2010 (5) TMI 660 - SC - Indian Laws

Court enforces arbitration clause in Purchase Order, appoints independent arbitrator over bias concerns.

The court found the arbitration clause in the Purchase Order valid, appointing an independent arbitrator due to potential bias of the Managing Director. ... Validity of an arbitration agreement - appointment of arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 - failure to act under an agreed appointment procedure - reasonable apprehension of bias and independence of an arbitrator who is an employee of a party - court's discretion to appoint an independent arbitrator in appropriate circumstances - protection claimed under Section 56 of the Indian Contract Act, 1872 (argument recorded)Validity of an arbitration agreement - appointment of arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 - failure to act under an agreed appointment procedure - Clause 10 of the Purchase Order is a valid arbitration clause and petitioner entitled to seek appointment of an arbitrator under Section 11(6) due to failure by respondent to secure appointment under the agreed procedure. - HELD THAT: - The Court held that Clause 10, providing reference of disputes to the Managing Director or his nominee, constitutes a valid arbitration agreement within the meaning of the Act. Sub-section (6) of Section 11 empowers the Chief Justice (or his designate) to take measures where a party fails to act under an agreed appointment procedure or the parties fail to reach agreement. On the material placed - invoices, correspondence and the respondent's communications - there existed a dispute as to payment and a failure by the respondent to appoint an arbitrator in accordance with the clause. Consequently, the petition under Section 11(6) was maintainable and requires relief in the form of judicial appointment of an arbitrator so that the dispute may be adjudicated. [Paras 6, 19, 21, 23]Petition under Section 11(6) is maintainable; Clause 10 is a valid arbitration clause and judicial appointment of an arbitrator is warranted due to failure under the agreed procedure.Reasonable apprehension of bias and independence of an arbitrator who is an employee of a party - court's discretion to appoint an independent arbitrator in appropriate circumstances - An arbitrator who is the Managing Director of the respondent (a government company) may give rise to reasonable apprehension of lack of independence in the particular facts, and the Court exercised its discretion to appoint an independent sole arbitrator. - HELD THAT: - Relying on the principles that an employee arbitrator is not ipso facto disqualified but that a reasonable apprehension of bias may arise where the named arbitrator is the controlling or dealing authority or is constrained by superior directions, the Court found the present facts exceptional. The respondent admitted liability but asserted inability to pay due to Ministry of Defence directions; thus the Managing Director, being bound by superior directions, might not be able to act independently. Given these peculiar circumstances and the need to do complete justice, the Court concluded that appointing an arbitrator other than the Managing Director was appropriate. The Court referred to established guidance on employee arbitrators and applied it to the facts to justify judicial appointment of an independent arbitrator. [Paras 16, 22, 25, 26]An independent arbitrator (other than the Managing Director) should be appointed; the Court appointed Hon'ble Dr. Justice Arijit Pasayat (Retired) as sole arbitrator.Final Conclusion: Arbitration petition allowed. Hon'ble Dr. Justice Arijit Pasayat (Retired) appointed sole arbitrator; he is at liberty to fix his remuneration and terms for conducting the arbitration. Issues Involved:1. Validity of the arbitration clause in the Purchase Order.2. Appointment of an independent arbitrator versus the named arbitrator.3. Respondent's refusal to pay due to government directions.4. Prematurity of the arbitration petition.Detailed Analysis:1. Validity of the arbitration clause in the Purchase Order:The court acknowledged that Clause 10 of the General Terms and Conditions of the Purchase Order constitutes a valid arbitration agreement. This clause explicitly states that all disputes regarding the order shall be referred to the Managing Director or his nominee for arbitration, thus demonstrating the parties' intention to resolve disputes through arbitration as per the Arbitration and Conciliation Act, 1996.2. Appointment of an independent arbitrator versus the named arbitrator:The petitioner argued that the arbitration clause, which appoints the Managing Director or his nominee as the arbitrator, is invalid. They contended that the Managing Director, being an appointee of the Central Government, might not be impartial due to the directions issued by the Ministry of Defence. The court referenced the case of Indian Oil Corporation Ltd. & Ors. Vs. Raja Transport Pvt. Ltd., which clarified that the mere fact that an arbitrator is an employee of one of the parties does not automatically imply bias. However, if the arbitrator has a direct connection with the subject matter of the dispute or is subordinate to the officer involved, there could be a justifiable apprehension of bias. Given the circumstances, the court found it appropriate to appoint an independent arbitrator.3. Respondent's refusal to pay due to government directions:The respondent admitted their liability towards the purchase orders but refused to make payments citing directions from the Ministry of Defence to withhold payments to the petitioner. The court noted that this refusal, based on external directions, does not negate the existence of a dispute between the parties that requires arbitration.4. Prematurity of the arbitration petition:The respondent argued that the petition was premature since the petitioner suggested appointing an independent arbitrator instead of following the procedure outlined in the arbitration clause. The court dismissed this argument, stating that the failure to appoint an arbitrator as per the agreed procedure justified the petitioner's request for court intervention under Section 11(6) of the Arbitration and Conciliation Act, 1996.Conclusion:The court concluded that there is a genuine dispute regarding the payment of amounts towards the purchase orders. Given the peculiar facts and circumstances, including the potential bias of the Managing Director due to government directions, the court found it in the interest of justice to appoint an independent arbitrator. Consequently, the Arbitration Petition was allowed, and Hon'ble Dr. Justice Arijit Pasayat (Retired) was appointed as the sole arbitrator to resolve the dispute. The arbitrator was granted the liberty to fix his own remuneration and terms for the arbitration proceedings.