Malu Sleepers Private Limited, Bangalore v. Union Of India And Another

1. This petition is filed under Section 11 of the Arbitration and Conciliation Act, 1996.

2. The facts leading to filing of this petition can be summarised as follows.—

The petitioner is a company incorporated under the Companies Act, 1956, having its registered office at Bangalore. The company is engaged in carrying on business in manufacture of Prestressed Mono Block Concrete Sleepers, which are used by the Indian Railways for laying railway tracks. The first respondent is the Union of India represented by its Executive Director Track (M), Ministry of Railways, having its office at New Delhi. The first respondent floated a tender for manufacture and supply of 3,54,000 Mono Block Concrete Sleepers. The petitioner-company, which is in the business of manufacture of the said Concrete Sleepers submitted tender for manufacture and supply of required quantity. The first respondent accepted the tender submitted by the petitioner-company and placed an order for manufacture and supply of the said number of Mono Blocks within the specified period i.e, 30-9-2000. Pursuant to it, an agreement dated 15-9-2000, was entered into between the petitioner and first respondent. A copy of which is produced at Annexure-A.

3. The first respondent subsequent to the execution of the first agreement, entered into another agreement which is called a rider agreement dated 25-8-2003, revised the quantity and enhanced the number of Prestressed Mono Block Concrete Sleepers to be manufactured and supplied to it. For the purpose of supply of the said Concrete Sleepers time was extended from 30-9-2000 to 31-12-2003. The copy of the subsequent rider agreement is at Annexure-B.

4. The case of the petitioner is that as per the terms stipulated in Clause 1.5(i) of the first agreement dated 15-9-2000, the first respondent was required to supply free of cost the MCI inserts, which are required to be embedded in the concrete used in the manufacture of the Concrete Sleepers were not supplied.

5. The grievance of the petitioner is that the respondent 1 failed to supply MCI inserts to the petitioner and it had committed breach of terms agreed under the contract dated 15-9-2000. Since default was committed on behalf of the first respondent in not supplying the required materials for the manufacture of the Concrete Sleepers, the petitioner-company could not manufacture the Concrete Sleepers as agreed under the tender and agreement within the stipulated period on 31-12-2003, since the respondent 1 did not supply the MCI inserts pursuant to the said agreement. When the agreement was still in force, the first respondent floated another tender for manufacture and supply of 1,95,000 Concrete Sleepers. The petitioner once again submitted its tender for manufacture and supply of 1,95,000 Concrete Sleepers, the first respondent accepted the tender submitted by the petitioner and placed an order with the petitioner for manufacture of the said number of Concrete Sleepers. The said acceptance was once again reduced in writing on 26-5-2003. The letter of acceptance is at Annexure-C.

6. It is submitted that under the terms of the contract dated 26-5-2003, it is clearly stipulated that for manufacture and supply of 1,95,000 Concrete Sleepers, the petitioner would commence work on 24-10-2003 once the outstanding supply of the Concrete Sleepers under earlier agreement was completed by 23-10-2003. It is submitted by the petitioner that once again for the default on the part of the respondent in not supplying necessary material for manufacture of Concrete Sleepers, the terms of the agreement could not be complied. The petitioner at this stage, issued a letter dated 12-1-2004 addressed to the 2nd respondent requesting for commencement of production of sleepers under two tender notifications. The said notice is at Annexure-D. Suffice to say that the 2nd respondent pursuant to its letter dated 17-12-2004 i.e, after 12 months of the petitioner's request, accorded permission to start production of Concrete Sleepers under second tender pending completion of the first tender subject to certain terms and conditions relating to the price payable to Prestressed Concrete Sleepers. According to the petitioner even as on 31-3-2005 the 2nd respondent did not fix the rate payable to the Concrete Sleepers neither under first tender notification nor under second tender notification. Since the terms regarding the rate payable were not fixed, the petitioner issued a letter on 20th January, 2006 requesting the 2nd respondent for extension of time along with price variation clause and liquidated damages. The said letter is at Annexure-G. The 2nd respondent pursuant to its letter dated 24-1-2006 extended the time of the contract under 2nd tender notification till 30-12-2006, but without providing the benefit of price variation clause and liquidated damages with complete denial of clauses. According to the petitioner, it is contrary Indian Railway Standard Conditions of Contract. It is noticed that since the petitioner was not in a position to perform his part of the obligation, the respondents proposed to take action to terminate the contract at the petitioners risk and cost and to initiate ‘Risk Purchase’ proceedings. The said notice issued by the respondent is produced at Annexure-J. Having regard to the attitude and conduct of the respondents, the petitioner issued a notice on 12-12-2006 proposing to foreclose the contract pursuant to the 2nd tender notification and sought for compensation of Rs. 1,37,74,800/-. The petitioner also made it evidently clear that, it had no intention to continue with the contract under 2nd notification and once again made a request to foreclose the contract. The said request was also not considered by the respondents. It is the case of the petitioner, having regard to the attitude of the respondents, the first notice was issued calling upon respondents to appoint an Arbitrator to resolve the dispute between the parties. The said notice was not responded. Hence, another notice was issued by the petitioners exercising arbitral clause requesting the respondents to appoint an Arbitrator to adjudicate the dispute regarding the compensation payable by them and the action of the respondents in terminating the contract under this proceedings or any other claim preferred by them. The said notice is at Annexure-P. Indeed the said notice was not responded. After waiting for the statutory period of 30 days, the present petition is filed seeking appointment of Arbitrator.

7. The respondents were notified of the proceedings and they have entered appearance and filed their statement of objections. Along with the said objections, Annexure-R1 is produced indicating that pursuant to the notice issued by the petitioners one Mr. M. Ramachandran of Southern Western Railway is appointed as an Arbitrator to resolve the dispute between the petitioner and respondents.

8. Mr. Chalapathy, learned Senior Counsel appearing for the petitioner submits that having regard to the fact that the appointment of an Arbitrator by the respondent is made after the present petition is filed, the provisions of Section 11(6) are squarely applicable and this Court under the said provision is required to appoint an Arbitrator. He further submits that notwithstanding the provisions made in the arbitral clause regarding appointment of an Arbitrator, the same is lost since the petition is filed immediately after expiry of 30 days and appointment of Arbitrator by respondent is after filing of this petition. Hence, he submits that the appointment of Arbitrator by the respondent is not in conformity with the provisions of Section 11(6) of the Act.

9. In support of his contention, he has relied on the latest ruling of the Apex Court in the case of Union Of India v. Bharat Battery Manufacturing Co. (P) Ltd. . 2007 7 SCC 684.

10. Mr. Sanjay Gowda, learned Counsel appearing for the respondent would contend that, having regard to the provisions of Section 11(6) of the Arbitration Act, the power of the respondent to appoint an Arbitrator notwithstanding filing of this petition in this Court is not lost, inasmuch as the appointment of an Arbitrator is regulated by the agreement between the parties regarding the appointment procedure provided therein. He submits that it is only after this Court directs the respondent to appoint an Arbitrator and if the same is not made within statutory period of 30 days, it is open for the Court to appoint an Arbitrator. He further submits that this question fell for consideration before this Court and this Court has ruled that the power of the respondent for appointment of an Arbitrator notwithstanding the filing of the petition is not taken away.

11. To appreciate the rival contentions, it is necessary to look into the provisions of Section 11 of the Act. Section 11 of the Act deal with the appointment of Arbitrators. Sub-sections (1) to (5) would deal with the situation where if notice is issued and if Arbitrator is not appointed, the aggrieved parties are required to file application under Section 11(6) of the Act. Sub-sections (1) to (5) would deal with the regulatory provisions as to how and in what circumstances the Arbitrator is required to be appointed. What is relevant for our purpose is sub-section (6) of Section 11. Sub-section (6) reads as under:

“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 or 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”.

12. Indeed sub-clauses (a), (b) and (c) of sub-section (6) are not applicable to the case on hand, inasmuch as, it would deal with the situation where the 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.

13. Stress is laid by the learned Counsel for the respondent on the usage of the word “necessary measure”. Indeed according to the respondent it would mean that if the Arbitrator is not appointed within the time stipulated by this Court, the provisions under Section 11(6) would be exercised. I am afraid such an interpretation certainly cannot be given to the said nomenclature. Indeed, the said provision i.e, Section 11(6) fell for consideration in the case of Datar Switchgears Limited v. Tata Finance Limited . 2000 8 SCC 151.. Wherein the Apex Court having regard to the provisions has opined that if the party who is responsible for appointment of an Arbitrator does not do so within 30 days of demand being made by the other party, the right to make the appointment is not automatically forfeited. The appointment can still be made, under the agreement, but however, with a rider that the said appointment shall be made, before the party aggrieved, moves the Court exercising his right for appointment of Arbitrator, since conditions of the agreement regarding the appointment of Arbitrator are not complied.

(emphasis supplied)

14. Indeed, once the petition is filed under Section 11(6) of the Act, the respondent would loose his right to appoint the Arbitrator. In the case of Datar Switchgears Limited, the point that fell for consideration before the Apex Court that there was no dispute between the parties regarding the interpretation of the terms of lease agreement. It was stipulated in the said agreement that failure of the appellant to pay within the time, notice was treated as one issued under the arbitration agreement, an Arbitrator was required to be nominated by the lessor. In the said case, the lessor did not appoint the Arbitrator. In that case, it was also noticed that the appellant and respondent 1 were parties to the lease agreement. When the dispute arises between them, the lesser sent notice on 5-8-1999 demanding payment within 14 days. It was stated in the notice that, if the appellant failed to pay amount, notice issued was to be treated as invoking the arbitration clause of the lease agreement. The appellant did not make payment, respondent 1 did not appoint the Arbitrator, even after 30 days had lapsed. However, on 20-10-1999, an application was filed for interim protection. On 25-11-1999, it appointed the 2nd Arbitrator as sole Arbitrator in the proceedings. The said appointment was questioned on the ground that the lessor's right to appoint the Arbitrator was lost. The Apex Court, while interpreting terms of the agreement, as well as Section 11(6) of the Act has observed thus:

“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 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”.

15. The said view is reiterated by the Apex Court in the latest decision which is referred to earlier, wherein it has been held that the application which is filed under Section 11(6) of the Act after statutory period of 30 days, the respondent who is vested with the right of appointment of an Arbitrator looses it, once the petition is presented.

16. Insofar as the decision which is sought to be pressed into service by the learned Counsel appearing for the respondent, it is to be noticed that the said question regarding the strict interpretation of Section 11(6) has not been dealt by this Court in the case of J.L Prasad v. The General Manager, Southern Railway, Chennai . 2002 1 Kar. L.J 491.. Indeed, a reference is made by this Court to the decision of the Apex Court in Datar Switchgears Limited's case. But however, it is to be noticed that para 19 of the said judgment was not brought to the notice of this Court.

17. Having regard to the fact that the appointment of an Arbitrator by the respondent is after presentation of the petition under Section 11(6) of the Act, the said appointment, to my mind would not be in compliance with the provisions of the Act and also the terms of the agreement. This takes to the next question whether additional agreement entered into between the petitioner and respondent does have an arbitral clause. Indeed, clause 2900 would clearly indicate that if any dispute has arisen between the parties, the same shall be resolved by the appointment of an Arbitrator. What is pressed into service by the learned Counsel appearing for the respondent is sub-clause (c) of clause 2900. According to the learned Counsel for the respondent, no person other than the person appointed by the authority as aforesaid, should act as an Arbitrator and that it for any reason that is not possible, the matter is not to be referred to arbitration at all. Obviously, the said clause runs contrary to the clauses (a), (b) and (d) to (h). Obviously, when there is an arbitral clause in the agreement that must be given effect to. In fact, this Court in the case of J.L Prasad has observed thus:

“The duty of the Court is to ensure that arbitration agreement is not rendered nugatory by one of parties refusing to act in terms of procedure agreed upon”.

18. Indeed, one is required to consider the entire arbitration clause in its entirety and not so as to depend solely on one of the clauses to exclude the other terms of the arbitration clause. Indeed, one is required to refer to Section 23 of the Contract Act, 1872 which would clearly show that if a clause is incorporated into an agreement and if it defeats the provisions of any other law, is required to be ignored or eschewed. Indeed, if clause 2900(c) is to be interpreted, in its grammatical sense, it will virtually ousts the jurisdiction of the arbitral Tribunal, which is impermissible having regard to the other clauses of the said arbitral clause. Consequently, I am of the view that the contention raised by the learned Counsel appearing for the respondent does not merit consideration. Consequently, the petition is allowed.

19. Having regard to the facts and circumstances, the following order is passed:

Mr. Justice R. Gururajan, Former Judge of this Court is appointed as. Arbitrator. Mr. M. Ramachandran, FA and CAO, South Western Railway Constructions, Bangalore, is the nominee of the respondent is also appointed an Arbitrator. Both the Arbitrators shall appoint an Arbitrator who shall act as an umpire.

Let a copy of this order be sent to both the Arbitrators who shall enter upon reference and cause notice to the parties.