Food Corporation of India v. Indian Council of Arbitration

The Food Corporation of India had contracts with rice millers that sent disputes to arbitration under the rules of the Indian Council of Arbitration. The Council refused to act without fresh written consent from both sides. The Supreme Court held that doubts about the arbitration agreement (an agreement to settle disputes by arbitration) are for the arbitral tribunal to decide, and told the Council to nominate an arbitrator within sixty days.

Quick Revision

Read the full judgment: Indian Kanoon (unofficial copy)

Parties

Food Corporation of India (FCI) — appellant; it asked the courts to make the ICA proceed with the arbitrations.

Indian Council of Arbitration (ICA) — respondent; the body whose rules the arbitration clause named. It refused to proceed without fresh agreement.

The Millers — respondents in the appeals; rice millers who had storage-cum-milling contracts with FCI. Some appeared through Rajiv Datta, senior counsel.

Procedural History

1. FCI approached the Delhi High Court against the ICA's refusal, conveyed in its letter of 4 March 1998, to proceed with the claims until FCI and the Millers agreed again in writing to arbitrate under the ICA Rules.
2. On 15 October 1997 FCI had asked for the disputes to be referred to arbitration.
3. The ICA's letter of 10 December 1998 asked FCI to have the Millers who consented write directly to the ICA. It said cases without clear consent would be closed and the deposit refunded.
4. FCI asked the High Court to decide three questions, which the judgment sets out.
5. By its order of 10 February 2000 in A.A. Nos. 175, 173 and others of 1999, the learned Single Judge held the petitions not maintainable.
6. FCI appealed. Leave was granted in the special leave petitions, and the appeals were heard together.

Facts

1. FCI, in its day-to-day business, made agreements with Millers to store FCI paddy at the mills and mill it into raw or parboiled rice.
2. The Millers had to deliver rice according to the stipulated out-turn for each variety of paddy, against payment at agreed rates.
3. The contracts had detailed terms and a uniform, standardised arbitration clause for disputes before the ICA.
4. In some cases the ICA asked FCI to send the name of a sole arbitrator. In another case it asked FCI to get the rice mills to send their consent directly.
5. The clause said all disputes arising out of or relating to the agreement would be settled by arbitration under the ICA rules, and the award would bind the parties.
6. The clause let the Senior Regional Manager or Zonal Manager of FCI appoint an arbitrator from the ICA panel. It said another person from the panel would replace an arbitrator who was transferred, left office, died or was unable to act. The replacement was to continue from the stage reached.
7. The clause required a Miller to demand arbitration in writing within one year of completion or expiry of the contract period. Otherwise the claim was deemed waived and barred.
8. The clause left the costs of arbitration to the arbitrator's discretion.
9. FCI sent consent letters from different rice mills to the ICA. Some Millers did not reply when the ICA wrote to them.
10. The ICA's letter of 10 December 1998 told FCI to have the consenting Millers write directly. It said the ICA would proceed on receipt of consent, and would close cases without clear consent and refund FCI's deposit.
11. The ICA had refused, by its letter of 4 March 1998, to proceed with the claims until FCI and the Millers agreed in writing again to arbitrate under the ICA Rules.

Issues Raised

The three questions FCI put to the Delhi High Court:

1. Is the dispute between the parties arbitrable under the ICA Rules, under the existing arbitration clause?
2. Does the Registrar of the ICA have jurisdiction to direct the claimant to get a fresh agreement signed? If so, what is the effect of failing to obtain it, and which forum will decide the dispute?
3. Is the Registrar justified in not proceeding, and in asking FCI to seek the approval of respondents 2 and 3 for a common arbitrator and to get their consent afresh?

Before the Supreme Court the Court also had to deal with whether the special leave petitions were maintainable.

Arguments Contended

For the appellant (FCI), by G.L. Sanghi:

• The High Court orders have serious infirmities and untenable reasons.
• There is no inconsistency between the arbitration clause and the ICA Rules. Both should be read harmoniously, given the parties' firm intent to arbitrate through the ICA.
• The High Court should have reconciled the clause and the Rules to ensure arbitration and not create a stalemate.
• FCI relied on the wording of the clause and on Rules 16, 21 and 22 of the ICA Rules.
• FCI had never claimed a right to nominate the arbitrator itself. It had always asked the ICA to nominate, so the insistence on fresh consent was unjustified.
• The ICA took varying stands at different stages and obstructed an amicable settlement where public money was at stake.
• Before the High Court, FCI relied on Rules 4(b), 5, 9, 10, 13, 14 to 19, 20 to 22 and 37 of the ICA Rules. It said arbitral proceedings began on 15 October 1997 and that a direction to get a fresh agreement was contrary to law.
• FCI said its request was not inconsistent with the ICA Rules or the Act, so the ICA could not have refused to refer and proceed with the claims.
• It relied on case law as well.

For the respondents:

• The ICA (A.K. Ganguli, senior counsel) relied on Konkan Railway Corporation Ltd. v. Rani Construction Pvt. Ltd. It said an order under Section 11(6) of the 1996 Act is not adjudicatory, so the special leave petitions are not maintainable under Article 136.
• The ICA, relying also on Konkan Railway Corporation Ltd. v. Mehul Construction Co., said FCI could not now say the High Court applications were not under Section 11(6).
• Because the clause lets FCI's Senior Regional Manager or Zonal Manager appoint the arbitrator, the ICA Registrar's nomination under Rule 22 does not arise.
• If arbitration failed, it was because FCI did not nominate an arbitrator under its own clause.
• The clause on appointment directly conflicts with the ICA Rules on nomination.
• The Millers (Rajiv Datta, senior counsel, and others) said the appeals are not maintainable for the same reasons and that the clause and the ICA Rules directly conflict. So the ICA could not nominate an arbitrator.
• The Millers said that without a fresh agreement there is no scope for arbitration.
• The Millers said the clause is one-sided and can be invoked only by the Millers. They said FCI's disputes fall outside it.

Court's Reasoning

The judgment has no numbered paragraphs and one opinion, delivered by D. Raju, J. Both Judges are named on the bench. Steps follow the order of the judgment and are not cited by paragraph.

D. Raju, J. (judgment of the Bench)

1. Noted: Leave was granted. The appeals were dealt with together because they involve identical questions on almost the same facts.
2. Noted: FCI approached the Delhi High Court, and then this Court, against the ICA's refusal to proceed until the parties agreed again in writing to arbitrate under the ICA Rules. The Council and the Millers are respondents.
3. Noted: The Court sets out the contracts, the uniform arbitration clause, the ICA's different requests to FCI, and the ICA's letter of 10 December 1998. It also sets out FCI's three questions before the High Court and FCI's stand on the ICA Rules.
4. Noted: The Single Judge held the petitions not maintainable because the steps for the court to appoint an arbitrator had not been fulfilled. The clause gave FCI the power to appoint, and the ICA could appoint only with the parties' consent, which was missing.
5. Noted: The Single Judge treated Rule 22(a) of the ICA Rules as in direct conflict with the clause. He held the ICA had no power to appoint, and that the ICA Rules apply to procedure only after FCI appoints. So there was no failure by the ICA.
6. Noted: The Court heard senior counsel on both sides. It records FCI's arguments as set out under Arguments Contended.
7. Noted: It records the ICA's and the Millers' arguments, including the objection to the maintainability of the appeals and the claim of a direct conflict between the clause and the ICA Rules.
8. Noted (maintainability): In Mehul Construction the Court held that the Chief Justice or his nominee should not decide contentious issues under Section 11, since the order is administrative and only aids constitution of the tribunal. Even refusal to appoint involves no judicial or quasi-judicial function. The remedy would be a mandamus under Article 226.
9. Noted: In Rani Construction a Constitution Bench held that an order of the Chief Justice or designate nominating an arbitrator is not adjudicatory. Those functionaries are not a Tribunal, so no appeal lies under Article 136. Questions of improper constitution, want of jurisdiction, or the existence or validity of the arbitration agreement go to the tribunal under Section 16.
10. Held: The High Court adopted an adjudicatory role. It gave reasons on the existence of the agreement and on whether a reference was tenable. It is futile to say the special leave petitions are not maintainable. Why: its detailed findings could block any recourse to an arbitrator.
11. Held: The details of which provision was invoked, the nature of the application and the character of the order are of no weight. The objections on maintainability are rejected.
12. Held: The scope and effect of the arbitration clause, the propriety of constituting the tribunal under Rules 21 and 22 of the ICA Rules, and alleged inconsistencies go to the tribunal's jurisdiction or to the existence or validity of the arbitration agreement. Under Section 16 of the 1996 Act the arbitral tribunal decides them. This position is settled by more than one decision, including the Constitution Bench.
13. Held: The Court refrained from expressing any opinion on the extensive arguments on those questions. It did so out of deference to the consistent view that the arbitral tribunal must decide them, and to avoid the High Court's mistake.
14. Noted: It is not in controversy that the parties agreed to arbitrate through the ICA under its rules.
15. Held: Even assuming an infirmity in the clause, or an objection to the existence of a valid arbitration agreement, the tribunal must adjudicate it after the reference. It is not for the ICA or the High Court "to undertake this impermissible adjudicatory task of adjudging highly contentious issues between the parties".
16. Noted: As the Constitution Bench observed, Section 11 does not require notice to the other party, a response from it, or any decision by the Chief Justice on a controversy it may raise, even about failure to appoint within the stipulated period.
17. Noted: The legislative intent of the 1996 Act "to minimize the supervisory rules of courts in arbitral process" and to nominate or appoint the arbitrator quickly. All contentious issues are left to the tribunal.
18. Noted: Even under the old law, a common sense approach was commended in construing an arbitration clause. The aim is to give effect to the parties' intention to resolve disputes by arbitration, and not to defeat it by "a narrow, pedantic and legalistic interpretation".
19. Held: The Court considered it just and proper, in law and in equity, to direct the ICA "to forthwith and not later than sixty days from this date nominate the Arbitrator" as FCI sought, and to place the matters before that arbitrator.
20. Held: The parties may raise and pursue all objections and contentions before the arbitrator, who will decide them under Section 16 of the 1996 Act and then decide the disputes on merits. Both parties have leave to do so after the ICA nominates the arbitrator.
21. Held: The appeals were allowed and disposed of as indicated, and the parties bear their own costs.

Authorities

• Konkan Railway Corporation Ltd. & Ors. v. Mehul Construction Co., (2000) 7 SCC 201. Relied on by the respondents and followed. Under Section 11 the order of the Chief Justice or his nominee is administrative, and refusal to appoint can only be met by a writ of mandamus.
• Konkan Railway Corporation Ltd. & Anr. v. Rani Construction Pvt. Ltd., (2002) 2 SCC 388 (Constitution Bench). Relied on by the respondents and followed. A Section 11 nomination is not adjudicatory and not appealable under Article 136, and jurisdiction questions go to the tribunal under Section 16.

Also cited in footnotes: the judgment has no footnotes.

Provisions

• Section 11(6), Arbitration and Conciliation Act, 1996: the provision under which the High Court applications were treated by the respondents as filed. The Court describes orders under Section 11 as administrative and not adjudicatory.
• Section 16, Arbitration and Conciliation Act, 1996: the arbitral tribunal rules on its own jurisdiction, including the existence or validity of the arbitration agreement.
• Rules 4(b), 5, 9, 10, 13, 14 to 19, 20 to 22 and 37 of the ICA Rules, named by FCI. Rules 16, 21 and 22 are discussed, and Rule 22(a) is the rule the Single Judge saw as in conflict with the clause.
• Article 136 of the Constitution: the ground on which maintainability of the special leave petitions was argued. Article 226: a writ of mandamus.

Judgement

1. The appeals are allowed.
2. The ICA must nominate the arbitrator sought by FCI at once and not later than sixty days from 17 July 2003.
3. The ICA must place the matters before that arbitrator.
4. All objections and contentions of the parties remain open. They may raise them before the arbitrator, who decides them under Section 16 of the 1996 Act, and then the disputes on merits.
5. The parties bear their own costs.

Legal Principle / Ratio

When parties have agreed to arbitrate under a named body's rules, objections about the clause, about conflicts with those rules or about the validity of the arbitration agreement are for the arbitral tribunal under Section 16. A court or the institution must not decide them first. Key holding: it is not for the ICA or the High Court to undertake "this impermissible adjudicatory task of adjudging highly contentious issues between the parties".

Critical Analysis

Analysis based on the judgment text.

• The Court expressly left open whether the clause was one-sided, whether it conflicted with the ICA Rules, and whether it could be invoked by FCI at all. These objections were not decided.
• The Court said the question of which provision was invoked before the High Court carried no weight. It did not decide whether the High Court application was under Section 11(6).
• The direction to nominate within sixty days depends on the Court's view that the parties agreed to arbitrate through the ICA. The judgment records this as not in controversy, while the respondents argued there was no fresh agreement.

Significance

• The case shows that questions about the arbitration clause go to the tribunal and not to the nominating body or the High Court.
• It applies Konkan Railway to hold the High Court's detailed findings improper.
• It states the Act's aim to reduce courts' supervision in arbitration and to appoint arbitrators without delay.
• It calls for a common sense reading of arbitration clauses that carries out the parties' intention.

Exam-Important Points

• Rule first: objections to the existence or validity of the arbitration agreement, or the tribunal's constitution, are decided by the arbitral tribunal under Section 16.
• A Section 11 appointment is administrative, not adjudicatory (Konkan Railway). No Article 136 appeal lies against the nomination itself.
• Trap: here the special leave petitions were still maintainable, because the High Court had gone beyond its role and given detailed findings.
• The Court did not decide the clause's validity or the conflict with the ICA Rules. It left both open for the arbitrator.
• Read arbitration clauses with common sense, not by a narrow, pedantic and legalistic reading.
• Direction: the ICA must nominate the arbitrator within sixty days. Costs: each party bears its own.

Prepared from the full text of the judgment. Paragraph numbers follow the official Supreme Court judgment text; law reports may number the same paragraph differently.