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M/s. D.P. Construction v/s M/s. Vishvaraj Environment Pvt. Ltd.

    Misc. Civil Appln. (Arbn.) No. 31 of 2021

    Decided On, 06 July 2022

    At, In the High Court of Bombay at Nagpur

    By, THE HONOURABLE MR. JUSTICE MANISH PITALE

    For the Applicant: Naresh R. Nebhani, V.P. Kukday, Counsels. For the Respondent: Kartik N. Shukul, Counsel.



Judgment Text

Heard the learned counsel appearing for the parties.

2. A preliminary objection taken by the nonapplicant has led to an interesting question in the present application pertaining to jurisdiction of this Court under section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “said Act”), in the context of section 21 thereof, as regards the invocation of arbitration by either party.

3. The facts in brief leading to filing of the present application are that the non-applicant was awarded contract by the Nagpur Municipal Corporation for laying pipelines and in that context the non-applicant engaged the applicant by issuing work order, after the terms were agreed upon negotiations. The work order executed in favour of the applicant consisted of a clause for settlement of disputes by arbitration. Upon the execution of the works, certain disagreements seem to have occurred between the parties as regards the extent of work done, the time taken for the said work and the entitlement of the applicant towards payment in terms of the agreement between the parties. There was exchange of communications between the parties, including a letter dated 07/09/2020, sent on behalf of the applicant to the General Manager of the non-applicant, stating that the representatives of the non-applicant had agreed to make necessary amendments to the work order for facilitating payments, but such amendments were not carried out and eventually it was requested that the non-applicant may take necessary steps so that the applicant was properly compensated.

4. Thereafter, on 07/10/2020, the applicant sent a legal notice to the non-applicant, through Advocate, stating in detail about its grievances and claims. The applicant quantified the amount that it expected the non-applicant to release along with interest within one month. It is significant that despite the aforesaid arbitration clause, having enumerated its grievances, the applicant only stated in the said notice that if the payment was not released as requested, the applicant would be constrained to seek redressal of grievances by approaching the competent Court of Law.

5. The non-applicant sent reply to the aforesaid legal notice through its Advocate on 29/09/2020. In this reply, the non-applicant repudiated the claims made by the applicant and instead demanded that a specific amount towards penalty be deposited by the applicant with the non-applicant. In this reply also, no reference was made to the arbitration clause and it was simply stated that if the applicant failed to pay the penalty amount, the non-applicant would be constrained to approach the appropriate forum.

6. Thereafter, the applicant filed the present application under section 11(6) of the said Act, seeking appointment of sole Arbitrator from amongst names proposed in the application or for appointment of any other competent independent Arbitrator for adjudication of the claims of the applicant. This Court issued notice in the present application. The non-applicant filed an affidavit raising preliminary objection as regards maintainability of the present application under section 11(6) of the said Act. Two issues were raised in the said affidavit. Firstly, that the arbitration clause provided for a two-tier procedure envisaging the applicant to first refer the dispute to the non-applicant, whose decision would be final and binding. In case, the said step failed, the dispute would be referred for arbitration to a sole Arbitrator and it would be governed by the provisions of the said Act. According to the non-applicant, the first tier of the procedure itself was not exhausted by the applicant and therefore, there was no question of the second tier of the procedure of invoking arbitration being resorted to.

7. Secondly, it was contended that even if it was to be assumed that the first tier of procedure had been satisfied, in the present case, the legal notice dated 07/10/2020, issued by the applicant did not amount to a notice invoking arbitration under section 21 of the said Act. There was no reference to the arbitration clause and there was no statement that arbitration was being invoked before a sole Arbitrator in terms of the said clause. It was further stated that even in the reply dated 29/10/2020, the non-applicant did not refer to the arbitration clause at all. On this basis, the non-applicant claimed that since the procedure agreed between the parties was yet to be resorted to, this Court could not invoke jurisdiction under section 11(6) of the said Act.

8. As a result of the preliminary objection raised on behalf of the non-applicant, the learned counsel for the rival parties addressed this Court at length on the said aspect of the matter.

9. Mr. N. R. Nebhani, learned counsel appearing for the applicant, submitted that the preliminary objection raised on behalf of the non-applicant on both counts was unsustainable. Insofar as the first aspect of the matter is concerned, it was submitted that number of communications were exchanged between the parties and eventually, on 07/09/2020, the applicant had sent the aforesaid letter to the General Manager of the non-applicant, asking the non-applicant to take necessary steps for compensating the applicant. This satisfied the first tier of the procedure and when there was no response on the part of the non-applicant, the applicant was certainly entitled to resort to arbitration in terms of the aforesaid clause. It was submitted that the legal notice dated 07/10/2020, clearly stated the claims and the points of dispute raised on behalf of the applicant. In fact, specific amount along with interest was demanded and it was stated that in case of failure on the part of the non-applicant, the applicant would be constrained to seek redressal of its grievances. According to the learned counsel for the applicant, this amounted to invocation of arbitration, as contemplated under section 21 of the said Act. It was further submitted that as the non-applicant sent reply dated 29/10/2020 and raised claims against the applicant, a dispute had clearly arisen between the parties. It was further submitted that since the non-applicant did not respond to the notice issued by the applicant, on the expected lines, the applicant was clearly entitled to invoke section 11(6) of the said Act for appointment of sole Arbitrator.

10. The learned counsel for the applicant relied upon judgment of this Court in the case of Veena wd/o Naresh Seth and another v. Seth Industries Ltd., Mumbai and others, reported in 2011 (2) Mh.L.J. 226 and judgments of the Hon’ble Supreme Court in the case of Bharat Sanchar Nigam Limited v. M/s. Nortel Networks India Pvt. Ltd., reported in (2021) 5 SCC 738 and Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, reported in (1988) 2 SCC 338.

11. On the other hand, Mr. Kartik Shukul, learned counsel appearing for the non-applicant, made submissions in terms of the aforesaid preliminary objection raised on behalf of the non-applicant. It was submitted that the first tier of the procedure was not satisfied and that therefore, the applicant was not entitled to invoke the arbitration clause. It was emphatically submitted that the legal notice dated 07/10/2020 did not amount to invocation of arbitration in terms of section 21 of the said Act. It was submitted that the applicant was required to invoke the arbitration clause in clear terms, because such invocation serves various purposes and a mere legal notice raising claims would not amount to invoking the arbitration clause under section 21 of the said Act. It was also submitted that the non-applicant did not refer to the arbitration clause in its reply and instead raised its own claims against the applicant. On this basis, it was submitted that although there was a dispute between the parties, but since the process of arbitration in the facts of the present case was not triggered, the stage of applying before this Court under section 11(6) of the said Act had not yet arrived. By referring to section 11(2) and (6), as also section 21 of the said Act, the learned counsel submitted that this Court ought not to exercise jurisdiction for entertaining the present application.

12. The learned counsel also relied upon the aforesaid judgment of the Hon’ble Supreme Court in the case of BSNL v. M/s. Nortel Networks India Pvt.Ltd. (supra) and he relied upon judgement of this Court in the case of Malvika Rajnikant Mehta v. JESS Construction, order dated 28/04/2022, in Arbitration Application No.425 of 2019. Reliance was also placed on the judgment of Delhi High Court in the case of Alupro Building Systems Pvt. Ltd. v. Ozone Overseas Pvt. Ltd., reported in 2017 SCC OnLine Del. 7228.

13. In the light of the rival submissions, it would be necessary to first refer to the arbitration clause in the present case. The said clause reads as follows.

“29. Settlement of Disputes: All disputes arising out of this work order failing amicable settlement at site shall be referred to the VEPI and the decision is final and binding both parties. In case it fails, the dispute shall be referred to the arbitration and arbitration shall be conducted as per Arbitration and Conciliation Act 1996 as amended from time to time. The Arbitral Tribunal shall be sole arbitrator and shall appointed by both parties. The place of the arbitration shall take place in Nagpur.”

14. There can be no dispute about the fact that the aforesaid clause does contemplate a two-tier procedure. In the first place, attempt is to be made for amicable settlement of the disputes and in case of failure, the matter is to be referred to the non-applicant, whose decision would be final and binding on the parties. It has been specifically contended on behalf of the non-applicant that the first tier of the procedure was not exhausted. This Court has perused the material on record. There is substance in the contention raised on behalf of the applicant that attempts were made for amicable settlement of the dispute with the nonapplicant and this is evident from the communications addressed by the applicant to the non-applicant. The applicant is justified in contending that the letter dated 07/09/2020, was indeed a step taken by the applicant under the first tier of the procedure by approaching the non-applicant for decision. Admittedly, there was no decision taken by the non-applicant in the matter. In such a situation, it cannot be said that the first tier of the procedure was yet to be exhausted. The material on record sufficiently indicates that the applicant did act in terms of the first tier of the procedure and when there was failure, the stage had arrived for the dispute to be referred to arbitration under the said clause. Thus, the preliminary objection raised on behalf of the non-applicant pertaining to the first tier of the procedure under the above quoted clause 29, i.e. the arbitration clause, is found to be without any substance.

15. As regards the second aspect of the preliminary objection, to the effect that in the present case arbitration was not at all invoked by the applicant, it would be necessary to refer to the relevant provisions, for applying them to the facts of the present case, in the light of the position of law clarified in the judgments relied upon by the rival parties. Section 11(2) and (6) of the said Act read as follows.

“11. Appointment of arbitrators.–

(1)……

(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

(3)……

(4)……

(5)……

(6) Where, under an 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,

[the appointment shall be made, on an application of the party, by the arbitral institution designated by the Supreme Court, in case of international commercial arbitration, or by the High Court, in case of arbitrations other than international commercial arbitration, as the case may be] to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.”

Section 21 of the said Act reads as follows.

“21. Commencement of arbitral proceedings.– Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent.”

16. Section 11(6) of the said Act comes into operation when the contingencies specified therein occur, including failure of a party to act as required under the procedure agreed by the parties. It is when the agreed procedure does not lead to appointment of Arbitrator, due to failure on the part of either party, that an application can be filed for appointment of Arbitrator, either before the institution specified under section 11(6) of the said Act or this Court, depending upon the facts of the case. In other words, this Court can be called upon to exercise jurisdiction under section 11(6) of the said Act, only when the procedure agreed between the parties under section 11(2) of the said Act has met with failure. This presupposes initiation of the procedure agreed between the parties.

17. At this stage, section 21 of the said Act, pertaining to commencement of arbitral proceedings, comes into picture. The said provision specifically states that the arbitral proceedings stand commenced on the date on which a request for that dispute to be referred to arbitration is received by the respondent. The crucial words in the said provision are “the date on which a request for that dispute to be referred to arbitration”. Thus, for commencement of arbitral proceedings, there has to be a request for the dispute to be referred to arbitration. Unless there is a request for referring the dispute to arbitration, it cannot be said that arbitration has been invoked by a party.

18. Section 21 of the said Act in this context has come up for consideration in the judgments relied upon by the parties. In the case of BSNL v. M/s. Nortel Networks Pvt. Ltd. (supra), the Supreme Court has observed that an application under section 11 for appointment of Arbitrator can be filed only after a notice of arbitration for the dispute to be referred for such arbitration, as contemplated under section 21 of the said Act, is made and there is failure to make the appointment. This has been discussed in detail in the context of the point from where limitation is to be calculated for filing such an application under section 11 of the said Act. Thus, the notice for referring the matter to arbitration has to be clear and unequivocal. In the case of Secunderabad Cantonment Board v. M/s. B.Ramachandraiah & Sons, reported in (2021) 5 SCC 705, the position of law has been reiterated in the context of the question of limitation and it is stated that there has to be invocation of arbitration under section 21 of the said Act.

19. This Court in the aforementioned judgment, in the case of Malvika Mehta (supra), has deliberated upon section 21 of the said Act and the manner in which arbitration is to be invoked. In the context of the purpose that notice under section 21 of the said Act serves, this Court in the said judgment, held as follows.

“31. Admittedly, the applicants do not claim that they had issued a notice before lodging the statement of claim with the named Arbitrator. The submission on behalf of the applicants that the parties had named the Arbitrator for resolution of the disputes cannot be stretched to the extent the applicants desire. The mere fact that the parties have named the Arbitrator would not imply that the parties have agreed to waive the requirement of notice contemplated under Section 21 of the Act. The notice under Section 21, as we have seen above, serves definite purposes. One, it puts the adversary on notice as to the nature of the claim, even when the Arbitrator is named by the parties. Two, it provides an opportunity to the adversary to contest the admissibility of the claims on the threshold. There, it allows adversary to raise the issue of the impartiality of the Arbitrator and the consequent disqualification. Four, the date of the receipt of the notice has a bearing upon the date of the commencement of the arbitration. Therefore, an inference that the parties had waived the notice cannot be drawn merely for the reason that the parties had named an Arbitrator.”

20. The Delhi High Court in the case of Alupro Building Systems Pvt. Ltd. v. Ozone Overseas Pvt. Ltd. (supra) has also analyzed section 21 of the said Act and the purpose it serves, in the context of application to be filed under section 11(6) of the said Act for appointment of the Arbitrator. The relevant portion of the said judgment reads as follows:

“25. A plain reading of the above provision indicates that except where the parties have agreed to the contrary, the date of commencement of arbitration proceedings would be the date on which the recipient of the notice (the Petitioner herein) receives from the claimant a request for referring the dispute to arbitration. The object behind the provision is not difficult to discern. The party to the arbitration agreement against whom a claim is made, should know what the claims are. It is possible that in response to the notice, the recipient of the notice may accept some of the claims either wholly or in part, and the disputes between the parties may thus get narrowed down. That is one aspect of the matter. The other is that such a notice provides an opportunity to the recipient of the notice to point out if some of the claims are time barred, or barred by any law or untenable in fact and/or that there are counter-claims and so on.

26. Thirdly, and importantly, where the parties have agreed on a procedure for the appointment of an arbitrator, unless there is such a notice invoking the arbitration clause, it will not be possible to know whether the procedure as envisaged in the arbitration clause has been followed. Invariably, arbitration clauses do not contemplate the unilateral appointment of an arbitrator by one of the parties. There has to be a consensus. The notice under Section 21 serves an important purpose of facilitating a consensus on the appointment of an arbitrator.

27. Fourthly, even assuming that the clause permits one of the parties to choose the arbitrator, even then it is necessary for the party making such appointment to let the other party know in advance the name of the person it proposes to appoint. It is quite possible that such person may be 'disqualified' to act an arbitrator for various reasons. On receiving such notice, the recipient of the notice may be able to point out this defect and the claimant may be persuaded to appoint a qualified person. This will avoid needless wastage of time in arbitration proceedings being conducted by a person not qualified to do so. The second, third and fourth reasons outlined above are consistent with the requirements of natural justice which, in any event, govern arbitral proceedings.

28. Lastly, for the purposes of Section 11(6) of the Act, without the notice under Section 21 of the Act, a party seeking reference of disputes to arbitration will be unable to demonstrate that there was a failure by one party to adhere to the procedure and accede to the request for the appointment of an arbitrator. The trigger for the Court's jurisdiction under Section 11 of the Act is such failure by one party to respond.

29. Of course, as noticed earlier, parties may agree to waive the requirement of such notice under Section 21. However, in the absence of such express waiver, the provision must be given full effect to. The legislature should not be presumed to have inserted a provision that serves a limited purpose of only determining, for the purposes of limitation, when arbitration proceedings commenced. For a moment, even assuming that the provision serves only that purpose viz. fixing the date of commencement of arbitration proceedings for the purpose of Section 43(1) of the Act, how is such date of commencement to be fixed if the notice under Section 21 is not issued? The provision talks of the 'Respondent' receiving a notice containing a request for the dispute "to be referred to arbitration". Those words have been carefully chosen. They indicate an event that is yet to happen viz. the reference of the disputes to arbitration. By overlooking this important step, and straightaway filing claims before an arbitrator appointed by it, a party would be violating the requirement of Section 21, thus frustrating an important element of the parties consenting to the appointment of an arbitrator.

30. Considering that the running theme of the Act is the consent or agreement between the parties at every stage, Section 21 performs an important function of forging such consensus on several aspects viz. the scope of the disputes, the determination of which disputes remain unresolved; of which disputes are time-barred; of identification of the claims and counter-claims and most importantly, on the choice of arbitrator. Thus, the inescapable conclusion on a proper interpretation of Section 21 of the Act is that in the absence of an agreement to the contrary, the notice under Section 21 of the Act by the claimant invoking the arbitration clause, preceding the reference of disputes to arbitration, is mandatory. In other words, without such notice, the arbitration proceedings that are commenced would be unsustainable in law.”

21. In the case of Veena wd/o Naresh Seth v. Seth Industries Ltd. (supra), this Court has held that even if the notice invoking arbitration does not state the claims proposed to be made in the reference, it would be necessary in the notice to indicate disputes that had arisen and that the arbitration clause was being invoked. Therefore, even though the learned counsel for the applicant is justified in relying upon judgment of the Hon’ble Supreme Court rendered in the case of Major (Retired) Inder Singh Rekhi v. Delhi Development Authority (supra) as to what could be said to be a dispute between the parties and that such a dispute was clearly manifested by the material on record in the present case, it would still be necessary to examine as to whether the applicant had, in fact, invoked arbitration as contemplated under section 21 of the said Act, upon failure of which, it was entitled to approach this Court under section 11(6) of the said Act. It is crucial that this Court can exercise jurisdiction for appointment of Arbitrator under section 11(6) of the said Act, only if the procedure agreed between the parties has failed.

22. It becomes clear from the position of law pertaining to section 21 of the said Act, that invocation of arbitration has to be in clear terms, as specified in the said provision, and that mere reference to claims and disputes sought to be raised by a party and existence of an arbitration clause would not itself mean that arbitration has indeed been invoked by such a party. Therefore, it becomes necessary to examine in detail the legal notice issued by the applicant in the present case and the reply sent by the non-applicant. If it can be said that the legal notice sent by the applicant amounted to invoking the arbitration clause and seeking reference of the dispute to arbitration, failure on the part of the non-applicant to respond to the same, would certainly entitle the applicant to maintain the present application filed under section 11(6) of the said Act before this Court.

23. A perusal of the legal notice dated 07/10/2020 shows that the applicant has referred to the work order dated 07/03/2019, the clauses of the work order, various aspects which could be categorized as claims and disputes raised by the applicant and finally the applicant has stated in paragraph 11 of the notice as follows.

“11) Now unless the amount of Rs.73,53,038/- together with interest @ 15% p.a. is released within a period of ONE month from the receipt of this instant notice, my client shall be constrained to such redressal of his grievances by approaching the competent Court of Law holding you noticees responsible for cost and consequences which please note and do the needful.”

24. It is significant that despite raising claims and demanding specific amount with interest within one month from the non-applicant, the applicant has not referred to the arbitration clause i.e. clause 29 of the work order, at any place in the said legal notice. In the above quoted paragraph 11 of the notice also, there is no reference to the intent of the applicant to invoke arbitration, leave alone naming an arbitrator or calling upon the non-applicant to agree to appointment of a sole Arbitrator. In fact, all that the applicant has stated in the above quoted paragraph 11 of the notice, is that the applicant would be constrained to seek redressal by approaching the competent Court of Law. An attempt was made by the learned counsel appearing for the applicant to contend that this ought to be read as invocation of arbitration clause, as there was dispute between the parties and there was an arbitration clause in existence.

25. Considering the position of law as clarified by this Court in the case of Malvika Rajnikant Mehta v. JESS Construction (supra) and the Delhi High Court in the case of M/s. Alupro Building Systems Pvt.Ltd. v. Ozone Overseas Pvt. Ltd. (supra) pertaining to the purposes that a notice invoking arbitration under section 21 of the said Act serves, with which this Court is in agreement, the notice invoking arbitration ought to be absolutely clear with reference to the arbitration clause and with clear intent of calling upon the rival party to proceed for appointment of

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an Arbitrator and referring the disputes to arbitration. The words in section 21 of the said Act, as regards commencement of arbitral proceedings specifically refer to a request for the dispute to be referred to arbitration. Hence, unless there is a request by a party that the dispute is to be referred to arbitration, merely stating the claims and disputes in the notice would not suffice. In the present case, even in the reply sent by the non-applicant, there is no reference to the arbitration clause or any intent on the part of the non-applicant to refer the dispute to arbitration, despite claiming huge amount from the applicant. This clearly indicates that in the present case, arbitration itself was not invoked by either party as per the agreed procedure under section 11(2) of the said Act read with section 21 thereof. 26. In absence of the agreed procedure being triggered by either party for reference of the dispute to arbitration, the question of failure thereof would not arise and hence, the precondition for invoking section 11(6) of the said Act for approaching this Court was not satisfied. This aspect goes to the very root of the matter and hits at the very jurisdiction of this Court to entertain the application for appointment of Arbitrator, filed by the applicant under section 11(6) of the said Act. The non-applicant is justified in contending that therefore, the present application deserves to be rejected only on the said limited ground. The learned counsel for the applicant is not justified in contending that the legal notice dated 07/10/2020, can be constructively read as a notice invoking arbitration under section 21 of the said Act and that the preliminary objection is hyper-technical in nature. This is for the reason that there are legal consequences to invoking of arbitration as contemplated under section 21 of the said Act, including the aspect of limitation, and other such purposes which have been enumerated in the above quoted judgments of this Court and the Delhi High Court. Therefore, merely because there is an arbitration clause, it cannot be said that this Court ought to exercise jurisdiction under section 11(6) of the said Act. 27. In view of the above, the preliminary objection raised on behalf of the non-applicant is accepted to that extent and accordingly, it is held that in the facts and circumstances of the present case, this Court cannot exercise jurisdiction under section 11(6) of the said Act for entertaining the present application filed by the applicant. 28. It is made clear that this order will not come in the way of the parties to proceed to invoke arbitration in terms of the aforesaid clause, as per procedure known to law and in case of failure thereof, to resort to the remedies available under the said Act. 29. In view of the above and subject to the observations made herein above, the application is dismissed. No costs.
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