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Sh. Surender Pal Singh Petitioner v. Hindustan Petroleum Corporation Ltd.
Structured Summary of the Opinion — Rajiv Sahai Endlaw, J.
Factual and Procedural Background
The parties entered into an agreement dated 15 December 1981 containing an arbitration clause under which all disputes were to be referred to the arbitrator nominated by the Managing Director (MD) of the respondent. The clause precluded the petitioner from objecting to nomination on the ground that the nominee was an officer of the respondent or had dealt with matters relating to the contract, and it authorized the MD to designate another person if the appointed officer was transferred, vacated office or became unable to act.
Disputes arose and the MD appointed Mr. S.P. Chaudhry, an officer of the respondent, as arbitrator. The arbitration clause provided that "the award shall be made in writing within six months after entering upon the reference or within such extended time not exceeding further four months as the sole arbitrator shall by a writing under his own hands appoint." Mr. S.P. Chaudhry entered upon reference on 29 May 2000.
On 31 March 2001 the petitioner contended that 10 months had elapsed without publication of the award and that Mr. Chaudhry could not continue. After the arbitrator refused that position, the petitioner filed Civil Misc. (Main) No. 281/2001 under Article 227 in this court seeking to quash the arbitrator's order; an interim order stayed the arbitration. The petitioner also filed a suit in the District Court for similar reliefs; during the suit the respondent terminated the petitioner's dealership. The District Court suspended the termination and directed the parties to arbitrate. Both parties appealed to this Court (RFA No. 186/2001 and RFA No. 283/2001).
The petitioner applied to the MD for appointment of another arbitrator; upon the MD's failure to appoint within 30 days, the petitioner filed Arbitration Application No. 38/2002 under Section 11(6) of the Arbitration and Conciliation Act, 1996.
The two RFAs, Arbitration Application No. 38/2002 and Civil Misc. (Main) No. 281/2001 were disposed of by a Division Bench judgment dated 10 October 2006 which held that the suit was not maintainable and that a contention that the arbitrator's mandate had terminated should be pursued under Section 14 of the Act; until the Section 14 petition was decided, Section 11(6) could not be entertained.
The present petition was thereafter filed under Sections 14 and 15 of the Arbitration and Conciliation Act, 1996 seeking a declaration that the arbitrator's mandate had terminated and for appointment of an independent (preferably retired judge) arbitrator. An interim order dated 11 December 2006 had stayed arbitration proceedings; the present judgment disposes of the petition and addresses the interim stay.
Legal Issues Presented
- Whether the arbitrator's mandate terminated by reason of the expiry of the time agreed between the parties for making the award (six months with an extension not exceeding four months).
- Whether failure by the arbitrator to make the award within the agreed time can be characterized as the arbitrator being "de-jure or de-facto unable to perform his functions" or as "failure to act without undue delay" under Section 14(1)(a) of the 1996 Act.
- Whether an agreement between parties fixing a time for making the award is effective notwithstanding that the arbitration commenced after the Arbitration and Conciliation Act, 1996 came into force (i.e., whether Part I of the 1996 Act bars such an agreement).
- What is the correct procedure for appointment of a substitute arbitrator if the mandate has terminated — i.e., whether Section 15(2) requires the appointment according to the same rules as applied to the original appointment, and whether the court can directly appoint an independent arbitrator or must follow the agreed mechanism (with Section 11(6) only coming into play upon default of the appointing authority).
Arguments of the Parties
Petitioner's Arguments
- The parties had agreed a time-limit (6 months, extendable by up to 4 months) for the arbitrator to make the award; upon expiry of that time without an award, the arbitrator's mandate terminated and he became de-jure unable to act.
- Accordingly, the petitioner sought a declaration under Sections 14 and 15 that the mandate of Mr. S.P. Chaudhry had terminated and sought appointment of an independent arbitrator (preferably a retired judge).
- The petitioner relied on the judgment of this court in Shyam Telecom Ltd. v. Arm Ltd. and the Bombay High Court judgment in Kifayatullah Haji Gulam Rasool v. Smt. Bilkish Ismail Mehsania to support the proposition that authority of an arbitrator derives from the agreement and that agreement to time limits can lead to termination of mandate.
Respondent's Arguments
- Because the arbitration commenced after the Arbitration and Conciliation Act, 1996 came into force, the 1996 Act governs the proceedings even though the agreement was dated before the Act.
- The 1996 Act, unlike the 1940 Act, does not prescribe any time limit for making an award; therefore the parties' contractual provision fixing time for award is ineffective to terminate the arbitrator's mandate and cannot be relied upon to deprive the arbitrator of his mandate.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Shyam Telecom Ltd. … Petitioner v. Arm Ltd.… 113 (2004) DLT 778 | That the arbitrator's authority is derived from the parties' agreement and is defined/limited by the terms of that agreement. | The Court relied on this authority to hold that the parties can validly agree a time-limit for making the award and that the arbitrator's mandate can be governed/terminated by such an agreement. |
| Kifayatullah Haji Gulam Rasool v. Smt. Bilkish Ismail Mehsania AIR 2000 Bombay 424 | A consent order providing time for making the award was treated as an agreement that the arbitrator's authority would end after the stipulated time. | The Court respectfully concurred with this proposition and used it to support the view that an agreed time for making the award can result in termination of the arbitrator's mandate. |
| N.H.A.I. v. Bumihiway DDB Ltd., 2006 (9) SCALE 564 | The Supreme Court held that where the presiding arbitrator resigned and Section 11(6) had been used to appoint a substitute, such appointment was improper; Section 15(2) applies and the agreed procedure must be followed for substitute appointment. | The Court applied this precedent to hold that upon termination under Section 14 the procedure under Section 15(2) (i.e., the same appointment mechanism as for the original arbitrator) must be followed and the court could not directly appoint a retired judge as sought by the petitioner. |
| Yashwith Construction (P) Ltd. v. Simplex Concrete Piles India Ltd. (2006) SLT 443 | Similar principle to N.H.A.I.: Section 15(2) applies and agreed procedure for substitute appointment is to be followed. | Reinforced the Court's conclusion that agreed appointment procedure must be followed for substitute arbitrator and Section 11(6) is not a substitute until default by the appointing authority. |
| D.S. Gupta Contracts Pvt. Ltd. v. Unison Hotels Ltd. 98 (2002) DLT 369 | To the same effect as N.H.A.I. and Yashwith — Section 15(2) governs substitute appointment and the agreed procedure must be followed. | Used as further support for requiring the agreed appointment mechanism to be followed on termination of mandate. |
| Ace Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd., 2007 (5) SCC 304 | Even when exercising powers under Section 11(6), the court can give a mandate to the appointing authority to appoint the arbitrator in accordance with the agreement or the agreed mechanism. | The Court cited this to clarify that if Section 11(6) becomes relevant (e.g., upon default), the Court may direct the appointing authority to act in accordance with the agreement rather than directly appointing a person outside the agreed mechanism. |
| Northern Railway Administration, Ministry of Railway, New Delhi v. Patel Engineering Company Ltd. (2008) 10 SCC 240 | Similar proposition to Ace Pipeline: the court in exercise of Section 11(6) can direct the appointing authority to make the appointment as per the agreement or agreed mechanism. | Supported the Court's direction that the appointing authority should be mandated to appoint in accordance with the agreement if required. |
Court's Reasoning and Analysis
The Court began by identifying the relevant statutory provision, Section 14(1)(a) of the Arbitration and Conciliation Act, 1996, which provides for termination of the mandant of an arbitrator where the arbitrator becomes de-jure or de-facto unable to perform his functions and also includes the ground of the arbitrator "for other reasons failing to act without undue delay."
The respondent's counsel argued that because the arbitration commenced after the 1996 Act came into force, that Act governs notwithstanding the pre-Act agreement and that the 1996 Act contains no time limit for making awards; consequently the contractual time-limit is ineffective to terminate the arbitrator's mandate. The Court rejected that contention.
Relying on Shyam Telecom Ltd. (this Court) and the Bombay High Court decision in Kifayatullah, the Court reasoned that nothing in the 1996 Act prevents parties from agreeing to a time-limit for making the award. Several provisions of Part I of the Act are subject to agreement between parties, and therefore an agreement fixing time is operative. Even where the agreement does not explicitly state that the arbitrator's mandate shall terminate upon expiry of the time, an agreement of time for making the award would, in the absence of contrary consent, terminate the mandate upon expiry of such time.
Further, the Court held that, irrespective of the contractual-termination analysis, the arbitrator's failure to make the award within the agreed time would also fall within the ambit of Section 14(1)(a) as "failure to act without undue delay." On that basis the Court concluded that the mandate of Mr. S.P. Chaudhry had terminated.
The Court then addressed the procedure for replacement. Section 15(2) provides that a substitute arbitrator shall be appointed according to the rules applicable to the appointment of the arbitrator being replaced. The Court observed that the petitioner sought an independent (retired judge) arbitrator and argued respondent had failed to appoint a substitute; but the Court emphasized that if a controversy exists as to whether the mandate has terminated, the party must approach the court under Section 14 and that only after the court rules on termination does the procedure under Section 15(2) get set in motion.
Citing Supreme Court and other authorities (N.H.A.I. v. Bumihiway DDB Ltd.; Yashwith; D.S. Gupta), the Court concluded that on allowance of a Section 14 petition the agreed procedure for appointment must be followed and the Court cannot bypass that mechanism by appointing a retired judge directly. Only if the appointing authority defaults in the agreed procedure will Section 11(6) come into play. The Court also noted authorities (Ace Pipeline; Northern Railway) that even when exercising Section 11(6) powers, a court can mandate the appointing authority to appoint in accordance with the agreement.
Applying these principles to the facts, the Court directed the Managing Director of the respondent (the agreed appointing authority) to appoint a substitute arbitrator within one month, with notice to the petitioner. The Court clarified that upon failure of the MD to act, the petitioner would have remedies available in law. The Court also made clear that the substitute arbitrator would deal with all disputes between the parties, including those accruing after the initiation of proceedings before Mr. Chaudhry, and that parties could file fresh pleadings in that regard.
Holding and Implications
Holding: The Court held that the mandate of Mr. S.P. Chaudhry has terminated. The Court directed that the Managing Director of the respondent, as the appointing authority under the agreement, shall appoint a substitute arbitrator within one month from the date of the order and give notice of such appointment to the petitioner. The petition is disposed of leaving the parties to bear their own costs.
Consequences and practical implications (as stated in the opinion):
- The substitute arbitrator appointed by the Managing Director shall deal with all disputes between the parties, including disputes that may have arisen after initiation of arbitration proceedings before Mr. S.P. Chaudhry; the parties are entitled to file fresh pleadings in respect of such disputes.
- Section 15(2) applies: the procedure for appointment of the substitute arbitrator must follow the same mechanism as applied to the appointment of the arbitrator being replaced; the Court will not directly appoint a retired judge in place of the agreed appointing authority.
- If the appointing authority (the Managing Director) defaults in making the appointment, the petitioner will have remedies available in law (including the potential operation of Section 11(6) as clarified by cited authorities).
- The interim stay that had been operating in respect of proceedings before Mr. S.P. Chaudhry (ordered on 11 December 2006) is vacated upon disposal of the petition; the related interlocutory application does not survive.
The Court applied established precedents in reaching its decision and directed the agreed appointing authority to act within the stipulated time; the order disposes of the petition and leaves the parties to bear their own costs.
Rajiv Sahai Endlaw, J.:—The petition has been preferred under sections 14&15 of the arbitration & conciliation act, 1996 for declaration that the mandate of the arbitrator has terminated and for appointment of an independent arbitrator, preferably a retired judge of this court or of some other High Court.
2. The parties herein are parties to an agreement dated 15th December, 1981 containing an arbitration clause whereunder all disputes and differences between the parties were agreed to be referred to the arbitration of the nominee of the Managing Director of the respondent. It is further a term of the said arbitration clause that the petitioner shall not have any objection to any such nomination by the Managing Director of the respondent on the ground that the person so nominated is an officer of the respondent corporation or that he has to deal with the matters to which the contract relates or that he has in the course of duties as an officer of the respondent corporation expressed views on the matters in dispute. The clause further authorizes the Managing Director to in the event of the officer so appointed as the arbitrator being transferred or vacating his office or being unable to act as the arbitrator, designate another person to act as the arbitrator in terms of the agreement.
3. Disputes and differences having accrued between the parties, the petitioner approached the Managing Director of the respondent, who then appointed one Mr. S.P Chaudhry officer of the respondent corporation as the arbitrator.
4. It is inter-alia the case of the petitioner that it is also a term of the arbitration clause aforesaid that
“the award shall be made in writing within six months after entering upon the reference or within such extended time not exceeding further four months as the sole arbitrator shall by a writing under his own hands appoint.”
5. It is not disputed that the aforesaid Mr. S.P Chaudhry entered into reference on 29 May, 2000. The petitioner on 31st March, 2001 applied to the arbitrator aforesaid with the contention that a period of 10 months having elapsed since entering upon reference and the award having not been published, Mr. S.P Chaudhry was not entitled to continue as the arbitrator. Upon the arbitrator refusing to admit the said position the petitioner filed a petition under Article 227 of the Constitution of India bearing Civil Misc. (Main) No. 281/2001 in this court inter-alia for quashing of the said order of the arbitrator. Vide interim order in the said petition, the arbitration proceedings were stayed. The petitioner then also filed a suit in the District Court for the same reliefs as claimed before the arbitrator. During the pendency of the suit the respondent also terminated the dealership of the petitioner. The suit was disposed of by suspending the operation of the letter of termination of dealership during the pendency of the arbitration and the parties were directed to take all their disputes before the arbitrator. Both parties filed appeals in this court against the said order, being RFA No. 186/2001 and RFA No. 283/2001.
6. In the interregnum the petitioner also applied to the Managing Director of the respondent for appointing another arbitrator and upon the failure of the Managing Director of the respondent to within 30 days thereof appoint an arbitrator filed arbitration application No. 38/2002 in this court under Section 11(6) of the Act for appointment of an independent arbitrator.
7. Both the RFAs, arbitration application No. 38/2002 and Civil Misc. (Main) No. 281/2001 were disposed of vide judgment dated 10 October, 2006 of the Division Bench of this court. The Division Bench inter-alia held that the suit filed by the petitioner was not maintainable; that if the petitioner contended that the mandate of the arbitrator had terminated, the proper remedy for the petitioner was to apply to the court under Section 14 of the Act and till the said petition was decided there could be no question of entertaining the petition under Section 11(6) of the Act.
8. It was thereafter that the present petition came to be filed. Vide order dated 11 December, 2006 in these proceedings arbitration proceedings were stayed.
9. It is the contention of the counsel for the petitioner that the parties having agreed that the arbitrator will render an award within the time specified, upon expiry of the said time and the failure of the arbitrator to render the award, the mandate of the arbitrator terminated and the arbitrator had become de-jure unable to perform his functions. He has in this regard also relied upon the judgment of this court in Shyam Telecom Ltd.…Petitioner v. Arm Ltd.… 113 (2004) DLT 778 and a judgment of Bombay High Court in Kifayatullah Haji Gulam Rasool v. Smt. Bilkish Ismail Mehsania AIR 2000 Bombay 424. In Shyam Telecom Ltd. it was held by this court that the arbitrator is clothed with authority only under the agreement of the party and the authority of the arbitrator is also unclothed in terms of the said agreement.
10. I may notice that section 14(1) (a) besides providing for the termination of the mandate of the arbitrator on the arbitrator becoming de-jure or de-facto unable to perform his functions also provides the ground of, the arbitrator for other reasons failing to act without undue delay also as a ground for termination of the mandate of the arbitrator.
11. The counsel for the respondent has contended that the arbitration in the present case having commenced after coming into force of the 1996 Act, notwithstanding the agreement being of a date prior thereto, the proceedings would be governed by the provisions of the 1996 act; that the 1996 act unlike the 1940 Act does not provide for any time limit for making of the award; it is thus contended that the agreement between the parties of the time for making of the award is of no avail and the mandate of the arbitrator cannot be terminated on the said ground.
12. In view of the judgment of this court in Shyam Telecom Ltd. and with which I am not inclined to disagree, the aforesaid contention of the counsel for the respondent cannot be upheld. There is nothing in the 1996 Act which prevents/bars the parties from agreeing to the time limit for making the award. Several of the provisions of part I of the Act are subject to the agreement to the contrary between the parties. The Bombay High Court, Judgment whereof I respectfully concur, has also held that it is open to the parties to provide for termination of mandate of arbitrator i.e the mandate of the arbitrator can be subject to agreement between the parties. The consent order in that case providing for time for making the award was held to be an agreement that the authority of arbitrator shall come to an end thereafter. Similarly, though the agreement in the present case does not provide that the mandate of arbitrator shall terminate after expiry of ten months but an agreement of time for making the award would in the absence of consent implied or explicit, terminate the mandate of arbitrator on expiry of such time. Same is not repugnant to the Act. I am also of the view that irrespective of the above, failure of the arbitrator to make the award within the agreed time would also fall within the ambit of the other ground under section 14 (1) (a) of termination of mandate i.e of failure to act without undue delay, which is found to be made out in present case. Thus it has to be necessarily held that the mandate of Mr. S.P Chaudhry has terminated.
13. I may however notice that even if the mandate of the arbitrator is held to terminate under Section 14 of the Act, Section 15 (2) of the Act provides that a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.
14. The counsel for the petitioner has contended that since the respondent failed to appoint a substitute arbitrator inspite of notice, the petitioner has become entitled to the appointment of an independent arbitrator. Though this is not a petition/application under Section 11(6) of the Act but nevertheless, besides the relief of declaration of termination of mandate of Mr. S.P Chaudhry, relief of appointment of alternate arbitrator is also claimed.
15. Under Section 14 of the Act, if a controversy remains between the parties and/or between the party and the arbitrator as to whether the mandate of the arbitrator has terminated or not, the party contending that the mandate has so terminated is to approach the court in this regard. From the facts aforesaid it is apparent that in the present case the controversy remained, leading to the filing of this petition. The controversy having remained, unless the said controversy is adjudicated by the court, it cannot be said that the petitioner has become entitled to apply under Section 11(6) or that there is any failure on the party of the respondent under the agreed procedure.
16. Thus, only upon this court ruling on the controversy of termination of mandate of arbitrator, the procedure under Section 15(2) is to be set into motion.
17. I may notice that in N.H.A.I v. Bumihiway DDB Ltd. 2006 (9) SCALE 564, upon resignation by presiding arbitrator, petition under Section 11(6) was preferred and substitute arbitrator appointed. The Supreme Court struck down such appointment and held Section 15(2) to be applicable and the agreed procedure for appointment of substitute arbitrator required to be followed. To the same effect are Yashwith Construction (P) Ltd. v. Simplex Concrete Piles India Ltd. V (2006) SLT 443 and D.S Gupta Contracts Pvt. Ltd. v. Unison Hotels Ltd. 98 (2002) DLT 369. Thus, as per the settled law, on petition under Section 14 being allowed, the procedure for appointment is the same as of appointment of arbitrator being replaced and this court cannot appoint a retired judge, as sought. Only if the respondent/appointing authority default in the agreed procedure, will Section 11(6) come into play.
18. As per the agreed procedure, the appointment has to be made by the Managing Director of the respondent.
19. I may also notice that as per the dicta in Ace Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd.. 2007 (5) SCC 304 and in Northern Railway Administration, Ministry of Railway, New Delhi v. Patel Engineering Company Ltd. (2008) 10 SCC 240, even in exercise of powers under Section 11(6) of the Act, the court can give a mandate to the appointing authority to appoint the arbitrator as per the agreement or appoint the arbitrator in terms of agreed mechanism.
20. Since the matter has already remained pending for long the Managing Director of the respondent is directed to appoint a substitute arbitrator within one month from today with notice thereof to the respondent. Needless to add that upon failure of the Managing Director, the petitioner shall have remedies available to it in law. It is further clarified that in accordance with the judgment aforesaid of the Division Bench, all disputes between the parties including which may have accrued after the initiation of arbitration proceedings before Mr. S.P Chaudhry will be dealt with by the substitute arbitrator and the parties shall be entitled to file fresh pleadings with respect thereto. With the aforesaid directions, the petition is disposed of leaving the parties to bear their own costs.
IA No. 13133/2006 (of the petitioner for interim stay).
Vide order dated 11 December, 2006 on this application further arbitration proceedings before Mr. S.P Chaudhry were stayed. The said order continues to be in force. Upon disposal of the petition the said application does not survive. The interim stay is vacated.
Copy of the order be given dasti under the signature of Court Master.
RAJIV SAHAI ENDLAW, J.
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