Datar Switchgears Ltd. V/s. Tata Finance Ltd. & Anr.

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.

PROCEDURAL HISTORY:

  • 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.

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