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CASE NO.: Appeal (civil)  2386 of 2007

PETITIONER: The Iron and Steel Co. Ltd

RESPONDENT: M/s. Tiwari Road Lines

DATE OF JUDGMENT: 08/05/2007

BENCH: G.P. Mathur & Lokeshwar Singh Panta

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO.     2386             OF 2007 (@ Special Leave Petition (Civil) No.26108 of 2005)

G.P. Mathur, J.

       Leave granted. 2.      This appeal, by special leave, has been filed against the  judgment and order dated 9.9.2005 of a Division Bench of Andhra  Pradesh High Court by which the writ petition filed by the appellant  herein The Indian Iron and Steel Co. Ltd. was dismissed.  The writ  petition was filed assailing the order dated 27.12.2004 of Chief Judge,  City Civil Courts, Hyderabad (designated authority) by which the  petition filed by the respondent M/s. Tiwari Road Lines was allowed  and a retired judicial officer was appointed as sole arbitrator to decide  the dispute between the parties. 3.      The appellant The Indian Iron and Steel Co. Ltd., having its  registered office at Kolkata, invited tenders on 17.2.2003 for  transportation of pig iron and steel material from Burnpur/Kolkata  stockyard to different customer locations in various parts of the  country.  The tender submitted by the respondent M/s. Tiwari Road  Lines was accepted and a letter was issued on 14.5.2003 awarding the  contract to the respondent to transport the material with effect from  17.5.2003 for a period of two years.  The tender was submitted by the  respondent at the Head Office of the company at Kolkata and the  agreement was also signed between the parties at Kolkata.  In terms of  the agreement the respondent furnished a bank guarantee for  Rs.5,00,000/-.  According to the appellant there was failure on the part  of the respondent to comply with the terms of the agreement and  accordingly the appellant invoked the bank guarantee on 16.9.2003.   Feeling aggrieved by the encashment of the bank guarantee, the  respondent filed an application before the Chief Judge, City Civil  Courts, Hyderabad, who was the designated authority under Section  11 of the Arbitration and Conciliation Act, 1996 (hereinafter referred  to as ’the Act’) under the scheme framed by the Andhra Pradesh High  Court, for appointment of an arbitrator to decide the dispute between  the parties.  The appellant contested the application on two grounds,  viz., that the City Civil Court at Hyderabad had no territorial  jurisdiction to entertain the application and, secondly, under the terms  of the agreement between the parties the dispute had to be resolved in  accordance with the Rules of Arbitration of the Indian Council of  Arbitration and the application filed under Section 11 of the Act was  not maintainable.  The Chief Judge, City Civil Courts, Hyderabad  allowed the application by order dated 31.3.2004 and appointed a  retired judicial officer as arbitrator to decide the dispute.  The said  order was challenged by the appellant by filing a civil revision

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petition before the Andhra Pradesh High Court.  The revision petition  was allowed and the matter was remanded to the City Civil Court,  Hyderabad to consider the question of jurisdiction.  The City Civil  Court again allowed the application filed by the respondent by order  dated 27.12.2004 and appointed a retired judicial officer as arbitrator  to decide the dispute between the parties.  This order was challenged  by the appellant by filing a writ petition in the High Court on the  ground, inter alia, that the application under Section 11 of the Act was  not maintainable as the agreement between the parties contained a  clause that any dispute between the parties shall be decided in  accordance with the Rules of Arbitration of the Indian Council of  Arbitration and the respondent had not taken recourse to the said  Rules.  The other plea taken in the writ petition was that the City Civil  Court, Hyderabad, had no territorial jurisdiction to entertain the  application under Section 11 of the Act.  The High Court negatived  the contention raised by the appellant and dismissed the writ petition  and it is these orders which are subject-matter of challenge in the  present appeal. 4.      We have heard learned counsel for the parties and have perused  the records. 5.      After the tender of the respondent M/s. Tiwari Road Lines had  been accepted, an agreement was executed between the parties which  contained General Conditions of Contract for transportation of iron/  steel materials and pig iron from Burnpur and Kolkata to various  destinations in India.  Clause 13 of the General Conditions of Contract  reads as under: - "13.    ARBITRATION 13.1    All disputes or differences whatsoever arising  between the parties out of or relating to the  construction, meaning and operation or effect of  this contract 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. 13.2    In all above cases, the work under the contract  shall, if reasonably possible, continue during the  arbitration proceedings and no payment due or  payable to the contractor as advised by the  company will be withheld by the companion  account of such proceedings."

A perusal of clause 13.1 will show that under the terms of the  agreement all disputes or differences whatsoever arising between the  parties have to be decided by arbitration in accordance with the Rules  or Arbitration of the Indian Council of Arbitration and the award  made in pursuance thereof shall be binding on the parties. 6.      It is not disputed that the respondent did not make any effort to  have the dispute settled by arbitration in accordance with the Rules of  Arbitration of the Indian Council of Arbitration.  On the contrary, it  straightaway moved an application under Section 11 of the Arbitration  and Conciliation Act, 1996 before the City Civil Court, Hyderabad,  which was the designated court, in accordance with the scheme  framed by the High Court of Andhra Pradesh.  The principal question,  which requires consideration is, whether such an application moved  by the respondent was maintainable.  Sub-sections (1) to (7) of  Section 11 of the Act read as under: - "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

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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\027 (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 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)     A decision on a matter entrusted by sub-section (4)  or sub-section (5) or sub-section (6) to the Chief Justice  or the person or institution designated by him is final."

Sub-section (2) of Section 11 of the Act provides that subject to sub- section (6), the parties are free to agree on a procedure for appointing  the arbitrator.  The opening part of sub-sections (3) and (5) of Section  11 of the Act use the expression "failing any agreement referred to in  sub-section (2)".  Therefore, sub-sections (3) and (5) will come into  play only when there is no agreement between the parties as is  referred to in sub-section (2) of Section 11 of the Act, viz., that the  parties have not agreed on a procedure for appointing the arbitrator or  arbitrators.  If the parties have agreed on a procedure for appointing  arbitrator or arbitrators, sub-sections (3) and (5) of Section 11 of the  Act can have no application.  Similarly, under sub-section (6) of  Section 11 request to the Chief Justice or to an institution designated  by him to take the necessary measures, can be made if the conditions  enumerated in clauses (a) or (b) or (c) of this sub-section are satisfied.   Therefore, recourse to sub-section (6) can be had only where the  parties have agreed on a procedure for appointment of an arbitrator  but (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 (c) a person, including an  institution, fails to perform any function entrusted to him or it under  that procedure.  Therefore, a combined reading of the various sub- sections of Section 11 of the Act would show that the request to the  Chief Justice for appointment of an arbitrator can be made under sub- sections (4) and (5) of Section 11 where parties have not agreed on a  procedure for appointing the arbitrator as contemplated by sub-section

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(2) of Section 11.  A request to the Chief Justice for appointment of an  arbitrator can also be made under sub-section (6) where parties have  agreed on a procedure for appointment of an arbitrator as  contemplated in sub-section (2) but certain consequential measures  which are required to be taken as enumerated in clauses (a) or (b) or  (c) of sub-section (6) are not taken or performed.   7.      In the present case the agreement executed between the parties  contains an arbitration clause and clause 13.1 clearly provides that all  disputes and differences whatsoever arising between the parties out of  or relating to the construction, meaning and operation or effect of the  contract 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.  This clause is in accordance with sub-section (2) of  Section 11 of the Act.  There being an agreed procedure for resolution  of disputes by arbitration in accordance with the Rules of Arbitration  of the Indian Council of Arbitration sub-sections (3), (4) and (5) of  Section 11 can have no application.  The stage for invoking sub- section (6) of Section 11 had also not arrived.  In these circumstances,  the application moved by the respondent before the City Civil Court,  Hyderabad, which was a designated authority in accordance with the  scheme framed by the Chief Justice of the Andhra Pradesh High  Court, was not maintainable at all and the City Civil Court had no  jurisdiction or authority to appoint an arbitrator.  Thus the order dated  31.03.2004 passed by the Chief Judge, City Civil Courts, Hyderabad,  appointing a retired juridical officer as arbitrator is clearly without  jurisdiction and has to be set aside. 8.      The legislative scheme of Section 11 is very clear.  If the parties  have agreed on a procedure for appointing the arbitrator or arbitrators  as contemplated by sub-section (2) thereof, then the dispute between  the parties has to be decided in accordance with the said procedure  and recourse to the Chief Justice or his designate cannot be taken  straightaway.  A party can approach the Chief Justice or his designate  only if the parties have not agreed on a procedure for appointing the  arbitrator as contemplated by sub-section (2) of Section 11 of the Act  or the various contingencies provided for in sub-section (6) have  arisen.  Since the parties here had agreed on a procedure for  appointing an arbitrator for settling the dispute by arbitration as  contemplated by sub-section (2) and there is no allegation that anyone  of the contingencies enumerated in clauses (a) or (b) or (c) of sub- section (6) had arisen, the application moved by the respondent herein  to the City Civil Court, Hyderabad, was clearly not maintainable and  the said court had no jurisdiction to entertain such an application and  pass any order.  The order dated 27.12.2004, therefore, is not  sustainable.   9.      In the matter of settlement of dispute by arbitration, the  agreement executed by the parties has to be given great importance  and an agreed procedure for appointing the arbitrators has been placed  on high pedestal and has to be given preference to any other mode for  securing appointment of an arbitrator.  It is for this reason that in  clause (a) of sub-section (8) of Section 11 of the Act it is specifically  provided that the Chief Justice or the person or institution designated  by him, in appointing an arbitrator, shall have due regard to any  qualifications required of the arbitrator by the agreement of the  parties. 10.     The judicial pronouncements also show that normally the  clause in the agreement providing for settling the dispute by  arbitration by arbitrators having certain qualifications or in certain  agreed manner should be adhered to and should not be departed with  unless there are strong grounds for doing so.  In S. Rajan vs. State of  Kerala (1992) 3 SCC 608, the Court was called upon to interpret sub- section (4) of Section 20 of the Arbitration Act, 1940, which reads as  under:  "20. Application to file in Court arbitration agreement. -  (1) Where any persons have entered into an arbitration

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agreement before the institution of any suit with respect  to the subject matter of the agreement or any part of it,  and where a difference has arisen to which the agreement  applies, they or any of them, instead of proceeding under  Chapter II, may apply to a Court having jurisdiction in  the matter to which the agreement relates, that the  agreement be filed in Court. (2) The application shall be in writing and shall be  numbered and registered as a suit between one or more of  the parties interested or claiming to be interested as  plaintiff or plaintiffs and the remainder as defendant or  defendants, if the application has been presented by all  the parties, or, if otherwise, between the applicant as  plaintiff and the other parties as defendants. (3) On such application being made, the Court shall  direct notice thereof to be given to all parties to the  agreement other than the applicants, requiring them to  show cause within the time specified in the notice why  the agreement should not be filed. (4) Where no sufficient cause is shown, the Court shall  order the agreement to be filed, and shall make an order  of reference to the arbitrator appointed by the parties,  whether in the agreement or otherwise, or, where the  parties cannot agree upon an arbitrator, to an arbitrator  appointed by the court. (5) Thereafter the arbitration shall proceed in accordance  with, and shall be governed by, the other provisions of  this Act so far as they can be made applicable."

The Court considered the scope of sub-section (4) of Section 20 of the  Arbitration Act, 1940 and held as under: - "Sub-section (4) of Section 20 says that the reference  shall be to the arbitrator appointed by the parties.  Such  agreed appointment may be contained in the agreement  itself or may be expressed separately.  Where the  agreement itself specifies and names the arbitrator, it is  obligatory upon the court, in case it is satisfied that the  dispute ought to be referred to the arbitrator, to refer the  dispute to the arbitrator specified in the agreement.  It is  not open to the Court to ignore such an arbitration clause  of the agreement and to appoint another person as an  arbitrator.  Only in cases where the arbitrator specified  and named in the agreement refuses or fails to act or  where the agreement does not specify the arbitrator and  the parties cannot also agree upon an arbitrator, does the  court get the jurisdiction to appoint an arbitrator.  Since  in the present case the agreement specified and named  the arbitrator, there was no occasion or warrant for the  court to call upon the parties to submit panels of  arbitrators.  The court was bound to refer the dispute only  to the arbitrator named and specified in the agreement."

In Government of A.P. vs. K. Mastan Rao 1995 Supp. (4) SCC 528,  the agreement between the parties provided for settlement of dispute  by three persons holding the post of Chief Engineer of the project,  Deputy Secretary to Government, Finance Department, and the  Director of Accounts of the project.  On the petition made by the  contractor, the subordinate judge removed the panel of three  arbitrators and appointed a retired Chief Engineer as the sole arbitrator  to adjudicate the dispute.  This Court, after taking into consideration  the terms of the agreement, set aside the order passed by the  subordinate judge and directed that the arbitration matter should be  entrusted to the incumbents of the three posts mentioned in the  agreement.  In Rite Approach Group Ltd. vs. Rosoboronexport (2006)  1 SCC 206, it was held as under in para 20 of the Report: -

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"20.    In view of the specific provision specifying the  jurisdiction of the Court to decide the matter, this Court  cannot assume the jurisdiction. Whenever there is a  specific clause conferring jurisdiction on particular Court  to decide the matter then it automatically ousts the  jurisdiction of the other Court. In this agreement, the  jurisdiction has been conferred on the Chamber of  Commerce and Trade of the Russian Federation as the  authority before whom the dispute shall be resolved. In  view of the specific arbitration clause conferring power  on the Chamber of Commerce and Trade of the Russian  Federation, it is that authority which alone will arbitrate  the matter and the finding of that arbitral tribunal shall be  final and obligatory for both the parties."

11.     This being the settled position of law we are clearly of the  opinion that the respondent should have initiated proceedings for  settlement of disputes by arbitration in accordance with the Rules of  Arbitration of the Indian Council of Arbitration as provided in clause  13.1 of the agreement and the application moved by it to the City  Civil Court, Hyderabad, for appointment of an arbitrator was not  maintainable.  Consequently, the order passed by the City Civil Court,  Hyderabad dated 27.12.2004 is wholly illegal and without jurisdiction  and is liable to be set aside. 12.     Learned counsel for the appellant has also submitted that City  Civil Court, Hyderabad had no jurisdiction to entertain the application  moved by the respondent as no part of cause of action had accrued  there.  In this connection, he has referred to clause (b) of sub-section  (12) of Section 11 and clause (e) of sub-section (1) of Section 2 of the  Act which will govern the question of jurisdiction as to Chief Justice  of which High Court has to be approached for moving an application  under Section 11 of the Act.  Learned counsel has submitted that the  tenders were floated at Kolkata, the respondent submitted the tender at  Kolkata, the agreement was executed at Kolkata and, therefore, the  court at Hyderabad had no jurisdiction to entertain the application.   Learned counsel has also submitted that the view taken by the High  Court that as the bank guarantee was furnished at Hyderabad and was  encashed at Hyderabad, the court at Hyderabad has jurisdiction is  erroneous in law inasmuch as the agreement did not contain any  clause regarding the place from where the bank guarantee had to be  furnished.   Learned counsel has submitted that there was only a  requirement for furnishing the bank guarantee and that it could be  furnished from anywhere in India and since in the present case the  bank guarantee was furnished by the respondent from a bank at  Hyderabad it was encashed there and, therefore, the said fact was  wholly irrelevant for deciding the plea of jurisdiction.  He has also  relied upon a decision of this Court in South East Asia Shipping Co.  Ltd. vs. Nav Bharat Enterprises Pvt. Ltd. (1996) 3 SCC 443, in  support of his contention that the submission of the bank guarantee  from Hyderabad or the encashment thereof does not constitute even a  part of cause of action to confer jurisdiction on the court at  Hyderabad.  Though we find substance in the contention raised by the  learned counsel for the appellant but in view of our finding recorded  on the main point, we do not consider it necessary to express any final  opinion on the second contention.   13.     For the reasons discussed above, the appeal is allowed with  costs throughout.  The judgment and order dated 9.9.2005 of the High  Court of Andhra Pradesh and the judgment and order dated  27.12.2004 of the City Civil Court, Hyderabad appointing an  arbitrator are set aside.  It will be open to the parties to get the dispute  decided by arbitration in accordance with the Rules of Arbitration of  the Indian Council of Arbitration.