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Arvind Construction Co. (P) Ltd. v. Engineering Projects India Ltd. .
Judgment Summary — B.N. Kirpal, J.
Factual and Procedural Background
The petitioner filed an application under Section 20 of the Arbitration Act seeking that disputes between the parties be referred to arbitration. Concurrently the petitioner sought interim relief under Section 41 of the Arbitration Act read with Order 39 Rules 1 and 2, praying that the respondent be restrained from encashing two bank guarantees furnished by the petitioner.
The respondent had obtained a contract from the Government of Iraq to construct the Council of Ministers Building at Baghdad and subcontracted certain civil works to the petitioner on 5 March 1980. The subcontract required IDBI approval, which was granted on condition of constituting a working group (representatives of the petitioner, respondent, IDBI and RBI). The petitioner furnished two bank guarantees: Rs. 12.75 lacs for performance and Rs. 25.50 lacs for mobilisation advance. IDBI's approval stipulated that the respondent should not invoke the guarantees without prior approval of the working group.
The petitioner alleges it performed the work and that delays were due to the respondent. The petitioner raised a claim on 18 March 1985; the respondent proposed reconciliation of accounts. Despite this, on 26 June 1986 and 8 July 1986 the respondent wrote to the State Bank of India to invoke the guarantees. The bank declined payment, citing absence of prior working-group approval.
The working group met on 5 December 1986; other members wanted the guarantees not to be invoked until arbitration or account reconciliation, but the respondent disagreed. The working group stated the unconditional guarantees should be encashed, advising caution. The respondent again approached the bank on 6 December 1986, and the guarantees were ultimately encashed on 6 January 1987.
In its reply the respondent did not deny the existence of an arbitration agreement or that disputes were referable to arbitration, but contested who can appoint the arbitrator and who may act as arbitrator under the subcontract's arbitration clause.
Legal Issues Presented
- Whether the disputes between the parties should be referred to arbitration under the subcontract and, if so, who is competent to appoint the sole arbitrator under the arbitration clause.
- Whether the Court, exercising powers under Section 20(4) of the Arbitration Act, can direct or suggest the category or background of the person to be appointed as arbitrator when the appointing authority has failed or refuses to act.
- Whether the respondent can be directed to restore the bank guarantees after they have been encashed, or alternatively what security (if any) should be provided to protect the petitioner pending arbitration.
Arguments of the Parties
Petitioner's Arguments
- The Court can and should indicate the appropriate background or category of person who should be appointed as arbitrator even though the arbitration clause vests appointment power in the Chairman & Managing Director/General Manager.
- The petitioner sought injunctive relief to restrain encashment of the bank guarantees (prayer in the application under Section 41 read with Order 39).
Respondent's Arguments
- The appointing authority (Chairman & Managing Director/General Manager) has exclusive discretion to select the sole arbitrator; the Court should not interfere with or direct the choice of arbitrator.
- The respondent did not dispute the existence of an arbitration agreement or referability of disputes but contested interference with the appointing authority's discretion.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Ved Prakash Mithal v. The Union of India and others, AIR 1984 Delhi 325 (Full Bench) | Confirms that under Section 20(4) of the Arbitration Act the Court may appoint an arbitrator where the appointing machinery has broken down; the Court may make appointment or name a person if the appointing authority fails to do so within a stipulated time. | The Court relied on the Full Bench's interpretation to recognise that it has power under Section 20(4) when the appointing authority fails to act; this supported the proposition that the Court can intervene where machinery breaks down, though the present Court framed a narrower form of intervention (directing category of arbitrator rather than nominating a specific person in the first instance). |
| V.K. Construction Works Pvt. Ltd. v. Food Corporation of India and another, S.L.P. (C) No. 12320 of 1986 (Supreme Court order) | The Supreme Court, faced with a similar clause vesting appointment in a Managing Director, left the choice to the Managing Director but restricted the choice to "any retired High Court Judge" and required appointment within a fixed time; the Court remarked that whether a Court may direct appointment was left open in an appropriate case. | The Court treated the Supreme Court's order as validating the permissibility of restricting the appointing authority's choice to a particular category (retired High Court Judge). Accordingly, the Court directed the respondent's Chairman & Managing Director either to act himself as sole arbitrator or to appoint a retired High Court Judge as sole arbitrator within two months. |
Court's Reasoning and Analysis
The Court first interpreted the subcontract's arbitration clause: it provides for reference to the sole arbitration of the Chairman & Managing Director/General Manager of the respondent; if that authority is unable or unwilling to act then that authority may appoint some other person as sole arbitrator. The clause further states there will be no objection if the arbitrator so appointed is an employee of the respondent, provided the person was not directly connected with execution of the work. It also states that no person other than one appointed by the Chairman & Managing Director should act as arbitrator.
From this textual reading the Court derived these propositions:
- The clause vests the initial power of appointment exclusively in the Chairman & Managing Director/General Manager.
- The clause does not restrict the appointing authority to selecting only an employee of the respondent; rather, it merely provides that appointment of an employee would not be objectionable.
- The appointing authority may itself act as arbitrator or nominate another person; the decision as to who shall be arbitrator is ordinarily left to that authority.
The Court then addressed whether it could, under Section 20(4) of the Arbitration Act, meaningfully intervene when the appointing authority failed to make an appointment. The Court relied on the Full Bench decision in Ved Prakash Mithal which held that Section 20(4) confers power on the Court to make an appointment where the appointing machinery breaks down. The Court read that power more narrowly in the present context: while it could not itself nominate the arbitrator in the first instance (displacing the appointing authority's discretion), it could direct that if the appointing authority chose to appoint another person (instead of acting itself) the person to be appointed should belong to a profession or category suggested by the Court.
The Court further took instructive support from the Supreme Court's order in V.K. Construction Works (where the Supreme Court left appointment to the Managing Director but restricted the choice to a retired High Court Judge and imposed a time limit). The present Court inferred that the Supreme Court must have considered such a restriction permissible under a clause of like tenor.
On that basis, balancing respect for the contractual appointment mechanism and the need to ensure that the arbitration process is effectuated when the appointing authority does not act, the Court directed a two-fold remedy: the Chairman & Managing Director should either act himself as sole arbitrator or, if he appoints another, that appointee must be a retired High Court Judge — and the appointment must be made within two months.
Concerning the bank guarantees, the Court observed the guarantees had already been encashed and held that it would not be lawful to require restoration of the encashed guarantees. Recognising the petitioner’s potential exposure and the respondent's poor financial condition, the Court required that the respondent furnish security to protect the petitioner in the event an arbitration award is made in its favour.
Holding and Implications
Holding: The Court issued the following orders:
- The Chairman & Managing Director of the respondent is directed either to adjudicate the dispute himself as the sole arbitrator or to appoint any retired High Court Judge to act as the sole arbitrator. The appointment must be made within two months from the date of the order.
- The respondent is directed to furnish, within four months from the date of the order and to the satisfaction of the Registrar of the Court, security for Rs. 38.25 lacs — the aggregate amount of the bank guarantees which had been encashed.
- The petition and interlocutory applications stand disposed of; parties to bear their own costs.
Implications:
- Direct effect on the parties: The Court compelled action to unblock the appointment process (by imposing a time limit and prescribing the permitted category of appointee) and protected the petitioner by requiring security to cover the amounts realised by encashment of bank guarantees.
- Scope as precedent: The Court applied established authority (Ved Prakash Mithal and the Supreme Court order in V.K. Construction Works) to justify limited judicial intervention under Section 20(4). The decision primarily resolves the appointment impasse in this case by directing who may be appointed and by setting time limits; it does not purport to create a broad new legal principle beyond the specific interpretation and application of Section 20(4) to the facts and clause before the Court. In other words, the ruling addresses the contractual and factual impasse here and prescribes a specific remedy rather than laying down a sweeping new precedent.
Disposition: Petition and I.As disposed of; parties to bear their own costs.
B.N Kirpal, J.:— The petitioner has filed the present application under Section 20 of the Arbitration Act, inter alia, praying that disputes which have arisen between the parties should be referred to arbitration. Along with the said application, the petitioner has also filed an application under Section 41 of the Arbitration Act read with Order 39 Rules 1 and 2 in which the prayer is that the respondent should be restrained from encashing the bank guarantees which had been furnished by the petitioner.
2. Briefly stated, the facts are that the respondent was awarded a contract by the Government of Iraq for the construction of Council of Ministers Building at Baghdad. The respondent then, on 5th March, 1980, entered into a sub-contract with the petitioner whereby the petitioner was required to undertake some civil works on labour contract basis.
3. According to the petitioner, this contract which was awarded to it required the approval of the Industrial Development Bank of India (hereinafter referred to as ‘the IDBT’). This approval was accorded by IDBI and the approval envisaged the constitution of the working group which was to consist of the representatives of the petitioner, respondent, IDBI and the Reserve Bank of India. In terms of the contract entered into between the petitioner and the respondent, the petitioner was required to submit a bank guarantee for due performance of the contract for a sum of Rs. 12.75 lacs and another bank guarantee to secure the mobilisation advance which had been accorded to the petitioner for a sum of Rs. 25.50 lacs. The IDBI, however, had, while according the approval, postulated that respondent would not invoke the guarantees without obtaining prior approval of the working group.
4. According to the petitioner it had carried out the work in the manner it could best execute and the delay which had occurred in execution of the work was on account of action or inaction of the respondent. The petitioner raised a claim to the Chairman of the respondent on 18th March, 1985. The respondent stated that the accounts should be settled by reconciliation but on 26th June, 1986 and 8th July, 1986 the respondent wrote to the State Bank of India invoking the two bank guarantees which had been furnished by the petitioner. The State Bank of India refused to make the payment and wrote back to the respondent stating that in the absence of prior approval of the working group, payment could not be made.
5. On 5th December, 1986 a meeting of the working group took place. Other members of the working group desired that the bank guarantees should not be invoked till the arbitration proceedings were concluded or the accounts reconciled. The respondent was not agreeable to this. The working group did state that the unconditional guarantees should be encashed but, at the same time, advised that the respondent should act cautiously. On 6th December, 1986 the respondent again approached the Bank for realisation of the bank guarantees. It is a common ground that on 6th January, 1987 the bank guarantees were encashed.
6. In the reply which has been filed by the respondent, it is not denied that there is a valid arbitration agreement between the parties. The respondent has also stated that disputes have arisen which could be referred to arbitration. The question which, however, arises is as to who can appoint the arbitrator and who can be the arbitrator. The relevant portion of Clause 5 of the agreement, which contains the arbitration clause, inter alia, provides that the disputes which are directly or indirectly connected with the agreement “shall be referred to the sole arbitration of the Chairman & Managing Director/General Manager (accepting authority) of Engineering Projects (India) Limited and if the Chairman & Managing Director/General Manager is unable or unwilling to act as such then the matter shall thereafter be referred to the sole arbitration of some other person, appointed by the Chairman and Managing Director/General Manager. There will be no objection if the Arbitrator, so appointed is an employee of Engineering Projects (India) Ltd., but such person shall be other than the officer/officers who have been directly connected with the execution of the work”. It is also a term of this sub-contract that no person other than a person appointed by such Chairman & Managing Director/General Manager as aforesaid should act as arbitrator.
7. The submission of the learned counsel for the petitioner is that though the arbitrator has to be appointed by the Chairman & Managing Director, it is open to the Court to indicate as to what background the arbitrator should have. Mrs. Kapur, on the other hand, submits that it is left to exclusive discretion of the Chairman & Managing Director to decide as to who should be the sole arbitrator.
8. A question had arisen in this Court, where the arbitration clause was similar, that where the appointing authority does not appoint an arbitrator, can the Court direct the appointment of an arbitrator. A Full Bench of this Court in Ved Prakash Mithal v. The Union of India and others, AIR 1984 Delhi 325 answered the aforesaid query in the affirmative by invoking the provisions of Section 20(4) of the Arbitration Act and observed that “the intention of Section 20(4) is to confer power on the Court to make an appointment where the machinery of appointment has broken down. This is a sensible meaning to give to the clause and the statute”. The Courts then directed the Chief Engineer, in that case, to appoint an arbitrator and it was further ordered that if the arbitrator was not appointed within two months, a person named by the Court was to be the arbitrator.
9. As I read the arbitration clause, relevant extract of which has been set out hereinabove, it is clear that the disputes are to be referred to the sole arbitration of the Chairman & Managing Director/General Manager of the respondent. If the said authority is unwilling to act then it is open to that authority to appoint some one else as the sole arbitrator. The arbitration clause does not state that it is only an employee of the respondent-Corporation who can be the sole arbitrator. It only states that if the person who is appointed happens to be an employee of the respondent-Corporation then his appointment cannot be objected to. This clause does not mean that there is any direction contained in the arbitration clause to the appointing authority to appoint only a person who is an employee of the respondent-Corporation. When, therefore, a dispute is sought to be referred, it is open to an appointing authority either to adjudicate upon the dispute itself as the arbitrator or to nominate any other person, including an employee of the Corporation, as the arbitrator. In the present case, no such appointment has been effected by the appointing authority. It is clear that the Court cannot nominate the person who is to be the arbitrator. The decision as to who is to be the arbitrator has to be left to the Chairman & Managing Director. In terms of the clause, the Chairman & Managing Director himself can act as the sole arbitrator but I think the Court, while exercising powers under Section 20(4) of the Arbitration Act, can direct that if the Chairman & Managing Director does not himself act as the sole arbitrator and decides to appoint another person as the sole arbitrator then the person to be so appointed should belong to a profession or a category suggested by the Court. Such a direction by the Court would not, to my mind, be contrary to the provisions of the arbitration clause because the arbitration clause postulates the selection of the arbitrator by the Chairman & Managing Director and as long as this discretion remains with the appointing authority merely suggesting or directing the appointment of a particular type of arbitrator would not be contrary to the arbitration clause.
10. At this stage it will be relevant to refer to an order which was passed by the Supreme Court in S.L.P (Civil) No. 12320 of 1986, V.K Construction Works Pvt. Ltd. v. F.C.I and another. The arbitration clause there was similar to the one as in the present case and it postulated disputes being referred to the sole arbitration of a person appointed by the Managing Director of the Food Corporation of India. The sole arbitrator not being appointed, the matter came up before the Supreme Court and it passed the following order:
“Heard, learned counsel for the parties. In the facts appearing in this case, we leave it open to the Mg. Director to make his choice of the arbitrator but that choice should be of any retired High Court Judge who will act as an arbitrator to dispose of the dispute in this case. Whether in view of the arbitration clause it is open to the court to direct any arbitrator to be appointed is left open to be decided in an appropriate case. The Managing Director shall make the appointment within 4 weeks from today. This disposes of the Special “Leave Petition”.
It is true that the Supreme Court did observe that whether it was open to the Court to direct any arbitrator to be appointed was left open to be decided in an appropriate case but it must be presumed that the order of the Supreme Court was a legal and valid order. The Supreme Court could have only given a direction restricting its choice of the arbitrator to be a retired High Court Judge if it thought that it was permissible to do so under the said arbitration clause. As I have indicated hereinabove, the power which is being exercised by the Court is under Section 20(4) of the Arbitration Act when the respondents have failed to appoint an arbitrator and the petitioner has been constrained to approach the Court under Section 20 of the Arbitration Act.
11. Following the aforesaid order of the Supreme Court and in view of what has been observed by me hereinabove, I direct the Chairman & Managing Director of the respondent either to decide the dispute between the parties himself as the sole arbitrator or to appoint any retired High Court Judge to act as the sole arbitrator. The appointment shall be made within two months from today.
12. As has already been observed earlier, the bank guarantees have already been encashed by the respondent. The counsel for the petitioner has submitted that the respondent should be directed to restore the bank guarantees. I am unable to agree with this submission. Once the bank guarantees are encashed, it would not be lawful to require restoration of the same. It is loss accounts of the respondent. As far as the respondent is concerned, it has already realised the moneys by encashing the bank guarantees. In view of the financial ill-health of the respondent, some provision should be made to secure the petitioner in the event of arbitration award being made in its favour.
13. I therefore, direct the respondent to furnish, within 4 months from today, to the satisfaction of the Registrar of this Court, security for a sum of Rs. 38.25 lacs being the amount of bank guarantees which had been encashed by the respondent.
14. The petition and I.As stand disposed of. Parties to beat their own costs.
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