August 17 2010
In Denel (Proprietary Limited) v Bharat Electronics Ltd,(1) which involved a petition for the appointment of an arbitrator under Section 11.6 of the Arbitration and Conciliation Act 1996, the Supreme Court appointed an independent sole arbitrator even though the contract provided for the appointment of an employee of one of the parties as the arbitrator. The court held that in the facts and circumstances of the case, the named employee was not in a position to decide independently the dispute between the parties.
In 2004 Bharat Electronics Limited (BEL), a government enterprise incorporated under Indian law, placed three purchase orders(2) for the supply of electronic equipment with Denel Eloptro - an internal division of Denel (Proprietary Limited), a company wholly owned by the South African government and incorporated under the laws of the Republic of South Africa.
The general terms and conditions of the foreign purchase orders contained an arbitration clause(3) providing that in the case of dispute arising from interpretation or any matter relating to the rights and obligations of the parties, the managing director of BEL or his or her appointed nominee would be the arbitrator. The validity of this clause and arbitration agreement was not in dispute.
Denel completed its obligations under the purchase orders and delivered the goods as ordered, which were accepted by BEL without any objections and, accordingly, the invoices were raised. According to Denel, BEL was required to pay it £34,894.75.
In response to Denel's demand for payment, BEL issued a letter dated May 4 2005, in which it refused to pay on the grounds that it was a 'government company' and, in view of directions issued by the Ministry of Defence to withhold funds, it was unable to make the payment.
Left with no option, Denel issued a letter dated November 29 2006 to BEL requesting payment. In response, in a letter dated December 29 2006, while admitting its liability under the purchase orders, BEL refused to settle the amount due on the grounds that it was prohibited from making any payments by the ministry.
Denel issued a notice dated May 30 2009 to BEL to refer the dispute for adjudication in accordance with the act. The notice stated that, since the arbitration clause provided for the appointment of the managing director or a nominee instead of a mutually agreed independent arbitrator, the clause was invalid. Accordingly, the appointment of a mutually agreed independent arbitrator to adjudicate the dispute was requested.
BEL did not accept the arbitrator proposed by Denel. In turn, Denel intimated that BEL was unwilling to refer the dispute to the arbitrator, since the direction issued by the ministry was in full force and it was protected under Section 56(4) of the Contract Act 1872. This led Denel to present an arbitration petition before the Supreme Court seeking the appointment of an arbitrator.
Denel argued that in terms of the specific arbitration clause, BEL was wrong in not referring the dispute to arbitration. It further argued that as the managing director of BEL or a nominee was a government employee, Denel genuinely feared that it may not get any justice due to obvious reasons of bias.
Reliance was placed on Indian Oil Corporation Ltd v Raja Transport Pvt Ltd,(5) where it was held that 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. However, there can be a justifiable apprehension about the independence or impartiality of an employee arbitrator if such person is the controlling entity in regard to the relevant contract, or a direct subordinate of the officer whose decision is the subject matter of the dispute. It was further held that the fact that someone is an employee of one of the parties (which is the state of its instrumentality) cannot per se be a bar to his or her acting as an arbitrator.
Denel submitted that it was clear from the invoices and the correspondence between the parties that BEL had not disputed the liability of payment and there was a dispute between the parties which required to be referred for arbitration before the arbitrator.
The court referred to two previous cases: Datar Switchgears Ltd v Tata Finance Ltd,(6) wherein the court considered the power of a court to appoint an arbitrator under Section 8 of the Arbitration Act 1940; and Bhupinder Singh Bindra v Union of India,(7) wherein it was held that the court cannot interpose and interdict the appointment of an arbitrator whom the parties have chosen under the terms of the contract unless it is pleaded and proved that the arbitrator is involved in legal misconduct, such as fraud or disqualification. It was held that it is not in the power of a party at its own will or pleasure to revoke the authority of the arbitrator appointed with its consent, and there should be sufficient cause for revocation.
The court observed that as BEL was a government company, it was bound by the directions and instructions issued by a superior authority. BEL admitted its liability to pay the amount due, but expressed failure on account of directions issued by the ministry.
In the interests of both parties and to achieve justice, the court appointed an arbitrator other than BEL's managing director.
The court did not interfere with the settled law, which stipulates that courts cannot interpose and interdict the appointment of an arbitrator, whom the parties have chosen under the terms of the contract unless legal misconduct of the arbitrator, fraud or disqualification is pleaded and proved. However, in the peculiar facts of this case and to achieve justice, the court rightly allowed Denel's petition seeking appointment of an independent arbitrator. The court has confirmed, as held in Indian Oil Corporation Ltd, that 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 such a person.
As per the judgment in Datar Switchgears Ltd, when there is failure to appoint an arbitrator which may be due to various circumstances, such a petition under Section 11.6 of the act seeking appointment of an arbitrator would be applicable. Since BEL failed to appoint an arbitrator at Denel's request, the court rightly appointed one itself.
For further information on this topic please contact Tejas Karia or Nitesh Jain at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500), fax (+ 91 11 2692 4900) or email (email@example.com or firstname.lastname@example.org).
"Agreement to do impossible act: an agreement to do an act impossible in itself is void. Contract to do act afterwards becoming impossible or unlawful: a contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act known to be impossible or unlawful: where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise."
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