In this post, we analayse a fairly old decision of a single Judge of the Supreme Court of India in Denel Proprietary v. Ministry of Defence, Government of India (decided on 09.01.2012).
The Ministry of Defence, Government of India (MoDS) placed an order on Denel Proprietary Limited (Denel) for the supply of certain units of an equipment. Some of the units supplied by Denel were rejected by MoD. Subsequently, MoD put hold to all the contracts with Denel. Denel contended that the rejected units failed due to the use of improper items by MoD. Disputes arose. Clause 19(4), the arbitration clause in the contract, provided:
"All the disputes and difference arising out of or in any way touching or concerning the agreement (matters for which the decision of a specific authority as specified in the contract shall be final under this agreement, shall not be subject to arbitration) shall be referred to the sole arbitration of the Director General, Ordnance Fys. Govt. of India for the time being or a Government servant appointed by him. The appointee shall not be a Govt. Servant who had dealt with the matters to which this agreement relates and that in the course of his duties as Govt. Servant has had not expressed views on all or any of the matter is in dispute or difference. In case the appointed Govt. Servant in place of the incumbents."
Apprehending bias, Denel wrote to the arbitrator invoking Section 14 of the 1996 Act and terminating the mandate of the arbitrator. The arbitrator nevertheless proceeded with the arbitration. Consequently, Denel applied to the District Court which terminated the mandate of the arbitrator and ordered the Director General, Ordnance Factory, Govt. of India to either act as the arbitrator or nominate the arbitrator as per the contract. The Director General, Ordnance Factory, Govt. of India did not take any action pursuant to the said direction within thirty days. Hence, Denel approached the Supreme Court of India under Section 11(6) of the 1996 Act on 02.03.2011 for the appointment of an independent arbitrator.
Denel contended as follows:
1. The District Court acted without authority by erroneously directing the Director General to be the sole arbitrator or appoint his nominee as arbitrator when no such power is contemplated under Section 15 of the 1996 Act.
2. Since the dispute is between an arm of the Government of India and Denel, the Director General would be disqualified to be appointed as arbitrator as he, as a government servant, is always bound by the directions of the Government and would not be independent or impartial.
3. The Director General colluded with MoD and appointed the arbitrator without any notice to Denel.
4. The correspondences show that the Director General was directly involved in the dispute. Vide letter dt. 30.06.2008, the Director General had specifically stated that Denel was to replace the rejected equipments.
5. In any case, the Director General failed to appoint the arbitrator in compliance with the directions of the District Court.
In reply, MoD contended as follows:
1. The application under Section 11(6) (dated 02.03.2011) was not maintainable as MoD had appointed the substitute arbitrator ad directed on 16.03.2011.
2. The Supreme Court has held valid arbitration clauses in which an employee of the Respondent was a party in cases such as Indian Oil Corporation v. Raja Transport (2009) 8 SCC 520.
Summary of the decision of the Supreme Court is as below:
1. There is no time limit fixed under Section 11(6) unlike Sections 11(4) and (5) where a thirty day period is fixed. Although, there is no such time limit, there is a right to appoint within thirty days but on expiry of the said period, the right does not automatically get forfeited. The right exists till the other party applies to the court for appointment.
2. On facts, the mandate of the earlier arbitrator was terminated by the District Court and a thirty day period was available to the DGOF. Since no arbitrator was appointed and since Denel approached the court under Section 11(6), DGOF had forfeited the right to be, or to appoint, the arbitrator.
3. It is settled law that arbitration clauses providing for senior employees of government/ PSUs as arbitrators in disputes involving such agency/ PSU are valid.
4. Generally, while exercising powers under Section 11, the court implements the agreement between the parties to appoint arbitrator. However, in the peculiar circumstances, which the records indicate, Denel was effectively denied opportunity by the arbitrator. Hence, there is reasonable apprehension that the person mentioned in the arbitration agreement is not likely to act independently or impartially as arbitrator.
Consequently, the court appointed a retired Chief Justice of Madras High Court as the arbitrator.
Where the court is of the view that it needs to divert from the norm of implementing the arbitration agreement, it should clearly spell out the factual circumstances which has made it to go for the exception. Apart from holding the following, the court has failed to spell out the relevant facts clearly:
“In the present case also, Mr. Naphade has made reference a to various notices issued by the arbitrator, none of which were received by the Petitioner within time. Therefore, the Petitioner was effectively denied the opportunity to present his case before the Sole Arbitrator.”
It is doubtable whether receipt of notices late by Denel would per se indicate that the arbitrator was not independent or impartial. In cases, circumstances indicated absence of independence or impartiality, the same should come out clearly.
Further, the arbitration clause provides for arbitration by DGOF or his nominee. The finding of the court was that the nominee of the DGOF had denied opportunity to Denel and not the DGOF. Hence, shouldn't it have asked the DGOF to be the arbitrator or appoint his nominee as arbitrator, unless there was a specific finding that the DGOF was biased or that he has failed to appoint an unbiased or independent nominee?