M.M.T.C. LIMITEDversusSTERLITE INDUSTRIES (INDIA) LTD.

A                          M.M.T.C. LIMITED
                                   v.
                   STERLITE INDUSTRIES (INDIA} LTD.

                             NOVEMBER 18, 1996

B                    [J.S. VERMA AND B.N. KIRPAL, JJ.]

           Arbitration and Conciliation Act, 1996: Sections 7, JO (1) and 11
    (3).

           Arbitration agreement-Provided appointment of one arbitrator by
C each party-The two appointed arbitrators required to appoint a third
    arbitrator-Act of J996 became applicable as dispute arose after Act came
    into force-Held: Arbitration agreement valid~It satisfied requirements of
    Ss. 7 and 10(1)-And accorded with implied condition contained in para
    2 of First Sch. to Arbitration Act, 1940-Hence, third arbitrator had to be
D   appointed to act as presiding arbitrator in accordance with S. 11 (3)-
    Arbitration Act, 1940, First Sch. para. 2.

        The respondent claimed that it had not received certain dues
  under the contract from the appellant and, therefore, it invoked the
  arbitration clause in the agreement between them. Subsequently, the
E respondent appointed its arbitrator. The appellant claimed that
  arbitration could not be resorted to and, therefore, it did not name
  its arbitrator. The respondent tiled an application in the High Court
  for appointing an arbitrator in accordance with the Arbitration and
  Conciliation Act, 1996.

F        The High Court allowed the application and directed the
    appellant to appoint an arbitrator. The appellant had in the meantime
    appointed its arbitrator. Hence this appeal.           ·

           On behalf of the appellant it was contended that an arbitration
G agreement providing for the appointment of an even number of
  arbitrators was not a valid agreement because of Section JO (1) of the
  New Act; that Section 10(2) of the New Act was not attracted since
  there was no failure to determine the number of arbitrators according
  to Section 10 (1) of the New Act; and that Section 10 of the New Act
  was inconsistent with para 2 of the First Schedule of the Arbitration
H Act, 1940.
                                       676
              M.M.T.C. LTD. v. STERLITE INDS. (I) LTD.              677


      On.behalf of the respondent it was contended that each of the        A
parties having nominated its arbitrator, the third arbitrator was
required to be appointed according to Section 11(3) of the New Act
and the failure to do so attracted the consequences under the New
Act; and that the provision for number of arbitrators was a machinery
provision and did not affect the validity of the arbitration agreement
which "'as to be determined according to Section 7 of the Ne\v Act.        B

     Disposing of the appeal, this Court

      HELD: I. The validity of an arbitration agreement does not
depend on the number of arbitrators specified therein. The number of
arbitrators is dealt with separately in Section IO of the Arbitration and C
Conciliation Act, 1996 which is a part of machinery provision for the
working of the arbitration agreement. Therefore, an arbitration
agreement specifying an even number of arbitrators cannot be a ground
to render the arbitration agreement invalid under the new Act.
Moreover, the arbitration agreement in the present case accords with
the implied condition contained in para 2 of the First Schedule to the D
Arbitration Act, 1940 requiring the two arbitrators, one each appointed
by the two sides, to appoint an umpire not later than one month from
the latest date of their respective appointments. [682 H, 683 D,EJ

      2. In view of the term in the arbitration agreement that the two
arbitrators would appoint the umpire or the third arbitrator before E
proceeding with the reference, the requirement of Section 10(1) of the
New Act is satisfied and sub-section (2) thereof has no application. Since
the agreement satisfies the requirement of Section 7 of the New Act
and, therefore, is a valid arbitration agreement, the appointment of
arbitrators must be governed by Section 11 of the New Act. [683-D-G)
                                                                           F
      3. In view of the fact that each of the two parties have appointed
their own arbitrators Section II (3) of the new Act was attracted and
the two appointed arbitrators were required to appoint a third
arbitrator to act as the presiding arbitrator, failing which the Chief
Justice of the High Court or any person or institution designated by       G
him would be required to appoint the third arbitrator as required by
Section 11(4) (b) of the New Act. Since the procedure prescribed in
Section 11 (3) has not been followed the further consequences provided
in Section Ii must follow. [683H, 684A[

     CIVIL APPELLATE JURISDICTION : Civil Appeal No. 12736 of H
    678                       SUPREME COURT REPORTS [ 1996] SUPP. 8 S.C.R.


A   1996.

         From the Judgment and Order dated 28.6.96 of the Bombay High
    Court in A.A. No. I. of 1996.

            Ashok Desai, Attorney General, Shri Narain, C.M. Oberoi, Sandeep
B Narain and Ashok Sharma for ,he Appellant.

            Dushyant Dave and K.J. John for the Respondents.

            The Judgment of the Court was delivered by

c         J.S. VERMA, J. The point involved for decision is, the effect of
    The Arbitration and Conciliation Act, 1996 (for short "New Act'') in the
    present case on the arbitration agreement made prior to the commencement
    of the New Act. Clause VII of the agreement dated December 14, 1993
    between the parties is, as under:

D                  "VII. In the event of any question or dispute arising under or
                   out of or relating to the construction, meaning and operation
                   or effect of this agreement or breach thereof, the matter in
                   dispute shall be referred to arbitrator. Both the parties shall
                   nominate one Arbitrator each and the arbitrators shall appoint
                   an umpire before proceeding with the reference. The decision
E                  of arbitrators or in the event of their not agreeing the decision
                   of the umpire will be final and binding on the parties. The
                   provisions of the Indian Arbitration Act and Rules made
                   thereunder shall apply for proceedings. The arbitrators or
                   the umpire, as the case may, shall be entitled with the consent
                   of the parties to enlarge the time, from time to time, for
F                  making the award. The arbitrators/umpire shall give a
                   reasoned award. The venue of the arbitration shall be
                   Bombay."

                                                              (Emphasis supplied)
G
          Sterlite Industries (India) Ltd.;-respondent, claimed that it had not
    received certain dues under the contract from the appellant-MMTC Ltd.
    and, therefore, it invoked the above arbitration clause in the agreement
    between them by a letter dated January 19, 1996 which was received by
    the MMTC Ltd. on January 31, 1996. On February 7, 1996 the respondent
H   appointed Shri M.N. Chandurkar, a former Chief Justice of Madras High
      M.M.T.C. LrD. v. STERLITE INDS.(!) LTD. [J.S. VERMA. J.] 679


Court, as its arbitrator. The MMTC Ltd. claimed that arbitration could not       A
be resorted to and, therefore, it did not name its arbitrator. The Sterlite
Industries (India) Ltd. filed an application in the Bombay High Court for
appointing an arbitrator in accordance with the New Act.

       Before the High Court, learned counsel for the MMTC Ltd. contended
that the arbitration clause was not attracted but this objection was rejected.   B
The other contention on behalf of the MMTC Ltd. was that the arbitration
agreement provided for the appointment of two arbitrators while Section
I 0 (I) of the New Act does not envisage the appointment of an even
number of arbitrators. The High Court by its order dated 28.6.1996 rejected
the contention and gave time to the MMTC Ltd. till July 5, 1996 to appoint
an arbitrator. In further held that in the event of the MMTC Ltd. failing to     C
name its arbitrator, the arbitrator appointed by Sterlite Industries {India)
Ltd. would be the sole arbitrator under Section I 0(2) read with Section 11
(5) of the New Act. Time for appointment of the arbitrator was later
extended. The MMTC Ltd. has in the meantime appointed Shri. S.N.
Sapra, a former Judge of the Delhi High Court as its arbitrator. Hence this
appeal by special leave.                                                         D

       The contention of the learned Attorney General on behalf of the
appellant is that an arbitration agreem~nt providing for the appointment
ofan even number ofarbitrators is not a valid agreement because of Section
I 0 (I) of the New Act; and, therefore, the only remedy in such a case is by     E
a suit and not by arbitration. For this reason, he urged, that sub-section (2)
of Section I 0 is not attracted since there is no failure to determine the
number of arbitrators according to sub-section {I). Another argument of
the learned Attorney General was that Section I 0 is a departure from para
2 of the First Schedule of the Arbitration Act, 1940 (for short 1940 Act),
which reads as under;                                                            F
              "2. If the reference is to an even number of arbitrators the
              arbitrators shall appoint an umpire not later than one month
              from the latest date of their respective appointments."

                                                                                 G
       In reply Shri Dave, learned counsel for the respondent contended
that there is no such inconsistency between Section 10 of the New Act and
the corresponding provision in the '1940 Act, both being substantially the
same. Learned counsel contended that the provisions of the New Act must
be construed to promote the object of implementing the scheme of
alternative dispute resolution; and the New Act must be construed to enable      H
    680                     SUPREME COURT REPORTS [1996] SUPP. 8 S.C.R.


A the enforcement of the earlier arbitration agreements. It was urged that
    each of the parties having nominated its arbitrator, the third arbitrator was
    required to be appointed according to Section 11 (3) and the failure to do
    so attracts the consequential results under the New Act. Learned counsel
    contended that the provision for number of arbitrators is a machinery
    provision and does not affect the validity of the arbitration agreement
B   which is to be determined according to Section 7 of the New Act.

          Some provisions of the New Act may now be referred. Section 2 (b)
    defines the 'arbitration agreement' to mean an agreement referred to in
    section 7. Section 7 deals with arbitration agreement, Section I 0 with the
    number of arbitrators and Section 11 with the appointment of arbitrators.
C   Sections 7, I 0 and the relevant part of the Section 11 are as under :

                  Section 7 :

                  "7 Arbitration agreement -( 1) In this part, "arbitration
                  agreement" means an agreement by the parties to submit to
D
                  arbitration all or certain disputes which have arisen or which
                  may arise between them in respect of a defined legal
                  relationship, whether contractual or not.

                  (2) An arbitration agreement may be in the form of an
E                 arbitration clause in a contract or in the form of a separate
                  agreement.

                  (3) An arbitration agreement shall be in writing .


F                 (4 ). An arbitration agreement is in writing if it is contained
                  inM

                  (a) A document signed by the parties;

                  (b) an exch•nge of letters, telex, telegrams or other means of
G                 telecommunication which provide a record of the agreement;
                  or

                   (c) an exchange of statements of claim and defence in which
                   the existence of the agreement is alleged by one party and
H                  not denied by the other.
M.M.T.C. LTD. v. STERLITE INDS.(!) LTD. [J.S. VERMA,!.] 681


       (5) The reference in a contract to a document containing an        A
       arbitration clause constitutes an arbitration agreement if the
       contract is in writing and the reference is such as to make
       that arbitration clause part of the contract."

Section JO :
                                                                          B
       "10. Number of arbitrators-(!) The parties are free to
       determine the number of arbitrators, provided that such
       number shall not be an even number.

       (2) Failing the determination referred to in sub-section (I),      C
       the arbitral tribunal shall consist of a sole arbitrator."

Section 11 :

       "11. Appointment of arbitrators. -(I) A person of any
       nationality may be an arbitrator, unless otherwise agreed by       D
       the parties.

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

       (3) Failing any agreement referred to in sub-section (2), in       E
       an arbitration with three arbitrators, each party shall appoint
       one arbitrator, and the two appointed arbitrators shall appoint
       the third arbitrator who shall act as the presiding arbitrator.

       (4) If the appointment procedure in sub-section (3) applies        F
       and·

       (a) A party fails to appoint an arbitrator within thirty days
       from the receipt of a request to do so from the other party;
       or
                                                                          G
       (b) The two appointed arbitrators fail to agree on the third
       arbitrator within thirty days from the date of their
       appointment,

       the appointment shall be made, upon request of a party, by         H
    682                     SUPREME COURT REPORTS [1996] SUPP. 8 S.C.R.


A                the Chief Justice or a11y person or institution designated by
                 him.

                 (5) Failing any agreement referred to in sub-section (2), in
                 an arbitration with a sole arbitrator, ifthe parties fail to agree
                 on the arbitrator within thirty days from receipt of a request
B                by one party from the other party 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.

                 (6) Where, under an appointment procedure agreed upon by
                 the parties,
c
                 (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
D
                 (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,
E                unless the agreement on the appointment procedure provides
                 other means for securing the appointment.

                 (7) A decision on a matter entrusted by sub-section (4) or
                 sub-section (5) or sub-section (6) to the Chief Justice or the
F                person or institution designated by him is final.

                                               xxx

          Chapter II of the New Act contains Sections 7 to 9 under the heading
G "Arbitration Agreement". Chapter III under the heading "Composition of
    Arbitral Tribunal" contains Sections IO to 15.

          Sub-section (3) of Section 7 requires an arbitration agreement to be
    in writing and sub-section (4) describes the kind of that writing. There is
    nothing in Section 7 to indicate the requirement of the number of arbitrators
H   as a part of the arbitration agreement. Thus the validity of an arbitration
      M.M.T.C. LTD. v. STERLITE INDS. (I) LTD. [J.S. VERMA. J.]           683


agreement does not depend on the number of arbitrators specified therein.         A
The number of arbitrators is dealt with separately in section I 0 which is a
part of machinery provision for the working of the arbitration agreement.
It is, therefore, clear that an arbitration agreement specifying an even
number of arbitrators cannot be a ground to render the arbitration agreement
invalid under the New Act as contended by the learned Attorney General.
                                                                                  B
      Section IO deals with the number of arbitrators. Sub-section(!)
says that the parties are free to determine the number of arbitrators, provided
that such number shall not be an even number. Sub-section (2) then says
that failing the determination referred to in sub-section (I), the arbitral
tribunal shall consist of a sole arbitrator. Section 11 provides for
appointment of arbitrators. This is how arbitral tribunal is constituted.         C

       The arbitration clause provides that each party shall nominate one
arbitrator and the two arbitrators shall then appoint an umpire before
proceeding with the reference. The arbitration agreement is valid as it
satisfies the requirement of Section 7 of the New Act. Section 11 (3)
requires the two arbitrators to appoint the third arbitrator or the umpire.       D
There can be no doubt that the arbitration agreement in the present case
accords with the implied condition contained in para 2 of the First Schedule
to the Arbitration Act, 1940 requiring the two arbitrators, one each appointed
by the two sides, to appoint an umpire not later than one month from the
latest date of their respective appointment.                                      E

        The question is : whether there is anything in the New Act to make
such an agreement unenforceable? We do not find any such indication in
the New Act. There is no dispute that the arbitral proceeding in the present
case commenced after the New Act came into force and, therefore, the
New Act applies. In view of the term in the arbitration agreement that the        F
two arbitrators would appoint the umpire or the third arbitrator before
proceeding with the reference, the requirement of sub-section (I) of Section
 I 0 is satisfied and sub-section (2) thereof has no application. As earlier
stated the agreement satisfies the requirement of Section 7 of the Act and,
therefore is a valid arbitration agreement. The appointment of arbitrators        G
must, therefore, be governed by Section 11 of the New Act.

     In view of the fact that each of the two parties have appointed their
own arbitrators, namely, Justice M.N. Chandurkar (Retd.) and Justice S.P.
Sapra (Retd.), Section 11 (3) was attracted and the two appointed arbitrators
were required to appoint a third arbitrator to act as the presiding arbitrator,   H
    684                     SUPREME COURT REPORTS [1996) SUPP. 8 S.C.R.


A failing which the Chief Justice of the High Court or any person or institution
    designated by him would be required to appoint the third arbitrator as
    required by section 11 (4) (b) of the New Act. Since the procedure
    prescribed in Section 11 (3) has not been followed the further consequence
    provided in Section 11 must follow.

B         Accordingly, we direct tbat the chief Justice of the High Court is to
    appoint the third arbitrator under Section 11 (4) (b) of the New Act in
    view of the failure of the two appointed arbitrators to appoint the third
    arbitrator within thiity days from the date of their appointments. Direction
    given by the Chief Justice of the High Court is substituted to this effect.

C         The appeal is disposed of accordingly. No costs.

    v.s.s.                                                 Appeal disposed of.