Citation Codes

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Case Number

W.P No. 4507 of 2007

Attorney(S)

Naman Nagrath
G.C Jain

Judges

Abhay M. Naik, J.

Acts

section 11(6) of the Arbitration and Conciliation Act, 1996.7. Agreement (Annx. P/1)
SECTION 11 ARBITRATION AND CONCILIATION ACT 1996
section 11(6) of the Arbitration and Conciliation Act, 1966,
ARBITRATION AND CONCILIATION ACT 1996
ARBITRATION ACT 1940

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The petitioner is the M.P. Housing Board which invited tenders for the construction of a commercial complex. The tender of respondent No. 1 was accepted for civil work worth Rs. 21,10,352/-. An agreement (Annexure P/1) was executed on 10-2-2005 and a work order dated 13-5-2005 was issued. A dispute arose during execution and the petitioner intimated respondent No. 1 to stop work by letter dated 17-8-2005.

Respondent No. 1 (identified in the opinion as the contractor) served notices under clause 29 of the agreement to refer the matter to arbitration. After receiving no response from the authority designated in clause 29, respondent No. 1 proposed respondent No. 2 (a retired Superintending Engineer) as sole Arbitrator and respondent No. 2 initiated arbitral proceedings. The petitioner raised a preliminary objection to the maintainability of those proceedings under the Arbitration and Conciliation Act, 1996. Respondent No. 2 rejected the objection by an order dated 9-10-2006 (Annexure P/9).

The petitioner filed the present petition seeking, inter alia, quashing of the arbitral proceedings before respondent No. 2, a declaration that the Arbitration Act, 1940 cannot be invoked after the Arbitration and Conciliation Act, 1996, and a direction that disputes under the works contract must be referred to the Tribunal constituted under the Madhya Pradesh Madhyastham Adhiniyam.

Legal Issues Presented

Whether the arbitral proceedings pending before respondent No. 2 (appointed by respondent No. 1) are void ab initio and without jurisdiction.
Whether the provisions of the Arbitration Act, 1940 can be invoked after the enactment of the Arbitration and Conciliation Act, 1996.
Whether disputes arising out of the works contract must be referred to the Tribunal constituted under the Madhya Pradesh Madhyastham Adhiniyam as per clause 29 of the agreement.

Arguments of the Parties

Petitioner's Arguments

The arbitral proceedings initiated by respondent No. 2 are not maintainable and are without jurisdiction under the Arbitration and Conciliation Act, 1996.
The provisions of the Arbitration Act, 1940 cannot be invoked after the Arbitration and Conciliation Act, 1996 has come into force.
Disputes arising under the works contract must be referred to the statutory Tribunal constituted under the Madhya Pradesh Madhyastham Adhiniyam in accordance with clause 29 of the agreement.

Respondent No. 1's Arguments

Clause 29 of the agreement binds the parties to the specified appointment and reference procedure for arbitration.
A notice was issued to the Deputy Housing Commissioner as per clause 29 and, upon receiving no response from the Deputy Housing Commissioner (and other housing authorities), respondent No. 1 proposed respondent No. 2 as Arbitrator.
Respondent No. 2 validly undertook the arbitration after issuing notice of proceedings to the petitioner.
The petitioner should have challenged the appointment of respondent No. 2 upon issue of the proposal (notice dated 1-4-2006) and has thereby waived its right to object; reliance was placed on the Apex Court decision in M.K. Shah Engineers & Contractors v. State of M.P. (1999) for the waiver principle.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
M.K. Shah Engineers & Contractors v. State of M.P., (1999) 2 SCC 594 : AIR 1999 SC 950	Principle that a party may be deemed to have waived the right to challenge appointment if not raised at the appropriate time.	Noted as relied upon by respondent No. 1 to argue waiver; the court considered timing and context of the petitioner's objection and did not accept that the petitioner was precluded from challenging jurisdiction in the circumstances of this case.
You One Engineering and Construction Co. Ltd. v. National Highways Authority of India, (2006) 4 SCC 372	Clarification on section 11(6) of the Arbitration and Conciliation Act, 1996: unless conditions under section 11(6) are satisfied there is no occasion to move the Chief Justice or designated person/institution for appointment.	Applied to hold that, because there was no agreed procedure appointing respondent No. 2, respondent No. 2 could not assume jurisdiction by reference to a request intended under section 11(6).
Ardy International (P) Ltd. v. Inspiration Clothes & U, (2006) 1 SCC 417	Objection in a civil suit on the basis of an arbitration clause has to be raised at the first instance.	Cited in the impugned order; the court observed that because the petitioners raised the jurisdictional objection before the alleged Arbitrator, they were not precluded from challenging the impugned order before the court.
Rite Approach Group Ltd. v. Rosoboronexport, (2006) 1 SCC 206 : AIR 2006 SC 401	If an arbitration agreement contains a specific clause naming who would decide the dispute, that specified person alone has jurisdiction to act as arbitrator.	Used to support the proposition that clause 29's specification (Dy. Housing Commissioner / Additional Housing Commissioner) should be respected and a person not named cannot assume jurisdiction.
Dharma Prathishthanam v. Madhok Construction (P) Ltd., (2005) 9 SCC 686 : AIR 2005 SC 214	Unilateral appointment of an arbitrator, reference to such arbitrator and ex parte proceedings/award are void ab initio; arbitrators derive jurisdiction from the arbitration agreement and consent.	Relied upon by the court to conclude that a unilateral appointment of respondent No. 2 (not provided for in the agreement) was null and void and the arbitral proceedings were therefore a nullity.
Khardah Co. Ltd. v. Raymond and Co. (India) Pvt. Ltd., AIR 1962 SC 1810	Constitution Bench view that arbitrators derive jurisdiction from the arbitration agreement; absence of agreement results in want of jurisdiction which cannot be cured by acquiescence.	Reiterated via the Dharma Prathishthanam decision and used to emphasize that arbitrators must derive jurisdiction from the parties' agreement and consent.

Court's Reasoning and Analysis

The court proceeded by analyzing the arbitration clause in the parties' agreement (Clause 29) and the statutory regime under the Arbitration and Conciliation Act, 1996.

Clause 29 of the agreement prescribed a two-stage internal procedure: disputes were to be referred first to the Deputy Housing Commissioner (Dy. Housing Commissioner) with a specified time frame for decision, and, if necessary, further reference to the Additional Housing Commissioner (and then to arbitration in accordance with the Madhya Pradesh Madhyastham Adhikaran Adhiniyam and, as the clause stated, "in accordance with the provisions of the Arbitration Act, 1940" where applicable).
The court examined section 11(6) of the Arbitration and Conciliation Act, 1996 and observed its scope: the provision applies where the parties have agreed on an appointment procedure and sets out measures when a party or institution fails to act under such agreed procedure. The court emphasised that if the parties themselves have agreed upon an appointment procedure, there would be no occasion to invoke the court/Chief Justice under section 11(6).
The agreement was executed on 10-2-2005, after the Arbitration and Conciliation Act, 1996 came into force (22-8-1996) and repealed the Arbitration Act, 1940. The court therefore interpreted the clause in that statutory context.
Clause 29 specifically identified the Dy. Housing Commissioner and the Additional Housing Commissioner as the designated decision-makers/arbitral route. The appointment of respondent No. 2 (a retired Superintending Engineer) was not contemplated by Clause 29 and thus there was no agreed procedure that would authorize respondent No. 2’s appointment.
The court reviewed the authorities cited in the impugned order (You One, Ardy, Rite Approach, etc.). It accepted the principle from Ardy that timing of raising objections can lead to preclusion in some contexts, but noted that in this case the petitioners had raised the objection before the arbitrator himself, so they were not necessarily precluded from seeking judicial review of the arbitrator's assumption of jurisdiction.
Drawing upon the doctrine in Rite Approach and the authoritative exposition in Dharma Prathishthanam (which reiterates the Constitution Bench view in Khardah), the court emphasized that arbitrators derive jurisdiction from the arbitration agreement and consent. A unilateral appointment and unilateral reference where the agreement prescribes a different method is illegal and void.
Applying these principles to the facts, the court concluded respondent No. 2’s appointment was unilateral and not authorized by the agreement; therefore respondent No. 2 lacked jurisdiction to assume and conduct the arbitral proceedings. The order made by respondent No. 2 rejecting the preliminary objection (Annexure P/9) was accordingly unsustainable.

Holding and Implications

Core Ruling: The petition is allowed; the impugned order (Annexure P/9) is quashed and the arbitral proceedings assumed by respondent No. 2 are quashed for want of jurisdiction.

Consequences and immediate effects:

The appointment of respondent No. 2 as sole Arbitrator, being unilateral and not authorised by the agreement (Annexure P/1), is declared null and void.
The arbitral proceedings that respondent No. 2 assumed are quashed as a nullity for want of jurisdiction.
No order as to costs was made by the court.

Broader implications:

The opinion applies established principles that arbitrators derive jurisdiction from the arbitration agreement and that unilateral appointments outside an agreed procedure are void. The court did not announce any novel legal principle beyond applying the cited precedents; the direct legal effect is the nullification of the specific appointment and proceedings in this case.

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M.P Housing Board And Another v. Sohanlal Chourasia And Another

1. Petitioner (M.P Housing Board) issued a notice inviting tender for proposed construction of Commercial complex near Gurudwara, Victoria Hospital Jabalpur. Tender of respondent No. 1 was accepted for civil work amounting to Rs. 21,10,352/-. An agreement, as contained in Annexure P/1 was duly executed between the parties on 10-2-2005. Work order dated 13-5-2005 was duly issued in favour of the petitioner requiring him to complete the work within six months. There arose some dispute and consequently, the petitioner intimated the respondent to stop work vide its letter dated 17-8-2005. Respondent No. 1 issued a notice dated 12-9-2005 (Annexure P/2) under clause 29 of the agreement with a request to refer the matter to the Arbitration of Additional Housing Commissioner. Again reminder-cum-notice dated 16-1-2006 (Annexure P/3) was issued by the respondent. Thereafter, another letter dated 1-4-2006 (Annexure P/4) was issued by the respondent that since the authority under the agreement had failed to act as an Arbitrator within the stipulated period, respondent proposed to appoint respondent No. 2 as a sole Arbitrator. Claim was submitted by respondent before the said Arbitrator who initiated the arbitral proceedings. Petitioner on receipt of notice from D.C Jain, respondent No. 2 submitted preliminary objection regarding maintainability of the proceedings, in view of the provisions of Arbitration and Conciliation Act, 1996. This objection was turned down by the respondent No. 2 vide his order dated 9-10-2006 contained in Annexure P/9. Consequently, this petition has been preferred for the following reliefs:—

“7.2 To quash the entire arbitral proceedings pending before respondent No. 2, as being ab initio void, contrary to law and without any jurisdiction.

7.3 To hold that the provisions of Arbitration Act, 1940 cannot be invoked after the enactment of Arbitration and Conciliation Act, 1996.

7.4 To hold that dispute arising out of a works contract with the petitioner has to be referred to Tribunal constituted under M.P Madhyastham Adhiniyam.”

2. Respondent No. 1 submitted his return and refuted the claim of the petitioner. Relying upon clause 29 of the agreement, it has been contended that the parties are bound by the said clause. A notice was duly issued by respondent No. 1 to the Deputy Housing Commissioner for taking up the matter in arbitration. On having received no response from the Deputy Housing Commissioner, the respondent No. 1 proposed the name of respondent No. 2 as an Arbitrator for adjudication of the dispute. Respondent No. 2 has undertaken job/work of arbitration in a valid manner after duly issuing the notice of the proceedings to the petitioner. It is contended that instead of filing preliminary objection, the appointment of respondent No. 2 as a sole Arbitrator ought to have been challenged on issuing notice dated 1-4-2006. Issues have already been framed by respondent No. 2 and time was granted to the parties to file statement on affidavit. Thus, the petitioner would be deemed to have waived its rights to challenge the appointment of Arbitrator in view of the law laid down by the Apex Court in M.K Shah Engineers & Contractors v. State Of M.P, (1999) 2 SCC 594 : AIR 1999 SC 950.

3. Shri Naman Nagrath, advocate and Shri D.C Jain, advocate made their submissions at length which have been considered in the light of material on record and provisions of law governing the situation.

4. Agreement between the petitioners and respondent No. 1 contained an Arbitration Clause as under:—

“Clause 29: Except as otherwise provided in this contract all questions and disputes relating to the meaning of the specifications, designs, drawings and instructions, hereinbefore mentioned and as to thing whatsoever, in any way arising out of or relating to the contracts, designs, drawings, specifications, estimates, concerning the work or the executing or failure to execute the same whether arising during the progress of the work or after the completion or abandonment thereof, shall be referred to the Dy. Housing Commissioner in writing for his decision within a period of thirty days of such occurrence. Thereupon, the Dy. Housing Commissioner shall give his written instructions and/or decision within a period of sixty days of such written request. This period can be extended by mutual consent of the parties.

Upon receipt of written instructions or decision the parties shall promptly proceed without delay to comply such decision or instructions, if the Dy. Housing Commissioner fails to give his instructions or decision in writing within a period of sixty days or mutually agreed time after being requested, if the parties are aggrieved against the decision of the Dy. Housing Commissioner the parties may within thirty days prefer such dispute/disputes for arbitration to the Addl. Housing Commissioner subject to the jurisdiction and limitations in accordance with the provisions of Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983. In case the dispute is within the jurisdiction of Addl. Housing Commissioner, he shall then act as sole Arbitrator, and he shall pass an award after hearing both the parties, strictly in accordance with the provisions of the Arbitration Act, 1940 and the rules made thereunder for the time being in force.

If the contractor does not make any demand for arbitration in respect of claim(s) in writing within ninety days on receiving information from the Executive Engineer that the final bill is ready for payment the claim of the contractor shall be deemed to have been waived and shall be absolutely barred and the Board shall be discharged or released of all the liabilities under the contract in respect of such claim(s).

A reference to the Arbitration, shall be no ground for not continuing the work on the part of the contractor and payment as per terms and conditions of the agreement shall be continued by the Board.”

Under the aforesaid clause, a dispute shall be liable to be referred to the Dy. Housing Commissioner in writing for his decision within a period of thirty days of such occurrence. In case of dissatisfaction, against the decision of the Dy. Housing Commissioner or in case of failure on his part, parties had a further right to prefer such dispute for arbitration to the Additional Housing Commissioner subject to the jurisdiction and limitation in accordance with the provisions of Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983.

5. In the present case, the contractor (respondent No. 1) after having received no response from the Dy. Commissioner Housing Board, Commissioner Housing Board and the Chairman Housing Board, proposed the name of respondent No. 2, a retired Superintending Engineer from Water Resources Department, Government of Madhya Pradesh, as a sole Arbitrator for adjudication of the dispute. Respondent No. 2 assumed the work of arbitration and commenced arbitration proceedings on 5-6-2006. He issued process to the petitioners fixing thereby 12-7-2006 as a date for arbitral proceedings. An objection was raised by the petitioners about jurisdiction of respondent No. 2 to proceed with the arbitration. This was turned down vide order dated 9-10-2006 by the respondent No. 2 in the light of the decisions of the Apex Court reported as You One Engineering and Construction Co. Ltd. v. National Highways Authority of India, (2006) 4 SCC 372, Ardy International (P) Ltd. v. Inspiration Clothes and U, (2006) 1 SCC 417 and Rite Approach Group Ltd. v. Rosoboronexport, (2006) 1 SCC 206 : AIR 2006 SC 401. This order is marked as Annexure-P/9 which is under challenge before me.

6. Before adverting to various authorities cited in the impugned order, I would like to advert to the provision contained in sub-section (6) of section 11 of the Arbitration and Conciliation Act, 1996, which is reproduced below for convenience:—

“11(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 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.”

From the aforesaid provision, it is clear that in case, if, the parties are agreed upon for a procedure for appointment of an Arbitrator, there would be no occasion to appoint an Arbitrator by making request to the Chief Justice of the Hon'ble Supreme Court of India or this Court as the case may be, or any person or institution designated by him to take the necessary measure under section 11(6) of the Arbitration and Conciliation Act, 1996.

7. Agreement (Annx. P/1) between the parties was executed on 10-2-2005, whereas, the Arbitration and Conciliation Act, 1996, had already come into force with effect from 22-8-1996 repealing thereby the Arbitration Act, 1940, by virtue of section 85. Hon'ble Supreme Court in the case of Rite Approach Group Ltd. (supra) has held that if the arbitration agreement contains a specific clause as to who would decide the dispute as an Arbitrator, it alone shall have the jurisdiction to act as an Arbitrator and resolve the dispute. In the present case, the dispute could have been referred under clause 29 to the Dy. Housing Commissioner and further to the Additional Housing Commissioner. Superintending Engineer, i.e respondent No. 2, was not specified as an Arbitrator in Clause 29. Thus, it cannot be said that the parties had agreed on a procedure to appoint respondent No. 2 as an Arbitrator.

8. In the case of Ardy International (P) Ltd. (supra) cited in the impugned order, it has been held that the objection in Civil Suit on the basis of arbitration clause has to be raised at the first instance. In the instant case, the petitioners raised an objection before the alleged Arbitrator himself about his jurisdiction. This being so, they are not precluded from challenging the impugned order before this Court.

9. In the case of You One Engineering and Construction Co. Ltd. (supra), it has been held that unless the conditions under section 11(6) of the Arbitration and Conciliation Act, 1966, are satisfied, there would be no occasion to move the Chief Justice or any person or institution designated by him to take the necessary measure. In the instant case, since no procedure for appointment of respondent No. 2 as an Arbitrator was agreed upon between the parties, respondent No. 2 could not have assumed the jurisdiction to initiate proceedings for arbitration on a request by respondent No. 2.

10. From the aforesaid discussion, it is clear that although agreement executed between the parties as revealed in Annexure-P/1 does contain an arbitration clause for the appointment of Dy. Housing Commissioner and further Additional Housing Commissioner on a dispute arrived at between the parties, yet it does not provide for appointment of any other person including respondent No. 2 as an Arbitrator. Respondent No. 2 has, thus, been appointed by the respondent No. 1 as an Arbitrator in a unilateral manner. This being in contravention of the provisions of Arbitration and Conciliation Act, 1996 is null and void and, consequently, the arbitral proceedings assumed by him are equally null and void. I may profitably refer to the decision of the Hon'ble Supreme Court in the case of Dharma Prathishthanam v. Madhok Construction (P) Ltd.., (2005) 9 SCC 686 : AIR 2005 SC 214, wherein, the earlier view of the Constitution Bench in the case of Khardah Co. Ltd. v. Raymond and Co. (India) Pvt. Ltd., AIR 1962 SC 1810 has been reiterated in the following manner:—

“What confers jurisdiction on the Arbitrators to hear and decide a dispute is an arbitration agreement and where there is no such agreement there is an initial want of jurisdiction which cannot be cured even by acquiescence. It is clearly spelled out from the law laid down by the Constitution Bench that the Arbitrators shall derive their jurisdiction from the agreement and consent.”

Hon'ble Supreme Court in the case of Dharma Prathishthanam (supra) was dealing with the provisions of the Arbitration Act of 1940, which has been referred to in Annexure-P/1. Dealing with various provisions of the Act, Hon'ble Supreme Court has observed:—

“12. On a plain reading of the several provisions referred to hereinabove, we are clearly of the opinion that the procedure followed and the methodology adopted by the respondent is wholly unknown to law and the appointment of the sole Arbitrator Shri Swami Dayal, the reference of disputes to such Arbitrator and the ex parte proceedings and award given by the Arbitrator are all void ab initio and hence nullity, liable to be ignored. In case of arbitration without the intervention of the Court, the parties must rigorously stick to the agreement entered into between the two. If the arbitration clause names an Arbitrator as the one already agreed upon, the appointment of an Arbitrator poses no difficulty. If the arbitration clause does not name an Arbitrator but provides for the manner in which the Arbitrator is to be chosen and appointed, then the parties are bound to act accordingly. If the parties do not agree then arises the complication which has to be resolved by reference to the provisions of the Act. One party cannot usurp the jurisdiction of the Court and proceed to act unilaterally. A unilateral appointment and a unilateral reference-both will be illegal.”

11. Summarising the aforesaid, it may be said that since the agreement marked as Annexure-P/1 did not contain a provision to appoint respondent No. 2 as an Arbitrator, his appointment by respondent No. 1 as an Arbitrator in a unilateral manner without the consent of petitioners is null and void in the light of the provisions of the Arbitration and Conciliation Act, 1996. Even the appointment of respondent No. 2 as an Arbitrator without the consent of petitioners could not have been upheld under the provisions of the earlier Act of Arbitration of the year 1940 in view of the law laid down by the Apex Court in the case of Dharma Prathishthanam (supra).

12. Consequently, the petition succeeds and is, hereby, allowed. Impugned order contained in Annexure-P/9 is, hereby, quashed and the arbitral proceedings assumed by respondent No. 2 are also hereby quashed for want of jurisdiction. No order as to costs.

Petition allowed.

M.P Housing Board And Another v. Sohanlal Chourasia And Another

Structured Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's Arguments

Respondent No. 1's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

M.P Housing Board And Another v. Sohanlal Chourasia And Another

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