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Keti Construction (I) Ltd. v. Gas Authority Of India Ltd. And Ors.

Delhi High Court

Dec 7, 2004

Judgment

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Judgment Summary — Vijender Jain, J. (Oral)

Factual and Procedural Background

The appellant challenged an order of the Single Judge that dismissed the appellant's objection under Section 34 of the Arbitration Act. The appellant had been awarded four separate work orders (labelled A, B, C and D) for different projects at the Petro Chemical Complex, Dibiyapur. The present dispute relates specifically to Contract (D) (work order no. CE/136.Auriaya/Housing/95, dated 28.09.1995).

Clause 107 of the contract (the arbitration clause) required that after written notice either party could refer disputes to a sole arbitrator; for appointment the appointing authority would send a panel of three unconnected persons within thirty days, from which the contractor would select one. If the appointing authority failed to send such a panel, the contractor could send a panel of three names and the appointing authority would select one. The clause also provided for continuance of work during arbitration and that the arbitrator's award would be final and binding.

The appellant invoked the arbitration clause for Contract (D) on 17 July 1999. The appellant states that the respondent did not send the required panel within the time envisaged by Clause 107. On 28 October 1999 the appellant sent a panel of three names to the respondent. The appellant thereafter appointed respondent no.4 as arbitrator on 10 December 1999 (who entered reference on 6 January 2000). The respondent also appointed respondent no.3 as arbitrator (appointment dated 13 January 2000), who entered reference on 13 January and 11 February 2000 and ultimately rendered a "No Claim" award dated 19 April 2000.

The appellant challenged the validity of respondent no.3's appointment and the award under Section 34. The Single Judge dismissed the objection; this appeal followed.

Legal Issues Presented

Whether the appointment of respondent no.3 as arbitrator (and the resulting award) complied with the appointment procedure mandated by Clause 107 of the contract for Contract (D).
Whether, given four separate contracts each containing independent arbitration clauses, communications or panels sent in relation to other contracts (A, B or C) could constitute compliance with Clause 107 in respect of Contract (D).
Whether Section 16 of the Arbitration and Conciliation Act (and specifically sub‑section (6)) required the appellant to participate in the arbitral proceedings before challenging the arbitrator's jurisdiction or award in court.

Arguments of the Parties

Appellant's Arguments (as advanced by Mr. Markanda)

The appellant invoked arbitration on 17 July 1999 in respect of Contract (D) and, under Clause 107, the respondent was required to send a panel of three names for appointment of a sole arbitrator; the respondent did not do so.
After waiting, the appellant sent a panel of three names to the respondent on 28 October 1999; the respondent did not communicate any selection within the contractually prescribed process.
The respondent could not validly appoint respondent no.3 as arbitrator because the procedure in Clause 107 was not followed in relation to Contract (D); consequently the award rendered by respondent no.3 suffered from patent illegality and was contrary to the terms of the agreement.
The four contracts were independent contracts with independent arbitration clauses; the learned Single Judge's view treating them as one contract was legally unsustainable and factually incorrect.

Respondent's Arguments (as advanced by Mr. Nayyar)

The respondent relied on correspondence (including a letter dated 15.11.1999) to show that a panel of three names had been sent and that the appellant was given the option to select one of them; when the appellant did not reply, the respondent appointed respondent no.3.
The respondent relied on earlier communications (a letter of the appellant dated 05.10.1998 and a purported letter of 31 July 1999 sent by a lawyer) to show that the respondent had already proposed panels and acted within the contractual process.
The respondent contended that Section 16 prescribes the procedure for objections to jurisdiction of an arbitral tribunal and the appellant should have challenged jurisdiction before the tribunal; having not done so the appellant's relief before court was limited.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court examined the contractual scheme of Clause 107 and the factual chronology of communications and appointments. Its analysis proceeded along the following lines:

Independence of contracts: The court emphasized that there were four distinct contracts, each containing its own arbitration clause. It held that a panel or name sent in relation to one or two contracts could not be treated as compliance of the appointment procedure in respect of a different contract (Contract (D)), unless the agreement expressly so provided. The court found no such cross‑contract provision in Clause 107.
On the respondent's alleged compliance: The court scrutinised the respondent's documentary basis for asserting that it had complied with Clause 107 after the appellant invoked arbitration for Contract (D) on 17 July 1999. The court found that the respondent relied on earlier correspondence (including a letter of 05.10.1998 and a reply dated 15.11.1999) that, on their face, related to other work orders (A and B) and not to Contract (D). Therefore those communications could not be treated as compliance with the Clause 107 procedure for Contract (D).
Doubtful documents and timing: The respondent also relied on a letter dated 31 July (the judgment records uncertainty about the authenticity and provenance of that letter, which purportedly came from a lawyer). The court noted that lawyers do not usually correspond in the place of the parties in the relevant manner here and observed that the existence and genuineness of that communication were doubtful.
Single Judge's error: The court found that the Single Judge had incorrectly treated a February 1999 letter as resolving the dispute in relation to Contract (D). The appellate court held that that letter pertained to other contracts (A and B) and could not be used to conclude that the respondent had complied with Clause 107 for Contract (D).
Section 16 argument: The respondent argued that Section 16 provided a complete code for challenges to jurisdiction and that the appellant should have participated in the arbitration and challenged jurisdiction before the tribunal. The court observed that the appellant repeatedly raised jurisdictional objections before respondent no.3. When respondent no.3 proceeded despite those protests and rendered a "No Claim" award, the appellant's available remedy (as the court described) was to challenge the award under sub‑section (6) of Section 16. The appellant did challenge the award under that provision. The court therefore found no merit in the respondent's contention that the appellant was barred from court relief for failing to participate.
Conclusion from analysis: Taking the contractual text and documentary chronology together, the court concluded that the appointment of respondent no.3 did not conform to Clause 107 for Contract (D). Consequently respondent no.3's appointment and award were invalid.

Holding and Implications

Holding:

The appeal is allowed; the order of the learned Single Judge is set aside and the award rendered by respondent no.3 is set aside.

Direct consequences and directions:

The order of the learned Single Judge (which had dismissed the appellant's objection under Section 34) is set aside.
The award of respondent no.3 (the "No Claim" award dated 19.04.2000) is set aside.
The matter is remitted: the parties are directed to appear before respondent no.4, who (the court directed) shall proceed in accordance with law and give an award.
The appeal stands allowed and disposed of in terms of these directions.

Broader implications:

The opinion confines itself to invalidating an improperly constituted arbitral appointment under the specific Clause 107 factual matrix and ordering fresh proceedings before respondent no.4. The judgment does not announce or discuss any new legal precedent beyond applying Clause 107 and the procedural consequences under Section 16; thus there is no indication in the opinion that it was intended to lay down a novel legal rule beyond these parties' circumstances.

Show all summary ...

Vijender Jain, J. (Oral):— This appeal has been preferred against the order passed by the learned Single Judge dismissing the objection of the appellant under Section 34 of the Act. Mr. Markanda, learned counsel for the appellant has contended that the appellant has been awarded four independent contracts for their various projects at Petro Chemical Complex Dibiyapur, District Etawah (UP) which are as follows:

“(A) Work order no. CE/AUR/Ph-II Extn. B. Works/97A/95, dated 26.05.1995: Balance work of construction of C-6 and D-2 Houses at GAIL Vihar Township, Dibiyapur;

(B) Work order no. CE/115.Auriaya/GAIL/GAIL Vihar Road Work/95, dated 10.02.1995: Construction of premix bitumen carpeting and repairs of roads in GAIL Vihar Colony and Compressor Station;

(C) Work order no. CE/137.Auriaya/Ext/SER/95, dated 01.11.1995: Construction of external sewerage line at UPPC Nagar, Dibiyapur; and

(D) Work order no. CE/136.Auriaya/Housing/95, dated 28.09.1995: Construction of residential quarters Type A-25 units, Type B-105 units, Type C-55 units for UPPC Complex, Dibiyapur.”

2. The dispute in question pertains to the work stated at serial no. D vide work order no. CE/136.Auriaya/Housing/95, dated 28.09.1995 The dispute raised in Section 34 of the Act was with regard to incorrect constitution of arbitral forum by the respondent. Both the sides relied upon Clause 107 of the agreement. The same is reproduced below:

“107.1 All disputes or differences whatsoever which shall at any time arise between the parties hereto touching or concerning the WORKS or the execution or maintenance thereof this CONTRACT or the rights touching or concerning the WORKS or the execution effect thereof or to the rights or liabilities or the construction meaning operation or effect whether during or after completion of the CONTRACT or whether before or after determination, foreclosure or breach of the CONTRACT (other than those in respect of which the decision of any person is by the CONTRACT expressed to be final and binding) shall after written notice by either party to the CONTRACT to the other of them and to the appointing authority hereinafter mentioned be referred for adjudication to a sole arbitrator to be appointed as hereinafter provided. 107.2 For the purpose of appointing the sole arbitrator referred to above, the appointing authority will send within thirty days of the receipt of the notice to the CONTRACTOR, a panel of three persons who shall all be presently unconnected with the organisation for which the WORK is executed. The CONTRACTOR shall on receipt of the names, as aforesaid, select any one of the persons named to be appointed as a sole arbitrator and communicate his name to the appointing authority within thirty days of receipt of names. The appointing authority shall thereupon without any delay appoint the said person as the sole arbitrator. If the CONTRACTOR fails to communicate such selection as provided above within the period specified, the appointing authority shall make the selection and appoint the selected as the sole arbitrator. If the appointing authority fails to send to the CONTRACTOR the panel of three names as aforesaid within the period specified, the CONTRACTOR shall send the appointing authority a panel of three names of persons who shall all be unconnected with either party. The appointing authority shall on receipt of the names as aforesaid select any one of the persons named and appoint him as the sole arbitrator. If the appointing authority fails to select the person and appoint him as the sole arbitrator within 30 days of the receipt of the panel and inform the CONTRACTOR accordingly, the CONTRACTOR shall be entitled to appoint one of the persons from the panel as the sole arbitrator and communicate his name to the appointing authority. If the arbitrator so appointed is unable to or unwilling to act or resigns his appointment or vacates his office due to any reason whatsoever, another sole arbitrator shall be appointed as aforesaid. The WORK under the CONTRACT shall, however, continue during the arbitration proceedings and no payment due or payable to the CONTRACTOR shall be withheld on account of such proceedings. The arbitrator shall be deemed to have entered on the reference on the date he issues notice to both the parties fixing the date of the first hearing. The arbitrator may, from time to time, with the consent of the parties, enlarge the time for making and publishing the. award. The venue of the arbitration shall be New Delhi. The fees, if any, of the arbitrator shall, if required to be paid before the award is made and published, be paid half AND half by each of the parties. The costs of the reference and of the award including the fees, if any, of the arbitrator shall be in the discretion of the arbitrator who may direct to and by whom and in what manner, such costs or any part thereof shall be paid and may fix or settle the amount of costs to be so paid. The award of the arbitrator shall be final and binding on both the parties. Subject to aforesaid the provisions of the Arbitration Act, 1940 or any statutory modification or re-enactment thereof and the rules made thereunder, and for the time being in force, shall apply to the arbitration proceedings under this clause.”

3. It is the case of the appellant that the appellant invoked the arbitration clause on 17th July, 1999. Reliance in this regard is placed on pages 42-43 of the paper book and as per the aforesaid Clause 107, the respondent was to send a panel of three names as per the agreement and then the appellant was to select any one of the person mentioned in the said panel as sole arbitrator.

4. However, even after the invocation of the arbitration clause on 17th July, 1999, the same was not done and the appellant waited till 28th October, 1999 and sent a panel of three names to the respondent. However, the respondent did not intimate their preference of the sole arbitrator in terms of the arbitration clause.

5. In the meanwhile, the appellant appointed respondent no. 4 as arbitrator on 10th December, 1999, who entered into reference on 6th January, 2000. It seems that in the meanwhile, the respondent also appointed respondent no. 3 as arbitrator on 13th January, 2000. Respondent no. 3 entered into reference on 13.01.2000 and 11.02.2000 and rendered ‘No Claim’ award on 19.04.2000

6. Mr. Markanda has contended that pursuant to the arbitration clause the panel of names was to be sent to the appellant indicating three names on the said panel for appointment of a sole arbitrator within thirty days after invocation of the arbitration clause. Having not done so, the respondent could not have appointed respondent no. 3 as an arbitrator and, therefore, the impugned order suffers from patent illegality and the same is against the terms of the agreement between the parties. It was also contended that the four contracts were independent contracts given on different dates. All the four works had independent arbitration clauses. Therefore, the approach of the learned Single Judge that four contracts were not independent contracts and it was one contract was legally unsustainable and factually incorrect.

7. On the other hand, Mr. Nayyar, counsel for the respondent has vehemently contended that pursuant to the letter dated 15.11.1999 which is at page 45 of the paper book, it was contended that the respondent had sent a panel of three names and had given the option to the appellant to select anyone of them to act as sole arbitrator and, therefore, when reply of the said letter was not received, the respondent was left with no other alternative except to appoint respondent no. 3 as the sole arbitrator. As the invocation of the arbitration clause by the appellant was on 17th July, 1999 a letter dated 31st July, 1999 sent by one Sushil Chauhan, Advocate to the appellant was relied upon by the respondent. The said letter is to the following effect:

“Pursuant to the discussions held on various occasions by you and my client, GAIL officials with regard to settlement of disputes and appointment of sole arbitrator, I am instructed by my client, Gas Authority of India Ltd. (GAIL) to call upon you to select the sole arbitrator from the names of three distinguished persons already suggested by my clients during discussions in response to your notices. Please take further necessary action.”

8. It was further contended by learned counsel for the respondent that in the said letter dated 15.11.1999 it was already communicated relying on a letter of the appellant dated 05.10.1998 that the respondent has responded to the communication of the appellant vide their letter dated 16.02.1999 and a panel of three arbitrators was indicated in the said letter. It was also contended by Mr. Nayyar that appellant having not participated before the arbitrator, no relief could be granted to the appellant as the procedure has been prescribed under Section 16 that in case an arbitral tribunal is not having jurisdiction still that jurisdiction has to be challenged before the said arbitration tribunal.

9. We have given our consideration to the arguments advanced by learned counsel for both the parties. At the outset we must observe that when there are four contracts and all contracts have independent arbitration clauses, to construe that if name of an arbitrator or a panel of arbitrators have been sent in relation to one or two contracts the same would not be sufficient compliance of an arbitration clause if the said arbitration clause takes into consideration the sending of a panel of names in one or two contracts. Rather this argument goes against the respondent as the respondent knew that there were four contracts and the arbitration clause has been incorporated with the consent of the parties in all four contracts. If that was the intention of the arbitration clause that the name of arbitrator in one contract between the parties will be taken, the panel of names for the purpose of another contract between the parties, ought to have been mentioned in such terms in the agreement. No such terms can be carved from the reading of Clause 107 of the agreement. Therefore, reliance on a letter of appellant dated 05.10.1998 and its reply by the respondent dated 15.11.1999 was in relation to other contracts and not in relation to Contract (D). Now let us deal with the submission of the respondent as to whether there was a compliance of the terms of agreement when the arbitration was invoked by the appellant on 17th July, 1999. Respondent tried to rely on a letter dated 31st July, 1999 which has not been admitted by the appellant. As a matter of fact, this letter purported to have been sent by a lawyer on behalf of respondent that too by UPC. Said letter, which has been sent by a lawyer and that too by UPC, raises doubt about the genuineness of this letter.

10. Normally, it is the parties who correspond with each other, here also it was not the case that lawyers were corresponding on behalf of the parties. Therefore, letter dated 31st July, 1993 on which reliance has been placed by the respondent, its existence is surrounded with mystery. Let us deal with the letter of the respondent dated 15.11.1999 It was contended before us that appellant has not responded to the names suggested by the respondent pursuant to the said letter. But this letter itself speaks the truth and demolishes the stand of the respondent that after invocation of the arbitration clause on 17th July, 1999, no action was taken by the respondent to send the names of a panel containing three names. From the perusal of the aforesaid letter of the respondent dated 15.11.1999 it appears that in relation to the work orders ‘A’ and ‘B’ in response to a letter of the respondent dated 05.10.1998, the respondent had submitted a panel of three arbitrators asking the appellant to select one of them. As a matter of fact, when the arbitration clause in relation to Contract (D) was invoked on 17th July, 1999, how a letter of 5th October, 1998 of the appellant could be acted upon or could be referred in the correspondence by the respondent. When there was no dispute till 17th July, 1999, the reliance placed by the respondent on a letter of the appellant dated 05.10.1998 which according to Mr. Nayyar was in relation to Contracts (A) and (B) shows that the respondent has not acted upon the invocation of the arbitration clause on 17th July, 1999 by the appellant. Therefore, there is no merit in the submission of the respondent that respondent had sent the names as per the arbitration clause of the agreement. Therefore, the finding of the learned Single Judge was based on wrong assumptions as he has taken the date of the letter as 16th February, 1999 and on that basis has come to the conclusion that dispute in relation to Contract (D) also stood resolved in terms of said letter. As stated earlier, said letter was in relation to disputes relating to Contracts (A) and (B) and not in relation to Contract (D).

11. We also find no merit in the submission of the respondent that Section 16 provides a complete code for such an eventuality when the arbitral tribunal is constituted de hors the terms of the agreement. According to the learned counsel for the respondent in such cases the appellant ought to have participated in the proceedings as they could have challenged the award. From the correspondence and the order sheets of respondent no. 3 we observe that at all stages the appellant have been questioning the jurisdiction of respondent no. 3 and respondent no. 3 in spite of the protests of the appellant regarding the jurisdiction, proceeded in the matter and gave no claim award, then the only remedy left for the appellant was to wait till the award was given as per sub-section (6) of Section 16 of the Arbitration and Conciliation Act and thereafter said award has been challenged pursuant to sub-section (6) of Section 16 of the Act. The same has been done by the appellant. Therefore, judging from any angle, we do not find any substance in the arguments of the respondent. The appointment of the respondent no. 3 was not in consonance with Clause 107 of the arbitration agreement. On this ground, order of the learned Single Judge is set aside. The award of the arbitrator/respondent no. 3 is consequently set aside. Parties to appear before respondent no. 4 who will proceed in accordance with law and give the award.

12. Appeal stands allowed and disposed of in terms of above directions.