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CASE NO.: Appeal (civil)  1119 of 2007

PETITIONER: C.M.C. LTD

RESPONDENT: UNIT TRUST OF INDIA & ORS

DATE OF JUDGMENT: 01/03/2007

BENCH: P.K. BALASUBRAMANYAN & V.S. SIRPURKAR

JUDGMENT: J U D G M E N T  (Arising out of SLP(C) No. 69 of 2004)

P.K. BALASUBRAMANYAN, J.

               Leave granted.                   1.              The appellant and respondent No. 1 entered into an  agreement dated 23.10.1992 for a Technology Upgrade Project  of the latter.  The said agreement contained an arbitration  clause.  The same read: "20.    In the event of any dispute or difference  relating to the interpretation or  application of any of the provision of this  Agreement or as to the performance of  any obligation by either party shall be  settled by arbitration.  Each party shall  appoint an arbitrator and the arbitrators  so appointed shall appoint an umpire to  whom the matter on which the  arbitrators disagree will be referred.  The  decision of the arbitrators and in the  event of there being disagreement  between the arbitrators, the decision of  the umpire shall be final, conclusive and  binding on the parties with respect to the  matter referred to arbitration.  The  decision of the arbitrators or the umpire  as the case may be shall constitute  arbitrators award for the purpose of  Indian Arbitration Act, 1940.  The  arbitration proceedings shall be  conducted in accordance with the rules  prescribed by the Indian Council of  Arbitration."

2.              Disputes arose between the parties.  On 16.5.2002,  respondent No. 1 issued a notice invoking the arbitration  clause and calling upon the appellant to refer the dispute and  differences to be settled through arbitration in terms of the  arbitration agreement.  Respondent No. 1 named an arbitrator  with the suggestion that he may be accepted as the sole  arbitrator.  But, if the appellant was not willing to treat him as  such, it was stated that the arbitrator named by respondent  No. 1 may be treated as the one appointed by it in terms of the  arbitration agreement and in that event, the appellant was

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called upon to name its arbitrator and the said two arbitrators  can then appoint a Presiding arbitrator.   The appellant replied  stating that the parties have agreed to follow the Rules  prescribed by the Indian Council of Arbitration by  incorporating the said Rules by reference in the arbitration  clause and since respondent No. 1 had not acted in terms of  the said Rules, the appellant regretted its inability to accept  the stand of respondent No. 1 or to appoint an arbitrator in  terms of the arbitration agreement.  The appellant regretted its  inability to act on the basis of the notice issued by respondent  No.1.  

3.              Respondent No. 1 thereupon moved the Chief  Justice of the High Court under Section 11(6) of the  Arbitration and Conciliation Act, 1996.  Respondent No.1  contended that the appellant had failed to act in terms of the  procedure for appointment of an arbitrator and hence the  Chief Justice or his Judge designate, may appoint an  arbitrator to act along with the arbitrator named by  respondent No.1 and direct the two arbitrators to appoint the  third, a Presiding Arbitrator, within the time fixed and to refer  all disputes and differences between respondent No.1 and the  appellant arising out of or in connection with the Technology  Upgrade Agreement as per the provisions of the Act.  The  appellant resisted the application essentially pleading that the  Rules of the Indian Council of Arbitration and the mandate  thereof had not been complied with by the applicant before the  Chief Justice and that the arbitration clause had not been  properly invoked and there is no failure on the part of the  appellant herein to act in accordance with the procedure  accepted by the parties.  No occasion had therefore arisen for  the Chief Justice to appoint an arbitrator in terms of Section  11(6) of the Act.  It is said that the appellant as directed by the  court had named an arbitrator without prejudice to its  contentions and it is common ground before us that the said  two arbitrators have also named the Presiding Arbitrator and  an Arbitral Tribunal had come into existence, but subject to  the decision in this appeal filed by the appellant.   

4.              The learned designated Judge of the High Court  held that on a true construction of clause 20 of the Agreement  which is the arbitration agreement, the right or duty to  appoint or name an arbitrator each, rested with the parties to  the contract and what was provided for in the arbitration  agreement was only regarding the following of the procedure of  the Rules of the Indian Council of Arbitration.  The arbitration  agreement did not contemplate the appointment of the  arbitrator to be as per the Rules of the Indian Council of  Arbitration or only from the panel of arbitrators maintained by  the Council.  Thus, on a construction of the arbitration  agreement in the light of the decisions brought to his notice,  the designated Judge, noticing that the appellant had also  named an arbitrator without prejudice to its contentions and  that the two arbitrators had nominated a Presiding Arbitrator  and that Tribunal can proceed to arbitrate on the dispute  allowed the application and constituted the Tribunal as  chosen by the parties.  The designated Judge also noticed that  the question about the jurisdiction of the Arbitral Tribunal  could be decided by the Tribunal itself.   

5.              It may be noted that his decision was rendered  before this Court spoke on the nature of the jurisdiction of the  Chief Justice or of the designated Judge in SBP & CO. VS.  PATEL ENGINEERING LTD. & ANR. [(2005) 8 S.C.C. 618]  and held it as a judicial function.  The appellant therefore,

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filed a petition under Article 226 of the Constitution of India  challenging the decision of the designated Judge, on the basis  that the said order was only an administrative order.   The  Division Bench held that in view of the restricted jurisdiction  that the court had in such matters and in the absence of any  injury of any kind to the appellant, there was no reason to  interfere with the decision of the designated Judge merely  because a writ petition was maintainable to challenge the  same.  The Petition for Special Leave to appeal was filed  originally challenging the decision of the Division Bench in the  writ petition.  But subsequent to the decision in SBP &  Company (supra), the appellant was permitted to convert the  Petition for Special Leave to Appeal as one challenging the  order of the designated Judge and pursue its challenge thereto  directly in this Court.  Thus, this appeal challenges the  decision of the designated Judge interpreting the arbitration  clause quoted above and holding that the parties retained the  right to nominate the respective arbitrators and there was no  obligation on any of the parties to choose only an arbitrator as  per the Rules of Arbitration of the Indian Council of  Arbitration or to proceed only in terms of those Rules for  appointment of an arbitrator.  

6.              It is settled that getting resolution of a dispute by  arbitration is a matter of contract between the parties.  So long  as the contract does not militate against the provisions of the  Arbitration Act, nothing in law prevents the arbitration  agreement between the parties being given effect to in full.   What is contended by learned counsel for the appellant is that  the arbitration agreement clearly specifies that "the arbitration  proceedings shall be conducted in accordance with the Rules  prescribed by the Indian Council of Arbitration" and this  would mean that the procedure for appointment of an  arbitrator and making a claim for arbitration must all be in  terms of the Rules of the Indian Council of Arbitration.   Learned counsel points out that under Rule 15 any party  wishing to commence arbitration proceedings under the Rules  of the Council had to give a notice of the request for  arbitration to the Registrar of Indian Council of Arbitration  and to the opposite party and had to follow the procedure laid  down in those Rules.  Learned counsel submits that the Rules  of the Indian Council of Arbitration had been incorporated in  the arbitration agreement by the parties and any mode of  exercise of right for invoking an arbitration clause other than  the one prescribed by the Rules of the Council would be futile.   Therefore, the notice issued on behalf of respondent No.1  intimating the appellant of the appointment of an arbitrator  and calling upon the appellant to appoint an arbitrator, would  not amount to a proper invocation of the arbitration agreement  and there is no failure on the part of the appellant to follow the  procedure agreed to between the parties for appointment of an  arbitrator resulting in conferment of jurisdiction on the Chief  Justice to appoint an arbitrator in terms of Section 11(6) of the  Act.  In this context, we may specifically record that the  learned counsel for the appellant agreed that the arbitration  was governed by the Arbitration and Conciliation Act, 1996.   Respondent No.1 had, of course, invoked that very Act.  

7.              Even going by the Rules of arbitration of the Indian  Council of Arbitration, it is seen that the parties are not  precluded from having a different procedure for appointment  of an arbitrator.   The Rules, even at the inception, suggests  the incorporation by the parties of an arbitration clause in  writing in their contracts in the following terms: "Any dispute or difference whatsoever arising

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between the parties out of or relating to the  construction, meaning, scope operation or  effect of this contract or the validity or the  breach thereof shall be settled by arbitration in  accordance with the Rules of Arbitration of the  Indian Council of Arbitration and the award  made in pursuance thereof shall be binding on  the parties."

Rule 4(c) which is relevant reads: "In case the parties have provided a different  procedure for appointment of arbitrator or  schedule of cost including the arbitrator’s fee,  the Council shall not be bound to process the  case unless both the parties agree to follow  entire procedure or arbitration under Rules of  Arbitration of the Council."

It is clear from the comparison of the arbitration agreement  suggested by the council and the arbitration agreement  between the parties, that the arbitration agreement between  the parties substantially differs from the one suggested by the  Indian Council of Arbitration.  Secondly, Rule 4(c) is specific  that in case the parties had provided a different procedure for  appointment of an arbitrator, the Council was not bound to  process the case unless both the parties agreed to follow the  entire procedure or Arbitration Rules of the Council.   Obviously, a different procedure for appointment of an  arbitrator or arbitrators had been agreed to by the parties and  respondent No.1 had obviously not agreed to follow the entire  procedure or have an arbitration under the Rules of the  Council.  Therefore, even if one were to apply the Rules, it is  difficult to accept the argument that respondent No.1 was  bound to invoke the Rules of the Council to put in motion an  effective machinery for arbitration.  

8.              Learned counsel has referred to the decisions in  FOOD CORPORATION OF INDIA vs. INDIAN COUNCIL OF  ARBITRATION & ORS. [(2003) 6 S.C.C 564] and in  GESELLSCHAFT FUR BIOTECHNOLOGISCHE FORSCHUN  GMBH Vs. KOPRAN LABORATORIES LTD. & ANR. [(2004  (13) S.C.C. 630] in support of his submission that respondent  No.1  was bound to proceed in terms of the Rules of the  Council.  But on a scrutiny of those decisions, it is clear that  the arbitration clauses in those cases were substantially in  conformity with the model arbitration clause prescribed by the  Council as quoted earlier and it was in that context that this  Court observed that the Rules of the Council must be followed.    The very appointment of the Arbitral Tribunal was to be  according to those Rules.  But in this case, it is clear that the  arbitration clause differs considerably from the agreements  involved in those cases and the parties retained in themselves  the right to appoint the arbitrators.  Hence, those decisions  cannot be relied on for the purpose of non-suiting respondent  No.1.

9.              The argument that there is an incorporation of the  Rules of the Council in the arbitration agreement and hence  those Rules must be given effect to fully, does not take the  appellant far in this case.  On a true construction of the  arbitration agreement, what we find is that the parties  retained in themselves the right to name an arbitrator of their  own, who in turn had to name a Presiding Arbitrator so as to  constitute an Arbitral Tribunal.  The power to appoint has not  been ceded to the Indian Council of Arbitration.  Once the

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appointments are made and the Arbitral Tribunals are  constituted, the parties have also agreed that the arbitration  proceedings shall be conducted in accordance with the Rules  prescribed by the Indian Council of Arbitration.  The provision  that the proceedings shall be conducted in accordance with  the Rules prescribed by the Indian Council of Arbitration does  not in any manner militate against the retention of the power  by the parties of appointing an arbitrator or constituting an  Arbitral Tribunal.  Only if there exists any inconsistency  between the two provisions we would be called upon to  undertake the existence of reading down one or ignoring one  as ineffective or inconsistent and giving effect to the other.  Here in this case, there is no difficulty in reconciling both the  clauses in the arbitration agreement.  As we have noticed,  resolution of disputes by way of arbitration is a matter of  agreement between the parties.  If while contemplating such a  resolution of disputes they also retain in themselves the power  to constitute an Arbitral Tribunal, it cannot be said that there  is anything wrong in such a provision or that the same cannot  be given effect to.    Therefore, the power retained by the  parties to name an arbitrator each, does not militate either  against the provisions of the Act or against the Rules of the  Indian Council of Arbitration.  That Arbitral Tribunal once  constituted in terms of the Act, may have to follow the Rules of  Indian Council of Arbitration in that behalf.  But as rightly  pointed out by the learned Additional Solicitor General who  appeared on behalf of respondent No.1, when an Arbitral  Tribunal of persons well versed in law is constituted, surely, a  proper procedure will be followed by them and there is no  reason to insist on a particular procedure to be followed.   But  obviously, it is not a matter on which we need pronounce now.   Suffice it to say, that we find no infirmity in the interpretation  of the arbitration agreement by the designated Judge and in  the constitution of the Arbitral Tribunal as presently  constituted.  We are also inclined to think that no prejudice is  caused to the appellant and no injustice is involved in the  constitution of the Arbitral Tribunal.  We therefore affirm the  order of the designated Judge and dismiss this appeal.  We  expect the Arbitral Tribunal to enter upon the reference  without any further delay and pronounce its award within  nine months of its entering upon the reference.  

10.             The appeal is thus dismissed with the above  expectation. The parties are directed to suffer their respective  costs.