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.
|Case name: Datar Switchgears Ltd. V/s. Tata Finance Ltd. & Anr.|
|Case number: Civil appeal number-5986 of 2000|
|Court: The Supreme Court of India|
|Bench: Justice M.J. Rao, Justice K.G. Balakrishna|
|Decided on: October 18, 2000|
|Relevant Act/Sections: Section 11 of the Arbitration and Conciliation Act, 1996|
BRIEF FACTS AND PROCEDURAL HISTORY:
- The appellant had entered into a lease agreement with the 1st respondent in respect of certain machineries. Dispute arose between the parties and the 1st respondent sent a notice to the appellant on 5.8.1999 demanding payment of Rs. 2,84,58,701 within fourteen days and in the notice it was specifically stated that in case of failure to pay the amount, the notice be treated as one issued under Clause 20.9 (Arbitration clause) of the Lease Agreement. The appellant did not pay the amount as demanded by the 1st respondent.
- The 1st respondent did not appoint an Arbitrator even after the lapse of thirty days, but filed Arbitration Petition No. 405/99 on 26.10.99 under Section 9 of the Act for interim protection. On 25.11.99, the 1st respondent appointed the 2nd respondent as the sole Arbitrator by invoking clause 20.9 of the Lease Agreement and the Arbitrator in turn issued a notice to the appellant asking them to make their appearance before him on 13th March, 2000.
- Thereafter, the appellant filed Arbitration Application No. 2/2000 before Hon’ble the Chief Justice of Bombay and prayed for appointment of another Arbitrator and the 1st respondent opposed this application. This petition was rejected by the Chief Justice holding that as the Arbitrator had already been appointed by the first respondent, the Lessor, the petition was not maintainable. This order is challenged before supreme court.
- The appellant challenges an order passed by the Chief Justice of Bombay High Court, under Section 11 of the Arbitration and Conciliation Act, 1996.
ISSUE BEFORE THE COURT:
- Whether in a case falling under Section 11(6) of the Arbitration and Conciliation Act, 1996 the arbitrator has to be appointed within 30 days from the date mentioned in the notice for appointment of arbitrator?
- Whether there was any real failure of the mechanism provided under the lease Agreement.
- RATIO OF THE COURT:
- The court observed that the Arbitration and Conciliation Act, 1996 made certain drastic changes in the Law of Arbitration. Section 11 of the Act deals with the procedure for appointment of Arbitrator. Section 11(2) says that the parties are free to agree to any procedure for appointing the Arbitrator. If only there is any failure of that procedure, the aggrieved party can invoke sub-clause (4), (5) or (6) of Section 11, as the case may be. In the instant case, the Arbitration clause in the Lease Agreement contemplates appointment of a sole Arbitrator. If the parties fail to reach any agreement as referred to in Sub-Section (2), or if they fail to agree on the Arbitrator within thirty days from receipt of the request by one party, the Chief Justice can be moved for appointing an Arbitrator either under sub-clause (5) or sub-clause (6) of Section 11 of the Act.
- The appellant in his application does not mention under which sub- section of Section 11 the application was filed. Evidently it must be under Sub-section (6) (a) of Section 11, as the appellant has no case that a notice was issued but an Arbitrator was not appointed or that there was a failure to agree on certain Arbitrator. The contention of the appellant might be that the first respondent failed to act as required under the procedure.
- The appellant contended that the 1st respondent did not appoint the Arbitrator within a reasonable period and that amounts to failure of the procedure contemplated under the Agreement. The court’s attention was drawn to a decision of the Bombay High Court reported in 1999(2) Bombay CR. 189 (Naginbhai C. Patel Vs. Union of India).
- The court held that the above decision has no application to the facts of this case as in the present case, the Arbitrator was already appointed before the appellant invoked Section 11 of the Act. The Counsel for the appellant contended that the Arbitrator was appointed after a long lapse of time and that too without any previous consultation with the appellant and therefore it was argued that the Chief Justice should have appointed a fresh arbitrator. We do not find much force in this contention, especially in view of the specific words used in the Arbitration clause in the Agreement, which is extracted above.
- The court observed that this is not a case where the appellant requested and gave a notice period for appointment of arbitrator and the latter failed to comply with that request. The amount allegedly due from the appellant was substantial and the 1st respondent cannot be said to be at fault for having given a larger period for payment of the amount and settling the dispute. It is pertinent to note that the appellant did not file an application even after the 1st respondent invoked Section 9 of the Act and filed a petition seeking interim relief. Under such circumstances, it cannot be said that there was a failure of the procedure prescribed under the contract.
- In court’s 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 the present case the respondent made the appointment before the appellant filed the application under Section 11(6) though it was beyond 30 days from the date of demand. In our view, the appointment of the arbitrator by the respondent is valid and it cannot be said that the right was forfeited after expiry of 30 days from the date of demand.
- The court settled that When parties have entered into a contract and settled on a procedure, due importance has to be given to such procedure. Even though rigor of the doctrine of “freedom of contract” has been whittled down by various labour and social welfare legislation, still the court has to respect http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6 the terms of the contract entered into by parties and endeavor to give importance and effect to it. When the party has not disputed the arbitration clause, normally he is bound by it and obliged to comply with the procedure laid down under the said clause.
DECISION HELD BY COURT:
- In this case the judgment was given by JUSTICE K.G BALKRISHNA that the court do not think that the first respondent, in appointing the second respondent as the Arbitrator, failed to follow the procedure contemplated under the Agreement or acted in contravention of the Arbitration clause.
- Lastly, the appellant alleged that “nomination” mentioned in the arbitration clause gives the 1st respondent a right to suggest the name of the Arbitrator to the appellant and the appointment could be done only with the concurrence of the appellant. The bench did not find any force in the contention.
- The appellant, while filing the application under Section 11 of the Act had no cause of action to sustain the same as there was no failure of the agreement or that the 1st respondent failed to act in terms of the agreement. The application was rightly rejected. The appeal deserves to be and is accordingly dismissed, however, without any order as to costs.