India: Arbitration – Appointment Of Arbitrator

Civil Appeal No. 2673 of 2013 (Arising out of SLP(C) No. 24686 of 2007)

Bench of Hon'ble S.C. comprising R.M. Lodha, J. Chelameswar and Madan B. Lokur, JJ.

The Hon'ble Apex Court vide its Judgment dated 22.03.2013 in the matter titled as "Deep Trading Company Vs. Indian Oil Corporation and Others" has held that right to appointment of Arbitrator is forfeited if the same is not exercised in accordance with the procedure agreed upon by the parties.

The questions, which were considered and decided by Hon'ble Supreme Court in present appeal by special leave are:

a. whether respondent No. 1 has forfeited its right to appoint the arbitrator having not done so after the demand was made and till the appellant had moved the court under Section 11(6) (a) of Arbitration & Conciliation Act 1996 and,

b. if the answer is in the affirmative, whether the appointment of the arbitrator by respondent No. 1 in the course of the proceedings under Section 11(6) is of any legal consequence and

c. The Chief Justice of the High Court ought to have exercised the jurisdiction and appointed an arbitrator?

The brief facts, which lead the filing of subject SLP are as under:

On 01.11.1998, an agreement for kerosene/LDO dealership was entered into between the first respondent – Indian Oil Corporation (for short, "the Corporation") and the appellant – Deep Trading Company (for short, "the dealer") for the retail sales supply of kerosene and light diesel oil. In the course of dealership agreement allegedly some violations were committed by the dealer. Following the show-cause notice dated 04.03.2004; the Corporation on 12.03.2004 suspended the sales and supplies of all the products to the dealer with immediate effect. Aggrieved by the action of the Corporation, the dealer filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (for short, "1996 Act") before the District Judge, Etawah seeking an order of injunction against the Corporation from stopping the supply of Kerosene/LDO. On 25.03.2004, the District Judge, Etawah passed a restraint order against the Corporation. The Corporation challenged the order of the District Judge before the Allahabad High Court however the Allahabad High Court refused to grant any interim relief to the Corporation. On 09.08.2004, the dealer made a demand to the Corporation by a written notice to refer the disputes between the parties to the arbitrator under the terms of the agreement. In the demand notice, it was also stated by the dealer that if the Corporation fails to appoint the arbitrator, the dealer may be constrained to approach the court under Section 11 of the 1996 Act. The Corporation challenged the order of the Allahabad High Court in the special leave petition before this Court but that was dismissed on 06.12.2004. On or about 06.12.2004, the dealer moved the Chief Justice of the Allahabad High Court under Section 11(6) for the appointment of an arbitrator as the Corporation had failed to act under the agreement. While the said proceedings were pending, on 28.12.2004, the Corporation appointed Shri B. Parihar, Senior Manager, (LPG Engineering) of its U.P. State Office as the sole arbitrator.

The Allahabad High Court found no reason to appoint the arbitrator, as sought by the dealer, since the arbitrator had already been appointed by the Corporation and vide Order dated.12.2007 dismissed the application of dealer filed under Section 11(6). The Hon'ble Apex Court has duly considered clause 29 of agreement dated 01.11.1998 agreed upon by the parties along with relevant provisions of Statute and precedents. Clause 29 of agreement between the parties reads as under:

"29. Any dispute or difference of any nature whatsoever or regarding any right, liability, act, omission on account of any of the parties here to arising out or in relation to this Agreement shall be referred to the sole arbitration of the Director (Marketing) of the Corporation, or of some Officer of the Corporation who may be nominated by the Director (Marketing). It is known to the parties to the Agreement that the arbitrator so appointed is a share holder and employee of the Corporation. In the event of the arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason, the Director (Marketing) as aforesaid at the time of such transfer, vacation of office or inability to act, shall designate another person to act as arbitrator in accordance with the terms of the Agreement. Such person shall be entitled toproceed with the reference from the point at which it was left by his predecessor. It is also a term of this contract that no person other than the Director (Marketing) or a person nominated by such Director (Marketing) of the Corporation as aforesaid shall act as arbitrator hereunder. The award of the arbitrator so appointed shall be final conclusive and binding on all parties, to the Agreement, subject to the provisions of the Arbitration and Conciliation Act, 1996 or any statutory modification of or reenactment thereof and the rules made thereunder and for the time being in force shall apply to the arbitration proceeding under this clause. The award shall be made in writing within six months after entering upon the reference or within such extended time not exceeding further four months as the sole arbitrator shall by writing under his own hands appoint." Sub-sections (1), (2), (6) and (8) of Section 11 of Arbitration and Conciliation Act 1996 are relevant and reads as under:

"11. Appointment of arbitrators.—1 A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.

2 Subject to sub-section 6, the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

3 to 5 xxx xxx xxx

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.

7 xxx xxx xxx

8 The Chief Justice or the person or institution designated by him, in appointing an arbitrator, shall have due regard to-

a. any qualifications required of the arbitrator by the agreement of the parties; and

b. other considerations as are likely to secure the appointment of an independent and impartial arbitrator.

9 to 12 xxx xxx xxx".

The three basic facts are not in dispute, namely, (i) on 09.08.2004, the dealer called upon the Corporation by a written notice to appoint an arbitrator in accordance with the terms of Clause 29 of the agreement; (ii) the dealer made an application under Section 11(6) for appointment of the arbitrator on 06.12.2004; and (iii) the Corporation appointed the sole arbitrator on 28.12.2004 after the application under Section 11(6) was already made by the dealer.

The Hon'ble Court amongst the various judgments placed before it has relied and agreed upon with legal position settled by Hon'ble Supreme Court in matter of "Datar Switchgears Ltd. v. Tata Finance Ltd. and Another: [(2000) 8 SCC 151]", wherein this Court considered the scheme of Section 11, noted the distinguishing features between Section 11(5) and Section 11(6) and then considered the question whether in a case falling under Section 11(6), the opposite party cannot appoint an arbitrator after the expiry of thirty days from the date of demand. This Court held that in cases arising under Section 11(6), if the opposite party has not made an appointment within thirty days of the demand, the right to make appointment is not forfeited but continues, but such an appointment has to be made before the first party makes application under Section 11 seeking appointment of an arbitrator. If no appointment has been made by the opposite party till application under Section 11(6) has been made, the right of the opposite party to make appointment ceases and is forfeited.

Hon'ble Supreme Court has accordingly held that the Corporation has failed to act as required under the procedure agreed upon by the parties in Clause 29 and despite the demand by the dealer to appoint the arbitrator; the Corporation did not make appointment until the application was made under Section 11(6). Thus, the Corporation has forfeited its right of appointment of an arbitrator. In this view of the matter, the Chief Justice ought to have exercised his jurisdiction under Section 11(6) in the matter for appointment of an arbitrator appropriately. The appointment of the arbitrator by the Corporation during the pendency of proceedings under Section 11(6) was of no consequence. Civil Appeal has been accordingly, allowed and Arbitration Case No. 107 of 2004, M/s. Deep Trading Company v. M/s. Indian Oil Corporation and others, is restored to the file of the High Court of Judicature at Allahabad for fresh consideration by the Chief Justice or the designate Judge, as the case may be, in accordance with law and in light of the observations made above.

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