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CASE NO.: Appeal (civil)  1945 of 2007

PETITIONER: Municipal Corporation, Jabalpur & Ors

RESPONDENT: M/s Rajesh Construction Co

DATE OF JUDGMENT: 13/04/2007

BENCH: TARUN CHATTERJEE & P.K. BALASUBRAMANYAN

JUDGMENT: J U D G M E N T

[ Arising out of S.L.P. (C) Nos.19332-33 of 2005 ]

TARUN CHATTERJEE,J.

Delay Condoned.  Leave granted.  This appeal is directed against the judgments and final  orders dated 29th July 2004 and 8th April, 2005 passed by a  learned Judge of the High Court of Madhya Pradesh at Jabalpur  in M.C.C. No. 3295 of 2003 and M.C.C. No. 1579 of 2004. By  the order dated 29th July 2004, learned Judge of the High Court  appointed Mr. Justice B.C. Verma, a retired Chief Justice of the  Punjab and Haryana High Court, as sole arbitrator to  adjudicate upon disputes between the appellants and the  respondent herein. The order dated 8th April, 2005 passed in  MCC No. 1579 of 2004 is under challenge as the application for  review and/or recall of the order dated    29th July 2004 at the  instance of the appellants was also rejected.

Notice was issued on the application for condonation of  delay and also on the special leave petitions by this court on  12th September 2005. After exchange of affidavits an order was  passed by this court on 5th January 2007 in which one of us  was a party. The said order of this court may be relevant for our  decision which is as follows:-

"Having regard to the facts of the case, we  suggested to the parties that the Municipal  Corporation may be directed by this Court to  constitute a Board of Arbitrators under Clause 29 of  the Agreement without any preconditions. Such an  appointment should be made within three weeks  from this Court’s order and the Board of Arbitrators  will take up the matter from the stage at which it has  reached before the Arbitrator appointed by the High  court. The Board of Arbitrators shall thereafter  conclude the proceedings within six months."

 However, this suggestion of this court made on              5th January 2007 was not accepted by the respondent and for  that reason, we heard the appeal on merits.

The appellants floated a notice inviting tender for  construction of a road. Finally, half of the job was awarded to  the respondent by entering into a contract on the same terms  and conditions as contained in the tender. The tender contained

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various clauses; one amongst the same being Clause 29 which  pertained to arbitration in case any dispute arose between the  parties and reads thus:-  

"Except as otherwise provided in this contract all  questions and disputes relating to the meaning of  the specifications, drawing and instructions  herein before mentioned and as to thing  whatsoever, in any way arising out or relating to  the contract, designs, drawings, specifications,  estimates concerning the works or the execution  or failure to execute the same, whether arising  during the progress of the work or after the  completion or abandonment there of shall be  referred to the City Engineer in writing for his  decision, within a period of 30 days of such  occurrence. Thereupon the City Engineer shall  give his written instructions and/or decisions  within a period of 60 days of such request. This  period can be extended by mutual consent of the  parties.

Upon receipt of written instructions of decisions,  the parties shall promptly proceed without delay  to comply such instructions or decisions. If the  City Engineer fails to give his instructions or  decisions in writing within a period of 60 days or  mutually agreed time after being requested if the  parties are aggrieved against the decision o f the  C. E., the parties may within 30 days prefer an  appeal of the M.P.L., Com. who shall afford an  opportunity to the parties of being heard and to  offer evidence in support of his appeal. The M.P.L.  Com will, give his decision within 90 days. If any  party is not satisfied with the decision of the  M.P.L. Com, he can refer such disputes for  arbitration by an Arbitration Board to be  constituted by the Corporation which, shall  consist of three members of whom one shall be  chosen from among the officers belonging to be  Urban Administration and Development  Department not below the rank of B.E. one  Retired Chief Engineer of any Technical  Department and City Engineer Nagar  Nigam  Jabalpur,

The following are also the terms of this contract, namely, :

a)      No person other than the aforesaid Arbitration Board  constituted by the Corporation (to handle cases of all  Technical Departments) shall act as Arbitrator and it for  any reason that is not possible the matter shall not be  referred to Arbitration at all.

b)      The Corporation may at any time effect any change  in the personnel of the Board and the new members or  members appointed to the Arbitration Board shall be  entitled to proceed with the reference from the stage it  was left by his or their predecessors.

c)      The party invoking arbitration shall specify the  dispute or disputes to be referred to arbitration under  this clause together with the amount or amounts  claimed in respect of each such dispute(s).

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d)  Where the party invoking arbitration is the contractor  no reference for arbitration shall be maintainable,  unless the contractor furnishes a security deposit of a  sum determined according to the table given below, and  the sum so deposited shall on the determination of  arbitration proceeding, be adjusted against the cost, if  any awarded by the Board against the party and the  balance remaining after such adjustment or in the  absence of the such cost being awarded the whole of  the sum shall be refunded to him within one month   from  the date  of the award.

Amount of Claim Rate of Security Deposits

For claim below  Rs.10000/-. 5% of amount claimed For claim of Rs.10000/-  and above but below  Rs.1 ,00 ,000/- 3% of amount claimed  subject to minimum of  Rs. 500/- For claims of  Rs.1,00,000/- and above 2% o f the amount  claimed subject to a  minimum o f Rs. 3000/   

e) \005 \005 f) \005 g)\005 h)\005 \005" (Underlining is ours)

 Reference to sub-clauses (e) to (h) of the Arbitration        Clause 29 would not be necessary in view of the fact that the  said sub-clauses are not required to be considered for decision  and accordingly are omitted.     In 2002, the respondent filed an application under         Section 11(6)(c) of the Arbitration and Conciliation Act 1996  (hereinafter called the "Act") in the High Court of Madhya  Pradesh at Jabalpur seeking appointment of an arbitrator to  adjudicate upon disputes between it and the appellants, which  came to be registered as M.C.C No. 285/2002. By an order  dated 7th May 2003, a learned Judge of the High Court allowed  the application directing the appellant, Municipal Corporation,  to invoke the arbitration clause and appoint an arbitrator in  compliance with Clause 29 of the contract at the earliest to  resolve the disputes between the parties. The learned Judge  directed: "In view of the aforesaid circumstances, the  application filed by the applicants under Section  11(6)(c) of the Act is hereby allowed. The  respondents are directed to invoke the arbitration  clause 29 and it is directed that as early as possible  the arbitrator be appointed to resolve the dispute  between the applicant and the respondent nos. 1  and 2."                                                    (Underlining is ours)

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A bare perusal of this direction made by the High Court,  while allowing the application under Section 11(6)(c) of the Act,  would clearly indicate that the Corporation was directed to  invoke the arbitration clause and appoint an Arbitration Board  in compliance with Clause 29 of the contract. In that view of the  matter, we examined Clause 29 of the contract and its sub  clauses in detail from which the followings emerge:    

[I]     No reference for arbitration shall be maintainable  unless the contractor furnishes the security deposit of a  sum determined as per the table given in sub-clause (d) of  the contract by the Corporation.  

[II]    Obligation of the Corporation would arise to  constitute an Arbitration Board only after the security  deposit is determined by the Corporation and deposited  by the contractor.

[III]   The Corporation shall constitute a Board called  ’Arbitration Board’ for arbitration which shall consist of  three members of whom one shall be chosen from among  the officers belonging to the Urban Administration and  Development Department not below the rank of B.E., one  Retired Chief Engineer of any Technical Department and  City Engineer, Nagar Nigam, Jabalpur; subject to  compliance of (I) and (II) as noted herein above.  

At the risk of repetition, we may reiterate that the High  Court while allowing the application under Section 11(6)(c) of  the Act directed appointment of the Arbitrator in terms of  Clause 29 of the contract, which contained the aforesaid  provisions.                   It may be kept on record that, on instruction, Mr. Ranjan  Mukherjee, appearing on behalf of the Corporation, submitted  that the Corporation was ready and willing to constitute an  Arbitration Board in compliance with Clause 29 of the contract  without any reference being made to the Chief Engineer, or in  case of failure of the Chief Engineer to take decision or give  instruction in writing to file an appeal before MPL Com and that  the Arbitration Board shall proceed from the stage at which the  learned Arbitrator, appointed by the High Court, had already  reached.  

Keeping in mind the aforesaid stand taken by the  Corporation, we shall now consider whether the High Court was  justified in appointing a retired Chief Justice of a High Court as  the sole arbitrator to resolve the disputes raised by the parties.

Seeking enforcement of the order of the High Court dated      7th May 2003, invoking Clause 29 for appointment of an  arbitrator, the respondent filed another application being  M.C.C.No. 3295/2003. By the impugned order, as noted herein  earlier, Mr. B.C Verma, retired Chief Justice of Punjab and  Haryana High Court was appointed by a learned Judge to act as  an arbitrator to adjudicate upon the disputes between the  parties.    Aggrieved by the aforesaid order of the learned Judge of  the High Court, the appellants filed a review application before  the High Court, which by the subsequent order dated 8th April,  2005 passed in M.C.C. No. 1579 of 2004, which is impugned in  Special Leave Petition No.19333 of 2005, was rejected. Feeling  aggrieved by the aforesaid orders, this appeal has been filed by

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the appellants.          We have heard the learned counsel for the parties and  gone through the material put on record in detail. At the outset,  it is necessary for us to examine Section 11(6)(c) of the Act,  which reads as under: "11.    Appointment of arbitrators. \026 (1)\005.

(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."       [Underlining is ours)

Section 11(6)(c) says that in case one of the parties to the  arbitration agreement fails to perform any function entrusted to  it, the other party shall have the right to approach the  appropriate forum to take necessary measure in that regard.  However, this provision also says that in a situation where the  arbitration agreement provides for other measures for securing  the appointment of an arbitrator, the same shall be followed.   It was contended by Mr. Ranjan Mukherjee, learned  counsel appearing for the appellants, that it was not open to the  High Court to appoint an arbitrator without complying with  Clause 29 of the contract. According to him, as noted herein  earlier, the High Court by its own order dated 7th May 2003  directed appointment of an arbitrator in compliance with Clause  29 of the contract which clearly provides a procedure for  appointment of an arbitrator and also indicates who shall be  appointed arbitrator and how he shall be appointed.               Mr. Mukherjee had brought to our notice that Clause 29 of the  contract clearly stipulated that no person other than the  Arbitration Board constituted by the Corporation would act as  arbitrator provided that the party invoking arbitration clause  furnishes a security deposit of a sum determined according to  the table given in the contract itself. After such determination  and on deposit of the said sum by the party invoking arbitration  clause, it would become the duty and obligation of the  Corporation to constitute an Arbitration Board as provided in  Clause 29 of the contract. Accordingly, Mr. Mukherjee  contended that since the High Court by its earlier order dated  7th of May, 2003, having directed the parties to invoke  arbitration clause in compliance with Clause 29 of the contract,  it was not open to the High Court to appoint a retired Chief  Justice of a High Court as an Arbitrator before the respondent  had furnished security and before determination of the amount  of security by the Corporation, as provided in Clause 29 (d) of  the contract, which clearly says, as noted herein earlier, that no  reference for arbitration shall be maintainable unless the

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contractor furnishes the security deposit of a sum determined  by the Corporation. Mr. Mukherjee, therefore, contended that  the High Court was not justified in appointing a retired Chief  Justice of a High Court to act as an Arbitrator over looking  Clause 29(d) of the contract and also without considering the  fact that obligation of the Corporation to appoint an arbitrator  to resolve a dispute between the parties would only arise when  the contractor had furnished security which was to be  determined by the Corporation.   This submission of Mr. Mukherjee was seriously  contested by Mr. Amit Sharma, learned counsel appearing for  the respondent. According to him, no interference can be made  with the impugned order since the High Court was fully justified  in appointing an arbitrator in the manner it had done. In this  connection reliance was placed on the case of Datar  Switchgears Ltd. v. Tata Finance Ltd [2000(8) SCC 151].  Reliance was also placed by Mr. Sharma on the case of Punj  Llyods Ltd v. Petronet MHB Ltd. [2006(2) SCC 638]. Relying  on the aforesaid two decisions, Mr. Sharma invited us to re- consider the submission of Mr. Mukherjee and to dismiss the  present appeal.  

Having heard the learned counsel for the parties and after  considering the rival submissions made on their behalf and  examining Clause 29 of the contract in detail, we are of the view  that the High Court was not justified in appointing a retired  Chief Justice of a High Court to act as sole arbitrator as the  same is contrary to Clause 29 of the contract. As noted earlier,  the High Court, by its earlier order dated 7th May 2003 directed  the parties to invoke the arbitration clause and to appoint an  arbitrator in compliance with Clause 29 of the contract entered  into between the parties.  Clause 29 specifically stipulates, as indicated herein  earlier, that if any dispute arises between the parties, the party  seeking invocation of the arbitration clause, shall first approach  the Chief Engineer and on his failure to arbitrate the dispute,  the party aggrieved may file an appeal to MPL Com, failing  which, the Corporation shall constitute an Arbitration Board to  resolve the disputes in the manner indicated in Clause 29.  However, before doing so, the party invoking arbitration clause  is required to furnish security of a sum to be determined by the  Corporation.    In this case, admittedly, the security has not been  furnished by the respondent to the Corporation. We, in fact,  asked Mr. Sharma, appearing on behalf of the respondent to  ascertain on the date of the hearing of the appeal, whether the  security deposit was made or not. On instruction, Mr. Sharma  informed us that such security has not yet been deposited.  Such being the position even today, we hold that the obligation  of the Corporation to constitute an Arbitration Board to resolve  disputes between the parties could not arise because of failure  of the respondent to furnish security as envisaged in Clause  29(d) of the contract. Therefore, we are of the opinion, that on  account of non-furnishing of security by the respondent, the  question of constituting an Arbitration Board by the  Corporation could not arise at all. Accordingly, we hold that the  High Court was not justified in appointing a retired Chief  Justice of a High Court as Arbitrator by the impugned order.   It is not disputed before us that the learned Arbitrator  appointed by the High Court has already commenced the  arbitration proceeding. Mr. Mukherjee, appearing on behalf of  the Corporation, on instruction, had submitted before us that  they shall constitute an Arbitration Board as soon as the

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respondent furnishes security in terms of Clause 29(d) of the  contract and if any direction is given to the Arbitration Board to  proceed from the stage the learned Arbitrator had already  reached, that would not be objected to. That is to say, Mr.  Mukherjee contended that the Arbitration Board may be  directed to take over the arbitration proceedings from the stage  the learned Arbitrator had already reached.   Such being the stand taken by the Corporation, we direct  the respondent to furnish the security of a sum to be  determined by the Corporation within six weeks from this date  and in the event security determined by the Corporation is  furnished within the time mentioned herein earlier, the  Corporation shall constitute an Arbitration Board in compliance  with Clause 29 of the contract. It is directed that the Arbitration  Board shall proceed from the stage the learned Arbitrator  appointed by the High Court had already reached.    That apart, it has to be kept in mind that it is always the  duty of the court to construe the arbitration agreement in a  manner so as to uphold the same. Therefore we must hold that  the High Court ought not to have appointed an arbitrator in a  manner, which was inconsistent with the arbitration agreement.  

Before parting with this judgment, we will be failing in  our duty if we do not consider and deal with the decisions cited  by Mr. Sharma appearing on behalf of the respondent. First  decision relied on by him was Datar Switchgears Ltd. case  (supra).  It is difficult to understand how the said decision  would be of assistance to Mr. Sharma. In this decision, this  Court was dealing with a case falling under Section 11(6) of the  Act where no time limit is prescribed, whereas time limit of 30  days is prescribed under Section 11(4) and (5) of the Act. In that  context, it was held by this court that if one party makes a  demand for appointment of an arbitrator to the opposite party  and the latter does not make an appointment within 30 days of  demand, the right of appointment of arbitrator does not get  automatically forfeited after expiry of 30 days. This Court held  that under Section 11(6), if the opposite party has not made an  appointment within 30 days of demand, the right to make  appointment is not forfeited but still continues.  However, the  right of the opposite party ceases when an application under  Section 11 seeking appointment of an arbitrator is filed. This is  not the factual situation in the present case, nor are we  concerned with this aspect in the present case.  

So far as the case of Punj Llyods Ltd (supra) is  concerned, it is true that this decision of this Court was  rendered by a bench of three Judges which affirmed the  decision in the case of Datar Switchgears Ltd. (supra). Since  we are not concerned in the facts and circumstances of the  present case with the question decided by this Court in the  aforesaid two decisions, we are unable to rely on those  decisions.      For the reasons aforesaid, the order dated 29th July 2004  which has given rise to Civil Appeal arising out of Special Leave  Petition No.19332 of 2005 is set aside and we direct the  Corporation to constitute an Arbitration Board in terms of  Clause 29 within a period of three months from this date,  provided the respondent furnishes security in terms of the table  provided in Clause 29(d) of the contract, as determined by the  Corporation within a period of six weeks from this date. We,  however, make it clear that in view of the stand taken by the  Corporation, as noted herein earlier, the Arbitration Board shall

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commence their proceedings from the stage the arbitrator  appointed by the High Court had already reached.  

Since we have set aside the order dated 29th July 2004,  Civil Appeal arising out of Special Leave petition No. 19333 of  2005 filed against the order dated 8th April, 2005 has become  infructuous.   The Appeal is disposed of in the manner indicated above.  There will be no order as to costs.