Full Judgment Text
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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.