Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5760 OF 2009 (Arising out of SLP [C] No.26906 of 2008)

Indian Oil Corporation Ltd. & Ors. ... Appellants

vs.

M/s Raja Transport (P) Ltd. ... Respondent

J U D G M E N T

R. V. Raveendran, J.

Leave  granted.  This  appeal  by  special  leave  is  filed  against  the  

order  dated  26.9.2008 of  the  learned  Chief  Justice  of  the  Uttaranchal  

High  Court,  in  a  petition  filed  by  the  respondent  herein,  under  

section 11(6) of the Arbitration & Conciliation Act, 1996 ('Act' for short),  

whereby he appointed a retired Judge as the sole arbitrator to adjudicate  

upon the disputes between the parties.

2. Under an agreement dated 28.2.2005, the appellant appointed the  

respondent as its dealer for retail sale of petroleum products. Clause 69 of  

the said agreement provided for settlement of disputes by arbitration. The  

said clause reads thus :

“69. Any dispute or a difference of any nature whatsoever or regarding  any right, liability, act, omission or account of any of the parties hereto  arising out of 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. The dealer will not be entitled to raise any objection to any  such  arbitrator  on  the  ground  that  the  arbitrator  is  an  officer  of  the  contract relates or that in the course of his duties or differences. 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 to proceed 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 Act, 1940 or any statutory modification  of re-enactment thereof and the rules made thereunder and for the time  being  in  force  shall  apply  to  the  arbitration  proceedings  under  this  clause.”

(emphasis supplied)  

3. By letter dated 6.8.2005, the appellant terminated the dealership of  

the respondent on the recommendation of its Vigilance Department. The  

respondent  filed  Suit  No.43/2005  in  the  Court  of  Civil  Judge,  Junior  

Division,  Rishikesh,  Dehradun  for  a  declaration  that  the  order  of  

termination of dealership dated 6.8.2005 was illegal and void and for a

permanent injunction restraining the appellant from stopping supply of  

petroleum products to its retail outlet.

4. In the said suit, the appellant filed an application under section 8 of  

the Act read with Order VII Rule 11 of Civil Procedure Code, praying  

that the suit be rejected and the matter be referred to arbitration in terms  

of Clause 69 of the agreement. The learned Civil Judge, by order dated  

16.11.2005 allowed the said application filed by the appellant directing  

the parties to refer the matter to arbitration within two months,  with a  

further direction that appellant shall not stop supplies to the respondent  

for a period of two months.

5. Both  appellant  and  respondent  challenged  the  order  dated  

16.11.2005. Respondent filed Civil Appeal No.96/2005 being aggrieved  

by the restriction of supply for only two months from 16.11.2005. The  

appellant  filed  Civil  Appeal  No.214/2005,  being  aggrieved  by  the  

direction  to  continue  the  supply  for  a  period  of  two  months  from  

16.11.2005. The respondent also filed an application under Section 9 of  

the  Act  seeking  an  interim  injunction  against  the  appellant.  The  two  

appeals and the application under section 9 of the Act were disposed of  

by  a  common  order  dated  20.1.2006  by  the  learned  District  Judge,

Dehradun.  He  dismissed  both  the  appeals  but  allowed  the  application  

under  section  9  of  the  Act  and  restrained  the  appellant  herein  from  

interrupting the supply of petroleum products to respondent for a period  

of two months, and directed the parties to refer the matter to arbitration as  

per the agreement within the said period of two months.

6. When  the  said  appeals  were  pending,  the  respondent  issued  a  

notice dated 4.1.2006 through its counsel to the appellant, referring to the  

appellant’s  insistence  that  only  its  Director  (Marketing)  or  an  officer  

nominated by him could act as the arbitrator, in pursuance of the order of  

the Civil Judge dated 16.11.2005. The respondent alleged that it did not  

expect fair treatment or justice, if the Director (Marketing) or any other  

employee of the appellant was appointed as arbitrator, and that therefore  

any such appointment would be prejudicial to its interest.  It contended  

that any provision enabling one of the parties or his employee to act as an  

arbitrator was contrary to the fundamental principle of natural justice that  

no person can be a judge in his own cause.  The respondent therefore  

called  upon  the  appellant  by  the  said  notice  dated  4.1.2006,  to  fix  a  

meeting at Dehradun between the officers of the appellant and respondent  

within seven days so as to mutually agree upon an independent arbitrator.  

The appellant submits that the said request, apart from being contrary to

the arbitration agreement, was also contrary to the subsequent order dated  

20.1.2006  which  directed  that  the  disputes  should  be  referred  to  the  

arbitrator as per the agreement and therefore, it did not agree to the said  

request for an outside arbitrator.   

7. In this background, the respondent filed an application (Arbitration  

Application No.2/2006) under section 11(6) of the Act in March 2006  

before  the  Chief  Justice  of  Uttaranchal  High  Court  praying  for  

appointment of an independent arbitrator to decide the dispute relating to  

the validity of the termination of the dealership, contending as follows :-

“That a dispute between the parties has arisen and by notice dated  4.1.2006,  the  applicant  served  the  respondent  a  notice  calling  upon them to appoint an independent arbitrator,  but in spite of  expiry  of  reasonable  time,  no  independent  arbitrator  has  been  appointed.”

The said  petition  was  resisted  by  the  appellant  by  contending  that  an  

arbitrator can be appointed only in terms or clause 69 of the agreement.  

The  learned  Chief  Justice,  after  hearing  the  parties  allowed  the  

application  by  the  impugned  order  dated  26.9.2008,  and  appointed  a  

retired  High Court  Judge as  sole  arbitrator  to  decide  the  dispute.  The  

learned Chief  Justice  assigned the following two reasons  to  appoint  a

retired Judge as Arbitrator, instead of the person named in the Arbitration  

Agreement :-   

(i) The  Director  (Marketing)  of  the  appellant,  being  its  employee,  

should be presumed not to act independently or impartially.  

(ii) The  respondent  had  taken  steps  in  accordance  with  the  agreed  

appointment  procedure  contained  in  the  arbitration  agreement  and the  

directions of the civil court, by issuing a notice dated 4.1.2006 calling  

upon the appellant to appoint an arbitrator. After the receipt of the notice  

dated  4.1.2006,  the  appellant  had  to  refer  matter  for  arbitration  to  its  

Director  Marketing,  but  it  did not  do so.  Nor did it  take any step for  

appointment of the Arbitrator. By not referring the matter to arbitration to  

its  own  Director,  despite  receipt  of  the  notice  dated  4.1.2006,  the  

appellant had failed to act as required under the agreed procedure.

8. The said order of the Chief Justice is challenged by the appellant.  

On the rival  contentions  urged by the  parties,  the following questions  

arise for our consideration :

(i) Whether the learned Chief Justice was justified in assuming that  when an employee of one of the parties to the dispute is appointed as an  arbitrator, he will not act independently or impartially?

(ii) In what circumstances, the Chief Justice or his designate can ignore  the  appointment  procedure  or  the  named  arbitrator  in  the  arbitration  agreement, to appoint an arbitrator of his choice?

(iii) Whether  respondent  herein  had  taken  necessary  steps  for  appointment of arbitrator in terms of the agreement, and the appellant had

failed to act in terms of the agreed procedure, by not referring the dispute  to its Director (Marketing) for arbitration?

Re : Questions No.(i)  

9. Arbitration  is  a  binding  voluntary  alternative  dispute  resolution  

process by a private forum chosen by the parties. It is quite common for  

governments, statutory corporations and public sector undertakings while  

entering  into  contracts,  to  provide  for  settlement  of  disputes  by  

arbitration, and further provide that the Arbitrator will be one of its senior  

officers.  If  a  party,  with  open  eyes  and  full  knowledge  and  

comprehension  of  the  said  provision  enters  into  a  contract  with  a  

government/statutory corporation/public sector undertaking containing an  

arbitration agreement providing that one of its Secretaries/Directors shall  

be the arbitrator, he can not subsequently turn around and contend that he  

is  agreeable  for  settlement  of  disputes  by  arbitration,  but  not  by  the  

named arbitrator who is an employee of the other party. No party can say  

he will be bound by only one part of the agreement and not the other part,  

unless  such  other  part  is  impossible  of  performance  or  is  void  being  

contrary to the provisions of the Act, and such part is severable from the  

remaining  part  of  the  agreement.  The  arbitration  clause  is  a  package  

which may provide for what  disputes  are arbitrable,  at  what  stage the

disputes are arbitrable, who should be the arbitrator, what should be the  

venue,  what law would govern the parties etc.  A party to the contract  

cannot claim the benefit of arbitration under the arbitration clause, but  

ignore  the  appointment  procedure  relating  to  the  named  Arbitrator  

contained in the arbitration clause.  

10. It  is now well  settled by a series of decisions of this Court that  

arbitration  agreements  in  government  contracts  providing  that  an  

employee of the Department (usually a high official unconnected with the  

work  or  the  contract)  will  be  the  Arbitrator,  are  neither  void  nor  

unenforceable. We may refer to a few decisions on this aspect.  

10.1) In  Executive  Engineer,  Irrigation  Division,  Puri  vs.  Gangaram  

Chhapolia – 1984 (3) SCC 627, this Court was considering the validity of  

appointment  of  the  Arbitrator  where  the  arbitration  required  that  the  

disputes  shall  be  referred  to  the  sole  arbitration  of  a  Superintending  

Engineer of the Public Works Department unconnected with the work at  

any stage nominated by the concerned Chief Engineer. This Court held :  

“The  use  of  the  expression  "Superintending  Engineer,  State  Public  Works  Department"  in  Clause  23  qualified  by  the  restrictive  words  "unconnected with the work" clearly manifests an intention of the parties  that all questions and disputes arising out of a works contract shall be  referred  to  the  sole  arbitration  of  a  Superintending  Engineer  of  the  concerned department. From the very nature of things, a dispute arising

out of a works contract relating to the Department of Irrigation has to be  referred to a Superintending Engineer, Irrigation as he is an expert on the  subject and it cannot obviously be referred to a Superintending Engineer,  Building  &  Roads.  The  only  limitation  on  the  power  of  the  Chief  Engineer under Clause 23 was that he had to appoint a "Superintending  Engineer unconnected with the work" i.e. unconnected with the works  contract  in  relation  to  which  the  dispute  has  arisen.  The  learned  Subordinate Judge was obviously wrong in assuming that since D. Sahu,  Superintending  Engineer,  Irrigation  was  subordinate  to  the  Chief  Engineer, he was not competent to act as an Arbitrator or since he was a  Superintending Engineer,  Irrigation,  he could not adjudicate upon the  dispute between the parties. The impugned order passed by the learned  Subordinate Judge is accordingly set aside.”

10.2) In Eckersley vs. Mersey Dock and Harbour Board – 1894 (2) QB  

667, it was held :  

“The  rule  which  applies  to  a  Judge  or  other  person  holding  judicial  office,  namely, that he ought not to hear cases in which he might be  suspected of a bias in favour of one of the parties, does not apply to an  arbitrator, named in a contract, to whom both the parties have agreed to  refer disputes which may arise between them under it. In order to justify  the court in saying that such an arbitrator is disqualified from acting,  circumstances  must  be  shown  to  exist  which  establish,  at  least,  a  probability that he will, in fact, be biased in favour of one of the parties  in giving his decision..... Where, in a contract for the execution of works,  the arbitrator selected by the parties is the servant of one of them, he is  not disqualified by the mere fact that under the terms of the submission  he may have to decide disputes involving the question whether he has  himself acted with due skill and competence in advising his employer in  respect of the carrying out of the contract.”  

10.3) In  Secretary  to  Government,  Transport  Department,  Madras v.  

Munuswamy Mudaliar – 1988 (Supp) SCC 651, the contract between the  

respondent  and  State  Government  contained  an  arbitration  clause  

providing  that  the  Superintending  Engineer  will  be  the  arbitrator.  

Disputes  arising  in  respect  of  cancellation  of  the  contract  by  the

department  were  referred  to  the  said  Arbitrator.  An  application  under  

section 5 of Arbitration Act, 1940 was filed by the contractor for removal  

of the arbitrator on the ground of apprehended bias on the part  of the  

arbitrator  as  he  was  an  employee  of  the  State  Government  and  was  

subordinate of the chief  Engineer  who took the decision to cancel  the  

contract. This Court negatived the said contention and held :-

“When the parties entered into the contract, the parties knew the terms of  the contract including arbitration clause. The parties knew the scheme  and the fact that the Chief Engineer is superior and the Superintending  Engineer is subordinate to the Chief Engineer of the particular Circle. In  spite of that the parties agreed and entered into arbitration. .... Unless  there is allegation against the named arbitrator either against his honesty  or mala fide or interest in the subject matter or reasonable apprehension  of  the  bias,  a  named and agreed arbitrator  cannot  and should not  be  removed in exercise of a discretion vested in the Court under Section 5  of the Act.

This  Court  in  International  Authority  of  India  v.  K.D.Bali  and  Anr.  [1988  (2)  SCC 360]  held  that  there  must  be  reasonable  evidence  to  satisfy  that  there  was  a  real  likelihood  of  bias.  Vague  suspicions  of  whimsical, capricious and unreasonable people should not be made the  standard to regulate normal human conduct. In this country in numerous  contracts  with  the  Government,  clauses  requiring  the  Superintending  Engineer or some official of the Govt. to be the arbitrator are there. It  cannot  be  said  that  the  Superintending  Engineer,  as  such,  cannot  be  entrusted  with  the  work  of  arbitration  and  that  an  apprehension  simpliciter in the mind of the contractor without any tangible ground,  would be a justification for removal.”

10.4) In S.Rajan v. State of Kerala – 1992 (3) SCC 608, this Court held :-

“Clause (3) of the agreement says that “the arbitrator for fulfilling the  duties set  forth in the arbitration clause of the Standard Preliminary  Specification  shall  be  the  Superintending  Engineer,  Building  and  Roads Circle, Travandrum”. Thus, this is a case where the agreement  itself  specifies  and names the arbitrator.  In  such a situation,  it  was   obligatory  upon  the  learned  Subordinate  Judge,  in  case  he  was   satisfied that the dispute ought to be referred to the arbitrator, to refer  

the dispute to the arbitrator specified in the agreement. It was not open   to  him  to  ignore  the  said  clause  of  the  agreement  and  to  appoint   another person as an arbitrator. Only if the arbitrator specified and  named in the agreement refuses or fails to act, does the court get the  jurisdiction to appoint another person or persons as the arbitrator. This  is the clear purport of Sub-section (4). It says that the reference shall be  to  the  arbitrator  appointed  by  the  parties.  Such  agreed  appointment  may  be  contained  in  the  agreement  itself  or  may  be  expressed  separately.  To  repeat,  only  in  cases  where  the  agreement  does  not  specify  the  arbitrator  and  the  parties  cannot  also  agree  upon  an  arbitrator, does the court get the jurisdiction to appoint an arbitrator.”

[emphasis supplied]

10.5) In  M/s.  Indian  Drugs  &  Pharmaceuticals  v.  M/s.  Indo-Swiss   

Synthetics Germ Manufacturing Co.Ltd. - 1996 (1) SCC 54, this Court  

held:

“Shri  Desai  submits  that  respondent  No.3  may  not  be  required  to  arbitrate  inasmuch  as  he  being  an  appointee  of  the  Chairman  and  Managing Director of the appellant himself, respondents' case may not  be fairly examined. He prays that any retired High Court Judge may be  appointed as an arbitrator by us. We have not felt inclined to accept  this submission, because arbitration clause states categorically that the  difference/dispute shall be referred “to an arbitrator appointed by the  Chairman  and  Managing  Director  of  IPDL”  (Indian  Drugs  &  Pharmaceutical  Limited)  who is  the appellant.  This provision in the  arbitration clause cannot be given a go-bye merely at the askance of the  respondent unless he challenged its binding nature in an appropriate  proceeding which he did not do.”

10.6) In Union of India v. M.P.Gupta (2004) 10 SCC 504, this Court was  

considering an arbitration agreement which provided for appointment of  

two Gazetted railway officers as arbitrators. But a learned Single Judge of  

the  High Court  while  allowing an application under  section  20 of  the  

Arbitration Act, 1940, appointed a retired Judge as the sole arbitrator and

a Division Bench affirmed the same. Reversing the said decision,  this  

Court held that having regard to the express provision in the arbitration  

agreement that two Gazetted railways officers shall be the Arbitrators, a  

retired Judge could not be appointed as sole Arbitrator.

10.7) In  Ace  Pipeline  Contract  Pvt.  Ltd.  v.  Bharat  Petroleum  

Corporation Ltd. [2007 (5) SCC 304], this Court considered a somewhat  

similar clause of another petroleum corporation which also provided that  

the arbitration will be by its Director (Marketing) or some other officer  

nominated  by  the  Director  (Marketing).  The  contractor  expressed  an  

apprehension  about  the  independence  and  impartiality  of  the  named  

arbitrator and prayed for appointment of a retired Judge as Arbitrator in  

his application under section 11(6) of the Act. This Court held :

“In the present case, in fact the appellant's demand was to get some  retired Judge of the Supreme Court to be appointed as arbitrator on the  ground  that  if  any  person  nominated  in  the  arbitration  clause  is  appointed, then it may suffer from bias or the arbitrator may not be  impartial or independent in taking decision. Once a party has entered  into an agreement with eyes wide open it  cannot wriggle out of the  situation (by contending) that if any person of the respondent BPCL is  appointed as arbitrator he will not be impartial or objective. However,  if the appellant feels that the arbitrator has not acted independently or  impartially, or he has suffered from any bias, it will always be open to  the party to make an application under section 34 of the Act to set aside  the award on the ground that arbitrator acted with bias or malice in law  or fact.”

11. The learned counsel for the respondent attempted to distinguish the  

said decisions. He submitted that except the last two decisions, all others

were rendered with reference to the provisions of the  Arbitration Act,  

1940,  whose  provisions  were  different  from  the  provisions  of  the  

Arbitration and Conciliation Act, 1996. It was also submitted that the last  

two  decisions  merely  followed  the  legal  position  enunciated  with  

reference to the old Act,  without  considering the provisions under the  

new  Act.  It  is  contended  that  the  provisions  of  the  Arbitration  and  

Conciliation  Act,  1996,  in  regard  to  appointment  of  arbitrators,  are  

materially different from the provisions of the old Act. It was submitted  

that several provisions of the new Act lay stress upon the independence  

and impartiality of the Arbitrator. Reference was invited to sub-section  

(8) of section 11, sub-sections (1) and (3) of section 12 and Section 18 of  

the Act. It is contended by the respondent that in view of the emphasis on  

the independence and impartiality of an arbitrator, in the new Act, and  

having regard to the basic principle of natural justice that no man should  

be judged in his own cause,  any arbitration agreement to the extent  it  

nominates  an  officer  of  one of  the  parties  as  the  arbitrator,  would be  

invalid and unenforceable.  

12. While the provisions relating to independence and impartiality are  

more  explicit  in  the  new  Act,  it  does  not  mean  that  the  old  Act  

(Arbitration Act, 1940) enabled persons with bias to act as Arbitrators.

What was implicit under the old Act is made explicit in the new Act in  

regard  to  impartiality,  independence  and  freedom  from  bias.  The  

decisions under the old Act on this issue are therefore not irrelevant when  

considering the provisions of the new Act. At all events, M. P. Gupta and  

Ace Pipeline are cases under the new Act. All the decisions proceed on  

the  basis  that  when  senior  officers  of  government/statutory  

corporations/public sector undertakings are appointed as Arbitrators, they  

will  function  independently  and  impartially,  even  though  they  are  

employees of such Institutions/organisations.  

13. We find no bar under the new Act,  for an arbitration agreement  

providing for an employee of a government/ statutory corporation/public  

sector undertaking (which is a party to the contract), acting as Arbitrator.  

Section 11(8) of the Act requires the Chief Justice or his designate, in  

appointing  an  arbitrator,  to  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  

or  impartial  arbitrator”.  Section  12(1)  requires  an  Arbitrator,  when  

approached in connection with his possible appointment, to disclose in  

writing any circumstances likely to give rise to justifiable doubts as to his  

independence  or  impartiality.  Sub-section  12(3)  enables  the  Arbitrator

being challenged if (i) the circumstances give rise to justifiable doubts as  

to  his  independence  or  impartiality,  or  (ii)  he  does  not  possess  the  

qualifications agreed to by the parties. Section 18 requires the Arbitrator  

to treat the parties with equality (that is to say without bias) and give each  

party full opportunity to present his case.  Nothing in sections 11, 12, 18  

or other provisions of the Act suggests that any provision in an arbitration  

agreement, naming the Arbitrator will be invalid if such named arbitrator  

is an employee of one of the parties to the arbitration agreement. Sub-

section (2) of section 11 provides that parties are free to agree upon a  

procedure for appointment of arbitrator/s. Sub-section (6) provides that  

where a party fails to act, as required under the procedure prescribed, the  

Chief  Justice  or  his  designate  can  take  necessary  measures.  Sub-  

section  (8)  gives  the  discretion  to  the  Chief  Justice/his  designate  to  

choose an arbitrator suited to meet the requirements of a particular case.  

The  said  power  is  in  no  way  intended  to  nullify  a  specific  term  of  

arbitration agreement naming a particular person as arbitrator. The power  

under sub-section (8) is intended to be used keeping in view the terms of  

the  arbitration  agreement.  The  fact  that  the  named  arbitrator  is  an  

employee  of  one  of  the  parties  is  not  ipso  facto  a  ground  to  raise  a  

presumption of bias or partiality of lack of independence on his part.

14. There  can  however  be  a  justifiable  apprehension  about  the  

independence or impartiality of an Employee-Arbitrator, if such person  

was the controlling or dealing authority in regard to the subject contract  

or if he is a direct subordinate (as contrasted from an officer of an inferior  

rank  in  some  other  department)  to  the  officer  whose  decision  is  the  

subject matter of the dispute. Where however the named arbitrator though  

a senior officer of the government/statutory body/government company,  

had nothing to do with execution of the subject contract, there can be no  

justification for anyone doubting his independence or impartiality, in the  

absence  of  any  specific  evidence.  Therefore,  senior  officer/s  (usually  

heads of department or equivalent) of a government/statutory corporation/  

public  sector  undertaking,  not  associated  with  the  contract,  are  

considered  to  be  independent  and  impartial  and  are  not  barred  from  

functioning as Arbitrators merely because their employer is a party to the  

contract.  

15. The  position  may  be  different  where  the  person  named  as  the  

Arbitrator is an employee of a company or body or individual other than  

the state and its instrumentalities. For example, if the Director of a private  

company (which is a party to the Arbitration agreement), is named as the  

Arbitrator,  there  may be valid  and reasonable  apprehension of  bias  in

view of his position and interest, and he may be unsuitable to act as an  

Arbitrator in an arbitration involving his company.  If any circumstance  

exists  to  create  a  reasonable  apprehension  about  the  impartiality  or  

independence of the agreed or named Arbitrator, then the court has the  

discretion not to appoint such a person.  

16. Subject to the said clarifications, we hold that a person being an  

employee of one of the parties (which is the state or its instrumentality)  

cannot  per se  be  a bar to his acting as an Arbitrator. Accordingly, the  

answer  to  the  first  question  is  that  the  learned  Chief  Justice  was  not  

justified in his assumption of bias.

17. Before parting from this issue, we may however refer to a ground  

reality. Contractors in their anxiety to secure contracts from government/  

statutory bodies/public sector undertakings,  agree to arbitration clauses  

providing for employee-arbitrators. But when subsequently disputes arise,  

they balk at the idea of arbitration by such employee-arbitrators and tend  

to litigate to secure an “independent” arbitrator. The number of litigations  

seeking appointment  of  independent  Arbitrator  bears  testimony to  this  

vexed  problem.  It  will  be  appropriate  if  governments/statutory  

authorities/public sector undertaking reconsider their policy providing for

arbitration by employee-arbitrators in deference to the specific provisions  

of the new Act reiterating the need for independence and impartiality in  

Arbitrators. A general shift may in future be necessary for understanding  

the word “independent” as referring to someone not connected with either  

party. That may improve the credibility of Arbitration as an alternative  

dispute resolution process. Be that as it may.

Re : Question No. (ii)  

18. Where the arbitration agreement names or designates the arbitrator,  

the question whether the Chief Justice or his designate could appoint any  

other person as arbitrator, has been considered by this Court in several  

decisions.

18.1) In  Ace Pipeline Contract Pvt. Ltd. (supra), a two-Judge Bench of  

this Court held that where the appointing authority does not appoint an  

arbitrator after receipt of request from the other party, a direction can be  

issued  under  section  11(6)  to  the  authority  concerned  to  appoint  an  

arbitrator as far as possible as per the arbitration clause. It was held that  

normally the court should adhere to the terms of the arbitration agreement  

except  in  exceptional  cases  for  reasons  to  be  recorded  or  where  both  

parties agree for a common name.

18.2) In Union of India v. Bharat Battery Manufacturing Company Pvt.   

Ltd. [2007 (7) SCC 684], another two-Judge Bench of this Court held that  

once  the  notice  period  provided  for  under  the  arbitration  clause  for  

appointment  of  an  arbitrator  elapses  and  the  aggrieved  party  files  an  

application under section 11(6) of the Act, the right of the other party to  

appoint  an  arbitrator  in  terms  of  the  arbitration  agreement  stands  

extinguished.

18.3) The divergent views expressed in Ace Pipeline (supra) and Bharat   

Battery (supra) were sought to be harmonised by a three-Judge Bench of  

this Court in Northern Railway Administration v. Patel Engineering Co.   

Ltd. [2008 (11) SCALE 500]. After examining the scope of sub-sections  

(6) and (8) of section 11, this Court held :

“The crucial expression in sub-section (6) is “a party may request the  Chief Justice or any person or institution designated by him to take the  necessary  measures”.  This  expression  has  to  be  read  along  with  requirement in sub-section (8) that the Chief Justice or the person or an  institution designated by him in appointing an arbitrator shall have “due  regard” to the two cumulative conditions relating to qualifications and  other  considerations  as  are  likely  to  secure  the  appointment  of  an  independent and impartial arbitration.

A bare reading of the scheme of Section 11 shows that the emphasis is   on the terms of the agreement being adhered to and/or given effect as  closely as possible. In other words, the Court may ask to do what has   not been done. The Court must first ensure that the remedies provided   for are exhausted. It is true as contended by Mr. Desai, that it is not   mandatory for the Chief Justice or any person or institution designated  

by him to appoint the named arbitrator or arbitrators. But at the same   time due regard has to be given to the qualifications required by the  agreement and other considerations.

The  expression  'due  regard'  means  that  proper  attention  to  several  circumstances  have  been  focused.  The  expression  'necessary'  as  a  general  rule  can  be  broadly  stated  to  be  those  things  which  are  reasonably  required  to  be  done  or  legally  ancillary  to  the  accomplishment of the intended act. Necessary measures can be stated to  be the reasonable step required to be taken...

... It needs no reiteration that appointment of the arbitrator or arbitrators  named in the arbitration agreement is not a must, but while making the  appointment, the twin requirements of sub-section (8) of section 11 have  to be kept in view, considered and taken into account.”

(emphasis supplied)

19. While  considering  the  question  whether  the  arbitral  procedure  

prescribed in the agreement for reference to a named arbitrator, can be  

ignored, it is also necessary to keep in view clause (v) of sub-section (2)  

of section 34 of the Act which provides that an arbitral award may be set  

aside by the court if the composition of the arbitral tribunal or the arbitral  

procedure was not in accordance with the agreement of the parties (unless  

such agreement was in conflict with any provision of Part-I of the Act  

from which parties cannot derogate, or, failing such agreement, was not  

in accordance with the provisions of Part-I of the Act). The legislative  

intent  is  that  the  parties  should  abide  by  the  terms  of  the  arbitration  

agreement.  If  the  arbitration  agreement  provides  for  arbitration  by  a  

named Arbitrator, the courts should normally give effect to the provisions  

of  the  arbitration  agreement.  But  as  clarified  by  Northern  Railway

Administration, where  there  is  material  to  create  a  reasonable  

apprehension that the person mentioned in the arbitration agreement as  

the Arbitrator is not likely to act independently or impartially, or if the  

named person is  not  available,  then the Chief  Justice or  his  designate  

may, after recording reasons for not following the agreed procedure of  

referring  the  dispute  to  the  named  arbitrator,  appoint  an  independent  

Arbitrator in accordance with section 11(8) of the Act. In other words,  

referring the disputes to the named arbitrator shall be the rule.  The Chief  

Justice  or  his  designate  will  have  to  merely  reiterate  the  arbitration  

agreement  by  referring  the  parties  to  the  named  arbitrator  or  named  

Arbitral  Tribunal.  Ignoring the  named Arbitrator/Arbitral  Tribunal  and  

nominating an independent arbitrator shall be the exception to the rule, to  

be resorted for valid reasons.  

20. This  takes  us  to  the  effect  of  the  condition  in  the  arbitration  

agreement that “it is also a term of this contract that no person other than  

the  Director,  Marketing  or  a  person  nominating  by  such  Director,  

Marketing of the Corporation as aforesaid shall act as Arbitrator.” Such a  

condition interferes with the power of the Chief Justice and his designate  

under section 11(8) of Act to appoint a suitable person as arbitrator is  

appropriate cases. Therefore, the said portion of the arbitration clause is

liable to be ignored as being contrary to the Act. But the position will be  

different  where  the  arbitration  agreement  names  an  individual  (as  

contrasted from someone referred to by designation) as the Arbitrator. An  

example is an arbitration clause in a partnership deed naming a person  

enjoying  the  mutual  confidence  and  respect  of  all  parties,  as  the  

Arbitrator. If such an arbitration agreement provides that there shall be no  

arbitration if such person is no more or not available, the person named  

being inextricably linked to the very provision for arbitration, the non-

availability of the named arbitrator may extinguish the very arbitration  

agreement. Be that as it may.   

21. In the light of the above discussion, the scope of section 11 of the  

Act  containing  the  scheme  of  appointment  of  arbitrators  may  be  

summarised thus:

(i) Where the agreement provides for arbitration with three arbitrators  (each party to appoint one arbitrator and the two appointed arbitrators to  appoint a third arbitrator), in the event of a party failing to appoint an  Arbitrator within 30 days from the receipt of a request from the other  party  (or  the  two  nominated  arbitrators  failing  to  agree  on  the  third  arbitrator within 30 days from the date of the appointment),  the Chief  Justice  or  his  designate  will  exercise  power  under  sub-section  (4)  of  section 11 of the Act.

(ii) Where the agreement provides for arbitration by a sole arbitrator  and the  parties  have  not  agreed  upon any appointment  procedure,  the  Chief Justice or his designate will exercise power under sub-section (5) of

section 11, if the parties fail to agree on the arbitration within thirty days  from the receipt of a request by a party from the other party.  

(iii) Where  the  arbitration  agreement  specifies  the  appointment  procedure,  then  irrespective  of  whether  the  arbitration  is  by  a  sole  arbitrator  or  by  a  three-member  Tribunal,  the  Chief  Justice  or  his  designate will exercise power under sub-section (6) of section 11, if a  party fails to act as required under the agreed procedure (or the parties or  the two appointed arbitrators fail to reach an agreement expected of them  under the agreed procedure or any person/institution fails to perform any  function entrusted to him/it under that procedure).

(iv) While failure of the other party to act within 30 days will furnish a  cause  of  action to  the  party  seeking arbitration  to  approach the Chief  Justice or his designate in cases falling under sub-sections (4) & (5), such  a time bound requirement is not found in sub-section (6) of section 11.  The  failure  to  act  as  per  the  agreed  procedure  within  the  time  limit  prescribed  by  the  arbitration  agreement,  or  in  the  absence  of  any  prescribed time limit, within a reasonable time, will enable the aggrieved  party to file a petition under Section 11(6) of the Act.  

(v) Where  the  appointment  procedure  has  been  agreed  between the  parties, but the cause of action for invoking the jurisdiction of the Chief  Justice or his designate under clauses (a), (b) or (c) of sub-section (6) has  not arisen, then the question of Chief Justice or his designate exercising  power under sub-section (6) does not arise. The condition precedent for  approaching  the  Chief  Justice  or  his  designate  for  taking  necessary  measures under sub-section (6) is that (i) a party failing to act as required  under the agreed appointment procedure; or (ii) the parties (or the two  appointed arbitrators),  failing to reach an agreement  expected of them  under the agreed appointment procedure; or (iii) a person/institution who  has  been  entrusted  with  any  function  under  the  agreed  appointment  procedure, failing to perform such function.   

(vi) The Chief Justice or his designate while exercising power under  sub-section  (6)  of  section  11  shall  endeavour  to  give  effect  to  the   appointment procedure prescribed in the arbitration clause.  

(vii) If  circumstances exist,  giving rise  to justifiable  doubts as  to the  independence  and  impartiality  of  the  person  nominated,  or  if  other  circumstances  warrant  appointment  of  an  independent  arbitrator  by

ignoring the procedure prescribed, the Chief Justice or his designate may,  for reasons to be recorded ignore the designated arbitrator and appoint  someone else.  

Re : Question (iii)

22. In this  case,  the respondent  approached the Chief  Justice of the  

High Court by alleging that it had acted in terms of the agreed procedure  

under the arbitration agreement, and that the appellant had failed to act as  

required  under  the  appointment  procedure.  Therefore,  the  respondent  

invoked the power of the Chief Justice under sub-section (6) of section  

11. In view of it, what falls for consideration is whether the appellant had  

failed  to  act  as  required  under  the  appointment  procedure.  This  pre-

supposes  that  the  respondent  had  called  upon  the  appellant  to  act  as  

required  under  the  agreed  appointment  procedure.  Let  us  examine  

whether the respondent had in fact  called upon the appellant  to act in  

accordance with the agreed procedure.  

23. When the dispute arose, the respondent did not seek arbitration, but  

went  to  civil  court.  It  was  the  appellant  who  sought  reference  to  

arbitration  in  terms  of  the  arbitration  agreement.  The  order  dated  

16.11.2005  of  the  Civil  Judge,  Junior  Division  directing  reference  to  

arbitration within two months from 16.11.2005 was challenged by both

the parties.  The District  Judge, Dehradun by its order dated 20.1.2006  

directed the parties  to refer  the dispute to arbitrator as  per  agreement,  

within two months. Therefore, the order dated 16.11.2005 stood merged  

with  the  order  of  the  District  Judge  dated  20.1.2006,  which  directed  

reference of the dispute to arbitration as per the agreement, within two  

months. But there was no direction by the court to appoint an independent  

arbitrator contrary to the terms of the arbitration agreement. In view of  

the  order  dated  20.1.2006,  the  respondent  ought  to  have  referred  the  

dispute to the Director (Marketing) of the appellant within two months  

from 20.1.2006. It failed to do so. Therefore, it was the respondent who  

failed to act in terms of the agreed procedure and not the appellant. In  

fact, as the Arbitrator was already identified, there was no need for the  

respondent  to  ask  the  appellant  to  act  in  accordance  with  the  agreed  

procedure.  On  the  other  hand,  the  respondent  ought  to  have  directly  

referred  the  disputes  to  the  Director  (Marketing)  of  the  appellant  

corporation in terms of the arbitration agreement.  

24. We may now deal  with the notice dated 4.1.2006 by which the  

respondent notified the appellant that it was not willing for appointment  

of arbitrator in terms of the agreement and that both should therefore hold  

discussions  to  decide  upon an independent  arbitrator.  The  letter  dated

4.1.2006  cannot,  be  construed  as  a  step  taken  by  the  respondent  for  

invoking  arbitration  in  terms  of  the  arbitration  agreement,  as  it  is  a  

demand in violation of the terms of arbitration agreement.  It required the  

appellant to agree upon an arbitrator,  contrary to the provisions of the  

arbitration agreement. If the respondent wanted to invoke arbitration in  

terms of the arbitration agreement, it ought to have referred the disputes  

to  the  Director  (Marketing)  in  term  of  section  69  of  the  contract  

agreement for arbitration. Alternatively, the respondent ought to have at  

least  called  upon  the  appellant,  to  refer  the  dispute  to  the  Director  

(Marketing) for arbitration. In the absence of any such a demand under  

clause 69, it  cannot be said that the respondent invoked the arbitration  

clause or took necessary steps for invoking arbitration in terms of the  

arbitration agreement. If the respondent had called upon the appellant to  

act in a manner contrary to the appointment procedure mentioned in the  

arbitration  agreement,  it  cannot  be  said  that  the  appellant  failed  to  

respond and act  as  required under  the agreed procedure.  As the  letter  

dated 4.1.2006 could not be construed as a valid demand for arbitration,  

the finding of the learned Chief Justice that non-compliance with such  

request would enable the respondent to appoint an independent arbitrator,  

is clearly illegal. What is significant is that even subsequent to the order  

dated 20.1.2006 passed by the District Court, the respondent did not refer

the disputes to the Director (Marketing) of the appellant nor called upon  

the appellant to refer to the disputes in terms of the arbitration agreement,  

nor withdraw its earlier letter dated 4.1.2006 demanding appointment of  

an  independent  arbitrator  contrary  to  the  agreed  procedure  under  the  

arbitration agreement.  

25. In the circumstances, the third question is answered in the negative.  

Consequently, the learned Chief Justice erred in having proceeded on the  

basis  that  the  respondent  had  performed  its  duty  in  terms  of  the  

arbitration  agreement  in  seeking  reference  to  arbitration  and  that  the  

appellant  had  failed  to  act  in  the  matter  and  therefore,  there  was  

justification for appointing an independent arbitrator.  

26. The appellant is therefore entitled to succeed on both the points.  

The appeal is, therefore, allowed. The order dated 26.9.2008 of the High  

Court is set aside. The Director (Marketing) of the appellant Corporation  

is  appointed  as  the  sole  arbitrator  to  decide  the  disputes  between  the  

parties.  

.............................................J [R. V. Raveendran]  

.............................................J [D. K. Jain]

New Delhi; August 24, 2009.