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Judgment
The Applicant has filed this Application under Section 11 of the Arbitration and Conciliation Act, 1996, asking this Court to appoint a Sole Arbitrator to decide the disputes between the parties arising out of the registered Leave and Licence Agreement dated 4 May 2017. The Respondent has opposed the Application. Its main case is that the Applicant has not followed the procedure for appointment of Arbitrators which was agreed by the parties in Clause XXXVIII of the Agreement. The Respondent has raised objections about limitation, the amount and nature of the claim and the effect of the earlier proceedings before the National Company Law Tribunal and the National Company Law Appellate Tribunal.
The Applicant is Samrat Restaurant. The Respondent is Brewcrafts Microbrewing Private Limited. Under the registered Leave and Licence Agreement dated 4 May 2017, the Applicant gave the premises situated at 10/A, Raj Kutir, Plot E854, 3rd Road, Khar (West), Mumbai, to the Respondent for use on leave and licence basis. The premises consisted of 218 square metres on the ground floor, 115 square metres on the first floor and a terrace of 126 square metres. The licence period was from 15 June 2017 to 30 April 2022. The Respondent was required to deposit Rs.39,65,000/- as an interest-free security deposit. The monthly licence fee was fixed for each year and was to increase as agreed between the parties. During the last year, that is, from 1 May 2021 to 30 April 2022, the monthly licence fee was Rs.14,30,131/-. These facts and the conditions for payment are found in the Application and the Agreement. The Applicant's case is that the Respondent failed to pay the monthly licence fee regularly and thereby committed defaults. The Applicant issued a demand notice dated 16 November 2018, claiming Rs.99,85,540. Thereafter, another notice dated 6 February 2019 was issued, demanding Rs.1,04,06,031/-. The Applicant is relying upon an undertaking dated 29 August 2021. According to the Applicant, by giving this undertaking, the Respondent accepted that the amount claimed was payable by it. Thereafter, the Applicant filed Company Petition No.483/MB/2023 before the National Company Law Tribunal, Mumbai Bench, under Section 9 of the Insolvency and Bankruptcy Code, 2016, claiming Rs.5,22,95,571/-.
By order dated 22 May 2024, the National Company Law Tribunal dismissed the Company Petition. The reason was that the amount of default was below the then prescribed limit of Rs.1 crore. The Applicant relies upon the observation of the Tribunal that dismissal of the Company Petition would not stop it from proving its outstanding dues, including utility expenses and interest, before any other forum. The Applicant thereafter challenged that order before the Supreme Court in Civil Appeal No.14031 of 2024. The Supreme Court dismissed the Appeal by order dated 3 January 2025. However, it recorded that dismissal of the Appeal would not affect the other remedies available to the Applicant under law. The Applicant now claims that Rs.3,56,39,549/- is due and payable by the Respondent, along with interest at the rate of 18% per annum. According to the Applicant, the dispute relates to the duties and obligations of the parties under the Agreement and falls within the arbitration clause. It is submitted that the Respondent has not denied the execution of the Agreement or the existence of the arbitration clause. On this basis, the Applicant says that the disputes are required to be referred to arbitration.
Earlier, the Applicant had issued a notice dated 4 June 2025, calling upon the Respondent to agree to appointment of a Sole Arbitrator. However, that notice was returned with the remark “Left”. Another notice sent to one of the Directors was returned with the remark “Unclaimed-Intimation Posted”. The Applicant thereafter filed Commercial Arbitration Application No.118 of 2026. When that Application came up for hearing, the Respondent objected that the notice invoking arbitration had not been properly served. By order dated 29 April 2026, this Court permitted the Applicant to withdraw that Application, with liberty to file a fresh Application after serving notice under Section 21 of the Arbitration and Conciliation Act, 1996. Thereafter, the Applicant issued another notice dated 9 May 2026 at the address of the Respondent, namely, First Brewhouse, The Corinthians Club, Mohammadwadi, Pune. That notice came back with the remark “Left”. The Applicant says that it thereafter made enquiries and came to know of the present address of the Respondent. Accordingly, another notice dated 11 July 2026 was issued. This time, the notice was received by the Respondent. By reply dated 23 July 2026, the Respondent refused to give consent for appointment of Advocate, as the Sole Arbitrator. Both the notice and the reply have been placed on record.
The Respondent has denied that Rs.3,56,39,549/-, or for that matter any other amount, is payable to the Applicant. It has pointed out that the notice dated 11 July 2026 does not hold how the amount of Rs.3,56,39,549/- has been arrived at. According to the Respondent, no statement of account, ledger, month-wise calculation or supporting documents were supplied along with the notice. The Respondent has asked the Applicant to provide details of the licence fee charged for each month, the period for which the amount is claimed, the payments made and the manner in which the security deposit of Rs.39,65,000/- has been adjusted. The Respondent has stated that the Agreement ended on 30 April 2022. Therefore, according to it, no amount can be claimed under the Agreement for any period after that date. It has disputed that claims based on the undertaking dated 29 August 2021, or claims which do not arise from the terms and conditions of the Agreement, can be referred to arbitration under Clause XXXVIII.
The Respondent has raised the objection of limitation. For this purpose, it relies upon Clause VI(D) of the Agreement. Under this clause, the monthly licence fee was required to be paid by the Licensee to the Licensor in advance, on or before the seventh day of every month. According to the Respondent, each monthly instalment gave a separate right to claim payment on the date when it became due. It submits that even after excluding the period from 15 March 2020 to 28 February 2022, as directed by the Supreme Court while extending limitation during the COVID-19 period, the last instalment for April 2022 became due on 7 April 2022. Therefore, according to the Respondent, the period of three years ended in April 2025. The Respondent has referred to the letters dated 29 August 2021 and 10 March 2023. Its submission is that the National Company Law Appellate Tribunal, in its judgment dated 25 September 2024, held that these letters did not amount to a one-time settlement. According to the Respondent, the date of default could not be changed on the basis of these letters and the payment conditions continued to be governed by the Leave and Licence Agreement. It submits that even if the letter dated 10 March 2023 is taken as the relevant date, limitation came to an end in March 2026. The Respondent says that it never received the earlier notice dated 4 June 2025 and that the earlier Application was withdrawn because proper service had not taken place. It has disputed the Applicant's claim for exclusion of time under Section 14 of the Limitation Act, 1963, for the period spent in the insolvency proceedings.
The Respondent has stated that the amount claimed by the Applicant is much more than what is payable. According to it, a total amount of Rs.6,92,46,223/- has been paid to the Applicant. The Respondent says that during the earlier insolvency proceedings, the licence fee was recalculated after taking into account the revised rates agreed between the parties during the COVID-19 period. It submits that the claim of Rs.47,01,629/-towards “other expenses reimbursement” was rejected by the National Company Law Tribunal and the National Company Law Appellate Tribunal because it was arbitrary and was not supported by material. The Respondent has questioned the manner in which the Applicant has calculated interest. These are the objections raised by the Respondent about the amount claimed and the earlier proceedings.
The main objection of the Respondent is about the procedure for appointment of Arbitrators. The Respondent has relied upon Clause XXXVIII of the Agreement. According to it, this clause provides that each party will appoint one Arbitrator and the Licensor will appoint the third Arbitrator if there is a deadlock in resolving any issue. The Respondent says that the Applicant has neither appointed its own Arbitrator nor called upon the Respondent to appoint its Arbitrator. Instead, the Applicant directly asked the Respondent to agree to appointment of a Sole Arbitrator. According to the Respondent, this was not the procedure agreed between the parties. Therefore, it submits that there has been no failure of the agreed procedure which would permit the Applicant to approach this Court under Section 11(6) of the Act.
The Respondent has objected to the power given to the Licensor to appoint the third Arbitrator. According to the Respondent, such a power cannot be exercised by the Licensor alone, as it would give the Applicant control over two out of the three Arbitrators. The Respondent submits that the arrangement of each party appointing one Arbitrator may be followed. However, if a third Arbitrator becomes necessary, the appointment should be made by the two Arbitrators or through the Court, as permitted by law. On this basis, the Respondent says that the present Application for appointment of a Sole Arbitrator is not in accordance with the Agreement. In support of its arguments, the Respondent has relied upon Indian Oil Corporation Limited v. Raja Transport Private Limited, (2009) 8 SCC 520. It has relied upon Adavya Projects Private Limited v. Vishal Structurals Private Limited, (2025) 9 SCC 686, Union of India v. Parmar Construction Company, (2019) 15 SCC 682, and Narayan Prasad Lohiya v. Nikunj Kumar Lohiya, (2002) 3 SCC 572.
REASONS AND FINDINGS:
I have considered the pleadings, the documents placed on record and the arguments made on behalf of both sides. There is no dispute that the parties entered into the registered Leave and Licence Agreement dated 4 May 2017. There is no serious dispute that the Agreement contains Clause XXXVIII, under which disputes between the parties can be referred to arbitration. The Respondent has not denied the Agreement or the existence of the arbitration clause. Therefore, the existence of an arbitration agreement between the parties is not in dispute.
The first question which arises is how much this Court is required to examine while deciding an Application under Section 11 of the Act. This question has to be considered because the Respondent has raised several objections about the amount claimed, limitation and the nature of disputes which can be referred under the arbitration clause.
In Ajay Madhusudan Patel v. Jyotrindra S. Patel, (2025) 2 SCC 147, the Supreme Court has held how the law relating to the powers of the Court under Section 11 has developed. Paragraph 76 of that judgment gives a summary of the legal position. Paragraphs 76.1 to 76.3 hold that after insertion of Section 11(6-A), the examination by the Court at the stage of referring the parties to arbitration became limited. Paragraph 76.2 states:
“The insertion of Section 11(6-A) through the 2015 Amendment to the 1996 Act stipulated that the courts under Section 11 shall confine their examination to the “existence” of an arbitration agreement. It legislatively overruled the decisions in SBP & Co. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618 : (2005) 128 Comp Cas 465] and Boghara Polyfab [National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 : (2009) 1 SCC (Civ) 117] by virtue of its non obstante clause.”
Paragraph 76.3 holds that Duro Felguera, S.A. v. Gangavaram Port Limited, (2017) 9 SCC 729, clarified the effect of Section 11(6-A) and held that:
“all that the courts need to see is whether an arbitration agreement exists — nothing more, nothing less.”
The Supreme Court has held that the existence and validity of an arbitration agreement have to be examined at the first look, on a prima facie basis. Paragraph 76.4 of Ajay Madhusudan Patel refers to Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1. It holds that where the facts are disputed and both sides have a case which can be considered, the Court may refer the parties to arbitration. This is because the Arbitral Tribunal has the power to decide questions relating to its jurisdiction.
Paragraph 76.5 of Ajay Madhusudan Patel refers to the judgment in Interplay Between Arbitration Agreements under the A&C Act, 1996 and the Stamp Act, 1899, In re, (2024) 6 SCC 1. The Supreme Court has held that while considering an Application under Section 11(6), the Court has to see whether an arbitration agreement exists under Section 7 and whether it fulfils the formal requirement of validity. It has stated that:
“the scope of examination under Section 11(6) should be confined to the “existence of the arbitration agreement” under Section 7 of the 1996 Act and the “validity of an arbitration agreement” must be restricted to the requirement of formal validity such as the requirement that the agreement be in writing. Therefore, substantive objections pertaining to existence and validity on the basis of evidence must be left to the Arbitral Tribunal since it can “rule” on its own jurisdiction.”
Paragraph 76.6 of Ajay Madhusudan Patel refers to SBI General Insurance Company Limited v. Krish Spinning, (2024) 12 SCC 1. The Supreme Court has held that if the Court at the stage of reference starts deciding matters which are required to be decided by the Arbitral Tribunal, the person making the claim may be left without any forum to decide the dispute. It has observed that detailed examination at the Section 11 stage would go against the purpose of deciding such Applications without delay. Paragraph 76.7 deals with cases where persons who have not signed the arbitration agreement are sought to be made parties to arbitration. Such a question does not arise here because both parties are relying upon the registered Agreement executed between them.
From the above judgments, it is clear that this Court is not required to decide at this stage whether the Applicant is entitled to receive Rs.3,56,39,549/-, whether the calculation made by it is correct, whether all payments made by the Respondent have been taken into account or whether the security deposit has been properly adjusted. These questions require examination of accounts and other evidence. They can be decided by the Arbitral Tribunal. This Court has to see whether an arbitration agreement exists and whether the requirements under Section 11 for appointment of an Arbitrator are fulfilled. But the limited examination under Section 11 does not mean that the Court can overlook the appointment procedure agreed between the parties. It is necessary to see whether that procedure has failed before an Application under Section 11(6) can be entertained.
I shall first deal with the objection regarding the notice under Section 21 of the Act. The Respondent has questioned the manner in which arbitration was invoked. In Bhagheeratha Engineering Limited v. State of Kerala, (2026) 5 SCC 758, the Supreme Court has held the purpose of Section 21. Paragraph 39 reads as follows:
“39.Secondly, the object of Section 21 of the A&C Act, is only for the purpose of commencement of arbitral proceedings is well settled. Section 21 is concerned only with determining the commencement of the dispute for the purpose of reckoning limitation. There is no mandatory prerequisite for issuance of a Section 21 notice prior to the commencement of arbitration. Issuance of a Section 21 notice may come to the aid of parties and the arbitrator in determining the limitation for the claim. Failure to issue a Section 21 notice would not be fatal to a party in arbitration if the claim is otherwise valid and the disputes arbitrable.”
Thus, Section 21 serves a procedural purpose. Mainly, it helps to identify the date from which the arbitral proceedings are treated as having started, particularly for calculating limitation. It does not create the arbitration agreement or give jurisdiction to the Arbitral Tribunal. However, where the parties have agreed upon a particular method for appointment of Arbitrators, a notice asking the other party to follow some different method cannot show that the agreed procedure has failed. Both matters have to be looked at separately. One relates to the starting of arbitration. The other relates to whether the Court can be asked to assist in appointment of the Arbitral Tribunal. In paragraph 40 of Bhagheeratha Engineering, the Supreme Court relied upon ASF Buildtech Private Limited v. Shapoorji Pallonji and Company Private Limited, (2025) 9 SCC 76, and reproduced paragraphs 163, 165 and 169 of that judgment. Paragraph 163 holds the purpose of Section 21 in the following words:
“It indicates that the provision is concerned only with determining when arbitration is deemed to have commenced for the specific dispute mentioned in the notice. The language in which the said provision is couched is neither prohibitive or exhaustive insofar as reference of any other disputes which although not specified in the notice of invocation yet, nonetheless falls within the scope of the arbitration agreement. The term “particular dispute”, does not mean all disputes, nor does it confine the jurisdiction of the Arbitral Tribunal which is said to be one emanating from the “arbitration agreement” to only those disputes mentioned in the notice of invocation, as it would tantamount to reading a restriction into the jurisdiction of the Arbitral Tribunal to the bounds of the notice of invocation instead of the arbitration agreement. Thus, there is no inhibition under Section 21 of the 1996 Act for raising any other dispute or claim which is covered under the arbitration agreement in the absence of any such notice. Section 21 is procedural rather than jurisdictional — it does not serve to create or validate the arbitration agreement, nor is it a precondition for the existence of the Tribunal's jurisdiction, but merely operates as a statutory mechanism to ascertain the date of initiation for reckoning limitation.”
Paragraph 165 of ASF Buildtech holds the difference between a notice under Section 21 and a statement of claim under Section 23. The Supreme Court has observed that under Section 23, the claimant is required to give the facts on which the claim is based, the matters which are in dispute and the relief which is being asked for. Such details are not required to be given in a notice under Section 21. This difference has to be kept in mind. A notice under Section 21 need not contain the full accounts, all the evidence or every detail of the claim. Those details have to be placed before the Arbitral Tribunal along with the statement of claim.
Paragraph 169 of ASF Buildtech states:
“Any restriction on the nature or content of claims, counterclaims, or set-offs in arbitration must be sourced solely from the express language of Section 23 and not from Section 21. Section(s) 21 and 23 of the 1996 Act although overlap in some aspects with each other in terms of the claims that would ordinarily be referred to the Tribunal more often than not tend to coincide, yet they are by no means tethered together in such a manner that neither of them can survive without one another. The latter serves only a procedural function and does not condition or limit the Tribunal's jurisdiction to adjudicate claims that may not have been invoked at the threshold stage. To read such a limitation into the statutory scheme would run contrary to both the text and the object of the Act.”
The same position has again been held in paragraph 41 of Bhagheeratha Engineering. The Supreme Court there referred to paragraph 24 of Adavya Projects Private Limited. The relevant part reads as follows:
“However, non-inclusion of certain disputes in Section 21 notice does not preclude a claimant from raising them during the arbitration, as long as they are covered under the arbitration agreement. Further, merely because a respondent did not issue a notice raising counterclaims, he is not precluded from raising the same before the Arbitral Tribunal, as long as such counterclaims fall within the scope of the arbitration agreement.”
The above legal position answers one part of the Respondent's objection. The Respondent cannot insist that the Applicant must give the full calculation of every part of its claim, along with all invoices and account statements, in the notice under Section 21. The Applicant has stated the nature of the dispute and has claimed arrears of licence fee and other dues. The Respondent has understood the claim and has denied it. It has asked the Applicant to give the calculation. Therefore, merely because a month-wise statement was not attached to the notice, the notice cannot be treated as invalid under Section 21. However, the Applicant will have to place a proper statement of claim, along with supporting documents, before the Arbitral Tribunal. The Respondent will have full opportunity to dispute the calculations and produce proof of the payments which it says have been made.
Paragraph 42 of Bhagheeratha Engineering refers to Indian Oil Corporation Limited v. Amritsar Gas Service, (1991) 1 SCC 533. The Supreme Court has referred to a counterclaim which could be raised before the Arbitrator after the disputes were referred to arbitration. The principle is that a party should not be prevented from raising a claim or counterclaim only because it was not mentioned at the earlier stage, provided that it is covered by the arbitration agreement. Therefore, the Respondent's objection that the notice does not contain every detail of the claim cannot be accepted as a reason to reject the reference to arbitration altogether.
I now consider the objection regarding limitation. The Respondent has relied upon Clause VI(D) of the Agreement. According to this clause, every monthly licence fee became payable in advance on the seventh day of the concerned month. Therefore, each unpaid monthly instalment gave a separate right to claim payment. The Respondent has relied upon the order of the Supreme Court by which the period from 15 March 2020 to 28 February 2022 was excluded while calculating limitation. On that basis, it submits that even the last instalment, which became due on 7 April 2022, became barred by April 2025. It says that the first notice dated 4 June 2025 was not received and that the notice dated 11 July 2026 was issued much later.
The Respondent has relied upon the letters dated 29 August 2021 and 10 March 2023. It says that these letters did not amount to a one-time settlement or an acknowledgment which could change the date of default. For this purpose, it has relied upon paragraphs 55 to 57 of the judgment of the National Company Law Appellate Tribunal dated 25 September 2024. On the other hand, the Applicant relies upon the undertaking dated 29 August 2021 and says that the Respondent admitted its liability through that undertaking. The contents and legal effect of the undertaking and the later correspondence will have to be considered along with the accounts and other documents. At present, this Court does not have the complete account showing the monthly dues, payments received, adjustment of the security deposit and the exact periods for which the Applicant has claimed Rs.3,56,39,549/-.
The Supreme Court has held the law on this aspect in Krish Spinning. It has held that while considering an Application under Section 11, the Court has to see whether the Application has been filed within the prescribed period. The Court should not go into a detailed examination of evidence to decide whether the claims before the Arbitral Tribunal are barred by limitation. Paragraph 133 of the judgment makes it clear that the question whether the claims are barred by limitation should ordinarily be left to the Arbitral Tribunal. The Supreme Court observed that:
“the referral courts, at the stage of deciding an application for appointment of arbitrator, must not conduct an intricate evidentiary enquiry into the question whether the claims raised by the applicant are time barred and should leave that question for determination by the arbitrator.”
In the present case, the notice dated 4 June 2025 was returned without service. The later notice dated 9 May 2026 was returned without service. However, the notice dated 11 July 2026 was received by the Respondent and the Respondent gave its reply on 23 July 2026. The present Application has been filed in the year 2026. On the basis of the notice dated 11 July 2026 and the reply dated 23 July 2026, there is no material to hold that the present Application under Section 11 has been filed beyond the period of three years. The main objection of the Respondent is that the monetary claims made by the Applicant are themselves barred by limitation.
The calculation made by the Respondent proceeds on the basis that the entire claim consists only of monthly instalments which became payable on the seventh day of each month and that no later acknowledgment or other event has any effect on limitation. The Applicant relies upon the undertaking dated 29 August 2021 and refers to the earlier proceedings. The Respondent disputes the effect of these documents. What amounts have been claimed, which instalments form part of the claim, what payments were made, what effect the undertaking has and what is the effect of the later correspondence are matters which require examination of the documents. It would not be proper for this Court to conduct a detailed trial of all these questions while deciding the present Application. Therefore, I am not accepting the Respondent's request to reject the entire claim as hopelessly barred by limitation at this stage. This does not mean that this Court has decided that the Applicant's claim is within limitation. The Respondent will be free to raise the objection of limitation before the Arbitral Tribunal. The Applicant will have to hold and establish how each part of its claim is within limitation. The Tribunal will decide this objection after considering the Agreement, the undertaking, the correspondence, the accounts and the law applicable to the dispute.
The Respondent has submitted that claims for any period after 30 April 2022 do not arise out of the Agreement and are not covered by Clause XXXVIII. Even the Applicant's notice states that the licence period ended on 30 April 2022. Therefore, the Respondent is right to the extent that the Agreement cannot be treated as continuing after that date only because the Applicant has made a claim. However, the expiry of the Agreement does not mean that every dispute connected with the Agreement comes to an end. There may be claims which arose during the licence period but were demanded or calculated after the Agreement had expired. Such claims may still have to be decided with reference to the Agreement. There may be disputes regarding adjustment of the security deposit, outstanding dues, interest and the effect of the undertaking dated 29 August 2021.
The arbitration clause is not worded in very wide terms. It covers disputes between the parties “with regard to the terms and conditions of this Agreement or relating to the interpretation thereof”. Therefore, a claim which has no connection with the terms of the Agreement or its interpretation cannot be brought under the arbitration clause merely by calling it a contractual claim. But, in the present case, the Applicant describes its claim as arrears of monthly compensation and other dues under the Agreement. The exact periods and parts of the claim are disputed and have not been held in the notice. On the material presently available, it is not possible to hold that the entire claim is outside the arbitration clause. The Arbitral Tribunal will have to examine each claim and decide whether it arises out of the Agreement or relates to its interpretation. The Respondent will be free to raise its objection under Section 16 of the Act.
The Respondent's objection about the amount claimed needs consideration. It says that it has paid Rs.6,92,46,223/-. It has questioned the amount claimed towards other expenses and the calculation of interest. In its reply dated 23 July 2026, the Respondent has asked the Applicant to give a month-wise statement showing the licence fee charged, the period of the claim, the payments received and the adjustment of the security deposit of Rs.39,65,000. The Respondent is entitled to ask for these details. The Applicant cannot expect the Respondent to accept the amount of Rs.3,56,39,549/- merely because that figure has been mentioned in the notice. However, the question before this Court is not whether the Applicant has proved its monetary claim. The question is whether the dispute is covered by the arbitration agreement and whether the procedure agreed for appointment of Arbitrators has failed. The Respondent's denial of the amount does not take away the power of the Arbitral Tribunal to decide the dispute. In the same way, merely because the Applicant has mentioned a particular amount, it cannot be held that the amount is payable. Both parties will have to place their accounts and documents before the Tribunal. After giving them an opportunity to produce the necessary material and make their submissions, the Tribunal will decide whether any amount is payable and, if so, what amount.
I now come to the main objection raised by the Respondent about the procedure for appointment of Arbitrators. Clause XXXVIII of the Agreement provides as follows:
“XXXVIII. DISPUTE RESOLUTION MECHANISM: It is hereby agreed by and between the parties hereto that in
case any dispute or differences arise between the parties with regard to the terms and conditions of this Agreement or relating to the interpretation thereof, the same shall be referred to an Arbitrator appointed by each party and the Licensor shall appoint a third Arbitrator in case of any deadlock in resolution of any issues. Such Arbitration shall be in accordance with the provisions of the Arbitration and Conciliation Act, 1996, or any statutory modification or re-enactment thereof for the time being in force.”
On reading the above clause, it is clear that the parties had not agreed to have their disputes decided by one Sole Arbitrator. Their agreement was that each party would appoint one Arbitrator. They had stated that a third Arbitrator would be appointed if there was a deadlock in resolving the disputes. The clause may not have held every step of the appointment process. But the main arrangement agreed between the parties is clear. They had agreed upon a procedure involving more than one Arbitrator. They had not agreed to appointment of a Sole Arbitrator. The notice dated 11 July 2026 issued by the Applicant does not ask the Respondent to appoint an Arbitrator of its choice under Clause XXXVIII. It does not state that the Applicant has appointed its own Arbitrator and that the Respondent should now appoint the second Arbitrator. On the contrary, paragraph 8 of the notice asks the Respondent to give its consent for appointment of Advocate, as the Sole Arbitrator. The Respondent was asked to give its consent within 14 days. By reply dated 23 July 2026, the Respondent refused to give such consent.
The Applicant says that the Respondent refused to agree to appointment of the proposed Sole Arbitrator and, therefore, there was failure on the part of the Respondent to follow the arbitration clause. I am unable to accept this argument. Under Clause XXXVIII, the Respondent was not required to give consent for appointment of a Sole Arbitrator. The clause does not provide for appointment of a Sole Arbitrator at all. Therefore, merely because the Respondent refused to accept a different procedure suggested by the Applicant, it cannot be said that the Respondent failed to follow the procedure agreed between the parties.
In Raja Transport Private Limited, the Supreme Court considered a similar issue. In that case, one party had asked the other party to agree to appointment of an independent Arbitrator, even though the arbitration agreement provided for a different procedure. The Supreme Court held that such a demand could not be treated as a proper step for invoking arbitration under the agreed procedure. Paragraph 53 reads as follows:
“53.We may now deal with the notice dated 4-1-2006 by which the respondent notified the appellant that it was not willing for appointment of an arbitrator in terms of the agreement and that both should hold discussions to decide upon an independent arbitrator. The letter dated 4-1-2006 cannot be construed as a step taken by the respondent for invoking arbitration in terms of the arbitration agreement, as it is a demand in violation of the terms of the arbitration agreement. It required the appellant to agree upon an arbitrator, contrary to the provisions of the arbitration agreement.”
Paragraph 54 of the same judgment holds:
“54.If the respondent wanted to invoke arbitration in terms of the arbitration agreement, it ought to have referred the disputes to the Director (Marketing) in terms of Section 69 of the contract agreement for arbitration. Alternatively, the respondent ought to have at least called upon the appellant, to refer the dispute to the Director (Marketing) for arbitration. In the absence of any such demand under Clause 69, it cannot be said that the respondent invoked the arbitration clause or took necessary steps for invoking arbitration in terms of the arbitration agreement. If the respondent had called upon the appellant to act in a manner contrary to the appointment procedure mentioned in the arbitration agreement, it cannot be said that the appellant failed to respond and act as required under the agreed procedure.”
Paragraph 56 of Indian Oil Corporation records:
“56.What is significant is that even subsequent to the order dated 20-1-2006 passed by the District Court, the respondent did not refer the disputes to the Director (Marketing) of the appellant nor called upon the appellant to refer to the disputes in terms of the arbitration agreement, nor withdraw its earlier letter dated 4-1-2006 demanding appointment of an independent arbitrator contrary to the agreed procedure under the arbitration agreement.”
The above observations of the Supreme Court apply to the present case. Here, the Applicant has asked the Respondent to agree to appointment of a Sole Arbitrator. But the Agreement provides that each party shall appoint one Arbitrator. The Applicant has not asked the Respondent to take the step required under the Agreement. Instead, it has asked the Respondent to accept a different method of appointment. If the Respondent refused to accept that different method, such refusal cannot be treated as a failure on its part to follow the agreed appointment procedure.
The same principle is found in paragraph 21 of Adavya Projects Private Limited. The Supreme Court has held that an Application under Section 11(6) can be made when the procedure agreed between the parties for appointment of Arbitrators has failed. The Court can then take the necessary steps for appointment of the Arbitral Tribunal. But the Court cannot ordinarily replace the agreed procedure merely because one party has suggested another method of appointment.
Section 11(6) of the Act provides for the Court to step in when a party fails to take the step required under the agreed procedure, when the parties or the two appointed Arbitrators fail to reach an agreement as required, or when a person or institution given a particular responsibility fails to perform it. Therefore, there must first be a failure of the procedure agreed between the parties. The power of the Court cannot be used to permit one party to avoid the very procedure which it had agreed to follow. The Applicant relies upon the notice dated 11 July 2026 and the reply dated 23 July 2026. According to the Applicant, the Respondent refused to cooperate and it became necessary to approach this Court. But the contents of the notice have to be seen. The Respondent was asked to agree to appointment of a Sole Arbitrator. It was not asked to appoint one Arbitrator under Clause XXXVIII. The Respondent's refusal to agree to the proposed Sole Arbitrator cannot be treated as its refusal to appoint an Arbitrator under the procedure agreed in the Agreement. Therefore, the notice and the reply do not show that the procedure under Clause XXXVIII has failed.
I am unable to accept that the Applicant can rely upon the limited examination required under Section 11(6-A) of the Act to get over this difficulty. There is no dispute about the existence of the arbitration agreement. But the Applicant has filed the present Application under Section 11(6). For exercising the power under that provision, this Court has to see whether the agreed procedure for appointment of Arbitrators has failed. This examination is necessary. It does not mean that the Court is deciding the actual monetary claim of the Applicant. It only means that the Court is examining whether the condition required for appointment of an Arbitrator by the Court has arisen. The Respondent has objected to that part of Clause XXXVIII which gives the Licensor the power to appoint the third Arbitrator in case of a deadlock. According to the Respondent, this gives the Applicant a one-sided right and goes against the requirement of equal treatment of parties under Section 18 of the Act. This argument of the Respondent needs to be considered.
In Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV), 2024 INSC 857, the Supreme Court has held that both parties must be treated equally at every stage of arbitration, including the stage of appointment of Arbitrators. A procedure under which one party gets a one-sided right to appoint the Sole Arbitrator, or gets control over the appointment process in such a way that the other party does not get an equal opportunity, is not consistent with the Act. In paragraph 169, the Supreme Court has held that equal treatment of the parties is required at the stage of appointment of Arbitrators.
In the present case, Clause XXXVIII gives each party the right to appoint one Arbitrator. To that extent, both parties have an equal say. However, the next part of the clause gives only the Licensor the power to appoint the third Arbitrator in case of a deadlock. In the present case, the Licensor is the Applicant. The Licensee has no similar right to take part in the appointment of the third Arbitrator. If this part of the clause is followed as it stands, the Applicant would get the power to appoint two out of the three Arbitrators. Such an arrangement cannot be accepted in view of the law laid down by the Constitution Bench in Central Organisation for Railway Electrification. The appointment process must treat both parties equally and must ensure that the Arbitral Tribunal is independent and impartial.
This does not mean that the entire arbitration agreement becomes invalid. The intention of the parties to refer their disputes to arbitration is clear. Only that part of the appointment procedure which gives the Licensor a one-sided power to appoint the third Arbitrator cannot be acted upon in a manner which is against the requirement of equal treatment. The remaining part of the clause, which gives each party the right to appoint one Arbitrator, can still be followed. If the two appointed Arbitrators have to appoint a third Arbitrator, they must do so in accordance with law. If they are unable to agree upon the third Arbitrator, the concerned party may approach the Court under Section 11 of the Act.
The decision in Narayan Prasad Lohiya, holds the position where the parties agree to appoint two Arbitrators and a third Arbitrator becomes necessary when they differ. Paragraph 17 of the judgment states:
“Under Section 11(3) the two arbitrators should then appoint a third arbitrator who shall act as the presiding arbitrator. Such an appointment should preferably be made at the beginning. However, we see no reason, why the two arbitrators cannot appoint a third arbitrator at a later stage i.e. if and when they differ.”
Therefore, the Respondent is right to the extent that the Applicant cannot appoint the third Arbitrator under Clause XXXVIII. But this objection does not help the Applicant in the present Application. The present Application is not for appointment of a third Arbitrator after two Arbitrators have been appointed and have failed to resolve the dispute or agree upon the third Arbitrator. The Applicant is asking for appointment of a Sole Arbitrator. Till now, neither party has appointed an Arbitrator under the first part of Clause XXXVIII. The Applicant has not asked the Respondent to appoint its Arbitrator. Therefore, at this stage, there is no occasion for this Court to appoint a third Arbitrator.
The Respondent has relied upon Parmar Construction Company. The Supreme Court has held that when the parties have agreed upon a particular procedure for appointment of Arbitrators, that procedure should normally be followed. The Court may make a different arrangement if the agreed procedure cannot be followed, if there is a real doubt about the independence or impartiality of the Arbitrator, or if the Arbitral Tribunal is not functioning. But before making such a different arrangement, the Court has to see whether the procedure agreed between the parties has failed. The Court cannot replace the agreed procedure at the first stage without any reason recognised by law.
The decision in Raja Transport Private Limited makes it clear that if one party asks the other party to act contrary to the appointment procedure in the Agreement, it cannot later complain that the other party failed to act under the agreed procedure. In the present case, the Applicant could have appointed its own Arbitrator and asked the Respondent to appoint its Arbitrator. If the Respondent had failed to take that step, the Applicant could have approached this Court under Section 11. If the two Arbitrators appointed by the parties thereafter failed to agree upon the third Arbitrator, the parties could take the necessary steps under Section 11. But the Applicant has not taken the first step required under the Agreement.
The Respondent has relied upon Section 18 of the Act. This Section requires that both parties must be treated equally. This requirement applies while appointing Arbitrators. The Respondent cannot be forced to accept a Sole Arbitrator proposed by the Applicant when the Agreement provides for a different procedure. At the same time, the Applicant cannot be allowed to appoint the third Arbitrator in a manner which gives it an unequal position. The appointment procedure has to be followed in a way which is consistent with the Act.
In view of the above discussion, I find that the Respondent has raised a valid objection regarding failure to follow the agreed procedure for appointment of Arbitrators. The notice dated 11 July 2026 shows that the Applicant wanted to refer its monetary disputes to arbitration. But, through that notice, the Applicant did not ask the Respondent to appoint its Arbitrator under Clause XXXVIII. The Respondent's refusal to agree to appointment of a Sole Arbitrator cannot be treated as failure of the agreed procedure. Therefore, the necessary condition for exercising power under Section 11(6) has not arisen.
After considering the material placed before this Court and the submissions made by both sides, I am of the view that the Applicant has not followed the procedure under Clause XXXVIII of the Agreement. The Applicant asked the Respondent to agree to appointment of a Sole Arbitrator, even though the Agreement provides for appointment of one Arbitrator by each party and thereafter appointment of a third Arbitrator in the situation mentioned in the clause. The Respondent was entitled to refuse consent for appointment of a Sole Arbitrator. Such refusal cannot be treated as failure on its part to follow the agreed procedure. Therefore, the present Application cannot be allowed.
It is made clear that this finding will not prevent the Applicant from invoking the arbitration agreement again by following the appointment procedure in accordance with law. The Applicant may appoint its own Arbitrator and call upon the Respondent to appoint its Arbitrator under Clause XXXVIII. If the Respondent fails to take the required step, or if a situation arises where the two appointed Arbitrators are unable to agree upon the third Arbitrator, the parties will be free to take appropriate steps under Section 11 of the Act. Any appointment of the third Arbitrator will have to be made by keeping in mind the requirement of equal treatment and independence of the Arbitral Tribunal.
All objections regarding limitation, calculation of dues, payments made, adjustment of the security deposit, interest, claims after 30 April 2022 and the effect of the earlier proceedings before the NCLT, NCLAT and Supreme Court are kept open. These objections may be considered by the Arbitral Tribunal, if and when it is constituted and subject to its jurisdiction.
The Application is accordingly dismissed as premature, as the Applicant has failed to show that the appointment procedure agreed between the parties has failed. There shall be no order as to costs.