2009 (10) TMI 971 - SC - Indian Laws

Supreme Court upholds maintainability of writ petitions challenging arbitrator appointments under Section 11(6)

The Supreme Court held that writ petitions against orders appointing arbitrators are maintainable, declaring the Chief Justice's power under Section 11(6) ... Interpretation of Section 15(2) of the Arbitration and Conciliation Act, 1996 - substitution of arbitrator - distinction between refusal to accept appointment and withdrawal from office - effect of an express arbitration clause providing for appointment of a sole arbitrator on refusal of the opposite party's appointee - mandatory adherence to the parties' agreed procedure for appointment of arbitrators - limits on the exercise of power under Section 11(6) of the Arbitration and Conciliation Act, 1996Interpretation of Section 15(2) of the Arbitration and Conciliation Act, 1996 - substitution of arbitrator - distinction between refusal to accept appointment and withdrawal from office - effect of an express arbitration clause providing for appointment of a sole arbitrator on refusal of the opposite party's appointee - Whether Section 15(2) permits appointment of a substitute arbitrator where an arbitrator appointed by a party declines to accept appointment, notwithstanding an arbitration clause that makes the other side's appointee the sole arbitrator on such refusal. - HELD THAT: - The Court held that Section 15(2) is confined to cases where the mandate of an arbitrator terminates by withdrawal or by agreement of the parties and that the word 'rules' in Section 15(2) includes the contractual appointment procedure. There is a clear linguistic and legal distinction between a person who 'refuses' to accept appointment (a pre-acceptance situation) and one who 'withdraws' after having accepted and entered upon office. Where an arbitration agreement (Clause 19) expressly provides that if an arbitrator appointed by one party refuses to act the arbitrator appointed by the other party shall proceed as Sole Arbitrator, that contractual stipulation governs and displaces any unilateral claim to appoint a substitute under Section 15(2). Consequently, an attempted substitute appointment after mere refusal to accept does not attract Section 15(2) unless the original arbitrator had accepted and subsequently withdrawn or the agreement otherwise permits substitution. [Paras 21, 22, 23, 24, 25]Section 15(2) does not apply where an arbitrator merely refuses to accept appointment; the parties' agreement (Clause 19) granting the other side's appointee the status of Sole Arbitrator on such refusal governs and precludes appointment of a substitute.Mandatory adherence to the parties' agreed procedure for appointment of arbitrators - limits on the exercise of power under Section 11(6) of the Arbitration and Conciliation Act, 1996 - Whether the designated Judge's appointment of a third arbitrator under Section 11(6) was legally sustainable in the face of the agreement's provision making the other side's appointee the Sole Arbitrator. - HELD THAT: - Applying the principle that the court must give effect to the appointment procedure agreed by the parties, the Court found that the designated Judge erred in treating the appointment of a substitute as permissible under Section 15(2) when the agreement produced the consequence of a Sole Arbitrator on refusal. Although the power under Section 11(6) may be exercised where a party fails to act under the agreed procedure, it must be exercised consistently with the parties' contractual terms and the statutory scheme. Here, because the contract provided that the other party's appointee becomes Sole Arbitrator upon such refusal, the designated Judge had no jurisdiction to appoint a third arbitrator; his order appointing Shri Justice M.N. Chandurkar (Retd.) was therefore legally incorrect. [Paras 21, 24, 25]The orders of the designated Judge appointing the third arbitrator were set aside; the designated Judge exceeded the proper scope for appointment under the agreement and statutory scheme.Final Conclusion: Appeals allowed. The orders appointing Shri Justice M.N. Chandurkar (Retd.) as third arbitrator are set aside. In accordance with the parties' agreement, respondent No. 2 shall act as Sole Arbitrator and proceed to decide the reference and pass an award in accordance with law within three months from receipt/production of a copy of this order. Issues Involved:1. Maintainability of writ petitions against orders appointing arbitrators.2. Validity of appointment of substitute arbitrators under Section 15(2) of the Arbitration and Conciliation Act, 1996.3. Interpretation of arbitration clauses in agreements.4. Judicial versus administrative nature of the Chief Justice's power under Section 11(6) of the Act.Detailed Analysis:1. Maintainability of Writ Petitions:The appellants challenged the Division Bench of the Bombay High Court's orders, which relied on the Supreme Court's judgments in Konkan Railway Corporation Ltd. v. Mehul Construction Company and Konkan Railway Corporation Ltd. v. Rani Construction Pvt. Ltd., holding that writ petitions against orders appointing arbitrators were not maintainable. The Supreme Court overruled these precedents in S.B.P. & Company v. Patel Engineering Ltd., declaring that the Chief Justice's power under Section 11(6) of the Arbitration and Conciliation Act, 1996, is judicial, not administrative. Consequently, orders passed by the Chief Justice or designated Judge are appealable under Article 136 of the Constitution.2. Validity of Appointment of Substitute Arbitrators:The primary issue was whether the appointment of Shri S.L. Jain as a substitute arbitrator by respondent No. 1, following the refusal of Shri S.N. Huddar to act, was legally valid. The Supreme Court analyzed Section 15(2) of the Act, which allows for the appointment of a substitute arbitrator according to the rules applicable to the original appointment. The Court emphasized that the term 'rules' includes the terms of the agreement between the parties. Since the agreements did not explicitly allow for the appointment of a substitute arbitrator, the appointment of Shri S.L. Jain was deemed invalid. Consequently, the appointment of Shri Justice M.N. Chandurkar as the third arbitrator by the designated Judge was also invalidated.3. Interpretation of Arbitration Clauses:Clause 19 of the piece work agreement specified that if an arbitrator appointed by either party refuses to act, the arbitrator appointed by the other party would act as the Sole Arbitrator. The Supreme Court held that the refusal of an arbitrator to act does not equate to withdrawal under Section 15(2) of the Act. Therefore, the appointment of a substitute arbitrator was not permissible under the agreement, and respondent No. 2, appointed by the appellants, became the Sole Arbitrator.4. Judicial versus Administrative Nature of the Chief Justice's Power:The Supreme Court reaffirmed that the power exercised by the Chief Justice or the designated Judge under Section 11(6) of the Act is judicial, not administrative. This was a significant departure from the earlier view that such power was administrative, as held in the overruled judgments of Konkan Railway Corporation Ltd. cases. The Court clarified that orders passed under Section 11(6) are subject to appeal under Article 136 of the Constitution, thereby providing a judicial remedy to aggrieved parties.Conclusion:The Supreme Court allowed the appeals, setting aside the orders of the designated Judge of the High Court appointing Shri Justice M.N. Chandurkar as the third arbitrator. It directed respondent No. 2 to proceed as the Sole Arbitrator and pass an appropriate award within three months. The judgment underscored the necessity of adhering to the terms of the arbitration agreement and clarified the judicial nature of the Chief Justice's power under Section 11(6) of the Act.