Reportable IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 3632 OF 2007

UNION OF INDIA     ……. APPELLANT (s) Vs. M/S. SINGH BUILDERS SYNDICATE   ….… RESPONDENT (s)  

O R D E R

R.V.Raveendran, J.

The appellant challenges the order of the Delhi High Court  dated  27.3.2006  appointing  a  Retired  Judge  of  the High  Court  as  sole  Arbitrator  to  decide  the  disputes arising in respect of a construction contract between the Northern Railways (appellant) and the respondent.

2. The appellant contends the appointment of arbitrators should be only in accordance with Clause 64 of the general terms and conditions contract which requires two serving Gazetted Railway officers of equal status being appointed

as Arbitrators, one by the contractor from a panel made available by the General Manager of Northern Railways and the other by the Northern Railways, and the two arbitrators so appointed, in turn appointing an Umpire.   

3. It  is  true  that  the  Arbitral  Tribunal  should  be constituted  in  the  manner  laid  down  in  the  Arbitration agreement. Provisions for arbitration in contracts entered by  governments,  statutory  authorities,  and  government companies, invariably require that the Arbitrators should be their own serving officers. Such a provision has to be given effect, subject to requirements of independence and impartiality.  But  there  can  be  exceptions  and  this  case which has a chequered history, falls under such exceptions.

4. Let us refer to the facts briefly. The respondent made a  request  for  arbitration  in  the  year  1999.  As  the appellant  failed  to  take  necessary  steps  as  mandated  by clause  64,  the  respondent  filed  an  application  under Section 11 of the Arbitration and Conciliation Act, 1996 (‘Act’ for short) in AA No. 202/2000. In pursuance of the directions  issued  on  11.11.2002  by  the  designate  of  the Chief Justice of the Delhi High Court, an Arbitral Tribunal was constituted in terms of clause 64, consisting of Shri

2

A.K.  Mishra,  (Chief  Engineer/TPS)  nominated  by  the contractor, Shri S.P. Virdi (Dy.F.A. & CEO) nominated by the appellant, and Shri H.K. Jaggi (Chief Bridge Engineer) as  the  Umpire.  But  even  before  the  proceedings  could commence before the Arbitral Tribunal, Shri A.K. Mishra, one of the Arbitrators, was transferred and consequently he tendered resignation in May, 2004. As the appellant failed to provide a fresh panel to enable the respondent to make a fresh nomination, the respondent again approached the High Court by filing AA No.240/2004.  A fresh panel was made available  thereafter  from  which  the  respondent  nominated Shri  Ashok  Gupta  as  its  Arbitrator.  Hardly  after  one sitting of the Arbitral Tribunal, Shri Ashok Gupta was also transferred and he tendered his resignation on 21.7.2005. As appellant again failed to take steps for filling the vacancy,  the  respondent  approached  the  Court  again  by filing IA No. 6511/2005 in AA 240/2004.  In pursuance of an order dated 24.8.2005 passed by the High Court, again a panel was made available and the respondent made its choice on 9.9.2005.  As no steps were taken in pursuance of it by the  appellant,  the  respondent  sent  a  reminder  on 14.10.2005.  There was no response. In this background, the respondent again approached the High Court on 10.11.2005 in Arb. Petn. No. 256/2005 for appointment of an independent

3

sole arbitrator.  During the pendency of the said petition, the General Manager of Northern Railways appointed Sri Ved Pal as the contractor’s nominee arbitrator on 22.11.2005.  

5. The High Court was of the view that no useful purpose will  be  served  by  again  reconstituting  a  Three  Member Arbitral Tribunal in accordance with clause 64.  The High Court found that the matter has been pending from 1999 when the  respondent  first  made  the  request  for  reference  to Arbitration and that the cumbersome process of constituting an Arbitral Tribunal in terms of the Arbitration agreement and the delays on the part of Railways in complying with the  provisions  of  the  arbitration  agreement,  led  to  the arbitration becoming virtually a non-starter.  Therefore, the  High  Court  allowed  the  petition  on  27.3.2006  and appointed  Justice  Jaspal  Singh,  a  retired  Judge  of  the Delhi High Court as the arbitrator. Justice Jaspal Singh recused himself and the High Court on 19.7.2006, appointed Justice  R.C.  Chopra,  another  retired  Judge  of  the  Delhi High Court as the arbitrator.  

6. The said order is challenged in this appeal by special leave.  On  6.11.2006,  this  Court  stayed  the  arbitration proceedings before the sole Arbitrator. The question that

4

arises for consideration in this appeal by special leave is whether the appointment of a the retired Judge of the High Court  as  sole  Arbitrator  should  be  set  aside  and  an Arbitral Tribunal should again be constituted in the manner provided in terms of clause 64.

7. Dealing  with  a  matter  arising  from  the  old  Act (Arbitration Act, 1940), this Court, in  Union of India v. M.P.Gupta [2004 (10) SCC 504], held that appointment of a retired  Judge  as  sole  Arbitrator  contrary  to  clause  64 (which  requiring  serving  Gazetted  Railway  Officers  being appointed) was impermissible. The position after the new Act came into force, is different, as explained by this Court  in  Northern Railway  Administration,  Ministry  of Railway, New Delhi v. Patel Engineering Company Ltd. [2008 (11) SCALE 500].  This Court held that the appointment of arbitrator/s  named  in  the  arbitration  agreement  is  not mandatory  or  a must, but  the emphasis should  be on the terms  of  the  arbitration  agreement  being  adhered  and/or given effect, as closely as possible. It was further held 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

5

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.  

8. 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 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

6

under  section  11  of  the  Act,  can  step  in  and  pass appropriate orders. We fail to understand why the General Manager  of  the  Railways  repeatedly  furnished  panels containing names of officers who were due for transfer in the  near  future.   We  are  conscious  of  the  fact  that  a serving officer is transferred on account of exigencies of service and transfer policy of the employer and that merely because  an  employee  is  appointed  as  arbitrator,  his transfer cannot be avoided or postponed.  But an effort should be made to ensure that officers who are likely to remain  in  a  particular  place  are  alone  appointed  as Arbitrators and that the Arbitral Tribunal consisting of serving  officers,  decides  the  matter  expeditiously. Constituting Arbitral Tribunals with serving officers from different far away places should be avoided. There can be no  hard  and fast rule,  but there should  be a conscious effort  to  ensure  that  Arbitral  Tribunal  is  constituted promptly and arbitration does not drag on for years and decades.  

9. As noticed above, the matter has now been pending for nearly  ten  years  from  the  date  when  the  demand  for arbitration  was  first  made  with  virtually  no  progress. Having  regard  to  the  passage  of  time,  if  the  Arbitral

7

Tribunal has to be reconstituted in terms of clause 64, there may be a need to change even the other two members of the  Tribunal.   The  delays  and  frequent  changes  in  the Arbitral  Tribunal  make  a  mockery  of  the  process  of arbitration.  Having regard to this factual background, we are of the view that the appointment of a retired Judge of the Delhi High Court as sole Arbitrator does not call for interference in exercise of jurisdiction under Article 136 of the Constitution of India.  

10. Another aspect referred to by the appellant, however requires serious consideration. When the arbitration is by a  Tribunal  consisting  of  serving  officers,  the  cost  of arbitration is very low. On the other hand, the cost of arbitration can be high if the Arbitral Tribunal consists of retired Judge/s. When a retired Judge is appointed as Arbitrator in place of serving officers, the government is forced  to  bear  the  high  cost  of  Arbitration  by  way  of private arbitrator’s fee even though it had not consented for  the  appointment  of  such  non-technical  non-serving persons  as  Arbitrator/s.  There  is  no  doubt  a  prevalent opinion that the cost of arbitration becomes very high in many cases where retired Judge/s are Arbitrators. The large number  of  sittings  and  charging  of  very  high  fees  per

8

sitting, with several add-ons, without any ceiling, have many a time resulted in the cost of arbitration approaching or even exceeding the amount involved in the dispute or the amount of the award. When an arbitrator is appointed by a court without indicating fees, either both parties or at least one party is at a disadvantage. Firstly, the parties feel constrained to agree to whatever fees is suggested by the  Arbitrator,  even  if  it  is  high  or  beyond  their capacity.  Secondly,  if  a  high  fee  is  claimed  by  the Arbitrator and one party agrees to pay such fee, the other party, who is unable to afford such fee or reluctant to pay such high fee, is put to an embarrassing position. He will not  be  in  a  position  to  express  his  reservation  or objection to the high fee, owing to an apprehension that refusal  by  him  to  agree  for  the  fee  suggested  by  the arbitrator,  may  prejudice  his  case  or  create  a  bias  in favour of the other party who readily agreed to pay the high fee. It is necessary to find an urgent solution for this problem to save arbitration from the arbitration cost. Institutional arbitration has provided a solution as the Arbitrators’  fees  is  not  fixed  by  the  Arbitrators themselves  on  case to case  basis, but is  governed by a uniform  rate  prescribed  by  the  institution  under  whose aegis the Arbitration is held. Another solution is for the

9

court  to  fix  the  fees  at  the  time  of  appointing  the arbitrator, with the consent of parties, if necessary in consultation with the arbitrator concerned. Third is for the  retired  Judges  offering  to  serve  as  Arbitrators,  to indicate  their  fee  structure  to  the  Registry  of  the respective High Court so that the parties will have the choice of selecting an Arbitrator whose fees are in their ‘range’ having regard to the stakes involved. What is found to be objectionable is parties being forced to go to an arbitrator appointed by the court and then being forced to agree for a fee fixed by such Arbitrator. It is unfortunate that delays, high cost, frequent and sometimes unwarranted judicial  interruptions  at  different  stages  are  seriously hampering the growth of arbitration as an effective dispute resolution process. Delay and high cost are two areas where the Arbitrators by self regulation can bring about marked improvement.  

11. We find that a provision for serving officers of one party  being  appointed  as  arbitrator/s  brings  out considerable resistance from the other party, when disputes arise. Having regard to the emphasis on independence and impartiality  in  the  new  Act,  government,  statutory authorities  and  government  companies  should  think  of

10

phasing  out  arbitration  clauses  providing  for  serving officers and encourage professionalism in arbitration.  

12. As far as this case is concerned, we do not propose to issue any directions in regard to the fees, as the High Court has fixed the fee at Rs.10,000/- per hearing subject to a maximum of Rs.150,000/- plus clerkage, to be shared equally by the parties.      

13. In view of the above, the appeal is dismissed.

_________________J [R. V. Raveendran]

_________________J [H.L. Dattu]

New Delhi; February 26, 2009.

11