2010 (5) TMI 660 - SC - Indian Laws

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

DENEL (PROPRIETARY LIMITED) Versus BHARAT ELECTRONICS LTD. & ANR.

The court found the arbitration clause in the Purchase Order valid, appointing an independent arbitrator due to potential bias of the Managing Director. ... Petition seeking reference of the disputes to an independent and impartial sole Arbitrator - Respondent contested that as per `General Terms and Conditions of the Purchase Order (Foreign) Clause 10 arbitration in case of dispute arising from the interpretation or from any matter relating to the rights and obligations of the parties calls to the appointment of the `Managing Director or his nominee' of the respondent as the arbitrator - Held that:- As respondent admitted their liability towards the Purchase Orders, refuse to settle the amounts due only on the ground as prohibited from making any payments to the petitioner by the Ministry of Defence, Government of India - the petitioner genuinely apprehends that it may not get any justice in the hands of the Managing Director, since he cannot go against the directions issued by the Ministry of Defence, Government of India and, therefore, it would be appropriate to appoint independent sole arbitrator - the Managing Director may not be in a position to independently decide the dispute between the parties as the respondent in the reply to the notice accepted liablity to pay the amount but is not in a position to settle the dues only because of the directions issued by Ministry of Defence, Government of India - it would be in the interest of both parties and to do complete justice, an arbitrator other than the Managing Director of the Respondent requires to be appointed to settle the dispute - in favour of petitioner 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.