2012 (1) TMI 105 - SC - Companies Law

Respondent forfeited right to appoint arbitrator; Court appoints independent arbitrator for impartial resolution.

The Supreme Court held that the respondent forfeited their right to appoint an arbitrator by failing to do so before the petitioner moved the court. The ... Forfeiture of right to appoint arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 - validity of appointment made in breach of the agreed procedure of the arbitration clause - reasonable apprehension of bias and requirement of independence and impartiality under Section 11(8) - power of the court/Chief Justice's designate to appoint an independent arbitrator under Sections 11(4) and 11(6)Forfeiture of right to appoint arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 - validity of appointment made in breach of the agreed procedure of the arbitration clause - Whether the respondent had forfeited its right to appoint an arbitrator and whether the appointment of Mr. Satyanarayana could be sustained - HELD THAT: - The Court found that the mandate of the earlier arbitrator was terminated by the Principal District Court on 21st December, 2010 and that pursuant to that order the DGOF did not make an appointment within the period before the petitioner filed the Section 11(6) petition on 2nd March, 2011. Applying the principle in Datar Switchgears and its progeny, the Court held that where an appointment is made after the 30 day period but before the aggrieved party files under Section 11, the right to appoint subsists; conversely, if no appointment is made before the filing of the Section 11 petition the opposite party's right to appoint is forfeited. On the admitted facts, the respondent had not validly appointed an arbitrator prior to the filing of the petition and therefore the subsequent appointment of Mr. Satyanarayana by letter dated 16th March, 2011 could not be sustained. [Paras 10]Respondent forfeited the right to appoint an arbitrator prior to the filing of the Section 11(6) petition; the appointment of Mr. Satyanarayana is not sustainable.Reasonable apprehension of bias and requirement of independence and impartiality under Section 11(8) - power of the court/Chief Justice's designate to appoint an independent arbitrator under Sections 11(4) and 11(6) - Whether, despite the arbitration clause providing for an employee/office-holder as arbitrator, the Court should appoint an independent arbitrator on account of reasonable apprehension of bias - HELD THAT: - The Court reiterated that ordinarily the agreed procedure for appointment should be followed but, in exceptional cases where material gives rise to a reasonable apprehension that the named arbitrator will not act independently or impartially, the Chief Justice or his designate may, after recording reasons and having regard to Section 11(8), appoint an independent arbitrator. Having examined the material - including the termination of the earlier arbitrator's mandate on grounds of bias, the fact that the proposed arbitrator was an employee within the same organization bound to governmental directions, and instances of late notices impeding the petitioner's opportunity to present its case - the Court concluded that the test of Section 11(8) was not satisfied by the respondent's nomination and that exceptional circumstances warranted deviation from the agreed procedure. [Paras 16, 18]The circumstances gave rise to a reasonable apprehension of bias such that the Court was justified in appointing an independent arbitrator instead of following the agreed procedure.Power of the court/Chief Justice's designate to appoint an independent arbitrator under Sections 11(4) and 11(6) - appointment of an independent arbitrator as an exception to the rule of referring disputes to the named arbitrator - Whether the Court should exercise its powers under Sections 11(4) and 11(6) read with the Chief Justice of India Scheme to appoint an independent arbitrator in this case - HELD THAT: - Having found the respondent's appointment unsustainable and that material established a reasonable apprehension of bias, the Court exercised its statutory powers to appoint an independent arbitrator. The Court noted authority that while the rule is to give effect to the arbitration agreement, the Chief Justice or his designate may appoint an independent arbitrator as an exception, after recording reasons and having regard to qualifications and independence under Section 11(8). Accordingly, the Court appointed Hon. Mr. Justice Ashok C. Agarwal, Retd., as Sole Arbitrator and directed registry to communicate the order so that the arbitrator may enter upon the reference. [Paras 20, 21]The petition is allowed and an independent Sole Arbitrator is appointed by the Court under its powers; the registry is directed to inform the arbitrator to proceed with the reference.Final Conclusion: The petition under Sections 11(4) and 11(6) is allowed: the respondents had forfeited the right to appoint an arbitrator before the Section 11(6) petition was filed; the appointment of Mr. Satyanarayana is not sustainable; and, on grounds of reasonable apprehension of bias and having regard to Section 11(8), the Court appointed an independent Sole Arbitrator to adjudicate the disputes. Issues Involved:1. Validity of the appointment of the arbitrator by the respondent.2. Jurisdiction and authority of the District Court in appointing an arbitrator.3. Allegations of bias against the arbitrator appointed by the respondent.4. The right of the petitioner to seek the appointment of an independent arbitrator.Issue-wise Detailed Analysis:1. Validity of the Appointment of the Arbitrator by the Respondent:The petitioner challenged the appointment of Mr. A.K. Jain as the arbitrator, fearing bias due to his favorable inclination towards the employer. The Principal District Court, Chandrapur, terminated Mr. Jain's mandate, citing bias. The court directed the Director General, Ordnance Factory (DGOF) to appoint a new arbitrator. However, the DGOF failed to appoint an arbitrator within the stipulated 30 days, leading the petitioner to file a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking an independent arbitrator. The Supreme Court held that the respondent forfeited their right to appoint an arbitrator since they did not do so before the petitioner moved the court.2. Jurisdiction and Authority of the District Court in Appointing an Arbitrator:The petitioner argued that the District Court's direction to appoint an arbitrator was void ab initio, as it was beyond the court's jurisdiction. The Supreme Court noted that the District Court's order was based on an incorrect interpretation of Section 15 of the Act. The Act does not allow the court to appoint an arbitrator outside the agreed arbitration agreement, except in limited circumstances provided in Section 11. Therefore, the Supreme Court found the District Court's directions to be without authority.3. Allegations of Bias Against the Arbitrator Appointed by the Respondent:The petitioner expressed concerns about the impartiality of the arbitrator appointed by the DGOF, Mr. Satyanarayana, arguing that any government servant appointed would be biased due to their obligation to follow superior authorities' instructions. The Supreme Court acknowledged the apprehensions of bias, noting that the previous arbitrator had been terminated for similar reasons. The court emphasized that the arbitrator's independence and impartiality are crucial, and the material presented indicated a reasonable apprehension of bias.4. The Right of the Petitioner to Seek the Appointment of an Independent Arbitrator:The Supreme Court considered the petitioner's request for an independent arbitrator, given the circumstances and the apprehensions of bias. The court referred to previous judgments, including Datar Switchgears Ltd. v. Tata Finance Ltd., which established that if an arbitrator is not appointed within 30 days of the demand, the right to appoint does not automatically forfeit but must be done before the first party moves the court. Since the respondent failed to appoint an arbitrator before the petition was filed, the Supreme Court concluded that the respondent forfeited their right to appoint. The court appointed Hon. Mr. Justice Ashok C. Agarwal, Retd. Chief Justice of the Madras High Court, as the Sole Arbitrator to ensure an independent and impartial resolution of the disputes.Conclusion:The Supreme Court allowed the petition, appointing an independent arbitrator to adjudicate the disputes, emphasizing the necessity of impartiality and independence in arbitration proceedings. The registry was directed to communicate the order to the Sole Arbitrator to expedite the resolution process.