person  mentioned  in  the  arbitration  agreement  as  the  arbitrator is not likely to act independently or impartially,  or if the named person is not available, then the Chief  Justice or his designate may, after recording reasons for  not  following  the  agreed  procedure  of  referring  the  dispute to the named arbitrator, appoint an independent  arbitrator in accordance with Section 11(8) of the Act. In  other  words,  referring  the  disputes  to  the  named  arbitrator  shall  be  the  rule.  The  Chief  Justice  or  his  designate  will  have  to  merely  reiterate  the  arbitration  agreement  by  referring  the  parties  to  the  named  arbitrator  or  named  Arbitral  Tribunal.  Ignoring  the  named  arbitrator/Arbitral  Tribunal  and  nominating  an  independent arbitrator shall be the exception to the rule,  to be resorted for valid reasons.”

        (emphasis  supplied)

18. The material placed before the Court by the petitioner would  

indicate that it would not be unreasonable to entertain the belief  

that  the  arbitrator  appointed  by  the  respondent  would  not  be  

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

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

19. Similarly,  applying  the  test  laid  down  in  Indian  Oil  

Corporation  Ltd.  (supra),  this  Court  in  the  case  of  Denel  

(Proprietary)  Limited  (supra) also  observed  that  the  Managing  

Director,  Bharat  Electronics  Limited,  which  is  a  Government  

company  is  bound  by  the  directions/instructions  issued  by  his  

superior authority.  The Court also observed that according to the  

pleaded case of the respondents, though it was liable to pay the  

amount due under the purchase order, it was not in a position to  

supply  the  dues  only  because  of  the  direction  issued  by   the  

Ministry  of  Defence,  Government  of  India.   Therefore,  the  Court  

concluded that the Managing Director may not be in a position to  

independently  decide  the  dispute  between  the  parties.  

Consequently,  the  Court  proceeded  to  appoint  an  independent  

arbitrator.

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20. In  my  opinion,  the  circumstances  in  the  present  case  are  

similar and a similar course needs to be adopted.  In view of the  

above, the petition is allowed.   

21. In exercise of my powers under Section 11(4) and (6) of the  

Arbitration and Conciliation Act, 1996 read with Paragraph 2 of the  

Appointment  of  Arbitrator  by the  Chief  Justice  of  India Scheme,  

1996, I hereby appoint Hon. Mr. Justice Ashok C. Agarwal, Retd.  

Chief Justice of the Madras High Court, R/o No. 20, Usha Kiran, 2nd  

Pasta  Lane,  Colaba,  Mumbai-400 005,  as the  Sole  Arbitrator,  to  

adjudicate the disputes that have arisen between the parties,  on  

such terms and conditions as the learned Sole Arbitrator deems fit  

and proper. Undoubtedly, the learned Sole Arbitrator shall decide  

all  the  disputes  arising  between  the  parties  without  being  

influenced by any prima facie opinion expressed in this order, with  

regard to the respective claims of the parties.

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22. The registry is directed to communicate this order to the Sole  

Arbitrator forthwith to enable him to enter upon the reference and  

decide the matter as expeditiously as possible.

……..…………………..J. [Surinder Singh Nijjar]  

New Delhi; January 09, 2012.                                         

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