IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4168 OF 2003

M/s. S.B.P. and Company … Appellant

Versus

M/s. Patel Engineering Ltd. and another … Respondents

With CIVIL APPEAL NO.4169 OF 2003

B.T. Patil and Sons Belgaum Construction Ltd. … Appellant

Versus

M/s. Patel Engineering Ltd. and another … Respondents

J  U  D  G  M  E  N  T

G.S. Singhvi,  J.

1. In compliance of the direction given by seven-Judge Bench in S.B.P.  

& Company v. Patel Engineering Ltd. and another (2005) 8 SCC 618,  

these appeals have been listed for disposal in the light of the principles laid  

down in that judgment.

2. In the special leave petitions, out of which these appeals arise, the  

appellants had challenged orders dated 3.2.2003 passed by the Division

Bench of the Bombay High Court whereby it held that the writ petitions  

filed against the orders passed by the learned designated Judge of that  

Court  appointing  Shri  Justice  M.N.  Chandurkar  (Retired)  as  the  third  

arbitrator  for  resolution  of  the  disputes  between  the  appellants  and  

respondent  No.1  are  not  maintainable.   For  this  purpose,  the  Division  

Bench  relied  upon  the  judgment  of  this  Court  in  Konkan  Railway  

Corporation  Ltd.  and  others  v.  Mehul  Construction  Company  

(2000) 7 SCC 201, which was subsequently approved by a Constitution  

Bench  in  Konkan  Railway  Corporation  Ltd.  and  another  v.  Rani  

Construction Pvt. Ltd. (2002) 2 SCC 388.  The ratio of the Constitution  

Bench judgment was that the power exercised by the Chief Justice or any  

person  or  institution  designated  by  him  under  Section  11(6)  of  the  

Arbitration  and  Conciliation  Act,  1996  (for  short,  ‘the  Act’)  is  purely  

administrative and the measures taken under that section are not open to  

be  challenged  by  the  aggrieved  party  by  resorting  to  intermediary  

proceedings.  The judgment of the Constitution Bench was overruled by  

the seven-Judge Bench in S.B.P. & Company v. Patel Engineering Ltd.  

and another (supra) and it was held that the power exercised by the  

Chief Justice of the High Court or the Chief Justice of India under Section  

11(6) of the Act is a judicial power and not an administrative power and  

further that an order passed by the Chief Justice of the High Court or by  

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the designated Judge of that Court can be challenged only under Article  

136 of the Constitution.

3. After the judgment of the larger Bench, the appellants filed I.A. Nos.  

1 and 2 of 2006 for leave to amend the memorandums of appeal so as to  

enable them to make a prayer for setting aside orders dated 18.11.2002  

passed by the learned designated Judge of the High Court in Arbitration  

Application Nos. 114 of 2002 and 90 of 2002. At the commencement of  

hearing of the appeals on 6.10.2009,  the prayer of the appellants  was  

granted.   

4. In the light  of  the above,  we shall  now consider  whether  orders  

dated 18.11.2002 passed by the learned designated Judge of the Bombay  

High Court under Section 11(6) of the Act appointing Shri  Justice M.N.  

Chandurkar (Retired) as third arbitrator is legally correct.

Background facts

5. In March, 1992, the Government of Maharashtra awarded contract  

to  respondent  No.1 for  execution of  works relating to Stage IV of  the  

Koyna Hydroelectric Project.  Respondent No.1 sub-contracted a portion of  

that work i.e., construction of civil works from Lake Intake to Emergency  

Valve Tunnel – K.H.E.P. Stage IV – I.C.B. No.1 to the appellant and M/s.  

B.T. Patil & Sons (Construction) Ltd., Belgaum (herein after described as  

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“B.T.  Patil  &  Sons”).   For  this  purpose,  the  parties  entered  into  two  

agreements on 15.10.1992 viz., sub-contract agreement and piece work  

agreement.  Both the agreements contained identical clauses for resolution  

of disputes and differences between the parties by arbitration.  For the  

sake of convenient reference, Clause 19 of the piece work agreement is  

reproduced below:

“The continuance of this piece work agreement / contract or  at any time after the termination thereof, any difference or  dispute shall arise between the parties hereto in regard to the  interpretation of any of the provisions herein contained or act  or  thing  in  relation  to  this  agreement  /  contract,  such  difference  or  dispute  shall  be  forthwith  referred  to  two  Arbitrators for Arbitration in Bombay one to be appointed by  each party with liberty to the Arbitrators in case of differences  or their failure to reach an agreement within one month of the  appointment, to appoint  an umpire residing in Bombay and  the award which shall be made by two Arbitrators or umpire  as the case may be shall be final, conclusive and binding on  the parties hereto.

If either party to the difference or dispute shall fail to appoint  an arbitrator within 30 calendar days after notice in writing  having been given by the parties or shall appoint an arbitrator  who shall refuse to act then the arbitrator appointed by the  other party shall be entitled to proceed with the reference as  a Sole Arbitrator and to make final decision on such difference  or dispute and the award made as a result of such arbitration  shall be a condition precedent to any right of action against  any two parties hereto in respect of any such difference and  dispute.”

(emphasis added)

6. In October 1996, some disputes and differences arose between the  

Government of Maharashtra and respondent No.1 with regard to contract  

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dated 10.3.1992. The panel of three arbitrators appointed by the parties  

passed unanimous awards on 11.2.2000 requiring the State Government  

to  pay  Rs.24,09,25,965/-  to  respondent  No.1.   The  State  Government  

challenged those awards but, later on, withdrew its challenge and paid the  

amount to respondent No.1.   

7. On 3.7.2001, the appellants through their power of attorney holder,  

Balasaheb B. Patil  served a notice upon respondent No.1 requiring it to  

pay the amount allegedly due to them, but the latter did not comply with  

their demand.  After three months, the appellants invoked the arbitration  

clauses  enshrined  in  the  sub-contract  agreement  and  piece  work  

agreement  and  issued  letter  dated  3.10.2001  appointing  Shri  T.G.  

Radhakrishna  (retired  Chief  Engineer)  (respondent  No.2  herein)  as  an  

arbitrator on their behalf.  In its response dated 1.11.2001, respondent  

No.1 denied the claim of the appellants and, at the same time, appointed  

Shri S.N. Huddar, Joint Secretary, Irrigation Department, Government of  

Maharashtra as an arbitrator  on its behalf.   However,  vide letter  dated  

1.2.2002, Shri Huddar declined to arbitrate in the matter by stating that he  

had remained associated with Kyona Project as Superintending Engineer  

and  Chief  Engineer.  Thereafter,  respondent  No.1  sent  letter  dated  

26.2.2002 to Shri S.L. Jain of S & S Consultants, Bhopal with the request  

to act as an arbitrator on its behalf.  Shri Jain communicated his consent  

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vide letter dated 27.2.2002.  On the same day, respondent No.1 informed  

respondent No.2 that in terms of Section 15(2) of the Act, it was entitled  

to  appoint  a  substitute  in  place  of  Shri  S.N.  Huddar  and  had,  in  fact,  

appointed Shri S.L. Jain as an arbitrator and the latter had consented to  

such an appointment.  On 7.3.2002, the power of attorney holder of the  

appellants informed respondent No.1 that appointment of Shri S.L. Jain as  

replacement arbitrator is contrary to the terms of sub-contract agreement  

and piece work agreement.

8. In the meanwhile, power of attorney holder of the appellants sent  

letter  dated  22.1.2002  to  respondent  No.2  and  Shri  S.N.  Huddar  

requesting them to appoint the third arbitrator.  On his part, respondent  

No.2 suo motu sent letter dated 21.2.2002 informing the parties that in  

view  of  Shri  Huddar’s  refusal  to  act  as  an  arbitrator  on  behalf  of  

respondent No.1, he had become the Sole Arbitrator and asked them to  

appear at Mumbai for a preliminary meeting.

9. After his appointment as an arbitrator on behalf of respondent No.1,  

Shri  S.L.  Jain  sent  letter  dated  11.3.2002  to  respondent  No.2  and  

suggested  the  names  of  three  retired  Bombay  High  Court  judges  for  

appointment  as  Presiding  Arbitrator.   In  his  reply  dated  25.3.2002,  

respondent No.2 claimed that Section 15(2) of the Act has no application  

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in the case and that in terms of Clause 18 of the sub-contract agreement  

and Clause 19 of the piece work agreement, he was entitled to act as the  

Sole Arbitrator.  

10. At that stage, respondent No.1 filed Arbitration Application Nos.114  

of 2002 and 90 of 2002 under Section 11 of the Act for appointment of the  

third arbitrator by asserting that in view of refusal of Shri S.N. Huddar to  

act  as  an  arbitrator,  it  had  appointed  Shri  S.L.  Jain  as  a  substitute  

arbitrator in terms of Section 15(2) of the Act and in that view of the  

matter respondent No.2 was not entitled to act as the Sole Arbitrator.  The  

designated Judge of the Bombay High Court allowed both the applications  

and  appointed  Shri  Justice  M.N.  Chandurkar  (Retired)  as  the  third  

arbitrator.  The learned designated Judge noticed the arguments made on  

behalf  of  the  parties,  the  provisions  of  Section  15  of  the  Act  and  

observed:-

“Section  15  is  a  new  provision.   Sub-section  (1)  and  (2)  thereof  correspond  to  Article  155  of  the  UNCITRAL  model  Law.   Sub-section (2) of section 15 provides that where the  mandate  of  arbitrator  is  terminated,  a  substitute  arbitrator  shall be appointed according to the rules that were applicable  to the appointment of the arbitrator being replaced.  Thus the  Legislature  clearly  intended  that  upon  termination  of  the  mandate  of  an  arbitrator,  a  substitute  arbitrator  shall  be  appointed  in  accordance  with  the  same  rules  as  were  applicable  to  the  appointment  of  the  original  arbitrator.  Therefore the arbitrator appointed by the other party is not  entitled  to  act  as  the  sole  arbitrator  in  view  of  this  clear  language of section 15(2).  This can be compared to the old  

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provision of section 9 of the 1940 Act providing that unless a  different intention is expressed in the agreement the court has  power to appoint a new arbitrator.  The words used in sub- section (2) of section 15 do not admit of any such exception.

The  decisions  relied  upon  by  Dr.  Tulzapurkar  have  no  application  to  the  facts  of  the  present  case.   In  Datar  Switchgears  Ltd.  v.  Tata  Finance  Ltd.  and  Anr.  while  construing section 11(6) of the 1996 Act, the court held that if  one party demands the opposite party to appoint an arbitrator  and the opposite party does not make an appointment within  30 days of demand being made by the other party, the right  to make the 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.  Only then the right of the opposite party  ceases.  It is in this context that the court observed in para 23  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  special  welfare legislation,  still  the court has to respect the  terms of the contract entered into by parties and endeavour  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”.  This case has no bearing on the issue involved in the  instant case.

The  other  case  cited  by  Dr.  Tulzapurkar  in  Open  Sea  Maritimes  Inc.  v.  R.  Pyarelal  International  Pvt.  Ltd.  is  distinguishable on facts.  In that case respondents had failed  to make appointment of an arbitrator even after the notice  period.  The court held that if the party fails to appoint an  arbitrator even after the notice then the Arbitrator appointed  by  the  other  party  can  act  a  sole  arbitrator  and  pass  the  award.   The court  referred to  clause 24 of  the agreement  between the parties which provide that if the other party fails  to appoint an arbitrator in spite of the notice, the arbitrator  appointed shall be entitled to act as the sole arbitrator as such  procedure was agreed upon between the parties.  The case  before Patankar J. was under Part II of the Act.  In the instant  

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case, in view of the provisions contained in section 15(2) of  the Act,  upon withdrawal  of  the arbitrator  Shri  Huddar the  petitioners had right to appoint a new arbitrator as per the  Rules that were applicable to appointment of arbitrator.”

11. The  appellants  challenged  the  orders  of  the  learned  designated  

Judge in two separate writ petitions, but could not persuade the Division  

Bench  of  the  High  Court  to  entertain  their  prayer  for  nullifying  the  

appointment of Shri Justice M.N. Chandurkar as the third arbitrator.  The  

Division  Bench  referred  to  the  judgments  of  this  Court  in  Konkan  

Railway  Corporation  Ltd.  and  others  v.  Mehul  Construction  

Company (supra)  and  Konkan  Railway  Corporation  Ltd.  and  

another v. Rani Construction Pvt. Ltd. (supra), and held that the writ  

petitions are not maintainable against the orders passed by the designated  

Judge, which were administrative in nature.  However, liberty was given to  

the  appellants  to  raise  the  issue  relating  to  appointment  of  the  third  

arbitrator before the Arbitral Tribunal.   

12. The Constitution Bench, which heard the special leave petitions filed  

by the appellants against the orders of the High Court, opined that the  

judgment rendered by an earlier Constitution Bench in Konkan Railway  

Corporation  Ltd.  and  another  v.  Rani  Construction  Pvt.  Ltd.  

(supra),  may  require  reconsideration  and  directed  that  the  matter  be  

placed before a larger  Bench.  Thereafter,  the cases were heard by a  

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seven-Judge Bench.  By majority judgment, the larger Bench overruled the  

Constitution Bench judgment in  Konkan Railway Corporation Ltd. v.  

Rani Construction Pvt. Ltd. (supra), and held that the power exercised  

by the Chief Justice of the High Court or the Chief Justice of India under  

Section  11(6)  of  the  Act  is  a  judicial  power  and not  an administrative  

power and that an order passed by the Chief Justice of the High Court or  

by the designated Judge of that High Court is appealable under Article 136  

of  the  Constitution.   The  conclusions  of  the  majority  are  contained  in  

paragraph  47  of  the  judgment,  the  relevant  portions  of  which  are  

extracted below:

“47. We, therefore, sum up our conclusions as follows:

(i) The power exercised by the Chief Justice of the High Court  or the Chief Justice of India under Section 11(6) of the Act is  not an administrative power. It is a judicial power.

(ii) The power under Section 11(6) of the Act, in its entirety,  could be delegated, by the Chief Justice of the High Court only  to another Judge of that Court and by the Chief Justice of  India to another Judge of the Supreme Court.

(iii) In case of designation of a Judge of the High Court or of  the  Supreme  Court,  the  power  that  is  exercised  by  the  designated  Judge  would  be  that  of  the  Chief  Justice  as  conferred by the statute.

(iv) The Chief Justice or the designated Judge will have the  right  to  decide  the  preliminary  aspects  as  indicated  in  the  earlier part of this judgment. These will be his own jurisdiction  to entertain the request, the existence of a valid arbitration  agreement,  the  existence  or  otherwise  of  a  live  claim,  the  existence of the condition for the exercise of his power and on  the  qualifications  of  the  arbitrator  or  arbitrators.  The Chief  

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Justice or the designated Judge would be entitled to seek the  opinion  of  an  institution  in  the  matter  of  nominating  an  arbitrator qualified in terms of Section 11(8) of the Act if the  need arises but the order appointing the arbitrator could only  be that of the Chief Justice or the designated Judge.

(v) xxx xxxx xxxx

(vi) Once the matter reaches the Arbitral Tribunal or the sole  arbitrator, the High Court would not interfere with the orders  passed by the arbitrator  or the Arbitral  Tribunal  during the  course of  the arbitration proceedings  and the parties  could  approach the Court only in terms of Section 37 of the Act or in  terms of Section 34 of the Act.

(vii) Since an order passed by the Chief Justice of the High  Court or by the designated Judge of that Court is a judicial  order, an appeal will lie against that order only under Article  136 of the Constitution to the Supreme Court.

(viii) xxxx xxxx xxxx

(ix) In a case where an Arbitral Tribunal has been constituted  by the parties without having recourse to Section 11(6) of the  Act, the Arbitral Tribunal will have the jurisdiction to decide all  matters as contemplated by Section 16 of the Act.

(x) xxxx xxxx xxxx

(xi) xxxx xxxx xxxx

(xii)  The  decision  in  Konkan  Rly.  Corpn.  Ltd. v.  Rani  Construction (P) Ltd. is overruled.”

Arguments

13. Shri  K.K.  Venugopal,  learned  senior  counsel  appearing  for  the  

appellants  argued  that  the  arbitration  clauses  contained  in  the  two  

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agreements are binding on the parties and in view of refusal of Shri S.N.  

Huddar to act as an arbitrator on behalf of respondent No.1, the arbitrator  

appointed  by  the  appellants  i.e.,  respondent  No.2  became  the  Sole  

Arbitrator  and as such the learned designated Judge did  not  have the  

jurisdiction,  power  or  authority  to  appoint  the  third  arbitrator.   Shri  

Venugopal  emphasized  that  the  appointment  of  Shri  S.L.  Jain  as  a  

substitute  arbitrator  was  legally  impermissible  because  there  is  no  

provision  in  the  arbitration  clauses  for  appointment  of  a  substitute  

arbitrator. Learned senior counsel argued that the provision contained in  

Section 15(2) of the Act can be invoked for appointment of a substitute  

arbitrator only if the mandate of an arbitrator gets terminated on account  

of his withdrawal from office or by or pursuant to an agreement of the  

parties and not in a case where the arbitrator appointed by either party  

refuses to act as such and, in any case, the provision contained in that  

section cannot be invoked for nullifying the agreement between the parties  

which  does  not  provide  for  appointment  of  a  substitute  arbitrator.  In  

support of his arguments, Shri Venugopal relied upon the judgments in  

S.B.P.  &  Company  v.  Patel  Engineering  Limited  and  another  

(supra),  ACE  Pipeline  Contracts  (P)  Ltd.  v.  Bharat  Petroleum  

Corpn. Ltd. (2007) 5 SCC 304, Northern Railway Admn., Ministry of  

Railway, New Delhi v. Patel Engineering Company Ltd.  2008 (11)  

SCALE 500  and  Union of  India  v.  M/s.  Singh Builders  Syndicate  

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2009(4) SCALE 491.     

14. Shri  Dushyant  Dave,  learned  senior  counsel  appearing  for  

respondent No.1, invited our attention to letter dated 1.2.2002 written by  

Shri S.N. Huddar expressing his inability to act as an arbitrator and argued  

that his client did not commit any illegality by appointing Shri S.L. Jain as a  

substitute  arbitrator.   Shri  Dave submitted  that  the  appointment  of  an  

arbitrator becomes effective only after he consents for the same and if he  

refuses to accept the appointment, the party appointing such person as an  

arbitrator  has  the  freedom to  appoint  another  arbitrator,  even  though  

there may not be any express provision to that effect in the agreement.  

In support of this argument, Shri Dave relied upon the judgment of this  

Court in Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles  

India Ltd. (2006) 6 SCC 204.  Shri Dave further argued that in view of  

the plain language of Section 15, respondent No.1 had the right to appoint  

a  substitute  arbitrator  and  respondent  No.2  could  not  act  as  the  Sole  

Arbitrator merely because Shri S.N. Huddar who was originally appointed  

as  an  arbitrator  on  behalf  of  respondent  No.1  refused  to  accept  the  

appointment.  Shri Dave submitted that learned designated Judge of the  

High Court  did not commit  any error  by appointing the third  arbitrator  

because respondent No.2 did not agree to the suggestion of Shri S.L. Jain  

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to appoint third arbitrator from the panel of three retired Judges of the  

High Court.

Relevant provisions of the Act and their analysis   

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) Failing any agreement referred to in sub-section (2), in an  arbitration with three arbitrators, each party shall appoint one  arbitrator, and the two appointed arbitrators shall appoint the  third arbitrator who shall act as the presiding arbitrator.

(4) If  the appointment procedure in sub-section (3) applies  and—

(a) a party fails to appoint an arbitrator within thirty days  from the receipt of a request to do so from the other party;  or

(b) the two appointed arbitrators fail to agree on the third  arbitrator  within  thirty  days  from  the  date  of  their  appointment,

the appointment shall be made, upon request of a party,  by the Chief Justice or any person or institution designated  by him.

(5) Failing any agreement referred to in sub-section (2), in an  arbitration with a sole arbitrator, if the parties fail to agree on  the arbitrator within thirty days from receipt of a request by  one party from the other party to so agree the appointment  shall be made, upon request of a party, by the Chief Justice or  any person or institution designated by him.

(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  

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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

12. Grounds for challenge.—  (1) and (2) xxx xxx xxx

(3) An arbitrator may be challenged only if—

(a) circumstances exist that give rise to justifiable doubts  as to his independence or impartiality, or

(b)  he does not possess the qualifications agreed to by the  parties.

(4) xxx xxx xxx

13. Challenge procedure.—

(1) and (2) xxx xxx xxx

(3) Unless the arbitrator challenged under sub-section (2)  withdraws from his  office  or  the other  party  agrees to  the  

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challenge, the arbitral tribunal shall decide on the challenge.

(4) to (6) xxx xxx xxx

14.  Failure or impossibility to act.— (1) The mandate of  an arbitrator shall terminate if—

(a) he becomes  de jure or  de facto unable  to  perform his  functions or for other reasons fails to act without undue delay;  and

(b) he withdraws from his office or the parties agree to the  termination of his mandate.

(2) If a controversy remain concerning any of the grounds  referred  to  in  clause  (a)  of  sub-section  (1),  a  party  may,  unless otherwise agreed by the parties, apply to the Court to  decide on the termination of the mandate.

(3) If, under this section or sub-section (3) of section 13,  an arbitrator withdraws from his office or a party agrees to  the termination of the mandate of an arbitrator, it shall not  imply acceptance of the validity of any ground referred to in  this section or sub-section (3) of section 12.

15.  Termination  of  mandate  and  substitution  of  arbitrator. — (1) In addition to the circumstances referred to  in section 13 or section 14, the mandate of an arbitrator shall  terminate—

(a) where he withdraws from office for any reason; or

(b) by or pursuant to agreement of the parties.

(2)  Where  the  mandate  of  an  arbitrator  terminates,  a  substitute arbitrator shall be appointed according to the rules  that  were  applicable  to  the  appointment  of  the  arbitrator  being replaced.

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(3) Unless  otherwise  agreed  by  the  parties,  where  an  arbitrator  is  replaced  under  sub-section  (2),  any  hearings  previously  held  may  be  repeated  at  the  discretion  of  the  arbitral tribunal.

(4) Unless  otherwise  agreed  by  the  parties,  an  order  or  ruling  of  the  arbitral  tribunal  made  prior  to  the  replacement of an arbitrator under this section shall not  be invalid solely because there has been a change in  the composition of the arbitral tribunal.

15. An  analysis  of  the  scheme  of  Section  11  which  relates  to  

appointment of arbitrators shows that in terms of sub-section (1) thereof,  

a person of any nationality can be appointed as an arbitrator unless there  

is a contra agreement between the parties.  Sub-section (2) lays down that  

the parties are free to agree on a procedure for appointing the arbitrator  

or arbitrators.  This is subject to the provision contained in sub-section (6).  

Sub-section  (3)  lays  down  that  if  there  is  no  agreement  between  the  

parties in an arbitration with three arbitrators, each party shall appoint one  

arbitrator, and the two arbitrators appointed by the parties shall appoint  

the third arbitrator who shall act as the Presiding Arbitrator.  Sub-section  

(4) lays down that if a party fails to appoint an arbitrator within 30 days  

from the date of receipt of request to do so from the other party or the  

two arbitrators fail to agree on the third arbitrator within 30 days from the  

date  of  their  appointment,  then  the  Chief  Justice  or  any  person  or  

institution  designated  by  him  can  be  approached  for  appointing  an  

arbitrator  or  the  third  arbitrator,  as  the  case may be.   The  procedure  

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prescribed in sub-section (4) also applies to a case involving appointment  

of  a  sole  arbitrator.   Sub-section  (6)  enumerates  the  contingencies  in  

which a party may request the Chief Justice or any person or institution  

designated by him to take necessary measure unless the agreement on  

the  appointment  procedure  provides  other  means  for  securing  the  

appointment.  The contingencies contemplated in sub-section (6) are: (i) if  

a party fails to act as required under the agreed procedure or, (ii)  the  

parties  or  the  two  appointed  arbitrators  fail  to  reach  an  agreement  

expected of  them under  such procedure,  or  (iii)  a person including an  

institution fails to perform any function entrusted to him or it under the  

procedure.  Sub-section (8) requires that in appointing an arbitrator, the  

Chief Justice or any person or institution designated by him shall have due  

regard to any qualification required of the arbitrator by the agreement of  

the  parties  and  other  considerations  as  are  likely  to  secure  the  

appointment of an independent and impartial arbitrator.  Sections 14 and  

15 enumerate the circumstances in which the mandate of an arbitrator  

shall terminate.  Sub-section (1) of Section 14 lays down that the mandate  

of an arbitrator shall terminate if he becomes de jure or de facto unable to  

perform his functions or for other reasons fails to act without undue delay  

and he withdraws from his office or the parties agree to terminate his  

mandate.   Sub-section  (2)  lays  down  that  if  there  is  any  controversy  

between the parties in relation to any of the grounds referred to in Clause  

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(a) of sub-section (1) and there is no other provision in the agreement  

between the parties, either party can apply to the Court for termination of  

the mandate of an arbitrator unless the parties agree otherwise.  By sub-

section  (3)  of  Section  14  it  has  been  clarified  that  if  an  arbitrator  

withdraws  from his  office  under  sub-section  (1)  of  Section  14  or  sub-

section  (3)  of  Section  13  or  a  party  agrees  to  the  termination  of  the  

mandate of an arbitrator, same shall not be construed as an acceptance of  

the validity of any of the grounds referred to in Section 14 or sub-section  

(3)  of  Section  12  which  speaks  of  the  grounds  of  challenge  to  the  

appointment  of  an  arbitrator.   Section  15  specifies  additional  

circumstances in which the mandate of an arbitrator shall terminate and  

also  provides  for  substitution  of  an  arbitrator.   Sub-section  (1)  of  this  

section  lays  down  that  in  addition  to  the  circumstances  referred  to  in  

Sections 13 and 14, the mandate of an arbitrator shall terminate where he  

withdraws from office  for  any reason or  pursuant  to agreement of  the  

parties.   Sub-section  (2)  of  Section  15  postulates  appointment  of  a  

substitute arbitrator in accordance with the rules that were applicable to  

the appointment of the original arbitrator.

16. What is significant to be noticed in the aforementioned provisions is  

that  the  legislature  has  repeatedly  laid  emphasis  on  the  necessity  of  

adherence to the terms of agreement between the parties in the matter of  

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appointment  of  arbitrators  and  procedure  to  be  followed  for  such  

appointment.   Even  Section  15(2),  which  regulates  appointment  of  a  

substitute  arbitrator,  requires  that  such  an appointment  shall  be  made  

according to the rules which were applicable to the appointment of an  

original arbitrator.  The term ‘rules’ used in this sub-section is not confined  

to  statutory  rules  or  the  rules  framed  by  the  competent  authority  in  

exercise of the power of delegated legislation but also includes the terms  

of  agreement  entered  into  between  the  parties.  In  Yashwith  

Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd. (supra),  

this Court was called upon to examine the scope of Section 15 of the Act  

in  the  backdrop  of  the  fact  that  after  resignation  of  the  arbitrator  

appointed by the Managing Director of the respondent-Company, another  

arbitrator  was  appointed  by  him  in  accordance  with  the  arbitration  

agreement.  At that stage, the petitioner filed an application under Section  

11(5) read with Section 15(2) of the Act and prayed that the Chief Justice  

of  the  High  Court  may  appoint  a  substitute  arbitrator  to  resolve  the  

disputes between the parties.   The learned Chief  Justice dismissed the  

application and held that Section 15(2) refers not only to statutory rules  

framed for regulating appointment of arbitrators but also to contractual  

provisions for such appointment.  The Division Bench of the High Court  

which heard the writ petition filed by the petitioners noted that in view of  

the  judgment  of  the  larger  Bench  in  S.B.P.  &  Company  v.  Patel  

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Engineering Ltd.  and another (supra),  a  writ  petition  would not  lie  

against an order made by the Chief Justice under Section 11 of the Act  

and an appeal could be filed only under Article 136 of the Constitution but  

proceeded to consider the issue raised by the writ petitioners on merits on  

the premise that appointments made on or before the judgment of the  

larger Bench had been saved.  The Division Bench then observed that in  

terms of Section 15(2) of the Act, the Managing Director could, by relying  

upon the arbitration agreement,  appoint  another arbitrator  because the  

original  arbitrator  had resigned.   The  Division  Bench held  that  Section  

15(2) of the Act is applicable not only to the cases of appointments under  

the statutory rules or rules framed under the Act but also the agreement  

between the parties for appointment of an arbitrator.  While approving the  

decision of the High Court, this Court held:

“……..The term “rules” in Section 15(2) obviously referred to  the  provision  for  appointment  contained  in  the  arbitration  agreement  or  any  rules  of  any  institution  under  which  the  disputes were referred to arbitration. There was no failure on  the  part  of  the  party  concerned  as  per  the  arbitration  agreement, to fulfil his obligation in terms of Section 11 of the  Act so as to attract the jurisdiction of the Chief Justice under  Section 11(6) of the Act for appointing a substitute arbitrator.  Obviously, Section 11(6) of the Act has application only when  a party or the person concerned had failed to act in terms of  the arbitration  agreement.  When Section 15(2)  says  that  a  substitute arbitrator can be appointed according to the rules  that  were  applicable  for  the  appointment  of  the  arbitrator  originally,  it  is  not  confined  to  an  appointment  under  any  statutory  rule  or  rule  framed  under  the  Act  or  under  the  scheme. It only means that the appointment of the substitute  arbitrator must be done according to the original agreement  

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or provision applicable to the appointment of the arbitrator at  the initial stage. We are not in a position to agree with the  contrary view taken by some of the High Courts.

Since here, the power of the Managing Director of the  respondent is saved by Section 15(2) of the Act and he has  exercised  that  power  on  the  terms  of  the  arbitration  agreement, we see no infirmity either in the decision of the  learned Chief Justice or in that of the Division Bench…..”

17. The need for adherence to the terms of agreement which provide  

for resolution of differences or disputes by arbitration was highlighted in  

Datar Switchgears Ltd. v. Tata Finance Ltd. and another (2000) 8  

SCC 151.  In that case the appellant had filed an application under Section  

11 of the Act for appointment of an arbitrator by contending that despite  

clear 30 days notice, the first respondent failed to appoint an arbitrator in  

accordance with the terms of lease agreement.  The Chief Justice of the  

High Court rejected the appellant’s prayer by observing that respondent  

No.1 had appointed an arbitrator before filing of the application.  In the  

appeal, it was argued that in view of the respondent’s failure to appoint an  

arbitrator within 30 days, the Chief Justice of the High Court was bound to  

exercise power under Section 11(6) of the Act and appoint an arbitrator.  

This Court referred to the arbitration clause contained in the agreement  

entered into between the parties, some of the judicial precedents on the  

subject and held that failure of respondent No.1 to appoint an arbitrator  

within  30 days  of  the  receipt  of  the  notice  did  not  have the  effect  of  

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forfeiting his right to do so and that the said right could be exercised till  

the filing of an application under Section 11 by the other side.  The Court  

then proceeded to observe:

“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  the  terms  of  the  contract  entered  into  by  parties  and  endeavour  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.”

(emphasis supplied)

18. In  Northern  Railway  Administration,  Ministry  of  Railway,  

New Delhi v. Patel Engineering Company Ltd. (supra), a three-Judge  

Bench  considered  apparently  divergent  opinions  expressed  in  Ace  

Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd. (supra)  

and Union of India v. Bharat Battery Mfg. Co. (P) Ltd. (2007) 7 SCC  

684, referred to Section 11 of the Act and observed:

“Sub-sections  (3)  to  (5)  refer  to  cases  where  there  is  no  agreed procedure.  Sub-section (2) provides that subject to  sub-section (6) the parties are free to agree on a procedure  for appointing the arbitrator or arbitrators.   Sub-section (6)  sets out the contingencies when party may request the Chief  Justice or any person or institution designated by him to take  necessary  measures  unless  the  agreement  on  the  appointment procedure provides other means for securing the  appointment.  The contingencies contemplated in sub-section  (6) statutorily  are (i)  a party fails  to act as required under  

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agreed  procedure  or  (ii)  the  parties  or  the  two  appointed  arbitrators fail to reach an agreement expected of them under  that procedure or (iii) a person including an institution fails to  perform  any  function  entrusted  to  him  or  it  under  the  procedure.  In other words, the third contingency does not  relate  to  the  parties  to  the  agreement  or  the  appointed  arbitrators.

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”  (underlined  for  emphasis).   This  expression  has  to  read  alongwith 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 arbitrator.

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.”

(emphasis supplied)

19. The aforementioned judgment was followed in  Union of India v.  

M/s. Singh Builders Syndicate (supra).  In that case it was found that  

the  Arbitral  Tribunal  constituted  in  accordance  with  Clause  64  of  the  

agreement, could not function due to frequent transfer of the incumbent  

of the post of General Manager who was appointed as one of the members  

of the Tribunal and, therefore, on a petition filed by the respondent, the  

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High Court appointed a retired Judge as an arbitrator.  This Court noted  

that the dispute was pending for nearly 10 years from the date when the  

demand for arbitration was first made and declined to interfere with the  

order of the High Court.  Paragraphs 14 and 15 of the judgment which  

have bearing on this case are extracted below:-   

14. It was further held in Northern Railway Administration,   Ministry of Railway, New Delhi v. Patel Engineering Company   Ltd. that the Chief Justice or his designate should first ensure  that the remedies provided under the arbitration agreement  are exhausted, but at the same time also ensure that the twin  requirements of sub-section (8) of Section 11 of the Act are  kept in view. This would mean that invariably the court should  first appoint the arbitrators in the manner provided for in the  arbitration  agreement.  But  where  the  independence  and  impartiality of the arbitrator(s) appointed/nominated in terms  of the arbitration agreement is in doubt, or where the Arbitral  Tribunal appointed in the manner provided in the arbitration  agreement has not functioned and it becomes necessary to  make fresh appointment, the Chief Justice or his designate is  not powerless to make appropriate alternative arrangements  to give effect to the provision for arbitration.

15. The object of the alternative dispute resolution process  of arbitration is to have expeditious and effective disposal of  the disputes through a private forum of the parties’ choice. If  the Arbitral Tribunal consists of serving officers of one of the  parties to the dispute, as members in terms of the arbitration  agreement,  and  such  tribunal  is  made  non-functional  on  account of the action or inaction or delay of such party, either  by frequent transfers of such members of the Arbitral Tribunal  or  by  failing  to  take  steps  expeditiously  to  replace  the  arbitrators  in  terms of  the arbitration agreement,  the Chief  Justice  or  his  designate,  required  to  exercise  power  under  Section 11 of the Act, can step in and pass appropriate orders.

20. We  may  now  advert  to  the  scope  of  Clause  19  of  piece  work  

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agreement,  which  provides  for  appointment  of  two  arbitrators,  one  by  

each party, with liberty to the arbitrators to appoint an Umpire, in case of  

difference or their failure to reach an agreement within one month of their  

appointment.  The award made by two arbitrators or Umpire, as the case  

may be, is treated as final, conclusive and binding on the parties.  This  

clause  also  specifies  the  consequence  of  failure  of  either  party  to  the  

difference  or  dispute  to  appoint  an  arbitrator  within  30  calendar  days  

counted  from the date  of  notice  in  writing  given by  the  other  side  or  

refusal  of  the  arbitrator  appointed  by  either  party  to  accept  such  

appointment or act upon the same.  In that event, the arbitrator appointed  

by the other party becomes entitled to proceed with the reference as the  

Sole Arbitrator and make an award.  There is nothing in Clause 19 from  

which it can be inferred that in the event of refusal of an arbitrator to  

accept the appointment or arbitrate in the matter, the party appointing  

such  arbitrator  has  an  implicit  right  to  appoint  a  substitute  arbitrator.  

Thus,  in  terms  of  the  agreement  entered  into  between  the  parties,  

respondent No.1 could not appoint Shri S.L. Jain as a substitute arbitrator  

simply because Shri S.N. Huddar declined to accept the appointment as an  

arbitrator.  The only consequence of Shri S.N. Huddar’s refusal to act as an  

arbitrator on behalf of respondent No.1 was that respondent No.2 who  

was  appointed  as  an  arbitrator  by  the  appellants  became  the  Sole  

Arbitrator for deciding the disputes or differences between the parties.  

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21. The learned designated Judge appointed the third arbitrator because  

he was of the view that in terms of Section 15(2), a substitute arbitrator  

could be appointed where the mandate of an already appointed arbitrator  

terminates.  In taking that  view, the learned designated Judge failed to  

notice  that  Section  15(1)  provides  for  termination  of  the  mandate  of  

arbitrator where he withdraws from office for any reason or by or pursuant  

to agreement of the parties and not where the arbitrator appointed by  

either party declines to accept the appointment or refuses to act as such  

and that the term ‘rules’ appearing in Section 15(2) takes within its fold  

not only the statutory rules, but also the terms of agreement entered into  

between the parties.   

22. The words ‘refuse’ and ‘withdraw’ have not been defined in the Act.  

Therefore, we may usefully refer to dictionary meanings of these words.  

As per P. Ramanatha Aiyar’s Advanced Law Lexicon (Third Edition 2005),  

the  word  ‘refuse’  means  to  decline  positively;  to  express  or  show  a  

determination not to do something.  As per Century Dictionary, the word  

‘refuse’ means to deny, as a request, demand or invitation; to decline to  

accept; to reject, as to refuse an offer.  As per New Oxford Illustrated  

Dictionary, Volume II, p.1421, the word ‘refuse’ means – say or convey by  

action that one will not accept, submit to, give, grant, gratify consent.  The  

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dictionary meanings of the word ‘withdraw’ are as follows:

1. The Law Lexicon (Third Edition, 2005) – to take back or away  something that has been given, allowed, possessed, experienced or  enjoyed; to draw away.

2. Black’s Law Dictionary (Eighth Edition, p.1632) – the act of  taking back or away, removal; the act of retreating from a place,  position or situation.

3. New Oxford Illustrated Dictionary (Volume II, p.1894) – pull  aside or back, take away, remove, retract; retire from presence or  place, go aside or apart.

23. The  above  extracted  meanings  of  two  words  bring  out  sharp  

distinction  between them.  While  the word ‘refuse’  denotes  a situation  

before acceptance of an invitation, offer, office, position, privilege and the  

like, the word ‘withdraw’ means to retract, retire or retreat from a place,  

position or situation after acceptance thereof.  Therefore, Section 15(2) of  

the Act does not per se apply to a case where an arbitrator appointed by a  

party to the agreement declines to accept the appointment or refuses to  

arbitrate in the matter.  Of course in a given case, refusal to act on the  

arbitrator’s part can be inferred after he has entered upon arbitration by  

giving consent to the nomination made by either party to the agreement.

24. Insofar  as  this  case  is  concerned,  we  find  that  the  arbitrator  

appointed  by  respondent  No.1,  namely,  Shri  S.N.  Huddar  declined  to  

accept the appointment/arbitrate in the matter on the ground that in his  

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capacity  as  Superintending  Engineer  and  Chief  Engineer,  he  was  

associated with Koyna Hydel Project implying thereby that he may not be  

able to objectively examine the claims of the parties or the other party  

may question his impartiality.  To put it differently, Shri S.N. Huddar did  

not enter upon the arbitration.  Therefore, there was no question of his  

withdrawing from the office of arbitrator so as to enable respondent No.1  

to appoint a substitute arbitrator.  In any case, in the absence of a clear  

stipulation to that effect in the agreements,  respondent No.1 could not  

have appointed a substitute arbitrator and the learned designated Judge  

gravely  erred  in  appointing  the  third  arbitrator  by  presuming  that  the  

appointment of Shri S.L. Jain was in accordance with law.

25. The  decision  in  Yashwith  Constructions  (P)  Ltd.  v.  Simplex  

Concrete Piles India Ltd. (supra) on which reliance has been placed by  

Shri Dave does not help the cause of respondent No.1.  A careful reading  

of that judgment shows that immediately after the arbitrator appointed by  

the  Managing  Director  of  the  respondent-Company  resigned,  another  

arbitrator was appointed in accordance with arbitration agreement.  The  

permissibility  of  appointment  of  another  arbitrator  by  the  Managing  

Director of the respondent-Company is clearly evinced from the following  

extracts of paragraphs 2 and 3 of the judgment:

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“2. On a dispute having arisen, the Managing Director of  the respondent Company appointed an arbitrator in terms of  the arbitration clause. The arbitrator resigned. Thereupon, the  Managing Director of the respondent Company, in view of the  mandate  in  the  arbitration  agreement  promptly  appointed  another arbitrator…….

3………The  Division  Bench  held  that  the  position  obtaining  under Section 8(1) of the Arbitration Act of 1940 differed from  that available under the present Act especially in the context  of Section 15 thereof and that in terms of Section 15(2) of the  Act,  the  Managing  Director  could,  on  the  basis  of  the  arbitration  agreement,  appoint  another  arbitrator  when  the  originally  appointed  arbitrator  resigned,  thus  attracting  Section 15(1)(a) of the Act…...”

Although, the language of paragraph 4 of the judgment gives an  

impression  that  the  Court  decided  the  matter  by  presuming  that  the  

agreement  between  the  parties  did  not  contain  a  provision  for  

appointment  of  a  substitute  arbitrator  if  the  original  appointment  

terminates or if the original arbitrator withdraws from the arbitration and  

this omission is supplied by Section 15(2) of the Act, if that paragraph is  

read in conjunction with paragraphs 2 and 3 it  becomes clear that the  

arbitration agreement did provide for appointment of another arbitrator in  

the event originally appointed arbitrator was to resign and there was no  

plausible reason for the Court to presume that there is an omission in the  

agreement on the issue of appointment of a substitute arbitrator.  In any  

case, the judgment cannot be read as laying down a proposition of law  

that in the absence of a specific provision in the arbitration clause, either  

party to the agreement can appoint a substitute arbitrator in the event of  

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the originally appointed arbitrator refusing to act.

26. At the cost of repetition, we consider it necessary to observe that  

the agreements entered into between the appellant and respondent No.1  

do not contain a provision for appointment of a substitute arbitrator in  

case  arbitrator  appointed  by  either  party  was  to  decline  to  accept  

appointment or refuse to arbitrate in the matter.  Therefore, respondent  

No.1 cannot draw support from the ratio of the judgment in  Yashwith  

Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd. (supra).

27. In the result the appeals are allowed and the orders of the learned  

designated  Judge  of  the  High  Court  appointing  Shri  Justice  M.N.  

Chandurkar as the third arbitrator are set aside.  Respondent No.2 shall  

now proceed with the matter as the Sole Arbitrator and pass appropriate  

award in accordance with law within a period of three months from the  

date of receipt/production of copy of this order.

……………………….J. [ G.S. Singhvi ]

New Delhi ……………………….J. October 21, 2009 [ Dr. B.S. Chauhan ]

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