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D. Raja Reddy v. Director General, National Institute Of Agricultural Extension Management
Concise Analytical Summary of the Opinion (B.S. Raikote, J.)
Factual and Procedural Background
The petitioner (the contractor) entered into an agreement dated 12.11.1992 with the Superintending Engineer, MANAGE for construction of a building complex at Rajendranagar, Hyderabad. The agreement contains an arbitration clause (Clauses 52.2 and 52.3) prescribing a procedure involving an appeal to the Director General, MANAGE and, where appropriate, appointment of a sole arbitrator from a panel proposed by the Director General.
The contractor claimed certain amounts and interest by letter dated 28.5.1998 and requested appointment of a sole arbitrator by letter dated 30.5.1998. MANAGE responded (3.7.1998 and 15.7.1998) directing the contractor to follow the appeal procedure under Clause 52.2. The contractor prematurely proposed a panel of arbitrators on 24.7.1998, which MANAGE rejected on 11.8.1998 as not following the prescribed procedure.
On 22.8.1998 the contractor filed an appeal to the Director General, MANAGE (stating in substance that, if the Director General did not accept its claims, it intended to refer disputes to arbitration under Clause 52.3). The appeal was dismissed on 25.9.1998 and, with that dismissal, MANAGE proposed a panel of three names for the arbitrator as part of the appeal order. The contractor rejected that panel by letter dated 9.10.1998 and indicated it would approach the High Court. MANAGE then appointed Sri V. Nainani (referred to as "Sri Nainani" in the opinion) as sole arbitrator by proceedings dated 27/29.10.1998; Sri Nainani accepted on 18.11.1998.
The petitioner filed the present application in the High Court seeking appointment of the sole arbitrator by the Court (relying on Section 11(6) of the Arbitration and Conciliation Act, 1996 and para 3(1)(c) of the A.P. High Court Scheme for appointment of arbitrators, 1996). A counter was filed denying the petitioner's allegations.
Legal Issues Presented
- Whether, given the contractual procedure in Clauses 52.2 and 52.3, this is a case for the High Court to appoint a sole arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 and the A.P. High Court Scheme.
- Whether the respondent's appointment of Sri V. Nainani as sole arbitrator (after proposing a panel in the appeal order) was consistent with the contractual mechanism and therefore not a matter for court appointment.
- Whether the petitioner, having rejected the panel proposed by the Director General and having failed to select an arbitrator from that panel, can invoke Section 11(6) to bypass the agreed appointment procedure.
Arguments of the Parties
Petitioner's Arguments
- The petitioner contended it had a right to seek appointment of a sole arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, read with para 3(1)(c) of the Scheme for appointment of arbitrators, 1996 of the A.P. High Court.
- The petitioner also objected that the panel proposed by MANAGE comprised persons from outside the State of Andhra Pradesh and submitted that there was no reason why a sole arbitrator from Andhra Pradesh could not be appointed; the petitioner raised concerns about bearing expenses if the arbitrator were from outside the State.
Respondent's Arguments (MANAGE)
- MANAGE argued that it was entitled to propose an external arbitrator to avoid local influence, and that selecting an outsider was not unreasonable.
- MANAGE pointed out that the petitioner rejected the panel proposed in the appeal order (by letter dated 9.10.1998) without assigning reasons and that the petitioner's approach to the High Court was an attempt to delay or drag the proceedings.
- MANAGE maintained that it had followed the contractual procedure in Clauses 52.2 and 52.3, and therefore there was no ground for invoking Section 11(6) to have the Court appoint an arbitrator.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Court undertook a clause-by-clause analysis of Clauses 52.2 and 52.3 of the parties' agreement and applied Section 11 of the Arbitration and Conciliation Act, 1996 as follows:
- The Court described the sequential procedure in the agreement: when the contractor disputes an instruction/decision of the Engineer-in-charge the contractor must ask for written instructions/decision; if dissatisfied the contractor may appeal to the Director General, MANAGE within 30 days; the Director General must decide within 30 days after affording opportunity to be heard. If the contractor is dissatisfied with the Director General's decision, the contractor must within 30 days indicate his intention to refer the dispute to arbitration; otherwise the decision becomes final and conclusive (proviso to Clause 52.2).
- Clause 52.3 prescribes that only after the contractor indicates the intention to refer to arbitration does the procedure for appointing a sole arbitrator arise: within 30 days the Director General must send a list of three officers (Superintending Engineer rank or higher) not connected with the work; the contractor must select one within 15 days; if the contractor fails to select, the Director General may select one and appoint him; if the Director General fails to send a list within the stipulated time, the contractor may send a list to the Director General, who must then select one; if the Director General fails to do so, the contractor may name the arbitrator.
- The Court found that the contractor's earlier proposal of a panel on 24.7.1998 was premature because the right to trigger the appointment mechanism arises only after the Director General's decision and the contractor's expression of dissatisfaction within the 30-day period—i.e., after the internal appeal process has run its course.
- The appeal filed by the contractor on 22.8.1998 was dismissed on 25.9.1998 when MANAGE proposed a panel of three names as part of the appeal order. The contractor then failed to select one of those names but instead rejected the panel on 9.10.1998. The Court held that under Clause 52.3, once the Director General communicated the panel, it was the contractor's obligation to choose one; the contractor had no contractual power to reject all three without selecting one. If the contractor failed to choose, the Director General was entitled to select and appoint one from the panel, which MANAGE did by appointing Sri Nainani.
- The Court examined Section 11(6) and observed that it empowers the Chief Justice (or designated person/institution) to take measures where a party fails to act under an agreed appointment procedure. The Court reasoned that Section 11(6) operates only where a party fails to act as required by the agreed procedure or where a designated person fails to perform functions under that procedure. In the present case, the Court concluded that MANAGE had acted in accordance with the contractual procedure by sending the panel with the appeal order and then appointing from the panel when the contractor did not select a name.
- Because the respondent (MANAGE) performed the functions required by the agreement and it was the contractor who refused to follow the procedure (rejecting the panel without selecting a name), the Court concluded that the petitioner could not invoke Section 11 to bypass the contractual appointment mechanism. The Court emphasized that parties are bound by their agreed procedure for appointment of arbitrators and a party cannot unilaterally refuse to follow that procedure and then seek the Court's intervention under Section 11.
- Given these findings, the judge found no merit in the petitioner's application for court appointment of an arbitrator and proceeded to reject the application.
Holding and Implications
Arbitration application rejected; Application dismissed.
Holding (core ruling): The Court held that this was not a case for appointment of a sole arbitrator by the High Court under Section 11(6) because the respondent (MANAGE) had followed the contractual appointment procedure in Clauses 52.2 and 52.3 and had proposed a panel of three names with the appeal order; the petitioner failed to select one name from that panel and thus could not seek to bypass the agreed procedure. The respondent's subsequent appointment of Sri V. Nainani as sole arbitrator in terms of Clause 52.3 was therefore valid and did not warrant court appointment.
Immediate consequences for the parties: The petition for appointment of an arbitrator by the Court was dismissed (the arbitration application was rejected) and the contractual appointment process as exercised by MANAGE stands. The Court granted the dismissal without costs. The opinion does not purport to set any new legal precedent beyond its application of the parties' agreed contractual procedure and Section 11(6) to the facts at hand.
B.S Raikote, J.:— The petitioner before me has filed this application for appointing the sole arbitrator. Though there are other reliefs, which go to the merits of the case, they do not arise for my consideration in this application.
2. A counter is filed denying the allegations of the petitioner. It is not in dispute that the petitioner has entered into an agreement vide proceedings No. MNG-05/92/1, dated 12.11.1992 with the Superintending Engineer, MANAGE for construction of building complex at Rajendranagar, Hyderabad. It appears that there is some dispute between the parties regarding the contract in question. The agreement dated 12.11.1992 provides for an arbitration clause, which reads as under:
“52.0 Settlement of Disputes:
52.1 Amicable Settlement:
52.2 If the Contractor considers any work demanded of him to be outside the requirements of the contract or considers the drawings, records or ruling of the Engineer-in-charge and any matter in connection with or arising out of the contract or the carrying out of work to be unacceptable he shall promptly ask the Engineer-in-charge in writing for written instructions or decision. Thereupon the Engineer-in-charge shall give his written instructions or decision within a period of thirty days of such request.
Upon receipt of the written instructions or decision, the Contractor shall promptly proceed without delay to comply with such instructions or decision.
If the Engineer-in-charge fails to give his instructions or decision in writing within a period of thirty days after being requested, or if the Contractor is dissatisfied with the instructions or decision of the Engineer-in-charge, the Contractor may within thirty days after receiving the instructions or decision appeal to the Director General, MANAGE, who shall afford an opportunity to the Contractor to be heard and to offer evidence in support of his appeal. The Director General, MANAGE shall give a decision within a period of thirty days after the Contractor has given the said evidence in support of his appeal.
If the Contractor is dissatisfied with his decision, the Contractor within a period of thirty days from receipt of the decision shall indicate his intention to refer the dispute to Arbitration, failing which the said decision shall be final and conclusive.
52.3 All disputes or differences in respect of which the decision is not final and conclusive, shall be referred for arbitration to a sole arbitrator appointed as follows:
Within thirty days of receipt of notice from the Contractor of his intention to refer the dispute to arbitration the Director General, MANAGE, shall send to the Contractor a list of three officers of the rank or Superintending Engineer or higher, who has not been connected with the work under this contract. The Contractor shall within fifteen days of receipt of this list select and communicate to the Director General, MANAGE, the name of one officer from the list who shall then be appointed as the sole arbitrator. If Contractor fails to communicate his selection of name within the stipulated period, the Director General, MANAGE, shall without delay select one officer from the list and appoint him as the sole arbitrator. If the Director General, MANAGE, fails to send such a list within thirty days, as stipulated, the Contractor shall send a similar list of the Director General, MANAGE, within fifteen days. The Director General, MANAGE, shall then select one officer from the list and appoint him as the sole arbitrator within fifteen days. If the Director General, MANAGE, fails to do so the Contractor shall communicate to the Director General, MANAGE, the name of the one officer from the list, who shall then be the sole arbitrator.”
3. Now in terms of the above clauses, the respondent-MANAGE appointed one Sri Nainani as the arbitrator vide its letter dated 27/29-10-1998. Being aggrieved by the said appointment of the said arbitrator, the petitioner has approached this Court for the appointment of the arbitrator.
4. In order to appreciate the respective cases, I think it appropriate to refer to the sequence of events on the basis of the correspondence placed before me, either in the file of the petitioner or in the counter of the respondent as material documents.
5. Vide its letter dated 28.5.1998, the applicant-Company (hereinafter referred to as ‘the contractor’) claimed certain amounts from the respondent with interest at the rate of 24% per annum from 31.8.1996, till the date of actual payment. The applicant Company also wrote another letter dated 30.5.1998 requesting the Director General, MANAGE for appointment of the sole arbitrator for adjudication in terms of Clauses 52.2 and 52.3 of the agreement. To that letter, the respondent wrote a letter dated 3.7.1998 to follow the procedure prescribed in Clause 52.2 Meanwhile, it appears that the applicant requested the respondent, as to indicate the nature of procedure. In those circumstances, the respondent vide letter dated 15.7.1998 directed the applicant to prefer an appeal in terms of Clause 52.2, so that further proceedings could be taken up in terms of Clause 52.3 Instead of preferring an appeal, the applicant proposed a panel of arbitrators vide its later dated 24.7.1998 For the that, the respondent, MANAGE wrote a letter dated 11.8.1998 rejecting the panel sent by the applicant, specifically stating that the applicant has got to adopt the procedure laid down in Clause 52.2 of the general conditions of the agreement. Thereafter, vide their letter dated 18.8.1998, the applicant requested the respondent to give clear indication under what provision appeal has got to be preferred. Thereafter, vide their proceedings daed 22.8.1998, the applicant preferred an appeal to the Director General of MANAGE with the following prayer:
“We now request the Director General, MANAGE to consider all our submissions and claims and arrange to release payments as claimed, within 30 days from the date of receipt of this appeal-cum-claim petition. If the Director General, MANAGE is not prepared to accept-our-above claims. We intend to refer the disputes and claims to be settled through arbitration, as provided under Clause 52.3 of general conditions of contract.”
6. Vide their proceedings dated 25.9.1998, the appeal filed by the applicant was rejected by proposing to appoint a sole arbitrator out of the panel of three names furnished with that letter. Thereafter, vide letter dated 9.10.1998, the applicant rejected the panel of names proposed by the respondent in their appeal order, stating that they would approach High Court. However, vide letter dated 27/29.10.1998, the respondent MANAGE appointed Sri. V. Nainani as sole arbitrator out of that panel. Thereafter the said Nainani wrote a letter dated 18.11.1998 accepting his appointment as the sole arbitrator and indicating the fees and expenses by him. Having regard to these facts on record, I have to find out whether it is a case for appointment of a sole arbitrator for this Court in terms of Section 11(6) of the Arbitration and Conciliation Act, 1996 (in short ‘the Act’), read with para 3(1)(c) of the Scheme for appointment of Arbitrator 1996 of the A.P High Court.
7. From reading of Clauses 52.2 and 52.3 of the agreement, I find that if there is any dispute between the contractor and the respondent, either with regard to the instructions or the decisions by the Engineer-in-charge, the contractor may within 30 days of receiving such “instructions” or “decision” shall appeal to the Director General, MANAGE. The Director General shall give decision within a period of 30 days after giving opportunity to both the parties. Proviso to Clause 52.2 further makes it clear that if the contractor is dissatisfied with this decision, he shall indicate his communication to refer the dispute to arbitration within 30 days and if he fails to do so, the decision becomes final and conclusive. Under Clause 52.3, all the disputes or differences in respect of which the decision is not final not conclusive, such dispute shall be referred for an arbitration by a sole arbitrator and a further procedure as to how such sole arbitrator could be appointed, is provided. It is only having regard to these conditions in Clauses 52.2 and 53.3, vide its letters dated 3.7.1998 and 15.7.1998, the respondent-MANAGE directed the applicant to follow the procedure. Vide letter dated 18.8.1998, the applicant further requested the respondent as to under which provision, such an appeal should be preferred and thereafter, on receiving communication from respondent, they preferred an appeal petition on 22.8.1998 with all the details and that appeal petition was dismissed on 25.9.1998 and in terms of last portion of Clause 52.2 within 30 days of the communication of the appeal order dated 25.9.1998, the applicant intimated his dissatisfaction with the decision. But however, he stated that the panel is not accepted to him vide his letter dated 9.10.1998 But without accepting this stand taken by the applicant, the respondent-Management appointed Sri Nainani as the sole arbitrator vide proceedings dated 27/29-10-1998. It has to be mentioned at this stage itself, as I have already noticed above, applicant himself had proposed one panel of their own, vide their letter dated 24.7.1998, much earlier to the decision in appeal. This was also rejected by the respondent vide their letter dated 11.8.1998 Having regard to these circumstances, now I have to see who has got a right to propose a panel in terms of Clause 52.3 of the agreement, which I have already extracted above. From reading of Clause 52.3, I find that within 30 days of the notice of intention of the contractor to refer the dispute to arbitration, the Director General, MANAGE shall send a list of three officers of the rank of Superintending Engineer or higher. The contractor shall within 15 days of receipt of this list, select one person out of the panel and communicate to the Director General. If the contractor fails to communicate his decision, the Director General of MANAGE shall select one officer from the panel and appoint him as the sole arbitrator. In case, if the Director General fails to send such a list within 30 days of the notice of intention of the contractor to refer the dispute to arbitration, the contractor would be entitled to send his own list to the Director General, then the Director General shall select one officer from the panel proposed by the contractor within 15 days and if the Director General does not exercise this option within 15 days, the contractor would be entitled to send the name of officer as the sole arbitrator.
8. From the facts narrated above, it is dear that the question of appointing a sole arbitrator comes only after the decision, but not earlier to the decision in the appeal. In terms of Clauses 52.2 and 52.3, it is only after the intention of the contractor not accepting the decision, the question of appointment of the sole arbitrator would arise, and not before the decision. Therefore, the contractor proposing the panel of names vide its letter dated 24.7.1998 was premature and it was rightly rejected by the Director General vide letter dated 11.8.1998 At any rate, it is the primary right of the Director General, first to propose panel of three names for appointment of arbitrator, out of which, the contractor has to select one and as per Clauses 52.2 and 52.3, the contractor has no first option at all. If the list of the panel is communicated by the Director General, as per the agreement, the contractor is bound to accept one of the persons from the panel as the sole arbitrator and there is no power with the contractor to reject all the persons in the panel, simply stating that they are not acceptable to him. The power of the contractor to select and seek the appointment of a sole arbitrator would arise only if the Director General does not propose a panel of the arbitrators within the stipulated time. In the instant case, the Director General has proposed a panel along with the appeal order itself and it does not He in the mouth of contractor to say that he does not want to accept any one of them. As per the terms of the agreement, incorporated under Clause 52.3, the contractor is bound to accept one of the persons in the panel as the sole arbitrator and if he does not indicate any one person from the panel, the Director General would be entitled to appoint one person from the said panel and that has been done in this case. Both the parties are bound by the Clauses 52.2 and 52.3 of the agreement and accordingly, Sri Nainani has been appointed as the sole arbitrator in terms of Clause 52.3 and hence I do not find that this is a case for appointment of the arbitrator at the hands of the High Court.
9. However, the learned Counsel for the petitioner submitted that the panel of arbitrators are from outside the State of Andhra Pradesh and the applicant has to bear expenses along with the respondent and there is no reason why one arbitrator from Andhra Pradesh State could not be a sole arbitrator. As against this argument, the learned Counsel for the respondent submitted that if a person belonging to Andhra Pradesh State is appointed, there is possibility that he may be influenced by one party or the other, therefore, they have opted for an arbitrator, who is an outsider, and there is no unreasonableness in such appointment. He further submitted that, at any rate, the applicant simply rejected the panel proposed by the Director General, without assigning any reasons vide his letter dated 9.10.1998, except stating that they would approach the High Court. He further submitted that this is only to drag on the proceedings, the contractor-applicant has approached this Court. As against this argument, the learned Counsel for the applicant submitted that the applicant has a right to seek appointment of a sole arbitrator in terms of Section 11(6) of the Act, read with para 3(1)(c) of the Scheme for appointment of arbitrator 1996 of the A.P High Court.
10. I have carefully gone through Section 11 of the Act. Relevant portion of the said section is extracted as under for ready reference:
“11. Appointment of arbitrators:
(1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.
(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.
(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.
(4) If the appointment procedure in sub-section (3) applies and—(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or (b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment.
The appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.
(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.
(6) Where, under an appointment procedure agreed upon by the parties:
(a) a party fails to act as required under that procedure; or
(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure,
a party may request the Chief Justice of any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.”
11. Section 11(2) of the Act provides that subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators. In the instant case, the parties have agreed to for a certain procedure for appointment of an arbitrator. Sub-section (6) to Section 11 would operate only if a party fails to act as required under that procedure. The instant case is not the one, in which the MANAGE has failed to act according to the procedure. As I have already stated above, immediately by rejecting the appeal filed by the applicant-Contractor, by finding that there is dispute, it has proposed a panel of three names for appointment of one of them as the sole arbitrator in terms of Clause 52.3 of the agreement, and it was only for the applicant to choose any one of them as the sole arbitrator, which the applicant has not chosen to do so. From this it follows that applicant wants to give a go-by to the procedure prescribed by the arbitration clause, agreed to by the parties under Clause 52.3 Since parties are free to agree upon a procedure for the appointment of a arbitrator or arbitrators and after such agreement, the applicant is bound of such agreement entered into. Hence, the applicant has to follow such procedure and it was bound to accept one of the arbitrators from out of the panel suggested by the MANAGE in terms of Clause 52.3 Therefore, the applicant by refusing to follow the procedure by itself, cannot approach this Court under Section 11 of the Act. The intendment of Section 11 is that, if the other side is not ready to follow the procedure, the applicant may seek the High Court for the direction to the other side either to follow the procedure or request the High Court to appoint one arbitrator in terms of the Scheme. In other words, it does not lie in the mouth of any person to say “I do not want to follow the procedure prescribed under the arbitration clause and appoint one arbitrator for me.” Having regard to these circumstances, I do not see that there is any merit in this application. Accordingly, I pass the order as under: The arbitration application is rejected, but in the circumstances without costs.
12. Application dismissed.
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