DENEL (PROPRIETARY LIMITED)versusBHARAT ELECTRONICS LTD. & ANR.

                         [2010] 6 S.C.R. 784


A                DENEL (PROPRIETARY LIMITED)
                                   v.
               BHARAT ELECTRONICS LTD. & ANR.
                (Arbitration Petition No. 16 of 2009)

                            MAY 10, 2010
B
                          [H.L. DATIU, J.)

       Arbitration and Conciliation Act, 1996 - s. 11 (6) - Dispute
  between parties regarding payment of certain amounts
C towards Purchase Orders - Arbitration clause of the
  agreement specifying 'Managing Director' of respondent-
  company to be arbitrator - Petition for appointment of
  arbitrator - Held: Generally court not to interdict appointment
  of an arbitrator, chosen by the parties under the terms of the
D contract - In the peculiar facts of the case, it is in the interest
  of both the parties to appoint an arbitrator other than the
  Managing Director of the respondent-Company - Retired
  Judge of Supreme Court appointed as sole arbitrator.

E        Respondent-Corporation entered into a contract with
    the appellant-Company. The 'general terms and
    conditions of the Purchase Order' contained an
    arbitration clause. As per the clause, 'Managing Director
    or his nominee' of the respondent-Corporation would be
    appointed as arbitrator.
F
      The petitioner after performing its obligation in terms
  of purchase orders, raised a demand. Respondent
  though admitted their liability, refused to settle the
  amounts on the ground that they were prohibited by the
G Ministry. Later the respondent denied its liability. Hence
  the petition uls. 11 (6) of Arbitration and Conciliation Act,
  1996.

        Allowing the petition, the Court
H                                 784
    DENEL (PROPRIETARY LIMITED) v. BHARAT              785
           ELECTRONICS LTD. & ANR.

    HELD: 1. There is a dispute between the parties in A
regard to payment of certain amounts towards Purchase
Orders/Invoice. Since, there is a failure on the part of the
respondent in mc.i.king appointment of an arbitrator for.
resolving the 1ispute in accordance with the
understanding of the parties which is reflected in the B
Purchase Order, .he prayer of the petitioner requires to
be granted. [Para 23] [795-B-C]

    2. The court cannot interpose and interdict the ·
appointment of an arbitrator, whom the parties have C
chosen under the terms of the contract unless legal
misconduct of the arbitrator, fraud, disqualification etc. is
pleaded and proved. It is not in the power of the party at
his own will or pleasure to revo_ke the authority of the
arbitrator appointed with his consent. There must be just
and sufficient cause for revocation. The said principle has D
to abtcfe by in the normal course. However, considering
the peculiar conditions in the present case, whereby the
arbitrator sought to be appointed under the arbitration
clause, is the Managing Director of the company against
whom the dispute is raised. In addition to that, the said E
Managing Director of the Company which is a
'Government Company' is also bound by the direction/
instruction issued by his superior authorities. It is also the
case of the respondent that though it is liable to pay the
amount due under the Purchase Orders, it is not in a .F
position to settle the dues only because of the directions
issued by Ministry of Defence, Government of India. It
only shows that the Managing Director may not be in a
position to independently decide the dispute between the
parties. [Para 22] [794-D·H; 795-A]                            G

     3. In the light of the peculiar facts and circumstances
of the instant case, 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       H
                                                                   '
    786       SUPREME COURT REPORTS                  [2010] 6 S.C.R.


A be appointed to settle the dispute. A retired judge of
  Supreme Court is appointed as the sole arbitrator. [Paras
  25 and 26] [795-E-F]

       Indian Oil Corporation Ltd. and Ors. vs. Raja Transport
B Pvt. Ltd., (2009) 8 SCC 520; You One Engineering and
  Construction Co. Ltd. and Anr. vs. National Highways Authority
  of India (NHAI) (2006) 4 SCC 372; Datar Switchgears Ltd. v.
  Tata Finance Ltd. and Anr. (2000) 8 SCC 151; Bhupinder
  Singh Bindra v. Union of India and Anr. AIR1995 SC 2464,

c referred to.
                          Case Law Reforence:
          (2009) s sec 520            Referred to.         Para 16
          (2006) 4 sec 372            Referred to.         Para 17
D
          (2000) s sec 151            Referred to.         Para 22
          AIR 1995 SC 2464            Referred to.         Para 22
      CIVIL APPELLATE JURISDICTION : Arbitration Petition
E No. 16 of 2009.

        Under Section 11 (6) of the Arbitration and Conciliation Act-
    1996.

          V.Giri, Madhu S., K.C. Dua, for the Appellant.
F
          S.N. Bhat for the Respondents.

          The Judgment of the Court was delivered by

         H.L. DATTU, J. 1. The Petitioner has filed the present
· G Arbitration Petition under sub-section (6) of Section 11 of the
    Arbitration and Conciliation Act, 1996 (hereinafter referred to
    as "the Act"). It is prayed in the petition to appoint a sole
    arbitrator to adjudicate the dispute between the parties.

H
     DENEL (PROPRIETARY LIMITED) v. BHARAT                       787
     ELECTRONICS LTD. & ANR. [H.L. DATTU, J.]

    2. The Petitioner is a· company wholly owned by the                 A
Government of the Republic of South Africa, duly incorporated
as per the laws of the Republic of South Africa, with its main
business address at Denel Head Office, Nelmapius Drive, Irene,
Pretoria. Republic of South Africa.
                                                                        B
     3. The Respondent is a Corporation duly registered under
the Companies Act, 1956, having its registered office at Pune,
Maharashtra. It is a Government of India Enterprise, Ministry of
Defence, Government of India.

     4. The Petitioner - company had several internal divisions;        C
one of them being Denel Eloptro at the time when the contracts
between Petitioner and Respondent were entered into. The
name of the said division was changed from Delnel Eloptro to
Denel Ptonics with effect from 1st April, 2004. The Optronics
division was not a separate legal entity, but was only a business       D
unit of the Petitioner.

     5. The Respondent in the year 2004. placed c.ertain
purchase orders with Denel Eloptro for supply of various
electronic equipments which are listed as under:
                                                                        E
       1.    PUR/PN/C1/621977 dated 28th July 2004

       2.    PUR/PN/CN/62.1973 dated 28th July 2004
                                \
       3.     PUR/PN/C1/622029 dated 11th December 2004
                                                                         F
        6. The 'General Terms and Conditions of the Purchase
  Order (Foreign) contains an Arbitration Clause. Clause 10 of
  the Purchase Order, inter-alia, provides for arbitration in case
  of dispute arising from the interpretation or from any matter
  relating to the rights and obligations of the parties. It also refers · G
  to the appointment of the 'Managing Director or his nominee'
  of the respondent as the arbitrator. It is not in dispute that the
. said Clause in the Purchase Order is a valid arbitration
  agreement in terms of Section 2(b) read with Section 7 of the
  Act. The Petitioner before the delivery of the goods to the H
    788       SUPREME COURT REPORTS                 [2010] 6 S.C.R.


A   Respondent as per the orders placed by them entered into a
    credit insurance policy with one Credit Guarantee Insurance
    Corporation of Africa Ltd. (hereinafter referred to as
    "Corporation") in respect of the said Purchase Orders.

        7. The petitioner states, that, it duly performed its
8
  obligations in terms of the purchase orders and delivered the
  goods as ordered and the invoices were issued. The said
  delivery of goods was also accepted by the respondent without
  raising any objection. It is further stated, that, as the goods were
  accepted and utilized, the respondent was liable to pay the
C value of the goods in a sum of GBP 34,894.75(Thirty Four
  Thousand Eight Hundred and Ninety Four and 75 Pence Pound
  Sterling).

          8. The petitioner raised a demand with respondent for the
D .; aforesaid amount. However, the respondent vide letter dated
     4th May 2005, refused to pay the said amount, only on the
     ground that it is a "Government Company" under the Ministry
     of Defence, Government of India and in view of the direction
     issued by the Ministry to withhold payment of the said invoices,
E it is unable to settle the amounts due to the petitioner.

          9. The Insurance Corporation also requested, vide its letter
    dated 29th May 2006, to pay the amount raised against them.
    The respondent by its reply letter dated 8th June 2006
    addressed to the Corporation - insurer, inter alia contended,
F   that, as per the guide-lines issued by the Ministry of Defence,
    Government of India, to discontinue dealings with M/s DENEL
    (PYT) LTD., and withhold payment due if any, it is unable to
    satisfy its liability to the petitioner.
          ~

G        1"0. Petitioner through its Advocate addressed a letter
    date'd 29th November, 2006, inter-alia, requesting them to
    make payments towards three Purchase Orders - PUR/PN/CI/
    621977 dated 28.07.2004, PUR/PN/CN/621973 dated
    28.07~2004 and PUR/PN/Cl/622029 dated 11.12.2004.
H
      DENEL (PROPRIETARY LIMITED) v. BHARAT                      789
      ELECTRONICS LTD. & ANR. [H.L. DATTU, J.]
                                                                         I
      11. The respondent through its Advocates and Solicitors, r A
 vide their letter dated 18th December, 2006, though admitted"
 their liability towards the aforesaid Purchase Orders, refuse to
 settle the amounts due only on the ground, that, they are
 prohibited from making any payments to the petitioner by the
 Ministry of Defence, Government of India vide its letter/ B
 communication dated 21st April, 2005.

  .     12. The petitioner was constrained to issue notice dated
  30th May, 2009 to the respondent which was served on the
  respondent and its Managing Director through fax on 30th May           C
· 2009 and through speed post and courier on 2nd June 2009
  and 6th June 2009, respectively. In the said notice, ttie
  petitioner cited Clause 10 of the General Terms and Conditions
  of the Purchase Orders which provides for reference of
  disputes to arbitration an9 accordingly requested the
   respondent, to refer the disputes for -adjudication in accordance     D
  with Arbitration and Conciliation Act, 1996. It was also stated,
  that, since the arbitration clause provides only for the
  appointment of Managing Director or his nominee, instead of
  mutually agreed indepenc;lent arbitrator, the said clause is invalid
  and accordingly requested the respondent for appointment of            E
  mutually agreed independent arbitrator. to adjudicate the
  disputes which. have arisen between the petitioner and
. respondent.

      13. In response to the notice issued by the petitioner, the        F
 respondent by its letter dated 24th June 2009 for the first time
 disputed its liability for the payment of the amount demanded
 by the petitioner. It was also stated, that the names proposed
 by the petitioner for the appointment of the arbitrator was not
 acceptable, as Clause 10 of the General Terms and Conditions            G
 of the Purchase Order does not permit the same and, further
 they are not yvilling to refer the dispute  tothe arbitrator, since
 the direction issued by the Ministry of defence is in full force
 and effect, and they are protected under Section 56 of the Indian
 Contract Act, 1872.
                                                                         H
    790       SUPREME COURT REPORTS                   [201 O] 6 S.C.R.


A         14. In the light of the aforesaid factual background, the
    petitioner has invoked the jurisdiction of this Court by filing the
    petition under Section 11 (6) of the Arbitration and Conciliation
    Act 1996, to appoint an arbitrator to resolve the dispute
    between the parties.
B
          15. After service of the notice, the parties have exchanged
    their pleadings.

          16. The learned senior counsel for the petitioner, Sri V. Giri
  would submit, that, in view of the specific clause for referring
C the disputes between the parties for arbitration, the respondent
  was not justified in refusing to refer the dispute to sole
  independent arbitrator on the only ground, that, they are
  prohibited from making any payment to the petitioner by the
  Ministry of Defence, Government of India. It is further contended,
D that, Clause-10 of the Purchase Order provides for referral of
  disputes between the parties to the Managing Director or his
  nominee and since the Managing Director being the appointee
  of the Central Government, the petitioner genuinely apprehends
  that it may not get any justice in the hands of the Managing
E 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.
  In aid of his submission, reliance is placed on the observations
  made by this Court in the case of Indian Oil Corporation Ltd.
F & Ors. Vs. Raja Transport Pvt. Ltd., [(2009) 8 SCC 520]. At
  paras 34 to 37, this Court has observed as under:

          "34. The fact that the named arbitrator is an employee of
          one of the parties is not ipso facto a ground to raise a
          presumption of bias or partiality or lack of independence
G         on his part. There can however be a justifiable
          apprehension about the independence or impartiality of an
          employee arbitrator, if such person was the controlling or
          dealing authority in regard to the subject contract or if he
          is a direct subordinate (as contrasted from an officer of
H         an inferior rank in some other Department) to the officer
   DENEL (PROPRIETARY LIMITED) v. BHARAT                     791
   ELECTRONICS LTD. & ANR. [H.L. DATIU, J.]

   whose decision is the subject-matter of the dispute.              A

    35. Where however the named arbitrator though a senior
    officer of the Government/statutory body/government
    company, had nothing to do with the execution of the
    subject contract, there can be no justification for anyone       B
    doubting his independence or impartiality, in the absence
    of any specific evidence. Therefore, senior officer(s)
    (usually Heads of Department or equivalent) of a
    Government/statutory corporation/public sector
    undertaking, not associated with the contract, are
    considered to be independent and impartial and are not           C
    barred from functioning as arbitrators merely because their
    employer is a party to the contract.

    36. The position may be different where the person named
    as the arbitrator is an employee of a company or body or         D
    individual other than the State and its instrumentalities. For
    example, if the Director of a private company (which is a
    party to the arbitration agreement), is named as .the
    arbitrator, there may be a valid and reasonable
    apprehension of bias in view of his position and interest,       E
    and he may be unsuitable to act as an arbitrator in an
    arbitration involving his company. If any circumstance
    exists to create a reasonable apprehension about the
    impartiality or independence of the agreed or named
    arbitrator, then the court has the discretion not to appoint     F
    such a person.

    37. Subject to the said clarifications, we hold that a person
    being an employee of one of the parties (which is the State
    or its instrumentality) cannot per se be a bar to his acting
    as an arbitrator. Accordingly, the answer to the first           G
    question is that the learned Chief Justice was not justified
    in his assumption of bias."

    17. Sri S.N. Bhat, learned counsel for the respondent would
submit, that the petition filed by the petitioner is premature,      H
    792       SUPREME COURT REPORTS                   [2010] 6 S.C.R.


A since respondent though stated in its notice that there is
  arbitration clause in the Purchase Order which provides for
  referral of the disputes to its Managing Director or its nominee,
  the petitioner had suggested that the disputes need not be
  referred to the 'named arbitrator', since he is not mutually
B agreed independent arbitrator and, therefore, there was no
  failure on the part of the respondent in responding to the
  request made by the petitioner. It is further contended, that, in
  view of Clause-10 of the Purchase Order which provides for
  appointment of the arbitrator, only the 'named person' in the
C Clause-10 can be appointed and, therefore, the petitioner-
  company cannot request for appointment of independent
  arbitrator for resolving disputes, if any, between the parties. The
  learned counsel relies on the observations made by this Court
  in the case of You One Engineering & Construction Co. Ltd.
  & Anr. Vs. National /-1ighways Authority of India (NHAI),
0
  [(2006) 4 SCC 372]. It is stated in the said decision:

          "Although the learned counsel for the petitioners contended
          that this is a situation falling within the contefl!plation of
          clause (c) of Section 11 (6) of the Act, namely, that the
E         institution i.e. IRC failing to perform the function entrusted
          to it under the appointment procedure, I am not satisfied.
          Under the appointment procedure agreed to under clause
          67.3, each of the parties to the dispute is required to
          nominate its arbitrator and the third arbitrator is to be
F         chosen by the two arbitrators appointed by the parties and
          he shall act as the presiding arbitrator. Clause 67.3(il)
          provides that in case of the failure of the two arbitrators
          appointed by the parties to reach upon a consensus within
          a period of 30 days from the appointment of the arbitrator
G         appointed subsequently, the presiding arbitrator shall be
          appointed by the President of the Indian Roads Congress."

         18. The petitioner has prayed before this Court for the
    appointment of the sole arbitrator. The petitioner has submitted,
    that, it is clear from the invoices and the correspondence
H
    DENEL (PROPRIETARY LIMITED) v. BHARAT                     793
    ELECTRONICS LTD. & ANR. [H.L DATTU, J.]

between the parties particularly dated 4th May 2005 and 8th          A
June 2006, that the respondent has not disputed the liability of
payment due to the petitioner. Therefore, as the respondent now
seeks to avoid the payment of the amount due to the petitioner,
there is dispute between the parties which requires to be
referred for arbitration before the arbitrator.                      B

     19. Clause 1O of the 'General Terms and Conditions to
Purchase Order' does constitute a valid arbitration clause as
it shows the intention of the parties to appoint an arbitrator and
refer the dispute between the parties for the arbitration            C
proceedings under the Arbitration and Conciliation Act 1996.
The wordings of Clause 10 are as follows:

     "ARBITRATION: All disputes regarding this order shall be
referred to our Managing Director or his nominee for
arbitration who shall have all powers conferred by Indian            D
Arbitration and Conciliation Bill, 1996 for the time in force."

     20. Section 11 of the Act provides for the appointment of
arbitrators and sub-section (6) of Section 11 of the Act under
which the present petition is before this Court reads as under:
                                                                     E
     "6) Where, under an appointment procedure agreed
     upon by the parties, -

     (a) A party fails to act as required under that procedure;
     or                                                              F
     (b) The parties, or the two appointed arbitrators, fail to
     reach an

     agreement expected of them under that procedure; or
                                                                     G
     (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          H
    794      SUPREME COURT REPORTS                  [2010] 6 S . C.R.


A         institution designated by him to take the necessary
          measure, unless the agreement on the appointment
          procedure provides other means for securing the
          appointmenf'

       21. Sub-section (6) of Section 1·1 of the Act provides, that,
8
  when the parties fail to reach to an agreement as regards the
  appointment of the arbitrator, can request the Chief Justice or
  any person or institution designated by him to come to the
  rescue of the parties. Therefore, petitioner in the present case
C has sought the appointment of the arbitrator by this Court so
  that the dispute between the parties can be resolved.
                                                                         .
                                                                         .
          22. In the case of Datar Switchgears Ltd. v. Tata Finance
    Ltd. & Anr., [(2000) 8 SCC 151), this Court while considering
    the powers of the Court to appoint arbitrator under Section 8
D   of the Arbitration Act, 1940, cited the decision of this Court in
    the case of Bhupinder Singh Bindra v. Union of India and Anr.
    [AIR1995 SC 2464]. It was held in that case that "It is settled
    law that court cannot interpose and interdict the appointment
    of ,en arbitrator, whom the parties have chosen under the
E   terms of the contract unless legal misconduct of the arbitrator,
    fraud, disqualification etc. is pleaded and proved. It is not in
    the power of the party at his own will or pleasure to revoke the
    authority of the arbitrator appointed with his consent. There
    must be just and sufficient cause for revocation." The said
F   principle has to abide by in the normal course. However,
    considering the peculiar conditions in the present case,
    whereby the arbitrator sought to be appointed under the
    arbitration clause, is the Managing Director of the company
    against whom the dispute is raised (the Respondents). In
G   addition to that, the said Managing Director of Bharat
    Electronics Ltd which is a 'Government Company', is also
    bound by the direction/instruction issued by his superior
    authorities. It is also the case of the respondent in the reply to
    the notice issued by the respondent, though it is liable to pay
    the amount due under the Purchase Orders, it is not in a
H
    DENEL (PROPRIETARY LIMITED) v. BHARAT                    795
    ELECTRONICS LTD. & ANR. [H.L. DATIU, J.]

position to settle the dues only because of the directions issued    A
by Ministry of Defence, Government of India. It only shows that
the Managing Director may not be in a position to
independently decide the dispute between the parties.

      23. The facts narrated by me would clearly demonstrate
that there is a dispute between the parties in regard to payment     B
of certain amounts towards Purchase Orders/Invoice. Since,
there is a failure on the part of the respondent in making
appointment of an arbitrator for resolving the dispute in
accordance with the understanding of the parties which is
reflected in the Purchase Order, the prayer of the petitioner        C
requires to be granted.

     24. Before parting with the case, in my considered opinion,
the decision on which reliance is placed by Shri S.N. Bhat,
learned counsel for the respondent, would not assist him to.         D
drive home his point.

    , 25. Therefore, in the light of the peculiar facts and
crrcumstances of this case, 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         E
to settle the dispute.

     26. For the foregoing reasons, the Arbitration Petition is
allowed. Hon'ble Dr. Justice Arijit Pasayat (Retired) is appointed
as the sole arbitrator.                                              F

     27. The Arbitrator will be at liberty to fix his own
remuneration and other terms and conditions with regard to
holding of the arbitration proceedings.

K.K.T.                              Arbitration Petition allowed.    G