REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL JURISDICTION

ARBITRATION PETITION NO. 16 OF 2009

Denel (Proprietary Limited)                                    ………….. Petitioner

Versus

Bharat Electronics Ltd. & Anr.                           …………..Respondents

J U D G M E N T

H.L. Dattu, J.

1)           The Petitioner has filed the present Arbitration Petition under  

sub-section (6) of Section 11 of the Arbitration and Conciliation Act,  

1996 (hereinafter referred to as “the Act”).  It is prayed in the petition  

to  appoint  a  sole  arbitrator  to  adjudicate  the  dispute  between  the  

parties.  

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2)           The  Petitioner  is  a  company  wholly  owned  by  the  

Government of the Republic of South Africa, duly incorporated as  

per  the  laws  of  the  Republic  of  South  Africa,  with  its  main  

business address at  Denel  Head Office,  Nelmapius Drive,  Irene,  

Pretoria, Republic of South Africa.

3)          The Respondent is a Corporation duly registered under the  

Companies  Act,  1956,  having  its  registered  office  at  Pune,  

Maharashtra.  It is a Government of India Enterprise, Ministry of  

Defence,  Government of India.  

4)          The Petitioner - company had several internal divisions, one  

of  them  being  Denel  Eloptro  at  the  time  when  the  contracts  

between Petitioner and Respondent were entered into. The name of  

the  said  division  was  changed  from  Delnel  Eloptro  to  Denel  

Ptonics with effect from 1st April, 2004. The Optronics division  

was not a separate legal entity, but was only a business unit of the  

Petitioner.

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5)           The Respondent in the year 2004, placed certain purchase  

orders  with  Denel  Eloptro  for  supply  of  various  electronic  

equipments which are listed as under:

                   1.  PUR/PN/C1/621977 dated 28th July 2004

                   2.   PUR/PN/CN/621973 dated 28th July 2004

                   3.   PUR/PN/C1/622029 dated 11th December 2004

6)            The ‘General Terms and Conditions of the Purchase Order  

(Foreign)  contains  an  Arbitration  Clause.  Clause  10  of  the  

Purchase  Order,  inter-alia,  provides  for  arbitration  in  case  of  

dispute arising from the interpretation or from any matter relating  

to the rights and obligations of the parties.  It  also refers to the  

appointment  of  the  ‘Managing  Director  or  his  nominee’  of  the  

respondent as the arbitrator.  It is not in dispute that the said Clause  

in the Purchase Order is a valid arbitration agreement in terms of  

Section 2(b) read with Section 7 of the Act. The Petitioner before  

the  delivery  of  the  goods  to  the  Respondent  as  per  the  orders  

placed  by them entered  into  a  credit  insurance  policy  with  one  

Credit Guarantee Insurance Corporation of Africa Ltd. (hereinafter  

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referred  to  as  “Corporation”)  in  respect  of  the  said  Purchase  

Orders.

7)           The petitioner states, that, it duly performed its obligations  

in terms of the purchase orders and delivered the goods as ordered  

and the invoices were issued. The said delivery of goods was also  

accepted  by  the  respondent  without  raising  any  objection.  It  is  

further stated, that, as the goods were accepted and utilized, the  

respondent was liable to pay the value of the goods in a sum of  

GBP 34,894.75(Thirty Four Thousand Eight Hundred and Ninety  

Four and 75 Pence Pound Sterling).  

8)           The petitioner raised a demand with respondent for the  

aforesaid amount. However,  the respondent vide letter dated 4th  

May 2005, refused to pay the said amount, only on the ground  that  

it  is  a  “Government  Company”  under  the  Ministry  of  Defence,  

Government of India and in view of the direction issued by the  

Ministry to withhold payment of the said invoices,  it is unable to  

settle the amounts due to the petitioner.  

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9)          The Insurance Corporation also requested, vide its letter  

dated 29th May 2006, to pay the amount raised against them. The  

respondent by its reply letter dated 8th June 2006 addressed to the  

Corporation – insurer, inter alia  contended, that, as per the guide-

lines issued by the Ministry of Defence, Government of India, to  

discontinue dealings with M/s DENEL (PYT) LTD., and withhold  

payment  due  if  any,  it  is  unable  to  satisfy  its  liability  to  the  

petitioner.

  10)          Petitioner through its Advocate addressed a letter dated 29th  

November,  2006,  inter-alia,  requesting  them to  make  payments  

towards  three  Purchase  Orders  –  PUR/PN/CI/621977  dated  

28.07.2004,  PUR/PN/CN/621973  dated  28.07.2004  and  

PUR/PN/CI/622029 dated 11.12.2004.  

11)          The respondent through its Advocates and Solicitors, vide  

their  letter  dated  18th December,  2006,  though  admitted  their  

liability towards the aforesaid Purchase Orders, refuse to settle the  

amounts due only on the ground,  that,  they are prohibited from  

making any payments to the petitioner by the Ministry of Defence,  

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Government  of  India  vide  its  letter/communication  dated  21st  

April, 2005.    

12)            The petitioner was constrained to issue notice dated 30th  

May, 2009 to the respondent which was served on the respondent  

and  its  Managing  Director  through  fax  on  30th  May  2009  and  

through speed post  and courier  on 2nd June 2009 and 6th June  

2009, respectively. In the said notice, the petitioner cited Clause 10  

of  the  General  Terms  and  Conditions  of  the   Purchase  Orders  

which  provides  for  reference  of  disputes  to  arbitration  and  

accordingly  requested  the  respondent,  to  refer  the  disputes  for  

adjudication in accordance with Arbitration and Conciliation Act,  

1996.  It was also stated, that, since the arbitration clause provides  

only for the appointment of  Managing Director  or  his nominee,  

instead of mutually agreed independent arbitrator, the said clause is  

invalid and accordingly requested the respondent for appointment  

of  mutually  agreed  independent  arbitrator  to  adjudicate  the  

disputes which have arisen between the petitioner and respondent.

13)         In  response  to  the  notice  issued  by  the  petitioner,  the  

respondent  by  its  letter  dated 24th June 2009 for  the  first  time  

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disputed its liability for the payment of the amount demanded by  

the petitioner. It was also stated, that the names proposed by the  

petitioner for the appointment of the arbitrator was not acceptable,  

as Clause 10 of the General Terms and Conditions of the Purchase  

Order does not permit the same and, further they are not willing to  

refer the dispute to the arbitrator, since the direction issued by the  

Ministry  of  defence  is  in  full  force  and  effect,  and  they  are  

protected under Section 56 of the Indian Contract Act, 1872.

14)           In  the  light  of  the  aforesaid  factual  background,  the  

petitioner has invoked the jurisdiction of this Court by filing the  

petition  under  Section 11(6)  of  the  Arbitration  and Conciliation  

Act 1996, to appoint an arbitrator to resolve the dispute between  

the parties.

15)           After service of the notice, the parties have exchanged their  

pleadings.

16)            The learned senior counsel for the petitioner, Sri V. Giri  

would submit, that, in view of the specific clause for referring the  

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disputes between the parties for arbitration, the respondent was not  

justified  in  refusing  to  refer  the  dispute  to  sole  independent  

arbitrator  on  the  only  ground,  that,  they  are  prohibited  from  

making any payment to the petitioner by the Ministry of Defence,  

Government of India.  It is further contended, that,  Clause-10 of  

the Purchase Order provides for referral of disputes between the  

parties  to  the  Managing  Director  or  his  nominee  and  since  the  

Managing Director being the appointee of the Central Government,  

the petitioner genuinely apprehends that it may  not get any justice  

in the hands of the Managing Director, since he cannot go against  

the directions issued by the Ministry of Defence, Government of  

India  and,  therefore,  it  would  be  appropriate  to  appoint  

independent sole arbitrator.  In aid of his submission, reliance is  

placed  on  the  observations  made  by  this  Court  in  the  case  of  

Indian Oil Corporation Ltd. & Ors. Vs. Raja Transport Pvt. Ltd.,  

[(2009) 8 SCC 520].  At paras 34 to 37, this Court has observed as  

under:   

                  “34. 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 or  lack of  independence on his  part.  There  can  however  be  a  justifiable  apprehension  about  the  independence  or  

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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.  

                 35. Where however the named arbitrator  though  a  senior  officer  of  the  Government/statutory  body/government  company,  had  nothing  to  do  with  the  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.   

                 36. 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 a 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.  

                 37. Subject to the said clarifications, we hold  that a person being an employee of one of  

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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)      Sri S.N. Bhat, learned counsel for the respondent would submit,  

that  the  petition  filed  by  the  petitioner  is  premature,  since  

respondent though stated in its notice that there is arbitration clause  

in the Purchase Order which provides for referral of the disputes to  

its Managing Director or its nominee, the petitioner had suggested  

that  the  disputes  need not  be referred to the `named arbitrator’,  

since  he  is  not  mutually  agreed  independent  arbitrator  and,  

therefore,  there  was  no failure  on the  part  of  the  respondent  in  

responding  to  the  request  made  by  the  petitioner.  It  is  further  

contended, that, in view of Clause-10 of the Purchase Order which  

provides for appointment of the arbitrator, only the `named person’  

in the Clause-10 can be appointed and, therefore,  the petitioner-

company cannot request for appointment of independent arbitrator  

for resolving disputes,  if  any,  between the parties.   The learned  

counsel relies on the observations made by this Court in the case of  

You  One  Engineering  &  Construction  Co.  Ltd.  &  Anr.  Vs.  

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National  Highways  Authority  of  India  (NHAI),  [(2006)  4  SCC  

372].  It is stated  in the said decision:    

“Although  the  learned  counsel  for  the  petitioners  contended  that  this  is  a  situation  falling  within  the  contemplation  of clause (c) of Section 11(6) of the Act,  namely, that the institution i.e. IRC failing  to  perform  the  function  entrusted  to  it  under  the  appointment  procedure,  I  am  not  satisfied.  Under  the  appointment  procedure  agreed  to  under  clause  67.3,  each  of  the  parties  to  the  dispute  is  required to nominate its arbitrator and the  third arbitrator is to be chosen by the two  arbitrators appointed by the parties and he  shall act as the presiding arbitrator. Clause  67.3(ii) provides that in case of the failure  of  the  two  arbitrators  appointed  by  the  parties to reach upon a consensus within a  period of 30 days from the appointment of  the arbitrator appointed subsequently, the  presiding arbitrator shall be appointed by  the  President  of  the  Indian  Roads  Congress.”

18)           The  petitioner  has  prayed  before  this  Court  for  the  

appointment of the sole arbitrator.  The petitioner has submitted,  

that, it is clear from the invoices and the correspondence between  

the parties particularly dated 4th May 2005 and 8th June 2006, that  

the respondent has not disputed the liability of payment due to the  

petitioner.  Therefore,  as  the  respondent  now seeks  to  avoid  the  

payment  of  the  amount  due  to  the  petitioner,  there  is  dispute  

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between the parties  which requires to be referred for arbitration  

before the arbitrator.   

19)    Clause 10 of the ‘General Terms and Conditions to Purchase  

Order’  does constitute a valid arbitration clause as  it  shows the  

intention of the parties to appoint an arbitrator and refer the dispute  

between  the  parties  for  the  arbitration  proceedings  under  the  

Arbitration and Conciliation Act 1996. The wordings of Clause 10  

are as follows:

“ARBITRATION: All disputes regarding this order shall be referred to our   

Managing Director or his nominee for arbitration who shall have all powers   

conferred by Indian Arbitration and Conciliation Bill, 1996 for the time in  

force.”

20)          Section 11 of the Act provides for the appointment  of  

arbitrators  and  sub-section  (6)  of  Section  11  of  the  Act  under  

which the present petition is before this Court reads as under:

“6) Where, under an appointment procedure agreed upon by the parties, -

(a) A party fails to act as required under that procedure; or

(b) The parties, or the two appointed arbitrators, fail to reach an

agreement expected of them under that procedure; or

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(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”

21)            Sub-section (6) of Section 11 of the Act provides, that,  

when  the  parties  fail  to  reach  to  an  agreement  as  regards  the  

appointment of the arbitrator, can request the Chief Justice or any  

person or institution designated by him to come to the rescue of the  

parties.  Therefore,  petitioner  in  the  present  case  has  sought  the  

appointment  of  the  arbitrator  by  this  Court  so  that  the  dispute  

between the parties can be resolved.

22)              In the case of Datar Switchgears Ltd. v. Tata Finance Ltd.  

&  Anr.,  [(2000)  8  SCC 151],  this  Court  while  considering  the  

powers of the Court to appoint arbitrator under Section 8 of the  

Arbitration Act, 1940, cited the decision of this Court in the case of  

Bhupinder Singh Bindra v. Union of India and Anr. [AIR1995 SC  

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2464].  It  was held in that case that “It  is settled law that court   

cannot interpose and interdict  the appointment of an arbitrator,   

whom the  parties  have  chosen  under  the  terms  of  the  contract   

unless legal misconduct of the arbitrator,  fraud, disqualification  

etc. is pleaded and proved. It is not in the power of the party at his  

own  will  or  pleasure  to  revoke  the  authority  of  the  arbitrator   

appointed with his consent. There must be just and sufficient cause   

for revocation.” The said principle has to abide by in the normal  

course. However, considering the peculiar conditions in the present  

case,  whereby  the  arbitrator  sought  to  be  appointed  under  the  

arbitration clause, is the Managing Director of the company against  

whom the dispute is raised (the Respondents). In addition to that,  

the said Managing Director of Bharat Electronics Ltd which is a  

‘Government Company’, is also bound by the direction/instruction  

issued  by  his  superior  authorities.   It  is  also  the  case  of  the  

respondent  in  the  reply  to  the  notice  issued  by  the  respondent,  

though  it  is  liable  to  pay  the  amount  due  under  the  Purchase  

Orders, it is not in a position to settle the dues only because of the  

directions issued by Ministry of Defence, Government of India.  It  

only shows that the Managing Director may not be in a position to  

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independently decide the dispute between the parties.   

23)       The facts narrated by me would clearly demonstrate that there  

is  a dispute between the parties  in regard to payment of certain  

amounts towards Purchase Orders/Invoice.  Since, there is a failure  

on  the  part  of  the  respondent  in  making  appointment  of  an  

arbitrator  for  resolving  the  dispute  in  accordance  with  the  

understanding  of  the  parties  which  is  reflected  in  the  Purchase  

Order, the prayer of the petitioner requires to be granted.  

24)           Before parting with the case, in my considered opinion, the  

decision on which reliance is  placed by Shri  S.N. Bhat,  learned  

counsel for the respondent, would not assist him to drive home his  

point.

25)            Therefore,  in  the  light  of  the  peculiar  facts  and  

circumstances  of  this  case,  it  would  be  in  the  interest  of  both  

parties  and  to  do  complete  justice,  an  arbitrator  other  than  the  

Managing Director of the Respondent requires to be appointed to  

settle the dispute.

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26)             For the foregoing reasons, the Arbitration Petition is  

allowed. Hon’ble Dr. Justice Arijit Pasayat (Retired) is appointed  

as the sole arbitrator.   

27)            The Arbitrator will be at liberty to fix his own remuneration  

and  other  terms  and  conditions  with  regard  to  holding  of  the  

arbitration proceedings.

                                                                          .…..……………………J.           [ H.L. DATTU ]

New Delhi, May 10, 2010.

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