Central Organisation For Railway … vs M/S Eci Spic Smo Mcml (Jv) A Joint … on 17 December, 2019


Supreme Court of India

Central Organisation For Railway … vs M/S Eci Spic Smo Mcml (Jv) A Joint … on 17 December, 2019

Author: R. Banumathi

Bench: R. Banumathi, A.S. Bopanna

                                                                     REPORTABLE
                                       IN THE SUPREME COURT OF INDIA
                                        CIVIL APPELLATE JURISDICTION

                                     CIVIL APPEAL NOS. 9486-9487 OF 2019
                                   (Arising out of SLP(C) Nos.24173-74 of 2019)


                         CENTRAL ORGANISATION FOR
                         RAILWAY ELECTRIFICATION                               ...Appellant

                                                      VERSUS
                         M/S ECI-SPIC-SMO-MCML (JV)
                         A JOINT VENTURE COMPANY                            …Respondent



                                                  JUDGMENT

R. BANUMATHI, J.

Leave granted.

2. These appeals have been preferred against the impugned

orders dated 03.01.2019 and 29.03.2019 passed by the High Court

of Judicature at Allahabad in Arbitration Application No.151 of 2018

in and by which the High Court rejected the contention of the

appellant that the arbitrator is to be appointed as per General

Conditions 64 (3)(a)(ii) and 64 (3)(b) of the Contract and appointed

Shri Justice Rajesh Dayal Khare as the sole arbitrator for resolving
Signature Not Verified

Digitally signed by
MAHABIR SINGH
Date: 2019.12.17
16:00:38 IST
the dispute between the parties.

Reason:

1

3. The appellant awarded work contract of Rs.165,67,98,570/- to

the respondent-Company by an agreement dated 20.09.2010 which

contains the arbitration clause. Subsequently, after coming into

force of Arbitration and Conciliation (Amendment) Act, 2015 (w.e.f.

23.10.2015), the Government of India, Ministry of Railways made a

modification to Clause 64 of the General Conditions of Contract and

issued a notification dated 16.11.2016 for implementation of

modification. The modified Clause 64(3)(a)(ii) (where applicability of

Section 12(5) has been waived off) inter alia provided that in cases

where the total value of all claims exceeds Rs. 1 crore, the Arbitral

Tribunal shall consist of a panel of three gazetted Railway Officers

not below JA (Junior Administrative) Grade or two Railway Gazetted

Officers not below JA Grade and a retired Railway Officer, retired

not below the rank of Senior Administrative (SA) Grade officer as

arbitrators. The procedure for constitution of the Arbitral Tribunal is

provided thereon. Clause 64(3)(b) deals with the appointment of

arbitrator where applicability of Section 12(5) of the Arbitration and

Conciliation Act has not been waived off. Clause 64(3)(b) stipulates

that the Arbitral Tribunal shall consist of a panel of three retired

railway officers not below the rank of Senior Administrative Officer

as the arbitrators as per the procedure indicated thereon.

2

4. Since the respondent did not complete the work under the

contract within the prescribed period, on 18.10.2017, the appellant

issued “Seven days” notice under Clause 62 of the General

Conditions of Contract to the respondent. Thereafter on

27.10.2017, the appellant issued a “48 hours’ notice” to the

respondent calling upon the respondent to make good the progress

of work, failing which the contract will stand terminated. Since the

respondent did not make adequate progress in the work, on

01.11.2017, the contract was terminated as per Clause 62 of the

General Conditions of the Contract. The respondent was also

informed that their security deposit has been forfeited and the

performance guarantee submitted by it shall also be encashed.

5. The respondent filed a Petition No.760 of 2017 before the

High Court challenging the termination of the contract which came

to be dismissed by the High Court vide order dated 28.11.2017 and

the High Court directed the respondent to avail the alternative

remedy by invoking arbitration clause. The respondent vide its

letter dated 27.07.2018 requested the appellant for appointment of

an Arbitral Tribunal for resolving the disputes between the parties

and settle the claims value of Rs.73.35 crores. In reply dated

24.09.2018, the appellant sent a list of four serving Railway

3
Electrification Officers of JA Grade to act as arbitrators. The

respondent was asked to select any two and communicate to the

appellant for formation of the arbitration tribunal panel. Vide letter

dated 25.10.2018, the respondent was sent a list of another panel

comprising four retired Railway officers. In terms of Clause 63(3)(b)

of Railway’s General Conditions of Contract, the respondent was

asked to select any two from this list and communicate them to the

appellant within thirty days for constitution of the arbitration tribunal.

6. The respondent did not send a reply to the above letters of the

appellant; but filed Arbitration Petition No. 151 of 2018 before High

Court under Section 11(6) of the Arbitration and Conciliation Act

seeking appointment of a sole arbitrator for resolution of differences.

In its petition, the respondent suggested the name of one Shri

Ashwani Kumar Kapoor, retired member Electrical from Railway

Board to be appointed as an arbitrator in the matter. According to

the respondent, there exists a valid and binding arbitration clause

between the parties being clause 1.2.54 of Part I of Chapter 2 and

also 64 of the General Conditions of Contract; but since no neutral

arbitrator is contemplated to be appointed in the General Conditions

of Contract, the respondent has no other recourse except by filing

the petition under Section 11(6) of the Arbitration and Conciliation

Act, 1996.

4

7. The High Court vide the impugned order dated 03.01.2019

rejected the argument of the appellant that the arbitrator ought to be

appointed only from the panel of arbitrators in terms of General

Conditions of Contract. The High Court observed that the powers of

the Court to appoint arbitrator are independent of the contract

between the parties and no fetters could be attached to the powers

of the court. With those findings, the High Court appointed Shri

Rajesh Dayal Khare, a retired judge of the Allahabad High Court as

the sole arbitrator subject to his consent, under Section 11(8) of the

Arbitration and Conciliation Act. Subsequently, vide order dated

29.03.2019, the High Court noted the consent of the arbitrator

appointed by the court and directed the Arbitrator to proceed with

the arbitration proceedings. Being aggrieved, the appellant has

preferred these appeals.

8. Mr. A.N.S. Nadkarni, learned Additional Solicitor General

(ASG) appearing for the appellant submitted that in terms of Clause

64(3)(a)(ii) of the General Conditions of Contract (where

applicability of Section12(5) of the Amended Act has been waived

off), the Arbitral Tribunal shall consist of a panel of three Gazetted

Railway Officers not below Junior Administrative Grade or two

Railway Gazetted Officers not below Junior Administrative Grade

5
and a retired Railway Officer retired not below the rank of Senior

Administrative Grade Officer as the arbitrators. It was submitted

that as per Clause 64(3)(b) of the General Conditions of Contract

(where applicability of Section 12(5) of the Act has not been waived

off), the Arbitral Tribunal shall consist of a panel of three retired

Railway Officers retired not below the rank of Senior Administrative

Grade Officers as the arbitrators after compliance of the procedure

stipulated in Clause 64(3)(b). It was contended that when the

agreement and the General Conditions of Contract provided for

appointment of Arbitral Tribunal consisting of three arbitrators from

the Panel, the High Court erred in appointing the sole arbitrator

outside the panel of the arbitrators. The learned ASG further

submitted that the appointment of an independent arbitrator is in

contravention of Clauses 64(3)(a)(i), 64(3)(a)(ii) and 64(3)(b) of the

General Conditions of Contract and the impugned judgment

appointing a former Judge of the High Court of Allahabad is not

sustainable. In support of the contention, the learned ASG inter alia

placed reliance upon Union of India v. Parmar Construction

Company (2019) SCC Online SC 442 and Union of India v.

Pradeep Vinod Construction Company (2019) SCC Online SC 1467

and other judgments.

6

9. Refuting the above contention, Mr. Sridhar Potaraju, learned

counsel appearing for the respondent submitted that the Arbitration

and Conciliation Act, 1996 was amended with effect from

23.10.2015 and in the present case, the demand for arbitration for

resolution of disputes was made by the respondent on 27.07.2018

and hence, the provisions of the amended Act applies to the present

case. It was submitted that by virtue of the provisions of Section

12(5) read with Schedule VII to the Arbitration and Conciliation Act,

1996, the panel of arbitrators proposed by the appellant vide letter

dated 24.09.2018 were statutorily made ineligible to be appointed

as arbitrators since they were either serving or retired employees of

the appellant. It was contended that as per the provisions of the

Amendment Act, 2015, all employees present or past are statutorily

made ineligibile for appointment as arbitrators. The learned counsel

further submitted that when the General Manager himself being

ineligible to be appointed as an arbitrator under Section 12(5) read

with Schedule VII of the Act, the General Manager cannot nominate

any of the persons to be arbitrator. The learned counsel for the

respondent inter alia placed reliance upon Voestalpine Schienen

Gmbh v. Delhi Metro Rail Corporation Limited (2017) 4 SCC 665,

TRF Limited v. Energo Engineering Projects Limited (2017) 8 SCC

7
377 and number of other judgments which would be referred to at

the appropriate place.

10. We have carefully considered the submissions and perused

the impugned judgment and materials on record. The point falling

for consideration is whether the High Court was right in appointing

an independent arbitrator in contravention of the Clauses 64(3)(a)(ii)

and 64(3)(b) of the General Conditions of Contract.

Appointment of an independent arbitrator without reference to
the Clauses of General Conditions of Contract (GCC) –
Whether correct?

11. Learned counsel for the respondent submitted that being

serving employees of the appellant, the panel of arbitrators

proposed by the appellant vide letter dated 24.09.2018 were not

eligible to be appointed as arbitrators in view of provisions of

Section 12(5) read with Schedule VII of the Arbitration and

Conciliation Act. Learned counsel further submitted that the panel of

arbitrators proposed by the appellant vide letter dated 25.10.2018

comprising of retired employees of the appellant were also not

eligible to be appointed as arbitrators under Section 12(5) read with

Schedule VII of the Act as the employees of the appellant are

expressly made ineligible.

8

12. In support of the above contention, learned counsel for the

respondent has placed reliance upon Voestalpine Schienen Gmbh

v. Delhi Metro Rail Corporation Limited (2017) 4 SCC 665 wherein,

the Supreme Court held as under:-

“24. …….The amended provision puts an embargo on a person to act
as an arbitrator, who is the employee of the party to the dispute. It also
deprives a person to act as an arbitrator if he had been the consultant or
the advisor or had any past or present business relationship with
DMRC…….”.

13. On behalf of the respondent, reliance was also placed upon

Bharat Broadband Network Limited v. United Telecoms Limited

(2019) 5 SCC 755 wherein, the Supreme Court held as under:-

“15. Section 12(5), on the other hand, is a new provision which relates
to the de jure inability of an arbitrator to act as such. Under this
provision, any prior agreement to the contrary is wiped out by the non
obstante clause in Section 12(5) the moment any person whose
relationship with the parties or the counsel or the subject-matter of the
dispute falls under the Seventh Schedule. The sub-section then declares
that such person shall be “ineligible” to be appointed as arbitrator. The
only way in which this ineligibility can be removed is by the proviso,
which again is a special provision which states that parties may,
subsequent to disputes having arisen between them, waive the
applicability of Section 12(5) by an express agreement in writing. What is
clear, therefore, is that where, under any agreement between the parties,
a person falls within any of the categories set out in the Seventh
Schedule, he is, as a matter of law, ineligible to be appointed as an
arbitrator. The only way in which this ineligibility can be removed, again,
in law, is that parties may after disputes have arisen between them,
waive the applicability of this sub-section by an “express agreement in
9
writing”. Obviously, the “express agreement in writing” has reference to a
person who is interdicted by the Seventh Schedule, but who is stated by
parties (after the disputes have arisen between them) to be a person in
whom they have faith notwithstanding the fact that such person is
interdicted by the Seventh Schedule.”

14. Per contra, on behalf of the appellant, Mr. A.N.S. Nadkarni,

learned ASG has submitted that the appointment of arbitrator is

governed as per Clauses 64(3)(a)(i) and 64(3)(a)(ii) of the General

Conditions of Contract (GCC) where applicability of Section 12(5) of

the Arbitration and Conciliation Act has been waived off and the

Arbitral Tribunal shall consist of a panel of three serving Railway

Officers or two serving officers and one retired officer. Learned ASG

submitted that Clause 64(3)(b) of GCC deals with appointment of

arbitrator where applicability of Section 12(5) of the Act has not

been waived off. It was further submitted that Clause 64(3)(b) of

GCC stipulates that the Arbitral Tribunal shall consist of a panel of

three retired railway officers not below the rank of Senior

Administrative Officer and the Arbitral Tribunal to be constituted as

per the procedure indicated thereon. Placing reliance upon Union of

India v. Parmar Construction Company (2019) SCC Online SC 442

and Union of India v. Pradeep Vinod Construction Company (2019)

SCC Online SC 1467, learned ASG has submitted that when the

agreement specifically provides for appointment of panel of

10
arbitrators, the appointment should be in terms of the agreement

and the appointment of independent sole arbitrator is in

contravention of the General Conditions of Contract which govern

the parties for appointment of arbitrators.

15. Clause 64 of the General Conditions of Contract deals with

the procedure for resolution of the disputes and provides for

“Demand for arbitration” and appointment of the arbitrators. Clause

64 of the General Conditions of Contract (GCC) reads as under:-

“64. (1): Demand for Arbitration:

64. (1) (i) In the event of any dispute or difference between the parties
hereto as to the construction or operation of this contract, or the
respective rights and liabilities of the parties on any matter in question,
dispute or difference on any account or as to the withholding by the
Railway of any certificate to which the contractor may claim to be entitled
to, or if the Railway fails to make a decision within 120 days, then and in
any such case, but except in any of the “excepted matters” referred to in
Clause 63 of these Conditions, the contractor, after 120 days but within
180 days of his presenting his final claim on disputed matters shall
demand in writing that the dispute or difference be referred to arbitration.

64. (1) (ii) (a) The demand for arbitration shall specify the matters which
are in question, or subject of the dispute or difference as also the
amount of claim item-wise. Only such dispute or difference, in respect of
which the demand has been made, together with counter claims or set
off, given by the Railway, shall be referred to arbitration and other
matters shall not be included in the reference.

64. (1) (ii) (b) The parties may waive of the applicability of sub-section
12(5)
of Arbitration and Conciliation (Amendment) Act, 2015. If they

11
agree or such waiver in writing after having arisen between them in the
formation under Annexure XII of these conditions.”

16. After coming into force of Arbitration and Conciliation

(Amendment) Act, 2015, the Government of India, Ministry of

Railways made a modification to Clause 64 of the General

Conditions of Contract and the Railway Board issued a notification

dated 16.11.2016 in this regard. The modified Clause 64(3)(a)(i)

(where applicability of Section 12(5) of the Act has been waived off)

inter alia provided that in case where the total value of all claims in

question added together does not exceed rupees one crore, the

arbitral tribunal shall consist of a sole arbitrator who shall be a

Gazetted Officer of Railways not below JA Grade nominated by the

General Manager. In terms of Clause 64(3)(a)(i), the sole arbitrator

shall be appointed within sixty days from the day when a written and

valid demand for arbitration is received by the General Manager. In

the present case, since the value of the work contract is worth more

than Rs.165 crores, Clause 64(3)(a)(i) is not applicable.

17. Clause 64(3)(a)(ii) of GCC deals with cases not covered by

Clause 64(3)(a)(i) where applicability of Section 12(5) of the Act has

been waived off. Clause 64(3)(a)(ii) of General Conditions of

Contract reads as under:-

“64. (3) Appointment of Arbitrator:

12

………..

64. (3) (a) (ii) In case not covered by the Clause 64(3)(a)(i), the Arbitral
Tribunal shall consist of a Panel of three Gazette Railway Officers not
below JA Grade or two Railway Gazette Officers not below JA Grade
and a retired Railway Officer, retired not below the rank of SAG officer,
as the arbitrators. For this purpose, the railway will send a panel of at
least four (4) names of Gazette Railway Officers of one or more
departments of the Railway which may also include the name(s) of
retired Railway Officer(s) empanelled to work as railway Arbitrator to the
contractor within 60 days from the day when a written and valid demand
for arbitration is received by the GM………”.

18. Clause 64(3)(b) of GCC deals with appointment of arbitrator

where applicability of Section 12(5) of the Act has not been waived

off. The modified Clause 64(3)(b) inter alia provided that the arbitral

tribunal shall consist of a panel of three retired railway officers not

below the rank of SAO officer as arbitrator. For this purpose, the

Railway will send a panel of at least four names of retired railway

officer(s) empanelled. The contractor will be asked to suggest to the

General Manager at least two names out of the panel for

appointment as the contractor’s nominee and the General Manager

shall appoint at least one out of them as the contractor’s nominee.

The General Manager will also simultaneously appoint the balance

number of arbitrators from the panel or from outside the panel. The

modified Clause 64(3)(b) of the General Conditions of Contract

reads as under:-

13
“64. (3)(b) Appointment of Arbitrator where applicability of Section
12(5) of A&C Act has not been waived off.

The Arbitrator Tribunal shall consist of a Panel of three retired Railway
Officer retired not below the rank of SAO officer, as the arbitrator. For
this purpose, the Railway will send a panel of at least four names of
retired Railway Officer(s) empanelled to work as Railway. Arbitrator
indicating their retirement date to the contractor within 60 days from the
day when a written and valid demand for arbitrators is received by the
GM.

Contractor will be asked to suggest to General Manager at least two
names out of the panel for appointment as contractor’s nominee within
30 days from the date of dispatch of the request by Railway. The
General Manager shall appoint at least one out of them as the
contractor’s nominee and will, also simultaneously appoint the balance
number of arbitrators other from the panel or from outside the panel, duly
indicating the ‘presiding arbitrator’ from amongst the three arbitrators so
appointed CM shall complete tis exercise of appointing the Arbitral
Tribunal within 30 days from the receipt of the names of contract’s
nominees. While nominating the arbitrators, it will be necessary to
ensure that one of them has served in the Accounts Department.”

19. After coming into force of the Arbitration and Conciliation

(Amendment) Act, 2015, when Clause 64 of the General Conditions

of Contract has been modified inter alia providing for constitution of

Arbitral Tribunal consisting of three arbitrators either serving or

retired railway officers, the High Court is not justified in appointing

an independent sole arbitrator without resorting to the procedure for

appointment of the arbitrator as prescribed under Clause 64(3)(b) of

the General Conditions of Contract.

14

20. It is pertinent to note that even in the application filed under

Section 11(6) of the Arbitration and Conciliation Act, 1996, the

respondent prayed for appointment of a sole arbitrator in terms of

Clause 1.2.54(b)(i) of the Tender Agreement/Clause 64 of the

General Conditions of Contract for adjudicating the disputes which

have arisen between the parties. In the petition filed under Section

11(6) of the Act, the respondent prayed for appointment of one Shri

Ashwani Kumar Kapoor to act as the arbitrator. Thus, the

respondent itself sought for appointment of arbitrator in terms of

Clause 64 of the General Conditions of Contract. The appointment

of Shri Ashwani Kumar Kapoor as arbitrator, of course, was not

agreeable to the appellant, since it was found that said Shri Ashwani

Kumar Kapoor was not in the panel of arbitrators and therefore,

could not be considered for appointment as arbitrator. As the value

of the work contract was worth more than Rs.165 crores, the

dispute can be resolved only by a panel of three arbitrators in terms

of Clause 64(3)(b) of the General Conditions of Contract. The

respondent was not right in seeking for appointment of a sole

arbitrator in terms of Clause 1.2.54(b)(i) of the Tender

Agreement/Clause 64 of the General Conditions of Contract.

15

21. Considering the various matters of railway contracts and

interference with the appointment of independent arbitrators, after

referring to Union of India and Another v. M.P. Gupta (2004) 10 SCC

504 and Union of India and Another v. V.S. Engineering (P) Ltd.

(2006) 13 SCC 240 and other judgments, in Union of India v.

Parmar Construction Company (2019) SCC Online SC 442, the

Supreme Court set aside the appointment of an independent

arbitrator and directed the General Manager of Railways to appoint

arbitrator in terms of Clause 64(3) of the agreement. In Para (44) of

Parmar Construction Company, the Supreme Court held as under:-

“44. To conclude, in our considered view, the High Court was not
justified in appointing an independent arbitrator without resorting to the
procedure for appointment of an arbitrator which has been prescribed
under clause 64(3) of the contract under the inbuilt mechanism as
agreed by the parties.”

22. Applying ratio of the Parmar Construction Company, in

Pradeep Vinod Construction Company (2019) SCC Online SC

1467, the Supreme Court held that the appointment of arbitrator

should be in terms of the agreement and the High Court was not

right in appointing an independent arbitrator ignoring Clause 64 of

the General Conditions of Contract. As held in Parmar Construction

Company and Pradeep Vinod Construction Company, the High

Court was not justified in appointing an independent arbitrator

16
without resorting to the procedure for appointment of the arbitrators

which has been prescribed under the General Conditions of

Contract.

RE: Contention:- Retired Railway Officers are not eligible to be
appointed as arbitrators under Section 12(5) read with
Schedule VII of the Act and were statutorily made ineligible to
be appointed as an arbitrator.

23. Vide letter dated 27.07.2018, the respondent made a request

for appointment of arbitrator/constitution of Arbitral Tribunal. In

response to the same, the appellant sent a letter dated 24.09.2018

nominating the names of four serving railway officers and the

respondent was asked to select any two names from the list of the

four railway officers and communicate to the appellant. It is seen

from the record that the respondent vide their letter dated

26.09.2018 expressed their disagreement in waiving off the

applicability of Section 12(5) of the Amendment Act, 2015. Referring

to its own earlier letter dated 24.09.2018 and letter of the

respondent dated 26.09.2018, the appellant had sent a

communication dated 25.10.2018 nominating the panel of four

retired railway officers to act as arbitrators and requesting the

respondent to select any two names from the list in terms of Clause

64(3)(b) of GCC and communicate to the appellant within thirty days

17
from the date of the letter for formation of Arbitration Tribunal.

According to the appellant, the respondent failed to select any of the

nominee from the panel within the stipulated time of thirty days. The

respondent neither responded to the appellant’s letter dated

25.10.2018 not suggested the names of two arbitrators from the

panel sent by the appellant. Instead the respondent approached the

High Court under Section 11(6) of the Act for appointment of an

independent sole arbitrator by filing a petition on 17.12.2018.

24. The contention of the learned counsel for the respondent is

that the panel of arbitrators proposed by the appellant vide letter

dated 25.10.2018 comprising of retired employees of the appellant

are not eligible to be appointed as arbitrators under Section 12(5)

read with Schedule VII of the Act. Further contention of the learned

counsel for the respondent is that the panel of arbitrators drawn by

the appellant consist of those persons who were railway employees

or Ex-railway employees and therefore, they are statutorily made

ineligible to be appointed as arbitrators.

25. Contending that the appointment of retired employees as

arbitrators cannot be assailed merely because an arbitrator is a

retired employee of one of the parties, learned ASG has placed

reliance upon Voestalpine Schienen Gmbh v. Delhi Metro Rail

18
Corporation Limited (2017) 4 SCC 665. After referring to various

judgments and also the scope of amended provision of Section 12

of the Amendment Act, 2015 and the entries in the Seventh

Schedule , the Supreme Court observed that merely because the

panel of arbitrators drawn by the respondent-Delhi Metro Rail

Corporation are the Government employees or Ex-Government

employees, that by itself may not make such persons ineligible to

act as arbitrators of the respondent-DMRC. It was observed that the

persons who have worked in the Railways under the Central

Government or the Central Public Works Department or Public

Sector Undertakings cannot be treated as employee or consultant

or advisor of the respondent-DMRC. In para (26) of Voestalpine

Schienen Gmbh, the Supreme Court held as under:-

“26. It cannot be said that simply because the person is a retired officer
who retired from the government or other statutory corporation or public
sector undertaking and had no connection with DMRC (the party in
dispute), he would be treated as ineligible to act as an arbitrator. Had
this been the intention of the legislature, the Seventh Schedule would
have covered such persons as well. Bias or even real likelihood of bias
cannot be attributed to such highly qualified and experienced persons,
simply on the ground that they served the Central Government or PSUs,
even when they had no connection with DMRC. The very reason for
empanelling these persons is to ensure that technical aspects of the
dispute are suitably resolved by utilising their expertise when they act as
arbitrators. It may also be mentioned herein that the Law Commission
had proposed the incorporation of the Schedule which was drawn from

19
the red and orange list of IBA guidelines on conflict of interest in
international arbitration with the observation that the same would be
treated as the guide “to determine whether circumstances exist which
give rise to such justifiable doubts”. Such persons do not get covered by
red or orange list of IBA guidelines either.” [Underlining added]

26. The same view was reiterated in Government of Haryana

PWD Haryana (B and R) Branch v. G.F. Toll Road Private Limited

and Others (2019) 3 SCC 505 wherein, the Supreme Court held that

the appointment of a retired employee of a party to the agreement

cannot be assailed on the ground that he is a retired/former

employee of one of the parties to the agreement. Absolutely, there is

no bar under Section 12(5) of the Arbitration and Conciliation

(Amendment) Act, 2015 for appointment of a retired employee to act

as an arbitrator.

27. By the letter dated 25.10.2018, the appellant has forwarded a

list of four retired railway officers on its panel thereby giving a wide

choice to the respondent to suggest any two names to be

nominated as arbitrators out of which, one will be nominated as the

arbitrator representing the respondent-Contractor. As held in

Voestalpine Schienen Gmbh (2017) 4 SCC 665, the very reason for

empanelling the retired railway officers is to ensure that the

technical aspects of the dispute are suitably resolved by utilising

their expertise when they act as arbitrators. Merely because the

20
panel of the arbitrators are the retired employees who have worked

in the Railways, it does not make them ineligible to act as the

arbitrators.

RE: Contention:- Failure to act in terms of the Contract in not
responding within thirty days from the date of the request.

28. Learned counsel for the respondent has submitted that vide

letter dated 27.07.2018, the respondent requested for referring the

dispute to arbitration but, no steps were taken by the appellant

within thirty days from the date of request dated 27.07.2018. It was

submitted that on 17.12.2018, respondent filed application under

Section 11(6) of the Act before the High Court for appointment of a

sole arbitrator, by which time, no steps were taken by the appellant

under the Contract, except sending two lists of persons by letters

dated 24.09.2018 and 25.10.2018 who were de jure ineligible to be

appointed as the arbitrators. In this regard, reliance was placed

upon Punj Lloyd Ltd. v. Petronet MHB Ltd. (2006) 2 SCC 638.

Considering the applicability of Section 11(6) of the Act, in Punj

Lloyd Ltd., the Supreme Court held as under:-

“5. Having heard the learned counsel for the parties, we are satisfied
that the appeal deserves to be allowed. The learned counsel for the
appellant has placed reliance on the law laid down by this Court in the
case of Datar Switchgears Ltd. v. Tata Finance Ltd. (2000) 8 SCC 151,
wherein this Court has held as under:

21
“[S]o far as Section 11(6) is concerned, if one party demands the
opposite party to appoint an arbitrator and the opposite party does
not make an appointment within 30 days of the demand, the right
to appointment does not get automatically forfeited after expiry of
30 days. If the opposite party makes an appointment even after
30 days of the demand, but before the first party has moved the
court under Section 11, that would be sufficient. In other words, in
cases arising under Section 11(6), if the opposite party has not
made an appointment within 30 days of demand, the right to
make appointment is not forfeited but continues, but an
appointment has to be made before the former files application
under Section 11 seeking appointment of an arbitrator. Only then
the right of the opposite party ceases.”

As held in Punj Lloyd Ltd., if the opposite party has not made any

application for appointment of the arbitrator within thirty days of

demand, the right to make appointment is not forfeited but

continues; but the appointment has to be made before the former

files application under Section 11 of the Act seeking appointment of

an arbitrator. Only then the right of the opposite party ceases.

29. In Union of India v. Bharat Battery Manufacturing Co. (P) Ltd.

(2007) 7 SCC 684, on 30.03.2006, the respondent thereon filed

petition under Section 11(6) seeking appointment of an arbitrator.

Union of India-the appellant thereon appointed Dr. Gita Rawat on

15.05.2006 as a sole arbitrator in terms of Clause 24 of the

agreement. In such facts and circumstances of the case,

considering the decision in Punj Lloyd Ltd., the Supreme Court held

22
that “once a party files an application under Section 11(6) of the

Act, the other party extinguishes its right to appoint an arbitrator in

terms of the clause of the agreement thereafter. The right to appoint

arbitrator under the clause of agreement ceases after Section 11(6)

petition has been filed by the other party before the Court seeking

appointment of an arbitrator…..”.

30. As discussed earlier, as per the modified Clause 64(3)(b) of

GCC, when a written and valid demand for arbitration is received by

the General Manager, the Railway will send a panel of at least four

names of retired railway officers empanelled to work as arbitrators.

The contractor will be asked to suggest to the General Manager at

least two names out of the panel for appointment as contractor’s

nominee within thirty days from the date of dispatch of the request

by the Railway. Vide letter dated 27.07.2018, the respondent has

sought for appointment of an arbitrator for resolving the disputes.

The appellant by its letter dated 24.09.2018 (which is well within the

period of sixty days) in terms of Clause 64(3)(a)(ii) (where

applicability of Section 12(5) of the Act has been waived off) sent a

panel of four serving railway officers of JA Grade to act as

arbitrators and requested the respondent to select any two from the

list and communicate to the office at the earliest for formation of

Arbitration Tribunal. By the letter dated 26.09.2018, the respondent

23
conveyed their disagreement in waiving the applicability of Section

12(5) of the Amendment Act, 2015. By the letter dated 25.10.2018,

in terms of Clause 64(3)(b) of GCC (where applicability of Section

12(5) has not been waived off) the appellant has nominated a panel

of four retired railway officers to act as arbitrators and requested the

respondent to select any two from the list and communicate to the

appellant within thirty days from the date of the letter for formation of

Arbitration Tribunal. The respondent has neither sent its reply nor

selected two names from the list and replied to the appellant.

Without responding to the appellant, the respondent has filed

petition under Section 11(6) of the Arbitration and Conciliation Act

before the High Court on 17.12.2018. When the respondent has not

sent any reply to the communication dated 25.10.2018, the

respondent is not justified in contending that the appointment of

Arbitral Tribunal has not been made before filing of the application

under Section 11 of the Act and that the right of the appellant to

constitute Arbitral Tribunal is extinguished on filing of the application

under Section 11(6) of the Act.

RE: Contention:- General Manager himself becoming ineligible
by operation of law to be appointed as arbitrator, is not eligible
to nominate the arbitrator.

24

31. Stand of the learned counsel for the respondent is that by

virtue of Section 12(5) read with Schedule VII of the Act, General

Manager himself is made ineligible to be appointed as an arbitrator

and hence, he cannot nominate any other person to be an

arbitrator. The essence of the submission is “that which cannot be

done directly, may not be done indirectly”. In support of his

contention, the learned counsel for the respondent placed reliance

upon TRF Limited v. Energo Engineering Projects Limited (2017) 8

SCC 377 wherein the Supreme Court held as under:-

“54. In such a context, the fulcrum of the controversy would be, can an
ineligible arbitrator, like the Managing Director, nominate an arbitrator,
who may be otherwise eligible and a respectable person. As stated
earlier, we are neither concerned with the objectivity nor the individual
respectability. We are only concerned with the authority or the power of
the Managing Director. By our analysis, we are obligated to arrive at the
conclusion that once the arbitrator has become ineligible by operation of
law, he cannot nominate another as an arbitrator. The arbitrator
becomes ineligible as per prescription contained in Section 12(5) of the
Act. It is inconceivable in law that person who is statutorily ineligible can
nominate a person. Needless to say, once the infrastructure collapses,
the superstructure is bound to collapse. One cannot have a building
without the plinth. Or to put it differently, once the identity of the
Managing Director as the sole arbitrator is lost, the power to nominate
someone else as an arbitrator is obliterated. Therefore, the view
expressed by the High Court is not sustainable and we say so.”

32. In TRF Limited, though the court observed that once the

arbitrator has become ineligible by operation of law, he cannot

25
nominate another as an arbitrator, in para (50), the Court has

discussed about another situation where both the parties could

nominate respective arbitrators of their choice and that it would get

counter-balanced by equal power with the other party. In para (50)

of TRF Limited, the Supreme court held as under:-

“50. …..We are singularly concerned with the issue, whether the
Managing Director, after becoming ineligible by operation of law, is he
still eligible to nominate an arbitrator. At the cost of repetition, we may
state that when there are two parties, one may nominate an arbitrator
and the other may appoint another. That is altogether a different
situation. If there is a clause requiring the parties to nominate their
respective arbitrator, their authority to nominate cannot be questioned.
What really in that circumstance can be called in question is the
procedural compliance and the eligibility of their arbitrator depending
upon the norms provided under the Act and the Schedules appended
thereto….” [Underlining added]

33. Considering the decision in TRF Limited, in Perkins Eastman

Architects DPC and another v. HSCC (India) Limited (2019) SCC

Online SC 1517, the Supreme Court observed that there are two

categories of cases. The first, similar to the one dealt with in TRF

Limited where the Managing Director himself is named as an

arbitrator with an additional power to appoint any other person as an

arbitrator. In the second category, the Managing Director is not to

act as an arbitrator himself; but is authorized to appoint any other

person of his choice or discretion as an arbitrator. Observing that if

26
in the first category, the Managing Director was found incompetent

similar invalidity will always arise even in the second category of

cases, in para (20) in Perkins Eastman, the Supreme Court held as

under:-

“20. ….If, in the first category of cases, the Managing Director was found
incompetent, it was because of the interest that he would be said to be
having in the outcome or result of the dispute. The element of invalidity
would thus be directly relatable to and arise from the interest that he
would be having in such outcome or decision. If that be the test, similar
invalidity would always arise and spring even in the second category of
cases. If the interest that he has in the outcome of the dispute, is taken
to be the basis for the possibility of bias, it will always be present
irrespective of whether the matter stands under the first or second
category of cases. We are conscious that if such deduction is drawn
from the decision of this Court in TRF Limited, all cases having clauses
similar to that with which we are presently concerned, a party to the
agreement would be disentitled to make any appointment of an Arbitrator
on its own and it would always be available to argue that a party or an
official or an authority having interest in the dispute would be disentitled
to make appointment of an Arbitrator.”

34. After referring to para (50) of the decision in TRF Limited, in

Perkins Eastman, the Supreme Court referred to a different situation

where both parties have the advantage of nominating an arbitrator

of their choice and observed that the advantage of one party in

appointing an arbitrator would get counter-balanced by equal power

with the other party. In para (21), it was held as under:-

“21. ….The next sentences in the paragraph, further show that cases
where both the parties could nominate respective arbitrators of their

27
choice were found to be completely a different situation. The reason is
clear that whatever advantage a party may derive by nominating an
arbitrator of its choice would get counter balanced by equal power with
the other party…..”

35. As discussed earlier, after Arbitration and Conciliation

(Amendment) Act, 2015, the Railway Board vide notification dated

16.11.2016 has amended and notified Clause 64 of the General

Conditions of Contract. As per Clause 64(3)(a)(ii) [where

applicability of Section 12(5) of the Act has been waived off], in a

case not covered by Clause 64(3)(a)(i), the Arbitral Tribunal shall

consist of a panel of three Gazetted Railway Officers not below the

rank of Junior Administrative Grade or two Railway Gazetted

Officers not below the rank of Junior Administrative Grade and a

retired Railway Officer retired not below the rank of Senior

Administrative Grade Officer, as the arbitrators. For this purpose,

the General Manager, Railway will send a panel of at least four

names of Gazetted Railway Officers of one or more departments of

the Railway within sixty days from the date when a written and valid

demand for arbitration is received by the General Manager. The

contractor will be asked to suggest to General Manager at least two

names out of the panel for appointment as contractor’s nominees

within thirty days from the date of dispatch of the request from the

Railway. The General Manager shall appoint at least one out of
28
them as the contractor’s nominee and will also simultaneously

appoint balance number of arbitrators from the panel or from

outside the panel duly indicating the “Presiding Officer” from

amongst the three arbitrators so appointed. The General Manager

shall complete the exercise of appointing the Arbitral Tribunal within

thirty days from the date of the receipt of the names of contractor’s

nominees.

36. Clause 64(3)(b) of GCC deals with appointment of arbitrator

where applicability of Section 12(5) of the Act has not been waived

off. In terms of Clause 64(3)(b) of GCC, the Arbitral Tribunal shall

consist of a panel of three retired Railway Officers retired not below

the rank of Senior Administrative Grade Officers as the arbitrators.

For this purpose, the Railway will send a panel of at least four

names of retired Railway Officers empanelled to work as arbitrators

indicating their retirement date to the contractor within sixty days

from the date when a written and valid demand for arbitration is

received by the General Manager. The contractor will be asked to

suggest the General Manger at least two names out of the panel for

appointment of contractor’s nominees within thirty days from the

date of dispatch of the request of the Railway. The General

Manager shall appoint at least one out of them as the contractor’s

29
nominee and will simultaneously appoint the remaining arbitrators

from the panel or from outside the panel, duly indicating the

“Presiding Officer” from amongst the three arbitrators. The exercise

of appointing Arbitral Tribunal shall be completed within thirty days

from the receipt of names of contractor’s nominees. Thus, the right

of the General Manager in formation of Arbitral Tribunal is counter-

balanced by respondent’s power to choose any two from out of the

four names and the General Manager shall appoint at least one out

of them as the contractor’s nominee.

37. In the present matter, after the respondent had sent the letter

dated 27.07.2018 calling upon the appellant to constitute Arbitral

Tribunal, the appellant sent the communication dated 24.09.2018

nominating the panel of serving officers of Junior Administrative

Grade to act as arbitrators and asked the respondent to select any

two from the list and communicate to the office of the General

Manager. By the letter dated 26.09.2018, the respondent conveyed

their disagreement in waiving the applicability of Section 12(5) of the

Amendment Act, 2015. In response to the respondent’s letter dated

26.09.2018, the appellant has sent a panel of four retired Railway

Officers to act as arbitrators giving the details of those retired

officers and requesting the respondent to select any two from the list

30
and communicate to the office of the General Manager. Since the

respondent has been given the power to select two names from out

of the four names of the panel, the power of the appellant

nominating its arbitrator gets counter-balanced by the power of

choice given to the respondent. Thus, the power of the General

Manager to nominate the arbitrator is counter-balanced by the

power of the respondent to select any of the two nominees from out

of the four names suggested from the panel of the retired officers.

In view of the modified Clauses 64(3)(a)(ii) and 64(3)(b) of GCC, it

cannot therefore be said that the General Manager has become

ineligible to act as the arbitrator. We do not find any merit in the

contrary contention of the respondent. The decision in TRF Limited

is not applicable to the present case.

38. There is an express provision in the modified clauses of

General Conditions of Contract, as per Clauses 64(3)(a)(ii) and

64(3)(b), the Arbitral Tribunal shall consist of a panel of three

Gazetted Railway Officers [Clause 64(3)(a)(ii)] and three retired

Railway Officers retired not below the rank of Senior Administrative

Grade Officers [Clause 64(3)(b)]. When the agreement specifically

provides for appointment of Arbitral Tribunal consisting of three

arbitrators from out of the panel serving or retired Railway Officers,

31
the appointment of the arbitrators should be in terms of the

agreement as agreed by the parties. That being the conditions in the

agreement between the parties and the General Conditions of the

Contract, the High Court was not justified in appointing an

independent sole arbitrator ignoring Clauses 64(3)(a)(ii) and 64(3)

(b) of the General Conditions of Contract and the impugned orders

cannot be sustained.

39. In the result, the impugned orders dated 03.01.2019 and

29.03.2019 passed by the High Court of Judicature at Allahabad in

Arbitration Application No.151 of 2018 are set aside and these

appeals are allowed. The appellant is directed to send a fresh panel

of four retired officers in terms of Clause 64(3)(b) of the General

Conditions of Contract within a period of thirty days from today

under intimation to the respondent-contractor. The respondent-

contractor shall select two from the four suggested names and

communicate to the appellant within thirty days from the date of

receipt of the names of the nominees. Upon receipt of the

communication from the respondent, the appellant shall constitute

the Arbitral Tribunal in terms of Clause 64(3)(b) of the General

Conditions of Contract within thirty days from the date of the receipt

32
of the communication from the respondent. Parties to bear their

respective costs.

………………………..J.

[R. BANUMATHI]

………………………..J.

[A.S. BOPANNA]

.………………………..J.

[HRISHIKESH ROY]
New Delhi;

December 17, 2019.

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