A.K. Sikri, J.@mdashThese three applications under Sections 7, 8 and 11 of the Arbitration and Conciliation Act, 1996 (in short ''the Act'') are filed by the applicant for appointment of an arbitrator for the purpose of adjudicating the disputes, differences, claims and questions which have arisen between the parties. All the applications involve same question of law, to be decided under similar set of facts for sake of convenience, facts of Arb. P. No. 162/99 are noted.
2. The applicant is a non-banking financial company. In the year 1995 it agreed to grant lease finance for purchase of certain equipments to the respondent No. 1, which is also a company incorporated under the Indian Companies Act. The lease agreement dated 29th March 1995 was entered into between the parties. Certain equipments, details whereof are given in para 7(d) were purchased and leased out to the respondent No. 1. Respondent No. 2, who is Chairman of respondent No. 1-company stood guarantee for repayment of the amount and signed Deed of Guarantee. Respondent No. 1 also executed demand promissory note for a sum of Rs. 43,88,472/- which was forwarded to the applicant under the cover of its letter dated 31st March 1995. The equipment was installed by respondent No. 1 at its premises at 10, Community Centre, East of Kailash, New Delhi.
3. The term of the agreement was for a period of 36 months and monthly lease rentals for this period were to be given by respondent No. 1 as per clause 4 of the agreement. It was also agreed in this agreement that the applicant would remain sole and exclusive owner of the leased equipment and right to use the equipment by the respondents was subject to payment of lease rentals with the stipulated regularity. Clause 23 of the agreements provides that if there is any ''default'' on the part of the respondent No. 1 in making payment of rentals or part thereof or in making other payments due under the agreement, the applicant could declare all sums due under the agreement as being immediately payable.
4. According to the averments made in the application, the respondent No. 1 did not adhere to the schedule and certain payments were made which were also irregular. Several cheques issued by the respondent No. 1 in this behalf were also dishonoured. Large sums became due and vide letter dated July 24, 1997 liability of Rs. 56,03,616/- was even admitted. Certain payments, however, were made thereafter and as on June 30, 1998 outstanding amount was Rs. 44,41,865/-. In view of these defaults, notice dated 22nd August 1998 was also issued calling upon the respondent No. 1 to make payment of the entire amount. After receipt of this notice the respondents approached the applicant for amicable settlement. Since there were two more agreements (in respect of which Arb. P. Nos. 166/99 and 167/99 are filed), on 26th December 1998 an agreement was arrived at whereby the respondent No. 1 agreed that a sum of Rs. 1,45,37,532/- was due. However, it was agreed that the respondent No. 1 shall make payment of Rs. 56,55,824/- to the applicant in the manner provided therein. It was also agreed that in the event of default, the entire amount would become payable. Though first two Installments under the said agreement dated 26th December 1998 were paid, cheque in respect of third Installment was dishonoured. The two cheques dated 10th March 1999 were given in lieu of the said dishonoured cheque. However, the applicant treated it as default as envisaged in the agreement dated 26th December 1998 and vide letter dated 30th March 1999 demanded the entire amount which had become payable under the three lease agreements. Some more payments were made thereafter which were appropriated by the applicant but the applicant maintains that there is a default.
5. Since the contract between the parties contains an arbitration clause/agreement, prayer is made for appointment of any arbitrator. Both the respondents have filed separate replies and have contested the application. The objection of the respondent No. 1 is that this application is not maintainable as the arbitration is not invoked as per the procedure mentioned in the arbitration clause and, Therefore, application is not maintainable in view of the provisions of Section 11 of the Act.
6. In the reply filed by the respondent No. 2, in addition to the aforesaid defense, application is also contested on the ground that when fresh agreement dated 26th December 1998 was arrived at between the applicant and the respondent No. 1, without involving and/or taking consent of the respondent No. 2, the respondent No. 2 stood absolved from his guarantees because of the said novation and, Therefore, the agreement dated 29th March 1994 does not survive qua the respondent No. 2 which contains an arbitration clause and thus, the present application is not maintainable against the respondent No. 2.
7. Two issues which require determination, Therefore, are the following:-
(1) Whether the petition is not maintainable on the ground that the procedure laid down in the arbitration clause is not followed and which was a precondition for filing the application u/s 11 of the Act?
(2) Whether the respondent No. 2 is discharged from his liability under the agreement dated 29th March 1995 in view of subsequent agreement dated 28th December 1998?
8. Issue No. (1):
For determining this issue, it would be necessary to refer to clause 32 of the agreement dated 29th March 1995,which reads as under:-
"All disputes, differences, claims and questions, which may arise, during the subsistence of this Agreement or supplemental agreement between the Lesser and the Lessee touching any matter covered by the Agreement shall be referred to the arbitration of two arbitrators one to be appointed by each party to the dispute in accordance with the provisions of the Arbitration Act, 1940. The venue of arbitration shall be Bangalore, India."
Argument of the learned counsel for the respondent is that as per the procedure specified in the aforesaid clause, in the event of disputes, the same were to be referred to the arbitration of two arbitrators, one to be appointed by each party to the dispute. Therefore, it was incumbent upon the petitioner to serve a notice upon the respondent and appoint its own arbitrator and call upon the respondent No. 1 to nominate its arbitrator. The petitioner, however, did not appoint its arbitrator. In the legal notice dated 22nd August 1998 sent by the petitioner to the respondent No. 1, it was stated that in case the respondents fail to return the plant and machinery and pay the amount due forthwith "our clients shall be constrained to infer that disputes have arisen under the agreement, and refer disputes to arbitration in the manner envisaged in the agreement." Thus, although the petitioner accepted even in this notice that they were to refer the dispute in the manner envisaged in the agreement, it failed to nominate its arbitrator and did not give any chance to the respondents to appoint their arbitrator and instead filed present petition making a prayer that the Court should appoint an arbitrator. According to the respondents, this was not permissible in view of Section 11(5) of the Act, which is to the following effect:-
"Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other to so agree the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him."
Learned counsel referred to the judgment of this Court in the case of Munish Gupta and Ors. v. Ram Dass and Ors., 2002 VII AD (Del) 276 wherein such a petition without complying with the provisions of Section 11(5) was dismissed and following observations are made in the process:-
"4. Bare reading of above sub-section (5) would show that before filing petition the party demanding appointment of arbitrator has to request the other party in writing to concur in the appointment of sole arbitrator out of the names of persons suggested, within 30 days of the receipt of such a request by it. To be only noticed that in para No. 9 reproduced above of the notice, neither the names of persons had been suggested nor respondents 1 to 3 called upon to concur in the appointment of sole arbitrator. Thus, based on such a notice the present petition is not legally maintainable as was rightly contended on behalf of respondents 1 to 3 and petition deserves to be dismissed on that ground alone."
9. Learned counsel for the petitioner, on the other hand, submitted that even if such a procedure was not followed, the petitioner could still maintain the petition under sub-section (6) of Section 11 of the Act which gives choice to a party to seek the appointment through the process of the court, namely, the Chief Justice or his designate. For this purpose he referred to the following observations of the Constitution Bench in the case of
"...That the Chief Justice or his designate has to make the nomination of an arbitrator only if the period of thirty days is over does not lead to the conclusion that the decision to nominate is adjudicatory. In its request to the Chief Justice to make the appointment the party would aver that this period has passed and, ordinarily, correspondence between the parties would be annexed to bear this out. This is all that the Chief Justice or his designate has to see...."
10. He also referred to para 5 of a Division Bench judgment of this Court in the case of
11. In order to appreciate the submission of the parties, one has to consider the provisions of Section 11 in its entirety. It relates to the appointment of arbitrator when disputes arise between the parties. Sub-section (2) of Section 11 states that the parties are free to agree on a procedure for appointing an arbitrator or a co-arbitrator. Thus, in the first instance, choice is left to the parties who may stipulate a particular procedure to be followed for appointment of the arbitrator(s) in the arbitration agreement. If there is no such procedure agreed to between the parties, sub-section (3) lays down that in such a case each party shall appoint one arbitrator and the two appointed arbitrators shall appoint a third arbitrator who shall act as the presiding arbitrator. The manner in which each party has to appoint its arbitrator is specified in sub-section (4). If the agreement does not stipulate the procedure as referred to in sub-section (2) and the arbitration clause stipulates the appointment of a sole arbitrator and the parties fail to agree on a particular arbitrator within 30 days from receipt of a request by one party from the other party, one party can approach the Chief Justice or any person or institution designated by him for appointment of an arbitrator. In the present case, we are not concerned with sub-section (3), (4) or (5), as a particular procedure is specified in the arbitration clause, namely, each party shall appoint its arbitrator. For this the procedure contained in Arbitration Act, 1940, which was the statute governing the field as on the date when the agreement was signed, is stipulated. Thus, one party was to give notice to the other party nominating its arbitrator and calling upon the other party to nominate the arbitrator.
12. Since the procedure is prescribed in the arbitration agreement, the relevant provisions of Section 11 would be sub-section (2) and sub-section (6). They read as under:-
"(1) xxxxx
(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.
(3) xxxxx
(4) xxxxx
(5) xxxxx
(6) Where, under the appointment procedure agreed upon by the parties,-
(a) a party fails to act as required under that procedure; or
(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(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 institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment."
13. A conjoint reading of the provisions would clearly indicate that:
(a) parties may agree on a particular procedure for appointment of the arbitrator;
(b) when such procedure is prescribed, one party has to give notice to the other party to act as required under that procedure [See Section 6(a)];
(c) if a party fails to act as required, the Chief Justice or any person or institution designated by him can be approached by taking necessary measures for appointment of the arbitrator.
The reading of Section 11 in the aforesaid manner would clearly lead to the conclusion that it is necessary for one party to put other party to notice and call upon the other party to act as per the procedure agreed to between the parties for appointment of an arbitrator and Chief Justice would be approached only if the party noticed fails to act as per the procedure. I am, Therefore, in agreement with the view taken by learned single Judge of this Court in Munish Gupta v. Ram Dass (supra).
It may be noted at this stage that Andra Pradesh High Court has also taken identical view in the case of D. Raja Reddy v. Director General, National Institute of Agricultural Extension Management, Hyderabad, 1999 (2) Arb. LR 212. It would be useful to quote the following passage from that judgment:-
"Section 11(2) of the Act provides that subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators. In the instant case, the parties have agreed to for a certain procedure for appointment of an arbitrator. Sub-section (6) to Section 11 would operate only if a party fails to act as required under that procedure. The instant case is not the one, in which the MANAGE has failed to act according to the procedure. As I have already stated above, immediately by rejecting the appeal filed by the applicant-Contractor, by finding that there is dispute, it has proposed a panel of three names for appointment of one of them as the sole arbitrator in terms of Clause 52.3 of the agreement, and it was only for the applicant to choose to do so. From this it follows that applicant wants to give a go-by to the procedure prescribed by the arbitration clause, agreed to by the parties under Clause 52.3. Since parties are free to agree upon a procedure for the appointment of a arbitrator or arbitrators and after such agreement, the applicant is bound of such agreement entered into. Hence, the applicant has to follow such procedure and it was bound to accept one of the arbitrators from out of the panel suggested by the MANGE in terms of Clause 52.3. Therefore, the applicant by refusing to follow the procedure by itself, cannot approach this Court u/s 11 of the Act. The intendment of Section 11 is that, if the other side is not ready to follow the procedure, the applicant may seek the High Court for the direction to the other side either to follow the procedure or request the High Court to appoint one arbitrator in terms of the scheme. In other words, it does not lie in the mouth of any person to say "I do not want to follow the procedure prescribed under the arbitration clause and appoint one arbitrator for me."
Having regard to these circumstances, I do not see that there is any merit in this application. Accordingly, I pass the order as under:
"The arbitration application is rejected, but in the circumstances without costs."
14. The two judgments quoted by the petitioner would be of no help to it. Konkan Railway Corporation (supra) was a case where the Court was considering as to whether the function of the appointment of arbitrator by the Chief Justice or his designate is an administrative function or judicial function and held that it was an administrative function. The observations were in that context. It may be noted that even this view that the Chief Justice or his designate discharges administrative function while appointing an arbitrator, has been overruled in a recent seven Judge judgment of the Supreme Court in the case of S.B.P. & Company v. Patel Engg. Ltd. and Anr. - Civil Appeal No. 4168/2003 decided on 26th October 2005.
15. In the case of Indian Oil Corporation Ltd. v. Kiran Construction Co. (supra) the Court was dealing with the maintainability of writ petition filed against the order of appointment of the arbitrator passed by the Chief Justice or his designate u/s 11(6) of the Act. Moreover, para 5 of the judgment relied upon by the petitioner, in fact, contains the submissions of the learned counsel and not the observation of the Court. Furthermore, in that case the Court dismissed the writ petition on the ground that the appointment was valid as the respondent had not acted and nominated an arbitrator in spite of notice issued and thus, in that case the party had approached the Chief Justice only after following the procedure. That can be clearly noticed from the reading of paras 14 and 18 of that judgment.
16. Since in the present case also the petitioner has filed this petition without exhausting the procedure contained in the arbitration agreement, it is not maintainable. As for this reason this petition has to be dismissed, it is not necessary to consider issue No. 2.
17. The petition is accordingly dismissed. However, in the circumstances of this case there shall be no orders as to costs.
