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					AIR 1994 SC 200

State of W.B. Vs. M/s. National Builders - Oct 13 1993




      Citation: AIR 1994 SC 200
      Honourable Judges: S. R. PANDIAN, R. M. SAHAI AND Dr. A. S. ANAND
      Issue: Arbitration Act (10 of 1940), Section 8(1)(b)
      Date Of Judgment: Oct 13 1993
      Case No: Civil Appeal No. 1138 of 1991



More cases on : Arbitration Act (10 of 1940) Total [239]

Judgement
R. M. SAHAI, J.:- The two questions of law that arise for consideration in this
appeal are if the refusal of an arbitrator to resign while not accepting the joint
request of the parties to extend time for arbitration and leave it to them to decide
their future course of action amounts to refusal to act by the arbitrator within the
meaning of S. 8(l)(b) of the Arbitration Act (in brief 'the Act') and if it be so
whether the power to appoint next arbitrator vests in the Court or it has once
again to be in accordance with the procedure provided in the Agreement.
2. Dispute about settlement of claim in respect of construction of 250 bed
hospital at Basudevpura having arisen between the respondent (contractor) and
the appellant (Public Works Department of the State of West Bengal) the Chief
Engineer nominated a Superintending Engineer as arbitrator in accordance with
clause 25 of the agreement, relevant part of which runs as under:-
"Except where otherwise provided in the contract all questions and disputes shall
be referred to the sole arbitration of the Chief Engineer of the department. Should
the Chief Engineer be for any reason unwilling or unable to act as such arbitrator,
such questions and disputes shall be referred to an arbitrator to be appointed by
the Chief Engineer".
When despite 59 sittings the proceedings did not come to an end and the
arbitrator entertained certain applications of the appellant at a belated stage the
respondent sought his resignation for legal misconduct. The application was
decided by the arbitrator by a detailed order with following observations:-
"I have given my opinion that there has been no misconduct on any of the
grounds before me by the learned claimant yet I am of the opinion justice
delayed is justice denied and hence in this case there has been delay and the
process in which the learned advocate of both the parties are leading and
pleading the case delay is inevitable. If the claimant suffers from loss of
confidence and apprehends miscarriage of justice from the arbitrator whose
award is vital to him I shall not intend to interfere in his way of pursuit for justice.
I, therefore, direct that further extension of time on consent of both the parties will
not be allowed by me and the extended date of arbitration is being allowed to
expire.
As regards claimants humble prayer to me that I would be pleased to resign from
the office. I am restraining myself in issuing any order as it concerns interest of
both the parties and I leave it to both the parties to decide."
With this order the respondent approached the Chief Engineer and sought for
appointment of a retired Additional Chief Engineer named in the application as
the sole arbitrator. The request was not accepted as according to the Chief
Engineer the arbitrator appointed was still continuing. The respondent was
however permitted to approach the Court for extension of time, the respondent,
instead of filing application for extension of time, approached the Court of Asstt.
District Judge under Section 12(2) of the Act for revoking authority of the sole
arbitrator and filling the vacancy by appointing another arbitrator. The application
was allowed as in the opinion of the Court the arbitrator in the circumstances of
the case had refused to act. The order was challenged by way of application
under Art. 227 of the Constitution. The application was dismissed as the
inference drawn by the trial Court that the arbitrator refused to act was a
plausible one. It is against this order that this appeal has been filed. It is not clear
if during pendency of the application under Art. 227 in the High Court the
appellant had applied for any interim order for stay of further proceedings before
the arbitrator. However even if it was prayed for then it presumably was not
granted as, admittedly, during pendency of the application the arbitrator
appointed by the Asstt. Distt. Judge started the proceedings in which the
Executive Engineer appeared but expressed his inability to participate in absence
of any instruction from the department and also because the department had
decided to challenge the order of the trial court before the High Court. In any
case it is not disputed that the arbitrator, since, has given the award which has
not been challenged by the department. May be the department might have been
advised, that the finality of the award could be subject to decision of this appeal
as if the appointment of the next arbitrator is held to be invalid the proceedings
consequent to it shall fall automatically.
3. To decide if the court was justified in assuming jurisdiction to appoint another
arbitrator as the arbitrator appointed by the Chief Engineer under clause 25
refused to act it is necessary to examine scope of Section 8(1)(b) of the
Arbitration Act which reads as under:-
Section 8(1):In any of the following cases:
(a)
(b) If any appointed arbitrator or umpire neglects or refuses to act, or is incapable
of acting, or dies, and the arbitration agreement does not show that it was
intended that the vacancy should not be supplied and the parties or the
arbitrators, as the case may be, do not supply the vacancy any party may serve
the other parties or the arbitrators, as the case may be, with a written notice to
concur in the appointment or appointments or in supplying the vacancy.
This provision vests the Court with supervisory jurisdiction to interfere with
relationship between the parties and the arbitrator if any of the situations as
provided in this subsection comes into being. What was claimed by the
respondent, which has been accepted by the Courts below is that the sole
arbitrator appointed by the Chief Engineer refused to act. The question,
therefore, is what does this expression mean? Refusal to act in legal sense
means denial to do something which one is obliged to do under law. Black's Law
Dictionary explains it thus, 'the act of one who has, by law, a right and power of
having or doing something of advantage, and declines it'. In private law, of which
arbitration is a part which court's power to supervise and intervene in arbitral
proceedings within statutory framework, an arbitrator who is appointed, with
common consent of parties may not proceed with arbitration for various reasons.
The refusal to act may be express or implied. If an arbitrator resigns or informs
the parties his inability to act it would be express refusal. And even the courts
cannot force him to arbitrate. In Shivcharan v. Rati Ram, (1884) ILR 7 Allahabad
20, when despite his refusal the Subordinate Judge directed the records to be
sent back to the arbitrators to submit the award within ten days who, thereafter,
made the same it was set aside by the High Court and it was held:
"Expression has recently been given by this Court to the view that one of the
most essential principles of the law of arbitration is that the adjudication of
disputes by arbitration should be the result of the free consent of the arbitrator to
undertake the duties of arbitrating between the contending parties who have
agreed to respose confidence in his judgment. Indeed, the finality of such award
is based entirely upon the principle that the arbitrators are judges chosen by the
parties themselves, and that such judges are willing to settle the disputes
referred to them. This essential characteristic of the effect of such adjudications
is necessarily vitiated if compulsion is employed by the Court".
4. Refusal to act may be inferred as well. On what facts such an inference can be
raised cannot be laid down with certainty. There can be no fixed principle for it.
When an arbitrator has failed to discharge his obligation so as to give rise to an
inference that he has refused to act shall have to be decided by the Court on
facts and circumstances of each case. For instance in Priyabrata Bose v. Phani
Bhushan Ghose, AIR 1937 Calcutta 523 the High Court held that even when the
arbitrator was not willing to proceed unless his fees were paid in advance it was
refusal to act. Inaction by the arbitrator or inordinate delay in rendering the award
are yet some of other reasons due to Which courts have raised an inference that
the arbitrator refused to act. (See Manohar Singh Sahay and Co. v. Jogendra
Singh, AIR 1984 Patna 3, State of U.P. v. Sardul Singh, AIR 1985 Allahabad 67,
Gajanand Sita Ram v. Phul Chand Fateh Chand, AIR 1930 Allahabad 675. The
parties appoint an arbitrator by consent and he undertakes to decide the dispute
out of his free will. He may withdraw his consent expressly or may act in a
manner giving rise to inference that he was not willing to act any more. In either
case the basic principle is that the arbitrator cannot be forced to act. But such an
inference should not be readily raised. The court's primary concern should be to
uphold the arbitration. But once the court is satisfied that the arbitrator has
refused to discharge his obligations then it has statutory duty to intervene and act
in accordance with S. 8(l)(b) of the Act. From the order of the arbitrator extracted
earlier what is made out is that he felt that the respondent had lost confidence in
him. With opinion, thus formed he refused to accede to the request of the parties
to extend the time for the award and directed parties to decide their future course
of action. True that he did not resign. It is also true that the Chief Engineer
insisted that the arbitrator was continuing. But where the arbitrator refused to
extend time and brought arbitration to an end leaving it open to parties to decide
their future course of action as one of the parties whose vital stakes were
involved did not have confidence in him, the Courts do not appear to have
committed any error of law in drawing inference that the arbitrator had refused to
act.
5. More important issue than this that was urged was that since clause 25 of the
agreement empowered the Chief Engineer to nominate any other person to act
as arbitrator the intention was to fill the vacancy in the same manner as provided
in the agreement. This raises an important issue as to whether the power of the
Chief Engineer to arbitrate himself or to nominate any other person as arbitrator
exhausted or revived after the earlier arbitrator nominated by him refused to act.
In other words does the power to appoint a sole arbitrator under the agreement
come to an end with such appointment or every time an arbitrator refuses to act
the parties are to take recourse to appoint another arbitrator as provided in the
agreement itself. Settlement of dispute between the parties through medium of
an independent person in whom both parties repose confidence is the basic
foundation on which the entire law of arbitration is founded. When the agreement
provides that dispute between parties shall be referred to the person named in an
agreement it is an appointment by consent. But where the arbitrator so appointed
refuses to act the next appointment could again be made either as agreed
between the parties and provided for in the arbitration clause or by consensus.
But where either is absent no party to the arbitration agreement can be forced to
undergo same procedure, for the simple reason that the arbitrator having refused
to act he cannot be asked to arbitrate again. In law the result of such refusal is
that the agreement clause cannot operate. It, therefore, follows that in a case
where the arbitration clause provides for appointment of a sole arbitrator and he
had refused to act then the agreement clause stands exhausted. And it is for the
Court to intervene and appoint another arbitrator under S. 8(l)(b), 'if arbitration
agreement does not show that it was intended that the vacancy shall not be
supplied'. That is the agreement should not debar any further arbitration. If it is
provided in the agreement that if the arbitrator appointed in accordance with the
agreement refuses to act then the dispute shall be resolved by another arbitrator.
There is an end of the matter. But if the agreement does not show this then the
next arbitrator can be appointed by the Court only. The expression used in the
sub-section is clear indication that the Court is precluded from exercising its
power only if the parties intended that the vacancy should not be filled. In other
words the Court shall exercise jurisdiction to appoint another arbitrator except
where it is specifically debarred from doing so. The word 'show' used in the
clause appears to be significant. It in fact furnishes key to the construction of the
expression. Mere neglect or refusal to act alone is not sufficient to empower the
Court to intervene. The agreement must not further show that the parties
intended that the vacancy shall not be supplied. To put it affirmatively in absence
of clear words or explicit language to the contrary the Court may appoint another
arbitrator. The true effect of the word is that it extends jurisdiction of the Court to
exercise power, if the agreement does not specifically debar it from doing so. To
put it simply the Court's power to interfere and appoint an arbitrator comes into
operation if the arbitrator refuses to act and the agreement does not show that
the parties did not intend that the vacancy shall not be supplied. In P. G.
Agencies v. Union of India, (1971) 1 SCC 79 it was held by this Court, 'that the
language of the provision is not "that the parties intended to supply the vacancy"
but on the other hand it is that "the party did not intend to supply the vacancy". In
other words if the agreement is silent as regards supplying the vacancy the law
presumes that the parties intended to supply the vacancy. To take the case out
of S. 8(l)(b) what is required is not the intention of the parties to supply the
vacancy but their intention is not to supply the vacancy'. In Chander Bhan
Harbhajan Lal v. State of Punjab, (1977) 2 SCC 715 (716) it was held that where
a committee of arbitrators nominated by the Government becomes incapable of
acting as such 'it was within the competence of the Court to proceed to appoint a
new Committee'. In Union of India v. M/s. R. B. Raghunath Singh & Co., (1979) 4
SCC 21 the arbitration clause provided for settlement of dispute and differences
by the Chief Commissioner/Director of Storage, Ministry of Food, Government of
India and his decision was to be final and binding. The post of Director of Storage
was abolished and the Chief Commissioner refused to act. The question arose
whether the Court could appoint an arbitrator in exercise of power under S.
8(l)(b). It was claimed on behalf of the Union of India that where there was a
named arbitrator even though he was named by office, it was not open to the
Court to supply the vacancy in his place under S. 8(l)(b) of the Act. The
contention was repelled and it was held that the argument was without any
substance as, 'The Court had no power to supply the vacancy under S. 8(l)(b)
only if the arbitration agreement did not show that the parties did not intend to
supply the vacancy. If no such intention could be culled from the arbitration
clause, the Court could supply the vacancy'. It is thus settled that even where an
authority is named by office to be the sole arbitrator but he refuses to act then the
jurisdiction to appoint another arbitrator vests in the Court. Since Cl. 25 of the
agreement extracted earlier does not indicate that the parties did not intend to
supply the vacancy the Court in our opinion rightly assumed jurisdiction u/S.
8(l)(b) to appoint another arbitrator.
6. Basis for assuming such jurisdiction, as stated earlier, is that the clause is
rendered inoperative. Where the agreement provides for appointment of a
specific person either by name or by designation and that person refuses to act
then the question of appointing him again cannot arise. Refusal by such a person
results in the agreement clause ceasing to operate. When two parties agree for
appointment of 'A' or 'B' by name or designation and the person so named
refuses to act then the agreement shall be deemed to have exhausted itself. The
person so named having refused to act he cannot be asked again to arbitrate.
That would be contrary to the very basis of arbitration that no one can be forced
to act against his free will. It would also be contrary to the agreement and if there
is no agreement to appoint another person, the only remedy is to approach the
Court to exercise its statutory power and appoint another arbitrator. Same result
follows where the arbitration clause empowers the sole arbitrator either to
arbitrate himself or to nominate anyone else. It was urged that the principle of
agreement clause coming to an end cannot apply where the sole arbitrator has
been given power to nominate another person. According to the learned counsel
once the nominee refused to act the Chief Engineer was again empowered to
nominate another person in his place. In our opinion the submission is not well
founded in law. A person nominated by the sole arbitrator stands substituted in
his place. He does not have any independent personality. The power and
authority exercised by him is the same as the authority which nominated him.
Therefore, once the nominee refuses to act it shall be deemed that the arbitrator
mentioned in the arbitration clause has refused to act and, therefore, the clause
would cease to operate in the same manner as the Chief Engineer himself has
refused to act. The appointment of next arbitrator could only be in accordance
with S. 8(l)(b) of the Act.
7. For these reasons the appeal fails and is dismissed with costs.
Held:
Appeal dismissed.


AIR 2003 SC 2629

Oil & Natural Gas Corporation Ltd. Vs. SAW Pipes Ltd. - Apr 17 2003


       Citation: AIR 2003 SC 2629
       Honourable Judges: M.B. Shah and Arun Kumar, JJ.
       Issue: Arbitration and Conciliation Act, 1996 - Sections 2 to 43, 48, 48(1), 67, 68,
        69, 70, 70(2), 70(3), 73, 75 and 81; Civil Procedure Code (CPC), 1908; Evidence
        Act, 1872; Representation of the People Act, 1951 - Sections 90, 90(2) and 92;
        Indian Contract Act, 1872 - Sections 56, 73 and 74; Transfer of Property Act;
        Arbitration (Protocol and Convention) Act, 1937 - Section 7(1); Foreign Awards
        (Recognition and Enforcement) Act, 1961 - Section 7(1); Arbitration Act, 1940 -
        Sections 23 and 28
       Date Of Judgment: Apr 17 2003
       Case No: Civil Appeal No. 7419 of 2001



More cases on : Arbitration and Conciliation Act Total [46]
Head Note:


Citations: 2003(3)ALD82(SC): 2003(2)ArbLR5(SC): 2003(3)CompLJ1(SC);
2003(4)JCR148(SC): JT2003(4)SC171: 2003SCC(5)705: 2003SCL(44)SCL89
JUDGMENT:
Shah, J.
COURT'S JURISDICTION UNDER SECTION 34 OF THE ARBITRATION AND
CONCILIATION ACT, 1996
1. Before dealing with the issues involved in this appeal, we would first decide
the main point in controversy, namely--the ambit and scope of Court's jurisdiction
in case where award passed by the Arbitral Tribunal is challenged under Section
34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "the
Act") as the decision in this appeal would depend upon the said finding. In other
words -- whether the Court would have jurisdiction under Section 34 of the Act to
set aside an award passed by the Arbitral Tribunal which is patently illegal or in
contravention of the provisions of the Act or any other substantive law governing
the parties or is against the terms of the contract?
2. Learned senior counsel Mr. Ashok Desai appearing for the appellant submitted
that in case where there is clear violation of Sections 28 to 31 of the Act or the
terms of the Contract between the parties, the said award can be and is required
to be set aside by the Court while exercising jurisdiction under Section 34 of the
Act.
3. Mr. Dushyant Dave, learned senior counsel appearing on behalf of respondent
- company submitted to the contrary and contended that the Court's jurisdiction
under Section 34 is limited and the award could be set aside mainly on the
ground that the same is in conflict with the 'Public Policy of India'. According to
his submission, the phrase 'Public Policy of India' cannot be interpreted to mean
that in case of violation of some provisions of law, the Court can set aside the
award.
4. For deciding this controversy, we would refer to the relevant part of Section 34
which reads as under:--
"34. Application for setting aside arbitral award-- (1) Recourse to a court against
an arbitral award may be made only by an application for setting aside such
award in accordance with Sub-section (2) and Sub-section (3).
(2) An arbitral award may be set aside by the court only if--
(a) the party making the application furnishes proof that-
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have
subjected it or, failing any indication thereon, under the law for the time being in
force; or
(iii) the party making the application was not given proper notice of the
appointment of an arbitrator or of the arbitral or was otherwise unable to present
his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling
within the terms of the submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to arbitration;
Provided that, if the decisions on matters submitted to arbitration can be
separated from those not so submitted, only that part of the arbitral award which
contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in
accordance with the agreement of the parties, unless such agreement was in
conflict with a provision of this Part from which the parties cannot derogate or,
failing such agreement, was not in accordance with this Part; or
(b) the court finds that--
(i) the subject-matter of the dispute is not capable of settlement by arbitration
under the law for the time being in force of
(ii) the arbitral award is in conflict with the public policy of India.
Explanation--Without prejudice to the generality of Sub-clause (ii), it is hereby
declared, for the avoidance of any doubt, that an award is in conflict with the
public policy of India if the making of the award was induced or affected by fraud
of corruption or was in violation of Section 75 or Section 81."
5. For our purpose, it is not necessary to refer to the scope of self explanatory
Clauses (i) to (iv) of Sub-section (2)(a) of Section 34 of the Act and it does not
require elaborate discussion. However, Clause (v) of Sub-section 2(a) and
Clause (ii) of Sub-section 2(b) require consideration. For proper adjudication of
the question of jurisdiction, we shall first consider what meaning could be
assigned to the term "Arbitral Procedure".
'ARBITRAL PROCEDURE'
The ingredients of Clause (v) are as under:-
1) The Court may set aside the award:--
(i) (a) if the composition of the arbitral Tribunal was not in accordance with the
agreement of the parties,
(b) failing such agreement, the composition of the arbitral tribunal was not in
accordance with Part-I of the Act.
(ii) if the arbitral procedure was not in accordance with:-
a) the agreement of the parties, or
b) failing such agreement, the arbitral procedure was not in accordance with
Part-I of the Act.
6. However, exception for setting aside the award on the ground of composition
of arbitration tribunal or illegality of arbitral procedure is that the agreement
should not be in conflict with the provisions of Part-I of the Act from which parties
cannot derogate.
7. In the aforesaid Sub-clause (v), the emphasis is on the agreement and the
provisions of Part-I of the Act from which parties cannot derogate. It means that
the composition of arbitral tribunal should be in accordance with the agreement,
Similarly, the procedure which is required to be followed by the arbitrator should
also be in accordance with the agreement of the parties. If there is no such
agreement then it should be in accordance with the procedure prescribed in the
Part-I of the Act i.e. Sections 2 to 43. At the same time, agreement for
composition of arbitral tribunal or arbitral procedure should not be in conflict with
the provisions of the Act from which parties cannot derogate. Chapter V of the
Part-I of the Act provides for conduct of arbitral proceedings. Section 18
mandates that parties to the arbitral proceedings shall be treated with equality
and each party shall be given full opportunity to present his case. Section 19
sepcificially provides that arbitral is not bound by the Code of Civil Procedure,
1908 or the Indian Evidence Act, 1872 and parties are free to agree on the
procedure to be followed by the arbitral tribunal in conducting its proceedings.
Failing any agreement between the parties subject to other provisions of Part-1,
the arbitral tribunal is to conduct the proceedings in the manner it considers
appropriate. This power includes the power to determine the admissibility,
relevance, the materiality and weight of any evidence. Section 20, 21, and 22
deal with place of arbitration, commencement of arbitral proceedings and
language respectively. Thereafter, Sections 23, 24 and 25 deal with statements
of claim and defence, hearing and written proceedings and procedure to be
followed in case of default of a party.
8. At this stage, we would refer to Section 24 which is as under:--
"24. Hearings and written proceedings-- (1) Unless otherwise agreed by the
parties, the arbitral tribunal shall decide whether to hold oral hearings for the
presentation of evidence or for oral argument, or whether the proceedings shall
be conducted on the basis of documents and other materials;
Provided that the arbitral tribunal shall hold oral hearings, at an appropriate stage
of the proceedings, on a request by a party, unless the parties have agreed that
no oral hearing shall be held.
(2) The parties shall be given sufficient advance notice of any hearing and of any
meeting of the arbitral tribunal for the purposes of inspection of documents,
goods or other property.
(3) All statements, documents or other information supplied to or applications
made to the arbitral tribunal by one party shall be communicated to the other
party, and any expert report or evidentiary document on which the arbitral
tribunal may rely in making its decision shall be communicated to the parties."
9. Thereafter Chapter VI deals with making of arbitral award and termination of
proceedings. Relevant Sections which require consideration are Sections 28 and
31. Sections 28 and 31 read as under:--
"28. Rules applicable to substance of dispute-
(1) Where the place of arbitration is situate in India--
(a) in an arbitration other than an international commercial arbitration, the arbitral
tribunal shall decide the dispute submitted to arbitration in accordance with the
substantive law for the time being in force in India;
(b) in international commercial arbitration,--
(i) the arbitral tribunal shall decide the dispute in accordance with the rules of law
designated by the parties as applicable to the substance of the dispute;
(ii) any designation by the parties of the law or legal system of a given country
shall be construed, unless otherwise expressed, as directly referring to the
substantive law of that country and not to its conflict of law rules;
(iii) failing any designation of the law under Clause (a) by the parties, the arbitral
tribunal shall apply the rules of law it considers to be appropriate given all the
circumstances surrounding the dispute.
(2) The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur
only if the parts have expressly authorised it to do so.
(3) In all cases, the arbitral tribunal shall decide in accordance with the terms of
the contract and shall take into account the usages of the trade applicable to the
transaction.
31. Form and contents of arbitral award--(1) An arbitral award shall be made in
writing and shall be signed by the members of the arbitral tribunal.
(2) For the purposes of Sub-section (1), in arbitral proceedings with more than
one arbitrator, the signatures of the majority of all the members of the arbitral
tribunal shall be sufficient so long as the reason for any omitted signature is
stated.
(3) The arbitral tribunal shall state the reasons upon which it is based, unless-
(a) the parties have agreed that no reasons are to be given, or
(b) the award is an arbitral award on agreed terms under Section 30,
(4) The arbitral award shall state its date and the place of arbitration as
determined in accordance with Section 20 and the award shall be deemed to
have been made at that place.
(5) After the arbitral award is made, a signed copy shall be delivered to each
party.
(6) The arbitral tribunal may, at any time during the arbitral proceedings, make an
interim arbitral award on any matter with respect to which it may make a final
arbitral award.
(7)(a). Unless otherwise agreed by the parties, where and in so far as an arbitral
award is for the payment of money, the arbitral tribunal may include in the sum
for which the award is made interest, at such rate as it deems reasonable, on the
whole or any part of the money, for the whole or any part of the period between
the date on which the cause of action arose and the date on which the award is
made.
(b) A sum directed to be paid by an arbitral award shall, unless the award
otherwise directs. carry interest at the rate of eighteen per centum per annum
from the date of the award to the date of payment.
(8) Unless otherwise agreed by the parties,--
(a) the costs of an arbitration shall be fixed by the arbitral tribunal;
(b) the arbitral tribunal shall specify,--
(i) the party entitled to costs,
(ii) the party who shall pay the costs,
(iii) the amount of cots or method of determining that amount, and
(iv) the manner in which the costs shall be paid.
Explanation: For the purpose of Clause (a), "costs" means reasonable costs
relating to,--
(i) the fees and expenses of the arbitrators and witnesses.
(ii) legal fees and expenses,
(iii) any administration fees of the institution supervising the arbitration, and
(iv) any other expenses incurred in connection with the arbitral proceedings and
the arbitral award."
10. The aforesaid provisions prescribe the procedure to be followed by the
arbitral tribunal coupled with its powers. Power and procedure are synonymous
in the present case. By prescribing the procedure, the arbitral tribunal is
empowered and is required to decide the dispute in accordance with the
provisions of the Act, that is to say, the jurisdiction of the tribunal to decide the
dispute is prescribed. In these sections there is no distinction between the
jurisdiction power and the procedure. In Harish Chandra Bajpai v. Trilok Singh
[1957 SCR 370], while dealing with Sections 90 and 92 of the Represention of
the People Act, 1951 (as it stood), this Court observed thus:--
"It is then argued that Section 92 confers powers on the Tribunal in respect of
certain matters, while Section 90(2) applies the CPC in respect of matters
relating to procedure that there is a distinction between power and procedure,
and that the granting of amendment being a power and not a matter of
procedure, it can be claimed only under Section 92 and not under Section 90(2).
We do not see any antithesis between 'procedure' in Section 90(2) and 'powers'
under Section 92. When the respondent applied to the Tribunal for amendment,
he took a procedural step, and that he was clearly entitled to do under Section
90(2). The question of power arises only with reference to the order to be passed
on the petition by the Tribunal. Is it to be held that the presumption of a petition is
competent, but the passing of any order thereon is not? We are of opinion that
there is no substance in the contention either."
11. Hence, the jurisdiction or the power of the tribunal is prescribed under the Act
and if the award is de hors the said provisions, it would be, on the face of it,
illegal. The decision of the Tribunal must be within the bounds of its jurisdiction
conferred under the Act or the contract. In exercising jurisdiction, the arbitral
tribunal can not act in breach of some provision of substantive law or the
provisions of the Act.
12. The question, therefore, which requires consideration is-- whether the award
could be set aside, if the arbitral tribunal has not followed the mandatory
procedure prescribed under Sections 24, 28 or 31(3), which affects the rights of
the parties" Under Sub-section (1)(a) of Section 28 there is a mandate to the
arbitral tribunal to decide the dispute in accordance with the substantive law for
the time being in force in India. Admittedly, substantive law would include the
Indian contract Act, the Transfer of Property Act and other such laws in force.
Suppose, if the award is passed in violation of the provisions of the Transfer of
Property Act or in violation of the Indian Contract Act, the question would --
whether such award could be set aside? Similarly, under Sub-section (3), arbitral
tribunal is directed to decide the dispute in accordance with the terms of the
contract and also after taking into account the usage of the trade applicable to
the transaction. If arbitral tribunal ignores the terms of the contract or usage of
the trade applicable to the transaction, whether the said award could be
interfered? Similarly, if the award is non-speaking one and is in violation of
Section 31(3), can such award be set aside? IN our view, reading Section 34
conjointly with other provisions of the Act, it appeals that the legislative intent
could not be that if the award is in contravention of the provisions of the Act, still
however, it couldn't be set aside by the Court. If it is held that such award could
not be interfered, it would be contrary to basic concept of justice. If the arbitral
tribunal has not followed the mandatory procedure prescribed under the Act, it
would mean that it has acted beyond its jurisdiction and thereby the award would
be patently illegal which could be set aside under Section 34.
13. The aforesaid interpretation of the Clause (v) would be in conformity with the
settled principle of law that the procedural law cannot fail to provide relief when
substantive law gives the right. Principle is -- there cannot be any wrong without
a remedy. In M.V. Elisabeth and Ors. Harwan Investment & Trading Pvt. Ltd.
[1993 Supp. (2) SCC 433] this Court observed that where substantive law
demands justice for the party aggrieved and the statute has not provided the
remedy, it is the duty of the Court to devise procedure by drawing analogy from
other systems of law and practice. Similarly, in Dhanna Lal v. Kalawatibi and Ors.
[(2002) 6 SCC 16] this Court observed that wrong must not be left unredeemed
and right not left unenforced.
14. Result is -- if the award is contrary to the substantive provisions of law or the
provisions of the Act or against the terms of the contract, it would be patently
illegal, which could be interfered under Section 34. However, such failure of
procedure should be patent affecting the rights of the parties.
WHAT MEANING COULD BE ASSIGNED TO THE PHRASE 'PUBLIC POLICY
OF INDIA'?
15. The next clause which requires interpretation is Clause (ii) of Sub-section
2(b) of Section 34 which inter alia provides that the Court may set aside arbitral
award if it is in conflict with the 'Public Policy of India'. The phrase 'Public Policy
of India' is not defined under the Act. Hence, the said term is required to be given
meaning in context and also considering the purpose of the section and scheme
of the Act. It has been repeatedly stated by various authorities that the
expression 'public policy' does not admit of precise definition and may vary from
generation to generation and from time to time. Hence, the concept 'public policy'
is considered to be vague, susceptible to narrow or wider meaning depending
upon the context in which it is used. Lacking precedent the Court has to give its
meaning in the light and principles underlying the Arbitration Act, Contract Act
and Constitutional provisions.
16. For this purpose, we would refer to few decisions referred to by the learned
counsel for the parties. While dealing with the concept of public policy, this Court
in Central Inland Water Transport Corporation Limited and Anr. v. Brojo Nath
Ganguly and Anr. [(1986) 3 SCC 156] has observed thus:--
"92. The Indian Contract Act does not define the expression "public policy" or
"opposed to public policy". From the very nature of things, the expressions
"public policy", "opposed to public policy", or "contrary to public policy" are
incapable of precise definition. Public policy, however, is not the policy of a
particular government. It connotes some matter which concerns the public good
and the public interest. The concept of what is for the public good or in the public
interest or what would be injurious or harmful to the public good or the public
interest has varied from time to time. As new concepts take the place of old,
transactions which were once considered against public policy are now being
upheld by the courts and similarly where there has been a well recognised head
of public policy, the courts have not shirked from extending it to the new
transactions and changed circumstances and have at times not even flinched
from inventing a new head of public policy. There are two schools of though --
"the narrow view" school and "the broad view" school. According to the former,
courts cannot create new heads of public policy whereas the latter countenances
judicial law-making in this area. The adherents of the "the narrow view" school
would not invalidate a contract on the ground of public policy unless that
particular ground had been well- established by authorities. Hardly ever has the
voice of the timorous spoken more clearly and loudly than in these words of Lord
Davey in Janson v. Driefontein Consolidated Gold Mines Ltd.[(1902) AC 484,
500]: "Public Policy is always an unsafe and treacherous ground for legal
decision". That was in the year 1902. Seventy-eight years earlier, Burrough, J., in
Richardson v. Mellish [(1824) 2 Bing 229, 252] described public policy as "a very
unruly horse, and when once you get astride it you never know where it will carry
you." The Master of the Rolls Lord Denning, however, was not a man to shy
away from unmanageable horse and in words which conjure up before our eyes
the picture of the young Alexander the Great laming Bucephalus, he said in
Enderby Town Footbal Club Ltd. v. Football Assn. Ltd. [(1971) Ch. 591, 606];
"with a good man in the saddle, the unruly horse can be kept in control. It can
jump over obstacles". Had the timorous always held the field, not only the
doctrine of public policy but even the Common Law or the principles of Equity
would never have evolved. Sir William Holdsworth in his "History of English Law",
Volume III, page 55, has said:
In fact, a body of law like the common law, which has grown up gradually with the
growth of the nation. necessarily acquires some fixed principles, and if it is to
maintain these principles it must be able, on the ground of public policy or some
other like ground, to suppress practices which, under ever new disguises seek to
weaken or negative them.
It is thus clear that the principles governing public policy must be and are
capable, on proper occasion, of expansion or modification. Practices which were
considered perfectly normal at one time have today become obnoxious and
oppressive to public conscience. If there is no head of public policy which covers
a case, then the court must in consonance with public conscience. and in
keeping with public good and public interest declare such practice to be opposed
to public policy. Above all, in deciding any case which may not be covered by
authority our courts have before them the beacon light of the Preamble to the
Constitution. Lacking precedent, the court can always be guided by that light and
the principles underlying the Fundamental Rights and the Directive Principles
enshrined in our Constitution.
93. The normal rule of Common Law has been that a party who seeks to enforce
an agreement which is opposed to public policy will be non-suited. The case of A.
Schroeder Music Public Co. Ltd. v. Macaulay [(1974) 1 WLR 1308], however,
establishes that where a contract is vitiated as being contrary to public policy, the
party adversely affected by it can sue to have it declared void. The case may be
different where the purpose of the contract is illegal or immoral. In Kedar Nath
Motani v. Prahlad Rai [(1960) 1 SCR 861], reversing the High Court and restoring
the decree passed by the trial court declaring the appellants' tile to the lands in
suit and directing the respondents who were the appellants' benamidars to
restore possession, this Court, after discussing the English and Indian law on the
subject, said (at page 873):
The correct position in law, in our opinion, is that what one has to see is whether
the illegality goes so much to the root of the matter the plaintiff cannot bring his
action without relying upon the illegal transaction into which he had entered. If
the illegality be trivial or venial, as stated by Williston and the plaintiff is not
required to rest his case upon that illegality, then public policy demands that the
defendant should not be allowed to take advantage of the position. A strict view,
of course, must be taken of the plaintiff's conduct, and he should not be allowed
to circumvent the illegality by resorting to some subterfuge or by misstating the
facts. If, however, the matter is clear and the illegality is not required to be
pleaded or proved as part of the cause of action and the plaintiff recanted before
the illegal purpose was achieved. then, unless it be of such a gross nature as to
outrage the conscience of the court, the plea of the defendant should not prevail.
The type of contract to which the principle formulated by us above applies are not
contracts which are tainted with illegality but are contracts which contain terms
which are so unfair and unreasonable that they shock the conscience of the
court. They are opposed to public policy and require to be adjudged void."
17. Further, in Renusagar Power Co. Ltd. v. General Electric Co. [1994 Supp. (1)
SCC 644], this Court considered Section 7(1) of the Arbitration (Protocol and
Convention) Act, 1937 which inter alia provided that a foreign award may not be
enforced under the said Act, if the Court dealing with the case is satisfied that the
enforcement of the award will be contrary to the Public Policy. After claborate
discussion, the Court arrived at the conclusion that Public Policy comprehended
in Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act,
1961 is the 'Public Policy of India' and does not cover the public policy of any
other country. For giving meaning to the term 'Public Policy', the Court observed
thus:--
"66. Article V(2)(b) of the New York Convention of 1958 and Section 7(1)(b)(ii) of
the Foreign Awards Act do not postulate refusal of recognition and enforcement
of a foreign award on the ground that it is contrary to the law of the country of
enforcement and the ground of challenge is confined to the recognition and
enforcement being contrary to the public policy of the country in which the award
is set to be enforced. There is nothing to indicate that the expression "public
policy" in Article V(2)(b) of the New York Convention and Section 7(1)(b)(ii) of the
Foreign Awards Act is not used in the same sense in which it was used in Article
I(c) of the Geneva Convention of 1927 and Section 7(1) of the Protocol and
Convention Act of 1937. This would mean that "public policy" in Section 7(1)(b)(ii)
has been used in a narrower sense and in order to attract to bar of public policy
the enforcement of the award must invoke something more than the violation of
the law of India. Since the Foreign Awards Act is concerned with recognition and
enforcement of foreign awards which are governed by the principles of private
international law, the expression "public policy" in Section 7(1)(b)(ii) of the
Foreign Awards Act must necessarily be construed in the sense the doctrine of
public policy is applied in the field of private international law. Applying the said
criteria it must be held that the enforcement of a foreign award would be refused
on the ground that it is contrary to public policy if such enforcement would be
contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii)
justice or morality."
The Court finally held that:--
"76. Keeping in view the aforesaid objects underlying FERA and the principles
governing enforcement of exchange control laws followed in other countries, we
are of the view that the provisions contained in FERA have been enacted to
safeguard the economic interests of India and any violation of the said provisions
would be contrary to the public policy of India as envisaged in Section 7(1)(b)(ii)
of the Act."
18. This Court in Murlidhar Agarwal and Anr. v. State of U.P. and Ors. [1974 (2)
SCC 472] while dealing with the concept of 'public policy' observed thus:--
"31. Public policy does not remain static in any given community. It may vary
from generation to generation and even in the same generation. Public policy
would be almost useless if it were to remain in fixed moulds for all time.
32....The difficulty of discovering what public policy is at any given moment
certainly does not absolve the Judges from the duty of doing so. In conducting an
enquiry, as already stated, Judges are not hide-bound by precedent. The Judges
must look beyond the narrow field of past precedents, though this still leaves
open the question, in which direction they must cast their gaze. The Judges are
to base their decision on the opinions of men of the world, as distinguished from
opinions based on legal learning. In other words, the Judges will have to look
beyond the jurisprudence and that in so doing, they must consult not their own
personal standards or predilections but those of the dominant opinion at a given
moment, or what has been termed customary morality. The Judges must
consider the social consequences of the rule propounded, especially in the light
of the factual evidence available as to its probable results..... The point is rather
that this power must be lodged somewhere and under and if they have to fulfil
their function as Judges, it could hardly be lodged elsewhere."
19. Mr. Desai submitted that the narrow meaning given to the term 'public policy'
in Renusagar's case in context of the fact that the question involved in the said
matter was with regard to the execution of the award which had attained finality.
It was not a case where validity of the Award is challenged before a forum
prescribed under the Act. He submitted that the scheme of Section 34 which
deals with setting aside the domestic arbitral award and Section 48 which deals
with enforcement of foreign award are not identical. A foreign award by definition
is subject to double exequatur. This is recognized inter alia by Section 48(1) and
there is no parallel provision to this clause in Section 34. For this, he referred to
Lord Mustill & Stewart C. Boyd QC's "Commercial Arbitration" 2001 wherein [at
page 90] it is stated as under:--
"Mutual recognition of awards is the glue which holds the international arbitrating
community together, and this will only be strong if the enforcing court is willing to
trust, as the convention assumes that they will trust, the supervising authorities of
the chosen venue. It follows that if, and to the extent that the award has been
struck down in the local court it should be a matter of theory and practice be
treated when enforcement is sought as if to the extent it did not exist."
20. He further submitted that in foreign arbitration, the award would be subject to
being set aside or suspended by the competent authority under the relevant law
of that country whereas in the domestic arbitration the only recourse is to Section
34.
21. The aforesaid submission of the learned senior counsel requires to be
accepted. From the judgments discussed above, it can be held that the term
'public policy of India' is required to be interpreted in the context of the jurisdiction
of the Court where the validity of award is challenged before it becomes final and
executable. The concept of enforcement of the award after it becomes final is
different and the jurisdiction of the Court at that stage could be limited. Similar is
the position with regard to the execution of a decree. It is settled law as well as it
is provided under Code of Civil Procedure that once the decree has attained
finality, in an execution proceeding, it may be challenged only on limited grounds
such as the decree being without jurisdiction or nullity. But in a case where the
judgment and decree is challenged before the Appellate Court or the Court
exercising revisional jurisdiction, the jurisdiction of such Court would be wider.
Therefore, in a case where the validity of award is challenged there is no
necessity of giving a narrower meaning to the term 'public policy of India'. On the
contrary, wider meaning is required to be given so that the 'patently illegal award'
passed by the arbitral tribunal could be set aside. If narrow meaning as
contended by the learned senior counsel Mr. Dave is given, some of the
provisions of the Arbitration Act would become nugatory. Take for illustration a
case wherein there is a specific provision in the contract that for delayed
payment of the amount due and payable, no interest would be payable, still
however, if the Arbitrator has passed an award granting interest, it would be
against the terms of the contract and thereby against the provision of Section
28(3) of the Act which specifically provides that "arbitral tribunal shall decide in
accordance with the terms of the contract". Further, where there is a specific
usage of the trade that if the payment this made beyond a period of one month,
then the party would be required to pay the said amount with interest at the rate
of 15 per cent. Despite the evidence being produced on record for such usage, if
the arbitrator refuses to grant such interest on the ground of equity, such award
would also be in violation of sub-sections (2) and (3) of Section 28. Section 28(2)
specifically provides that arbitrator shall decide ex aequo et bono [according to
what is just and good] only if the parties have expressly authorised him to do so.
Similarly, if the award is patently against the statutory provisions of substantive
law which is in force in India or is passed without giving an opportunity of hearing
to the parties as provided under Section 24 or without giving any reason in a
case where parties have not agreed that no reasons are to be recorded, it would
be against the statutory provisions. In all such cases, the award is required to be
set aside on the ground of 'patent illegality'.
22. The learned senior counsel Mr. Dave submitted that the Parliament has not
made change while adopting Article 34 of UNCITRAL Model Law by not
providing error of law as a ground of appellant submitted that in case where there
is clear violation of challenge to the arbitral award under Section 34 of the Act.
For this purpose, he referred to Sections 68, 69 and 70 of the Arbitration Act,
1996 applicable in England and submitted that if the legislature wanted to give a
wider jurisdiction to the Court, it would have done so by adopting similar
provisions.
23. Section 68 of the law applicable in England provides that the award can be
challenged on the ground of serious irregularities mentioned therein. Section 68
reads thus:--
"68. Challenging the award: serious irregularity-
(1) A party to arbitral proceedings may (upon notice to the other parties and to
the tribunal) apply to the court challenging an award in the proceedings on the
ground of serious irregularity affecting the tribunal, the proceedings or the award.
A party may lose the right to object (see Section 73) and the right to apply is
subject to the restrictions in Section 70(2) and (3).
(2) Serious irregularity means an irregularity of one or more of the following kinds
which the court considers has caused or will cause substantial injustice to the
applicant--
(a) failure by the tribunal to comply with Section 33 (general duty of tribunal);
(b) the tribunal exceeding its powers (otherwise than by exceeding its substantive
jurisdiction: see Section 67);
(c) failure by the tribunal to conduct the proceedings in accordance with the
procedure agreed by the parties:
(d) failure by the tribunal to deal with all the issues that were put to it;
(e) any arbitral or other institution or person vested by the parties with powers in
relation to the proceedings or the award exceeding its powers;
(f) uncertainty or ambiguity as to the effect of the award;
(g) the award being obtained by fraud or the award or the way in which it was
procured being contrary to public policy;
(h) failure to comply with the requirement as to the form of the award; or
(i) any irregularity in the conduct of the proceedings or in the award which is
admitted by the tribunal or by any arbitral or other institution or person vested by
the parties with powers in relation to the proceedings or the award.
(3) If there is shown to be serious irregularity affecting the tribunal, the
proceedings or the award, the court may--
(a) remit the award to the tribunal, in whole or in part, for reconsideration;
(b) set the award aside in whole or in part, or
(c) declare the award to be of no effect, in whole or in part.
The Court shall not exercise its power to set aside or to declare an award to be of
no effect, in whole or in part, unless it is satisfied that it would be inappropriate to
remit the matters in question to the tribunal for reconsideration.
(4) The leave of the Court is required for any appeal from a decision of the court
under this section."
24. Similar, Section 69 provides that appeal on point of law would be
maintainable and the procedure thereof is also provided. Section 70 provides
supplementary provisions.
25. It is true that Legislature has not incorporated exhaustive grounds for
challenging the award passed by the arbitral tribunal or the ground on which
appeal against the order of the Court would be maintainable.
26. On this aspect, eminent Jurist & Senior Advocate Late Mr. Nani Palkhivala
while giving his opinion to 'Law of Arbitration and Conciliation' by Justice Dr. B.P.
Saraf and Justice S.M. Jhunjhunuwala, noted thus:--
"I am extremely impressed by your analytical approach in dealing with the
complex subject of arbitration which is emerging rapidly as an alternate
mechanism for resolution of commercial disputes. The new arbitration law has
been brought in parity with statutes in other countries, though I wish that the
Indian law had a provision similar to Section 68 of the English Arbitration Act,
1996 which gives power to the Court to correct errors of law in the award.
I welcome your view on the need for giving the doctrine of "public policy" its full
amplitude. I particularly endorse your comment that Courts of law may intervene
to permit challenge to an arbitral award which is based on an irregularity of a kind
which has caused substantial injustice.
If the arbitral tribunal does not dispense justice, it cannot truly be reflective of an
alternate dispute resolution mechanism. Hence, if the award has resulted in an
injustice, a Court would be well within its right in upholding the challenge to the
award on the ground that it is in conflict with the public policy of India."
27. From this discussion it would be clear that the phrase 'public policy of India' is
not required to be given a narrower meaning. As stated earlier, the said term is
susceptible of narrower or wider meaning depending upon the object and
purpose of the legislation. Hence, the award which is passed in contravention of
Sections 24, 28 or 31 could be set aside. In addition to Section 34, Section 13(5)
of the Act also provides the constitution of the arbitral tribunal could also be
challenged by party. Similarly, Section 16 provides that a party aggrieved by the
decision of the arbitral tribunal with regard to its jurisdiction could challenge such
arbitral award under Section 34. In any case, it is for the Parliament to provide for
limited or wider jurisdiction to the Court in case where award is challenged. But in
such cases, there is no reason to give narrower meaning to the term 'public
policy of India' as contended by learned senior counsel Mr. Dave. In our view,
wider meaning is required to be given so as to prevent frustration of legislation
and justice. This Court in Rattan Chand Hira Chand v. Askar Nawaz Jung (Dead)
By LRs and Ors. [(1991) 3 SCC 67], this Court observed thus:--
"17... It cannot be disputed that a contract which has a tendency to injure public
interests or public welfare is one against public policy. What constitutes an injury
to public interests or welfare would depend upon the times and climes.... The
legislature often fails to keep pace with the changing needs and values nor as it
realistic to except that it will have provided for all contingencies and eventualities.
It is, therefore, not only necessary but obligatory on the courts to step in to fill the
lacuna. When courts perform this function undoubtedly they legislate judicially.
But that is a kind of legislation which stands implicitly delegated to them to further
the object of the legislation and to promote the goals of the society. Or to put it
negatively, to prevent the frustration of the legislation or perversion of the goals
and values of the society."
28. Learned senior counsel Mr. Dave submitted that the purpose of giving limited
jurisdiction to the Court is obvious and is to see that the dispute are resolved at
the earliest by giving finality to the award passed by the forum chosen by the
parties. As against this, learned senior counsel Mr. Desai submitted that in the
present system even the arbitral proceedings are delayed on one or the other
ground including the ground that the arbitrator is not free and the matters are not
disposed of for months together. He submitted that the legislature has not
provided any time limit for passing of the award and this indicates that the
contention raised by the learned counsel for the respondent has no bearing in
interpreting Section 34.
29. It is true that under the Act, there is no provision similar to Sections 23 and
28 of the Arbitration Act, 1940, which specifically provided that the arbitrator shall
pass award within reasonable time as fixed by the Court. It is also true that on
occasions, arbitration proceedings are delayed for one or other reason, but it is
for the parties to take appropriate action of selecting proper arbitrator(s) who
could dispose of the matter within reasonable time fixed by them. It is for them to
indicate the time limit for disposal of the arbitral proceedings. It is for them to
decide whether they should continue with the arbitrator(s) who cannot dispose of
the matter within reasonable time. However, non-providing of time limit for
deciding the dispute by the arbitrators could have no bearing on interpretation of
Section 34. Further, for achieving the object of speedier disposal of dispute,
justice in accordance with law cannot be sacrificed. In our view, giving limited
jurisdiction to the Court for having finality to the award and resolving the dispute
by speedier method would be much more frustrated by permitting patently illegal
award to operate. Patently illegal ward is required to be set at naught, otherwise
it would promote injustice.
30. Therefore, in our view, the phrase 'Public Policy of India' used in Section 34
in context is required to be given a wider meaning. It can be stated that the
concept of public policy connotes some matter which concerns public good and
the public interest. What is for public good or in public interest or what would be
injurious or harmful to the public good or public interest has varied from time to
time. However, the award which is, on the face of it, patently in violation of
statutory provisions cannot be said to be in public interest. Such
award/judgment/decision is likely to adversely affect the administration of justice.
Hence, in our view in addition to narrower meaning given to the term 'public
policy' in Renusagar's case (supra) it is required to be held that the award could
be set aside if it is patently illegal. Result would be--award could be set aside if it
is contrary to:--
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the illegality is of trivial nature it
cannot be held that award is against the public policy. Award could also be set
aside if it is so unfair and unreasonable that it shocks the conscience of the
Court. Such award is opposed to public policy and is required to be adjudged
void.
NOW ON FACTS:--
The brief facts of the case are as under:--
31. Appellant - ONGC which is a Public Sector Undertaking, has challenged the
arbitral award dated 2nd May, 1999 by filing Arbitration Petition No. 917/1999
before the High Court of Bombay. Learned Single Judge dismissed the same.
Appeal No. 256/2000 preferred before the Division Bench of the High Court was
also dismissed. Hence, the present appeal.
32. It is stated that in response to a tender, respondent-Company which is
engaged in the business of supplying equipment for Offshore Oil exploration and
maintenance by its letter dated 27th December, 1995 on agreed terms and
conditions, offered to supply to the appellants 26" diameter and 30" diameter
casing pipes. The appellant by letter of intent dated 3rd June, 1996 followed by a
detailed order accepted the offer of the respondent-Company. As per terms and
conditions, the goods were required to be supplied on or before 14th November,
1996.
33. It was the contention of the respondent that as per Clause (18) of the
agreement, the raw materials were required to be procured from the reputed and
proven manufacturers/suppliers approved by the respondent as listed therein. By
letter dated 8th August, 1996, respondent placed an order for supply of steel
plates, that is, the raw material required for manufacturing the pipes with Liva
Laminati, Piani S.P.A., Italian suppliers stipulating that material must be shipped
latest by the end of September 1996 as timely delivery was of the essence of the
order. It is also their case that all over Europe including Italy there was a general
strike of the steel mill workers during September/October 1996. Therefore,
respondent by its letter dated 28th October, 1996 conveyed to the appellant that
Italian suppliers had faced labour problems and was unable to deliver the
material as per agreed schedule. Respondent, therefore, requested for an
extension of 45 days time for execution of the order in view of the reasons
beyond its control. By letter dated 4th December, 1996, the time for delivery of
the pies was extended with a specific statement inter alia that the amount
equivalent to liquidated damages for delay in supply of pipes would be recovered
from the respondent. It is the contention of the respondent that the appellant
made payment of the goods supplied after wrongfully deducting an amount of US
$ 3,04,970.20 and Rs. 15,75,559/- as liquidated damages. That deduction was
disputed by the respondent and, therefore, dispute was referred to the arbitral
tribunal. The arbitral tribunal arrived at the conclusion that strikes affecting the
supply of raw material to the claimant are not within the definition of 'Force
Majeure' in the contract between the parties, and hence, on that ground, it cannot
be said that the amount of liquidated damages was wrongfully withheld by the
appellant. With regard to other contention on the basis of customs duty also, the
arbitral tribunal arrived at the conclusion that it would not justify the delay in the
supply of goods. Thereafter, the arbitral tribunal considered various decisions of
this court regarding recovery of liquidated damages and arrived at the conclusion
that it was for the appellant to establish that they had suffered any loss because
of the breach committed by the respondent in not supplying the goods within the
prescribed time limit. The arbitral tribunal thereafter appreciated the evidence
and arrived at the conclusion that in view of the statement volunteered by Mr.
Arumoy Das, it was clear that shortage of casing pipes was only one of the other
reasons which led to the change in the deployment plan and that it has failed to
establish its case that it has suffered any loss in terms of money because of
delay in supply of goods under the contract. Hence, the arbitral tribunal held that
appellant has wrongfully withheld the agreed amount of US $ 3,04,970.20 and
Rs. 15,75,559/- on account of customs duty, sales tax, freight charges deducted
by way of liquidated damages. The arbitral tribunal further held that the
respondent was entitled to recover the said amount with interest at the rate of 12
per cent p.a. from 1st April 1997 till the date of the filling of statement of claim
and thereafter having regard to the commercial nature of the transaction at the
rate of 18 per cent per annum pendente lite till payment is made.
34. For challenging the said award, learned senior counsel Mr. Desai submitted
that:--
(1) the award is vitiated on the ground that there was delay on the part of
respondent in supplying agreed goods/ pipes and for the delay, appellant was
entitled to recover agreed liquidated damages i.e. a sum equivalent to 1% of the
contract price for whole unit per week of such delay or part thereof. Thereby, the
award was contrary to Section 28(3) which provides that the arbitral tribunal shall
decide the dispute in accordance with the terms of the contract;
(2) the award passed by the arbitrator is on the face of it illegal and erroneous at
it arrived at the conclusion that the appellant was required to prove the loss
suffered by it before recovering the liquidated damages. He submitted that the
arbitral tribunal misinterpreted the law on the subject;
(3) in any set of circumstances, the award passed by the arbitrator granting
interest on the liquidated damages deducted by the appellant is, on the face of it,
unjustified, unreasonable and against the specific terms of the contract, namely
Clause 34.4 of the agreement, which provides that on 'disputed claim', no interest
would be payable.
35. As against this, learned senior counsel Mr. Dave submitted that it is settled
law that for the breach of contract provisions of Section 74 of the Contract Act
would be applicable and compensation/damages could be awarded only if the
loss is suffered because of the breach of contract. He submitted that this
principle is laid down by the Privy Council as early as in 1929 in Bhai Panna
Singh and Ors. v. Bhai Arjun Singh and Ors. [AIR 1929 PC 179], wherein the
Privy Council observed thus:--
"The effect of Section 74, Contract Act of 1872, is to disentitle the plaintiffs to
recover simplicitor the sum of Rs. 10,000/- whether penalty or liquidated
damages. The plaintiffs must prove the damages they have suffered."
36. He submitted that this Court has also held that the plaintiff claiming liquidated
damages has to prove the loss suffered by him. In support of this contention, he
referred to and relied upon various decisions. In any case, it is his contention that
even if there is any error in arriving at the said conclusion, the award cannot be
interfered with under Section 34 of the Act.
37. At this stage, we would refer to the relevant terms of the contract upon which
learned counsel for the appellant has based his submission which are as under:--
"11. Failure and Termination Clause/Liquidated Damages:--
Time and date of delivery shall be essence of the contract. If the contractor fails
to deliver the stores, or any installment thereof within the period fixed for such
delivery in the schedule or at any time repudiates the contract before the expiry
of such period, the purchaser may, without prejudice to any other right or
remedy, available to him to recover damages for breach of the contract:--
(a) Recovery from the contractor as agreed liquidated damages are not by way of
penalty, a sum equivalent to 1% (one percent) of the contract price of the whole
unit per week for such delay or part thereof (this is an agreed, genuine pre-
estimate of damages duly agreed by the parties) which the contractor has failed
to deliver within the period fixed for delivery in the schedule, where delivery
thereof is accepted after expiry of the aforesaid period. It may be noted that such
recovery of liquidated damages may be upto 10% of the contract price of whole
unit of stores which the contactor has failed to deliver within the period fixed for
delivery, or
(c) It may further be noted that Clause (a) provides for recovery of liquidated
damages on the cost of contract price of delayed supplies (whole unit) at the rate
of 1% of the contract price of the whole unit per week for such delay or part
thereof upto a ceiling of 10% of the contract price of delayed supplies (whole
unit). Liquidated damages for delay in supplies thus accrued will be recovered by
the paying authorities of the purchaser specified in the supply order, from the bill
for payment of the cost of material submitted by the contractor or his foreign
principals in accordance with the terms of supply order or otherwise.
(f) Notwithstanding anything stated above, equipment and materials will be
deemed to have been delivered only when all its components, parts are also
delivered. If certain components are not delivered in time the equipment and
material will be considered as delayed until such time all the missing parts are
also delivered.
12. Levy of liquidated damages (LD) due to delay in supplies.
LD will be imposed on the total value of the order unless 75% of the value
ordered is supplied within the stipulate delivery period. Where 75% of the value
ordered has been supplied within stipulated delivery period. LD will be imposed
on the order value of delayed supply(ies). However, where in judgment of ONGC,
the supply of partial quantity does not fulfill the operating need, LD will be
imposed on full value of the supply order.
34.4 Delay in Release of Payment:--
In case where payment is to be made on satisfactory receipt of materials at
destination or where payment is to be made after satisfactory commissioning of
the equipment as per terms of the supply order. ONGC shall make payment
within 60 days of receipt of invoice/claim complete in all respects. Any delay in
payment on undisputed claim/amount beyond 60 days of the receipt of
invoice/claim will attract interest @ 1% per month. No interest will be paid on
disputed claims. For interest on delayed payments to small scale and Ancillary
Industrial Undertakings, the provisions of the "Interest of delayed payments to
small scale and Ancillary Industrial Undertakings Act, 1993 will govern."
38. Mr. Desai referred to the decision rendered by this Court in Delta
International Ltd. v. Shyam Sundar Ganeriwalla and Anr. [(1999) 4 SCC 545] and
submitted that for the purpose of construction of contracts, the intention of the
parties is to be gathered from the words they have used and there is no intention
independent of that meaning.
39. It cannot be disputed that for construction of the contract, it is settled law that
the intention of the parties is to be gathered from the words used in the
agreement. If words are unambiguous and are used after full understanding of
their meaning by experts, it would be difficult to gather their intention different
from the language used in the agreement. If upon a reading of the document as a
whole, it can fairly be deduced from the words actually used therein that the
parties had agreed on a particular term, there is nothing in law which prevents
them from setting up that term. {Re: Modi & Co. v. Union of India [(1968) 2 SCR
565]}. Further, in construing a contract, the Court must look at the words used in
the contract unless they are such that one may suspect that they do not convey
the intention correctly. If the words are clear, there is very little the court can do
about it. {Re: Provash Chandra Dalui and Anr. v. Biswanath Banerjee and Anr.
[1989 Supp (1) SCC 487]}.
40. Therefore, when parties have expressly agreed that recovery from the
contractor for breach of the contract is pre-estimated genuine liquidated
damages and is not by way of penalty duly agreed by the parties, there was no
justifiable reason for the arbitral tribunal to arrive at a conclusion that still the
purchaser should prove loss suffered by it because of delay in supply of goods.
41. Further, in arbitration proceedings, the arbitral tribunal is required to decide
the dispute in accordance with the terms of the contract. The agreement between
the parties specifically provides that without prejudice to any other right or
remedy if the contractor fails to deliver the stores within the stipulated time,
appellant will be entitled to recover from the contractor, as agreed, liquidated
damages equivalent to 1% of the contract price of the whole unit per week for
such delay. Such recovery of liquidated damage could be at the most up to 10%
of the contract price of whole unit of stores. Not only this, it was also agreed
that:--
(a) liquidated damages for delay in supplies will be recovered by paying authority
from the bill for payment of cost of material submitted by the contractor;
(b) liquidated damages were not by way of penalty and it was agreed to be
genuine, pre-estimate of damages duly agreed by the parties;
(c) This pre-estimate of liquidated damages is not assailed by the respondent as
unreasonable assessment of damages by the parties.
42. Further, at the time when respondent sought extension of time for supply of
goods, time was extended by letter dated 4.12.1996 with a specific demand that
the clause for liquidated damages would be invoked and appellant would recover
the same for such delay. Despite this specific letter written by the appellant,
respondent had supplied the goods which would indicate that even at the stage,
respondent was agreeable to pay liquidated damages.
43. On this issue, learned counsel for the parties referred to the interpretation
given to Sections 73 and 74 of the Indian Contract Act in Sir Chunilal. V. Mehta &
Sons Ltd. v. The Century Spinning and Manufacturing Co. Ltd. [1962 Supp. (3)
SCR 549], Fateh Chand v. Balkishan Das [(1964) 1 SCR 515 at 526], Maula Bux
v. Union of India [(1969) 2 SCC 554] Union of India v. Rampur Distillery and
Chemical Co. Ltd. [(1973) 1 SCC 649] and Union of India v. Raman Iron
Foundary [(1974) 2 SCC 231].
44. Relevant part of Sections 73 and 74 of Contract Act are as under:--
"73. Compensation for loss or damage caused by breach of contract:--When a
contract has been broken, the party who suffers by such breach is entitled to
receive, from the party who has broken the contract compensation for any loss or
damage caused to him thereby, which naturally arose in the usual course of
things from such breach, or which the parties knew, when they made the
contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.
74. Compensation for breach of contract where penalty stipulated for.-When a
contract has been broken, if a sum is named in the contract as the amount to be
paid in case of such breach, or if the contract contains any other stipulation by
way of penalty, the party complaining of the breach is entitled, whether or not
actual damage or loss is proved to have been caused thereby, to receive from
the party who has broken the contract reasonable compensation not exceeding
the amount so named or, as the case may be, the penalty stipulated for.
Explanation.--A stipulation for increased interest from the date of default may be
a stipulation by way of penalty."
45. From the aforesaid Sections, it can be held that when a contract has been
broken, the party who suffers by such breach is entitled to receive compensation
for any loss which naturally arise in the usual course of things from such breach.
These sections further contemplate that if parties knew when they made the
contract that a particular loss is likely to result from such breach, they can agree
for payment of such compensation. In such a case, there may not be any
necessity of leading evidence for proving damages, unless the Court arrives at
the conclusion that no loss is likely to occur because of such breach. Further, in
case where Court arrives at the conclusion that the term contemplating damages
is by way of penalty, the Court may grant reasonable compensation not
exceeding the amount so named in the contract on proof of damages. however,
when the terms of the contract are clear and unambiguous then its meaning is to
be gathered only from the words used therein. In a case where agreement is
executed by experts in the field, it would be difficult to hold that the intention of
the parties was different from the language used therein. In such a case, it is for
the party who contends that stipulated amount is not reasonable compensation,
to prove the same.
46. Now, we would refer to various decisions on the subject. In Fateh Chand's
case (supra), the plaintiff made a claim to forfeit a sum of Rs. 25000/- received
by him from the defendant. The sum of Rs. 25000/- consisted of two items--Rs.
1000/- received as earnest money and Rs. 24000/- agreed to be paid by the
defendant as out of sale price against the delivery of possession of the property.
With regard to earnest money, the Court held that the plaintiff was entitled to
forfeit the same. With regard to claim of remaining sum of Rs. 24000/-, the Court
referred to Section 74 of Indian Contract Act and observed that Section 74 deals
with the measure of damages in two clauses of cases (i) where the contract
names a sum to be paid in case of breach, and (ii) where the contract contains
any other stipulation by way of penalty. The Court observed thus:--
"The measure of damages in the case of breach of a stipulation by way of
penalty is by Section 74 reasonable compensation not exceeding the penalty
stipulated for. In assessing damages the Court has, subject to the limit of the
penalty stipulated, jurisdiction to award such compensation as it deems
reasonable having regard to all the circumstances of the case. Jurisdiction of the
Court to award compensation in case of breach of contract is unqualified except
as to the maximum stipulated; but compensation has to be reasonable, and that
imposes upon the Court duty to award compensation according to settled
principles. The section undoubtedly says that the aggrieved party is entitled to
receive compensation from the party who has broken the contract, whether or not
actual damage or loss is proved to have been caused by the breach. Thereby it
merely dispenses with proof of "actual loss or damages"; it does not justify the
award of compensation when in consequence of the breach no legal injury at all
has resulted, because compensation for breach of contract can be awarded to
make good loss or damage which naturally arose in the usual course of things, or
which the parties knew when they made the contract, to be likely to result from
the breach.
The Court further observed as under:--
... Duty not to enforce the penalty clause but only to award reasonable
compensation is statutorily imposed upon courts by Section 74. In all cases,
therefore, where there is a stipulation in the nature of penalty for forfeiture of an
amount deposited pursuant to the terms of contract which expressly provides for
forfeiture, the court has jurisdiction to award such sum only as it considers
reasonable, but not exceeding the amount specified in the contract as liable to
forfeiture."
47. From the aforesaid decision, it is clear that the Court was not dealing with a
case where contract named a sum to be paid in case of breach but with a case
where the contract contained stipulation by way of penalty.
48. The aforesaid case and other cases were referred to by three Judge Bench in
Maula Bux's case (supra) wherein the Court held thus:--
"...It is true that in every case of breach of contract the person aggrieved by the
breach is not required to prove actual loss or damage suffered by him before he
can claim a decree, and the Court is competent to award reasonable
compensation in case of breach even if no actual damage is proved to have been
suffered in consequence of the breach of contract. But the expression "whether
or not actual damage or loss is proved to have been caused thereby" is intended
to cover different classes of contracts which come before the Courts. In case of
breach of some contracts it may be impossible for the Court to assess
compensation arising from breach, while in other cases compensation can be
calculated in accordance with established rules. Where the Court is unable to
assess the compensation, the sum named by the parties if it be regarded as a
genuine pre- estimate may be taken into consideration as the measure of
reasonable compensation, but not if the sum named is in the nature of a penalty.
Where loss in terms of money can be determined, the party claiming
compensation must prove the loss suffered by him."
49. In Rampur Distillery and Chemical Co. Ltd.'s (supra) also, two Judge Bench
of this Court referred to Maula Bux's case and observed thus:--
"...It was held by this Court that forfeiture of earnest money under a contract for
sale of property does not fall within Section 70 of the Contract Act, if the amount
is reasonable, because the forfeiture of a reasonable sum paid as earnest money
does not amount to the imposition of a penalty. But, "where under the terms of
the contract the party in breach has undertaken to pay a sum of money or to
forfeit a sum of money which he has already paid to the party complaining of a
breach of contract, the undertaking is of the nature of a penalty."
50. In Raman Iron Foundry's case (supra), this Court considered Clause 18 of
the Contract between the parties and arrived at the conclusion that it applied only
where the purchaser has a claim for a sum presently due and payable by the
contractor. Thereafter, the Court observed thus:--
"11. Having discussed the proper interpretation of Clause 18, we may now turn to
consider what is the real nature of the claim for recovery of which the appellant is
seeking to appropriate the sums due to the respondent under other contracts.
The claim is admittedly one for damages for breach of the contract between the
parties. Now, it is true that the damages which are claimed are liquidated
damages under Clause 14, but so far as the law in India is concerned, there is no
qualitative difference in the nature of the claim whether it be for liquidated
damages or for unliquidated damages. Section 74 of the Indian Contract Act
eliminates the somewhat elaborate refinements made under the English common
law in distinguishing between stipulates providing for payment of liquidated
damages and stipulations in the nature of penalty. Under the common law a
genuine pre-estimate of damages by mutual agreement is regarded as a
stipulation naming liquidated damages and binding between the parties: a
stipulation in a contract in terrorem is a penalty and the Court refuses to enforce
it, awarding to the aggrieved party only reasonable compensation. The Indian
Legislature has sought to cut across the web of rules and presumptions under
the English common law, by enacting a uniform principle applicable to all
stipulations naming amounts to be paid in case of breach, and stipulations by
way of penalty, and according to this principle, even if there is a stipulation by
way of liquidated damages, a party complaining of breach of contract can recover
only reasonable compensation for the injury sustained by him, the stipulated
amount being merely the outside limit. It, therefore, makes no difference in the
present case that the claim of the appellant is for liquidated damages. It stands
on the same footing as a claim for unliquidated damages. Now the law is well
settled that a claim for unliquidated damages does not give rise to a debt until the
liability is adjudicated and damages assessed by a decree or order of a Court or
other adjudicatory authority. When there is a breach of contract, the party who
commits the breach does not eo instanti incur any pecuniary obligation, nor does
the party complaining of the breach becomes entitled to a debt due from the
other party. The only right which the party aggrieved by the breach of the
contract has is the right to sue for damages."
51. Firstly, it is to be stated that in the aforesaid case Court has not referred to
earlier decision rendered by the five Judge Bench in Fateh Chand's case or the
decision rendered by the three Judge Bench in Maula Bux's case. Further, in
H.M. Kamaluddin Ansari and Co. v. Union of India and Ors. [(1983) 4 SCC 417],
three Judge Bench of this Court has over-ruled the decision in Raman Iron
Foundry's case (supra) and the Court while interpreting similar term of the
contract observed that it gives wider power to Union of India to recover the
amount claimed by appropriating any sum then due or which at any time may
become due to the contractors under other contracts and the Court observed that
Clause 18 of the Standard Contract confers ample powers on the Union of India
to withhold the amount and no injunction order could be passed restraining the
Union of India from withholding the amount.
52. In the light of the aforesaid decisions, in our view, there is much force in the
contention raised by the learned counsel for the appellant. However, the learned
senior counsel Mr. Dave submitted that even if the award passed by the arbitral
tribunal is erroneous, it is settled law that when two views are possible with
regard to interpretation of statutory provisions and or facts, the Court would
refuse to interfere with such award.
53. It is true that if the arbitral tribunal has committed mere error of fact of law in
reaching its conclusion on the disputed question submitted to it for adjudication
then the Court would have no jurisdiction to interfere with the award. But, this
would depend upon reference made to the arbitrator: (a) If there is a general
reference for deciding the contractual dispute between the parties and if the
award is based on erroneous legal proposition, the Court could interfere; (b) It is
also settled law that in a case of reasoned award, the Court can set aside the
same if it is, on the face of it, erroneous on the proposition of law or its
application; (c) If a specific question of law is submitted to the arbitrator,
erroneous decision in point of law does not make the award bad, so as to permit
of its being set aside, unless the Court i satisfied that the arbitrator had
proceeded illegally.
54. In the facts of the case, it cannot be disputed that if contractual term, as it is,
is to be taken into consideration, the award is, on the face of it, erroneous and in
violation of the terms of the contract and thereby it violates Section 28(3) of the
Act. Undisputedly, reference to the arbitral tribunal was not with regard to
interpretation of question of law. it was only a general reference with regard to
claim of respondent. Hence, if the award is erroneous on the basis of record with
regard to proposition of law or its application, the Court will have jurisdiction to
interfere with the same.
55. Dealing with the similar question, this Court in Alopi Parshad & Sons Ltd. v.
The Union of India [(1960) 2 SCR 793] observed that the extent of jurisdiction of
the Court to set aside the award on the ground of an error in making the award is
well defined and held thus:--
"The award of an arbitrator may be set aside on the ground of an error on the
face thereof only when in the award or in any document incorporated with it, as
for instance, a note appended by the arbitrators, stating the reasons for his
decision, there is found some legal proposition which is the basis of the award
and which is erroneous--Champsey Bhara and Company v. Jivaraj Balloo
Spinning and Weaving Company Limited [L.R. 50 IA 324]. If however, a specific
question is submitted to the arbitrator and he answers it, the fact that the answer
involves an erroneous decision in point of law, does not make the award bad on
its face so as to permit of its being set aside--In the matter of an arbitration
between King and Duveen and Ors. [LR (1913) 2 KBD 32] and Government of
Kelantan v. Duff Development Company Limited [LR 1923 AC 395].
Thereafter, the Court held that if there was a general reference and not a specific
reference on any question of law then the award can be set aside if it
demonstrated to be erroneous on the fact of it. The Court, in that case,
considering Section 56 of the Indian Contract Act held that the Indian Contract
Act does not enable a party to a contract to ignore the express provisions thereof
and to claim payment of consideration for performance of the contract at rates
different from the stipulated rates, on some vague plea of equity and that the
arbitrators were not justified in ignoring the expressed terms of the contract
prescribing the remuneration payable to the agents. The aforesaid law has been
followed continuously. {Re. Rajasthan State Mines & Minerals Ltd. v. Eastern
Engineering Enterprises and Anr. [(1999) 9 SCC 283], Sikkim Subba Associates
v. State of Sikkim [(2001) 5 SCC 629] and G.M., Northern Railway and Anr. v.
Sarvesh Chopra [(2002) 4 SCC 45]}.
56. There is also elaborate discussion on this aspect in Union of India v. A.L.
Rallia Ram [(1964) 3 SCR 164] wherein the Court succinctly observed as under:-
-
"...But it is now firmly established that an award is bad on the ground of error of
law on the face of it, when in the award itself or in a document actually
incorporated in it, there is found some legal proposition which is the basis of the
award and which is erroneous. An error in law on the face of the award means:
"you can find in the award or a document actually incorporated thereto, as for
instance, a note appended by the arbitrator stating the reasons for his judgment,
some legal proposition which is the basis of the award and which you can then
say is erroneous. It does not mean that if in a narrative a 'reference is made to a
contention of one party, that opens the door to setting first what that contention
is, and then going to the contract on which the parties' rights depend to see if that
contention is sound" Champsey Bhara and Company v. Jivraj Balloo Spinning
and Weaving Company Ltd. [(1932) L.R. 50 I.A. 324]. But this rule does not apply
where question of law are specifically referred to the arbitrator for his decision:
the award of the arbitrator on those questions is binding upon the parties, for by
referring specific questions the parties desire to have a decision from the
arbitrator on those question rather than from the Court, and the Court will not
unless it is satisfied that the arbitrator had proceeded illegally interfere with the
decision."
57. The Court thereafter referred to the decision rendered in Seth Thawardas
Pherumal v. The Union of India [(1955) 2 SCR 48] wherein Bose, J. delivering
the judgment of the Court had observed:
"Therefore, when a question of law is the point at issue, unless both sides
specifically agree to refer it and agree to be bound by the arbitrator's decision,
the jurisdiction of the courts to set an arbitration right when the error is apparent
on the face of the award is not ousted. The mere fact that both parties submit
incidental arguments about point of law in the course of the proceedings is not
enough."
The learned Judge also observed at p. 59 after referring to F.R. Absalom Ltd. v.
Great Western (London) Garden Village Society [1933] AC 592, 616;
Simply because the matter was referred to incidentally in the pleadings and
arguments in support of, or against, the general issue about liability for damages,
that is not enough to clothe the arbitrator with exclusive jurisdiction on a point of
law. "
58. The Court also referred to the test indicated by Lord Russell of Killowen in
F.R. Absalom Ltd. v. Great Western (London) Garden Village Society Ltd., and
observed that the said case adequately brings out a distinction between a
specific reference on a question of law, and a question of law arising for
determination by the arbitrator in the decision of the dispute. The Court quoted
the following observations with approval:-
"...it is, I think, essential to keep the case where disputes are referred to an
arbitrator in the decision of which a question of law becomes material distinct
from the case in which a specific question of law has been referred to him for
decision. x x x x The authorities make a clear distinction between these two
cases, and, as they appear to me, they decide that in the former case the Court
can interfere if and when any error of law appears on the face of the award, but
that in the latter case, no such interference is possible upon the ground that it so
appears that the decision upon the question of law is an erroneous one."
59. Further, in Maharashtra State Electricity Board v. Sterlite Industries (India)
and Anr. [(2001) 8 SCC 482], the Court observed as under:--
"9. The position in law has been noticed by this Court in Union of India v. A.L.
Rallia Ram [AIR 1963 SC 1685] and Madanlal Roshanlal Mahajan v.
Hukumchand Mills Ltd. [(1967) 1 SCR 105] to the effect that the arbitrator's
award both on facts and law is final that there is no appeal from his verdict; that
the court cannot review his award and correct any mistake in his adjudication,
unless the objection to the legality of the award is apparent on the face of it. In
the understanding what would be an error of law on the face of the award, the
following observations in Champsey Bhara & Co. v. Jivraj Balloo Spg and Wgv.
Col. Ltd. [(1922-23 50 IA 324] a decision of the Privy Council, are relevant (IA p.
331)
"An error in law on the face of the award means, in Their Lordship's view, that
you can find in the award on a document actually incorporated thereto, as for
instance, a note appended by the arbitrator stating the reasons for his judgment,
some legal proposition which is the basis of the award and which you can that
say in erroneous."
10. In Arosan Enterprises Ltd. v. Union of India [1999 (9) SCC 449], this Court
again examined this matter and stated that where the error of finding of fact
having a bearing on the award is patent and is easily demonstrable without the
necessity of carefully weighing the various possible viewpoints, the interference
in the award based on an erroneous finding of fact is permissible and similarly, if
an award is based by applying a principle of law which is patently erroneous, and
but for such erroneous application of legal principle, the award could not have
been made, such award is liable to be set aside by holding that there has been a
legal misconduct on the part of the arbitrator."
60. Next question is--whether the legal proposition which is the basis of the
award for arriving at the conclusion that ONGC was not entitled to recover the
stipulated liquidated damages as it has failed to establish that it has suffered any
loss is erroneous on the face of it? The arbitral tribunal after considering the
decisions rendered by this Court in the cases of Fateh Chand, Maula Bux and
Rampur Distillery (supra) arrived at the conclusion that "in view of these three
decisions of the Supreme court, it is clear that it was for the respondents to
establish that they had suffered any loss because of the breach committed by the
claimant in the supply of goods under the contract between the parties after 14th
November, 1996. In the words we have emphasized in Maula Bux decision, it is
clear that if loss in terms of money can be determined, the party claiming the
compensation 'must prove' the loss suffered by him".
61. Thereafter the arbitral tribunal referred to the evidence and the following
statement made by the witness Das:
"The re-deployment plan was made keeping in mind several constraints including
shortage of casing pipes."
62. Further, the arbitral tribunal came to the conclusion that under these
circumstances, the shortage of casing pipes of 26" diameter and 30" diameter
pipes was not the only reason which led to redeployment of rig Trident II to
Platform B 121. The arbitral tribunal also appreciated the other evidence and
held that the attempt on the part of the ONGC to show that production of gas on
Platform B 121 was delayed because of the supply of goods by the claimant
failed. Thereafter, the arbitral tribunal considered the contention raised by the
learned counsel for the ONGC that the amount of 10% which had been deducted
by way of liquidated damages for the late supply of goods under the contract was
not by way of penalty. In response thereto, it was pointed out that it was not the
case of learned counsel Mr. Setalwad on behalf of the claimants that "these
stipulations in the contract for deduction of liquidated damages was by way of
penalty".
Further, the arbitral tribunal observed that in view of the decisions rendered in
Fateh Chand and Maula Bux cases, "all that we are required to consider is
whether the respondents have established their case of actual loss in money
terms because of the delay in the supply of the Casing Pipes under the contract
between the parties". Finally, the arbitral tribunal held that as the appellant has
failed to prove the loss suffered because of delay in supply of goods as set out in
the contract between the parties, it is required to refund the amount deducted by
way of liquidated damages from the specified amount payable to the respondent.
63. It is apparent from the aforesaid reasoning recorded by the arbitral tribunal
that it failed to consider Sections 73 and 74 of Indian Contract Act and the ratio
laid down in Fateh Chand's case (supra) wherein it is specifically held that
jurisdiction of the Court to award compensation in case of breach of contract is
unqualified except as to the maximum stipulated; and compensation has to be
reasonable. Under Section 73, when a contract has been broken, the party who
suffers by such breach is entitled to receive compensation for any loss caused to
him which the parties knew when they made the contract to be likely to result
from the breach of it. This Section is to be read with Section 74, which deals with
penalty stipulated in the contract, inter alia [relevant for the present case]
provides that when a contract has been broken, if a sum is named in the contract
as the amount to be paid in case of such breach, the party complaining of breach
is entitled, whether or not actual loss is proved to have been caused, thereby to
receive from the party who has broken the contract reasonable compensation not
exceeding the amount so named. Section 74 emphasizes that in case of breach
of contract, the party complaining of the breach is entitled to receive reasonable
compensation whether or not actual loss is proved to have been caused by such
breach. Therefore, the emphasis is on reasonable compensation. If the
compensation named in the contract is by way of penalty, consideration would be
different and the party is only entitled to reasonable compensation for the loss
suffered. But if the compensation named in the contract for such breach is
genuine pre-estimate of loss which the parties knew when they made the
contract to be likely to result from the breach of it, there is no question of proving
such loss or such party is not required to lead evidence to prove actual loss
suffered by him. Burden is on the other party to lead evidence for proving that no
loss is likely to occur by such breach. Take for illustration: if the parties have
agreed to purchase cotton bales and the same were only to be kept as a stock-
in-trade. Such bales are not delivered on the due date and thereafter the bales
are delivered beyond the stipulated time, hence there is breach of the contract.
Question which would arise for consideration is--whether by such breach party
has suffered any loss. If the price of cotton bales fluctuated during that time, loss
or gain could easily be proved. But if cotton bales are to be purchased for
manufacturing yarn, consideration would be different.
64. In Maula Bux's case (supra), plaintiff--Maula Bux entered into a contract with
the Government of India to supply potatoes at the Military Head Quarters, U.P.
Area and deposited an amount of Rs. 10000/- as security for due performance of
the contract. He entered into another contract with the Government of India to
supply at the same place poultry eggs and fish for one year and deposited an
amount of Rs. 8500/- for due performance of the contract. Plaintiff having made
persistent default in making regular and full supplies of the commodities agreed
to be supplied, the Government rescinded the contracts and forfeited the
amounts deposited by the plaintiff, because under the terms of the agreement,
the amounts deposited by the plaintiff as security for the due performance of the
contracts were to stand forfeited in case plaintiff neglected to perform his part of
the contract. In context of these fats, Court held that it was possible for the
Government of India to lead evidence to prove the rates at which potatoes,
poultry, eggs and fish were purchased by them when the plaintiff failed to deliver
"regularly and fully" the quantities stipulated under the terms of the contracts and
after the contracts were terminated. They could have proved the rates at which
they had to be purchased and also the other incidental charges incurred by them
in pronouncing the goods contracted for. But no such attempt was made. Hence,
claim for damages was not granted.
65. In Maula Bux's case (supra), the Court has specifically held that it is true that
in every case of breach of contract the person aggrieved by the breach is not
required to prove actual loss or damage suffered by him before he can claim a
decree and the Court is competent to award reasonable compensation in a case
of breach even if no actual damages is proved to have been suffered in
consequence of the breach of contract. The Court has also specifically held that
in case of breach of some contracts it may be impossible for the Court to assess
compensation arising from breach.
66. Take for illustration construction of a road or a bridge. If there is delay in
completing the construction of road or bridge within stipulated time, then it would
be difficult to prove how much loss is suffered by the Society/State. Similarly in
the present case, delay took place in deployment of rigs and on that basis actual
production of gas from platform B-121 had to be changed. It is undoubtedly true
that the witness has stated that redeployment plan was made keeping in mind
several constraints including shortage of casing pipes. Arbitral Tribunal,
therefore, took into consideration the aforesaid statement volunteered by the
witness that shortage of casing pipes was only one of the several reasons and
not the only reason which led to change in deployment of plan or redeployment
of rigs Trident-II platform B-121. In our view, in such a contract, it would be
difficult to prove exact loss or damage which the parties suffer because of the
breach thereof. In such a situation, if the parties have pre-estimated such loss
after clear understanding, it would be totally unjustified to arrive at the conclusion
that party who has committed breach of the contract is not liable to pay
compensation. It would be against the specific provisions of Section 73 and 74 of
the Indian Contract Act. There was nothing on record that compensation
contemplated by the parties was in any way unreasonable. It has been
specifically mentioned that it was an agreed genuine pre-estimate of damages
duly agreed by the parties. It was also mentioned that the liquidated damages
are not by way of penalty. It was also provided in the contract that such damages
are to be recovered by the purchaser from the bills for payment of the cost of
material submitted by the contractor. No evidence is led by the claimant to
establish that stipulated condition was by way of penalty or the compensation
contemplated was, in any way, unreasonable. There was no reason for the
tribunal not to rely upon the clear and unambiguous terms of agreement
stipulating pre-estimate damages because of delay in supply of goods. Further,
while extending the time for delivery of the goods, respondent was informed that
it would be required to pay stipulated damages.
67. From the aforesaid discussions, it can be held that:--
(1) Terms of the contract are required to be taken into consideration before
arriving at the conclusion whether the party claiming damages is entitled to the
same;
(2) If the terms are clear and unambiguous stipulating the liquidated damages in
case of the breach of the contract unless it is held that such estimate of
damages/compensation is unreasonable or is by way of penalty, party who has
committed the breach is required to pay such compensation and that is what is
provided in Section 73 of the Contract Act.
(3) Section 74 is to be read along with Section 73 and, therefore, in every case of
breach of contract, the person aggrieved by the breach is not required to prove
actual loss or damage suffered by him before he can claim a decree. The Court
is competent to award reasonable compensation in case of breach even if no
actual damage is proved to have been suffered in consequence of the breach of
a contract.
(4) In some contracts, it would be impossible for the Court to assess the
compensation arising from breach and if the compensation contemplated is not
by way of penalty or unreasonable, Court can award the same if it is genuine pre-
estimate by the parties as the measure of reasonable compensation.
68. For the reason stated above, the impugned award directing the appellant to
refund the amount deducted for the breach as per contractual terms requires to
be set aside and is hereby set aside.
WHETHER THE CLAIM OF REFUND OF THE AMOUNT DEDUCTED BY THE
APPELLANT FROM THE BILLS IS DISPUTED OR UNDISPUTED CLAIM?
69. As the award directing the appellant to refund the amount deducted is set
aside, question of granting interest on the same would not arise. Still however, to
demonstrate that the award passed by the arbitral tribunal is, on the face of it,
erroneous with regard to grant of interest, we deal with the same.
70. Arbitral Tribunal arrived at the conclusion that the appellant wrongfully
withheld/deducted the aggregate amount of US $ 3,04,970.20 on account of
delay in supply of goods and amount of Rs. 15,75,559/- on account of excise
duty, sales tax, freight charges deducted a and by way of liquidated damages
from the amount payable by the respondent and thereafter arrived at the
conclusion that the said amount was deducted from undisputed invoice amount,
therefore, the said claim of the respondent cannot be held to be 'disputed claim'.
71. It is apparent that the claim of the contractor to recover the said amount was
disputed mainly because it was agreed term between the parties that in case of
delay in supply of goods appellant was entitled to recover damages at the rate as
specified in the agreement. It was also agreed that the said liquidated damages
were to be recovered by paying authorities from the bills for payment of the cost
of material submitted by the contractor. If this agreed amount is deducted and
thereafter contractor claims it back on the ground that the appellant was not
entitled to deduct the same as it has failed to prove loss suffered by it, the said
claim undoubtedly would be a 'disputed claim'. The arbitrators were required to
decide by considering the facts and the law applicable, whether the deduction
was justified or not? That itself would indicate that the claim of the contractor was
'disputed claim' and not 'undisputed'. The reason recorded by the arbitrators that
as the goods were received and bills are not disputed, therefore, the claim for
recovering the amount of bills cannot be held to be 'disputed claim' is, on the face
of it, unjust, unreasonable, unsustainable and patently illegal as well as against
the expressed terms of the contract. As quoted above, Clause 34.4 in terms
provides that no interest would be payable on 'disputed claim'. It also provides
that in which set of circumstances, interest amount would be paid in case of
delay in payment of undisputed claim. In such case, the interest rate is also
specified at 1% per month on such undisputed claim amount. Despite this clause,
the arbitral tribunal came to the conclusion that it was undisputed claim and held
that in law, appellant was not entitled to withhold these two payments from the
invoice raised by the respondent and hence directed that the appellant was liable
to pay interest on wrongful deductions at the rate of 12% p.a. from 1.4.1997 till
the date of filing of the statement of claim and thereafter having regard to the
commercial nature of the transaction at the rate of 18% p.a. pendente lite till
payment.
72. It is to be reiterated that it is the primary duty of the arbitrators to enforce a
promise which the parties have made and to uphold the sanctity of the contract
which forms the basis of the civilized society and also the jurisdiction of the
arbitrators. Hence, this part of the award passed by the arbitral tribunal granting
interest on the amount deducted by the appellant from the bills payable to the
respondent is against the terms of the contract and is, therefore, violative of
Section 28(3) of the Act.
CONCLUSIONS:--
In the result, it is held that:--
A. (1) The Court can set aside the arbitral award under Section 34(2) of the Act if
the party making the application furnishes proof that:--
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have
subjected it or, failing any indication thereon, under the law for the time being in
force; or
(iii) the party making the application was not given proper notice of the
appointment of an arbitrator or of the arbitral proceedings or was otherwise
unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling
within the terms of the submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to arbitration;
2) The Court may set aside the award:--
(i) (a) if the composition of the arbitral tribunal was not in accordance with the
agreement of the parties,
(b) failing such agreement, the composition of the arbitral tribunal was not in
accordance with Part-I of the Act.
(ii) if the arbitral procedure was not in accordance with:--
(a) the agreement of the parties, or
(b) failing such agreement, the arbitral procedure was not in accordance with
Part-I of the Act.
However, exception for setting aside the award on the ground of composition of
arbitral tribunal or illegality of arbitral procedure is that the agreement should not
be in conflict with the provisions of Part-I of the Act from which parties cannot
derogate.
(c) If the award passed by the arbitral tribunal is in contravention of provisions of
the Act or any other substantive law governing the parties or is against the terms
of the contract.
(3) The award could be set aside if it is against the public policy of India, that is to
say, if it is contrary to:--
(a) fundamental policy of Indian law;
(b) the interest of India; or
(c) justice or morality, or
(d) if it is patently illegal.
(4) It could be challenged:--
(a) as provided under Section 13(5); and
(b) Section 16(6) of the Act.
B. (1) The impugned award requires to be set aside mainly on the grounds:--
(i) there is specific stipulation in the agreement that the time and date of delivery
of the goods was the essence of the contract;
(ii) in case of failure to deliver the goods within the period fixed for such delivery
in the schedule, ONGC was entitled to recover from the contractor liquidated
damages as agreed;
(iii) it was also explicitly understood that the agreed liquidated damages were
genuine pre-estimate of damages;
(iv) on the request of the respondent to extend the time limit for supply of goods,
ONGC informed specifically that time was extended but stipulated liquidated
damages as agreed would be recovered;
(v) liquidated damages for delay in supply of goods were to be recovered by
paying authorities from the bills for payment of cost of material supplied by the
contractor;
(vi) there is nothing on record to suggest that stipulation for recovering liquidated
damages was by way of penalty or that the said sum was in any way
unreasonable.
(vii) In certain contracts, it is impossible to assess the damages or prove the
same. Such situation is taken care by Sections 73 and 74 of the Contract Act and
in the present case by specific terms of the contract.
Held:
For the reasons stated above, the impugned award directing the appellant to
refund US $ 3,04,970.20 and Rs. 15,75,559/- with interest which were deducted
for the breach of contract as per the agreement requires to be seaside and is
hereby set aside. The appeal is allowed accordingly. There shall be no order as
to costs.
M/s. Konkan Railway Corporation Ltd. and another Vs. M/s. Rani Construction P.
Ltd. - Jan 30 2002


      Citation: AIR 2002 SC 778
      Honourable Judges: S. P. BHARUCHA C.J.I, S. S. MOHAMMED QUADRI,
       U. C. BANERJEE, S. N. VARIAVA AND SHIVARAJ V. PATIL
      Issue: Arbitration and Conciliation Act (26 of 1996), Section 1, Section 11,
       Section 34
      Date Of Judgment: Jan 30 2002
      Case No: Civil Appeals Nos. 5880-5889 of 1997 with C.A. Nos. 713-716, 2037-
       2044, 4311-4312, 4324, 4356, 7304 and 7306-7309 of 1999



More cases on : Arbitration and Conciliation Act (26 of 1996) Total [32]

Judgement
BHARUCHA, C. J. I.:- In Ador Samia Private Limited v. Peckay Holdings Limited
and others, 1999 (8) SCC 572, a Bench of two learned Judges of this Court
came to the conclusion that the Chief Justice or any person or institution
designated by him, acting under Section 11 of the Arbitration and Conciliation
Act, 1996 (hereinafter called "The Act"), acted in an administrative capacity and
such order did not attract the provisions of Article 136 of the Constitution of India.
A Bench of two learned Judges referred for reconsideration the decision in Ador
Samia to a Bench of three learned Judges. The decision of the Bench of the
three learned Judges Konkan Railway Corporation Ltd. and others v. Mehul
Construction Co., 2000 (7) SCC 201 affirmed the view taken in Ador Samia,
namely, that the order of the Chief Justice or his designate in exercise of the
power under Section 11 of the Act was an administrative order and that such
order was not amenable to the jurisdiction of this Court under Article 136.
Thereafter, in Konkan Railway Corpn. Ltd. and another v. Rani Construction Pvt.
Ltd., 2000 (8) SCC 159 a Bench of two learned Judges referred to a larger Bench
the decision of the three learned Judges, for reconsideration (a practice which a
Constitution Bench has frowned upon). This is how the matter comes to be
placed before a Constitution Bench.
2. When it first reached before a Constitution Bench, the following order was
passed:
"This reference has been made by a detailed referral order 2000 (8) SCC 159.
It appears that the Chief Justice or his nominee, acting under Section 11 of the
Arbitration and Conciliation Act, 1996, have decided contentious issues arising
between the parties to an alleged arbitration agreement and the question that we
are called upon to decide is whether such an order deciding issues a judicial
order or an administrative order.
In the course, of the short hearing before us, another question has surfaced,
which is: does the Chief Justice or his nominee, acting under Section 11, have
the authority to decide any contentions issues between the parties to the alleged
arbitration agreement? In other words, is the power of the Chief Justice or his
nominee under Section 11 restricted to the nomination of an arbitrator in cases
falling under sub-sections (4), (5) and (6) thereof?
From what we understood, the learned Solicitor General appearing for the
appellant, and learned counsel appearing for the respondents are ad idem on
this aspect. According to both of them, the power of the Chief Justice or his
nominee under Section 11 is restricted to the nomination of an arbitrator and the
order that he makes is an administrative order.
It, therefore, becomes necessary to request the Attorney General to assist the
Court. Mr. Andhyarujina, who is in Court but is not appearing in the matter, has
advanced some submissions before us. He shall also be entitled to do so when
the matter is taken up again before a Constitution Bench.
The Registry shall furnish a copy of this order and a copy of the paper books
both to the Attorney General and to Mr. Andhyarujina.
Adjourned accordingly."
3. To determine whether the order of the Chief Justice or his designate under
Section 11 of the Act is a judicial order or an administative order, it is necessary
to take note of certain provisions of the Act. Section 2(e) defines a Court thus:
"(e) "Court" means the principal Civil Court of orginal jurisdiction in a district, and
includes the High Court in exercise of its ordinary original civil jurisdiction, having
jurisdiction to decide the questions froming the subject-matter of the arbitration if
the same had been the subject-matter of a suit, but does not include any Civil
Court of a grade inferior to such principal Civil Court, or any Court of Small
Causes;"
Section 5 reads thus:
"Extent of judicial intervention- Notwithstanding anything contained in any other
law for the time being in force, in matters governed by this Part, no judicial
authority shall intervene except where so provided in this Part."
Section 8, so far as is relevant, reads thus:
"8(1) A judicial authority before which an action is brought in a matter which is the
subject of an arbitration agreement shall, if a party so applies not later than when
submitting his first statement on the substance of the dispute, refer the parties to
arbitration."
Section 10 states that the parties to an arbitration agreement are free to
determine the number of arbitrators, provided that such number shall not be an
even number; failing such determination, the arbitral tribunal shall consist of a
sole arbitrator.
Section 11 reads thus:
"Appointment of arbitrators- (1) A person of any nationality may be an arbitrator,
unless otherwise agreed by 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 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 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
(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 the Chief Justice or
any person or institution designated by him.
(5) Failing any agreement referred to in sub-section (2), in an arbitrator with a
sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from
receipt of a request 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,-
(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, a party may request the Chief Justice or any
person or institution designated by him to take the necessary measure, 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 person or institution designated by him is
final.
(8) The Chief Justice or the person or institution designated by him, in appointing
an arbitrator, shall have due regard to-
(a) any qualifications required of the arbitrator by the agreement of the parties;
and
(b) other considerations as are likely to secure the appointment of an
independent and impartial arbitrator.
(9) In the case of appointment of sole or third arbitrator in an international
commercial arbitration, the Chief Justice of India or the person or institution
designated by him may appoint an arbitrator of a nationality other than the
nationalities of the parties where the parties belong to different nationalities.
(10) The Chief Justice may make such scheme as he may deem appropriate for
dealing with matters entrusted by sub-section (4) or sub-section (5) or sub-
section (6) to him.
(11) Where more than one request has been made under sub-section (4) or sub-
section (5) or sub-section (6) to the Chief Justices of different High Courts or their
designates, the Chief Justice or his designate to whom the request has been first
made under the relevant sub-section shall alone be competent to decide on the
request.
(12) (a) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and
(10) arise in an international commercial arbitration, the reference to "Chief
Justice" in those sub-section shall be construed as a reference to the "Chief
Justice of India".
(b) Where the matters referred to in sub-sections (4), (5, (6), (7), (8) and (10)
arise in any other arbitration, the reference to "Chief Justice" in those sub-
sections shall be construed as a reference to the Chief Justice of the High Court
within whose local limits the principal Civil Court referred to in clause (e) of sub-
section (1) of Section 2 is situate and, where the High Court itself is the Court
referred to in that clause, to the Chief Justice of that High Court."
Section 12 imposes upon a person approached to be an arbitrator the obligation
to disclose to the parties in writing any circumstance that may give rise to
justifiable doubts as to his independence and impartiality. An arbitrator can be
challenged if there are circumstances that give rise to justifiable doubts about his
independence and impartiality or if he does not possess the qualifications agreed
to by the parties, but such challenge can be made only for reasons which the
party challenging becomes aware of after the appointment has been made.
Section 13 speaks of the challenge procedure. It states that the parties are free
to agree on such a procedure. Failing that, the party who makes the challenge
must within fifteen days after becoming aware of the constitution of the arbitral
tribunal or of any of the circumstances mentioned in Section 12, send a written
statement of the reasons for the challenge to the arbitral tribunal. Unless the
challenged arbitrator withdraws or the other party to the arbitration agrees to the
challenge, the arbitral tribunal shall decide upon the challenge and if the
challenge is not successful it shall continue the arbitration proceedings and make
an award. That award can be sought to be set aside under Section 34.
Section 16 empowers the arbitral tribunal to rule on its own jurisdiction. Clause
(1) of Section 16 is relevant, and reads thus:
"(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any
objections with respect to the existence or validity of the arbitration agreement,
and for that purpose,"
(a) an arbitration clause which forms part of a contract shall be treated as an
agreement independent of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the contract is null and void shall not
entail ipso jure the invalidity of the arbitration clause.
4. If a party is aggrieved by an arbitral award made after rejection of his plea of
jurisdiction, he can challenge it in accordance with Section 34.
5. Section 34, so far as is relevant reads thus:
"(1) Recourse to a Court against an arbitral award may be made only by an
application for setting aside such award in accordance with sub-section (2) and
sub-section (3).
(2) An arbitral award may be set aside by the Court only if-
(a) the party making the application furnishes proof that-
(i) a party was under some incapacity; or
(ii) the arbitration agreement is not valid under the law to which the parties have
subjected it or, failing any indication thereon, under the law for the time being in
force; or
(iii) the party making the application was not given proper notice of the
appointment of an arbitrator or of the arbitral proceedings or was otherwise
unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling
within the terms of the submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can be
separated from those not so submitted, only that part of the arbitral award which
contains decisions on matters not submitted to arbitration may be set aside; or
(v) The composition of the arbitral tribunal or the arbitral procedure was not in
accordance with the agreement of the parties, unless such agreement was in
conflict with a provision of this Part from which the parties cannot derogate, or,
failing such agreement, was not in accordance with this Part; or,
(b) the Court finds that-
(i) the subject-matter of the dispute is not capable of settlement by arbitration
under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation.- Without prejudice to the generality of sub-clause (2), it is hereby
declared, for the avoidance of any doubt, that an award is in conflict with the
public policy of India if the making of the award was induced or affected by fraud
or corruption or was in violation of Section 75 or Section 81."
An order setting aside or refusing to set aside an arbitral award under Section 34
is appealable by reason of Section 37. Also appealable are the orders relating to
the jurisdiction of the arbitral tribunal under Section 16.
6. It is convenient at this stage to set out the scheme framed by the Chief Justice
of India under Section 11(10) of the Act. It is representative of the schemes
framed by the High Court is under the same provision.
"THE APPOINTMENT OF ARBITRATORS BY THE CHIEF JUSTICE OF INDIA
SCHEME, 1996
No. F. 22/1/95/SCA/Genl.- In exercise of the powers conferred on the Chief
Justice of India under sub-section (10) of Section 11 of the Arbitration and
Conciliation Ordinance, 1996, I hereby make the following Scheme.
1. Short title.- This Scheme may be called the Appointment of Arbitrators by the
Chief Justice of India Scheme, 1996.
2. Submission of request.- The request to the Chief Justice under sub-section (4)
or sub-section (5) or sub-section (6) of Section 11 shall be made in writing and
shall be accompanied by-
(a) the original arbitration agreement or a duly certified copy thereof;
(b) the names and addresses of the parties to the arbitration agreement;
(c) the names and addresses of the arbitrators, if any, already appointed;
(d) the names and address of the person or institution, if any, to whom or which
any function has been entrusted by the parties to the arbitration agreement under
the appointment procedure agreed upon by them;
(e) the qualifications required, if any, of the arbitrators by the agreement of the
parties;
(f) a brief written statement describing the general nature of the dispute and the
points at issue;
(g) the relief or remedy sought; and
(h) an affidavit, supported by the relevant document, to the effect that the
condition to be satisfied under sub-section (4) or sub-section; (5) or sub-section
(6) of Section 11, as the case may be, before making the request to the Chief
Justice, has been satisfied.
3. Authority to deal with the request.- Upon receipt of a request under paragraph
2, the Chief Justice may either deal with the matter entrusted to him or designate
any other person or institution for that purpose.
4. Forwarding of request to designated person or institution.- Where the Chief
Justice designates any person or institution under paragraph 3, he shall have the
request along with the documents mentioned in paragraph 2 forwarded forthwith
to such person or institution and also have a notice sent to the parties to the
arbitration agreement.
5. Seeking further information.- The Chief Justice or the person or the institution
designated by him under paragraph 3 may seek further information or
clarification from the party making the request under this Scheme.
6. Rejection of request.- Where the request made by any party under paragraph
2 is not in accordance with the provisions of this Scheme, the Chief Justice or the
person or the institution designated by him may reject it.
7. Notice to affected persons.- Subject to the provisions of paragraph 6, the Chief
Justice or the person or the institution designated by him shall direct that a notice
of the request be given to all the parties to the arbitration agreement and such
other person or persons as may seem to him or is likely to be affected by such
request to show cause, within the time specified in the notice, why the
appointment of the arbitrator or the meausre propose to be taken should not be
made or taken and such notice shall be accompanied by copies of all documents
referred to in paragraph 2 or, as the case may be, by information or clarification,
if any, sought under paragraph 5."
8. Withdrawal of authority.- If the Chief Justice, on receipt of a complaint from
either party to the arbitration agreement or otherwise is of opinion that the person
or institution designated by him under paragraph 3 has neglected or refused to
act or is incapable of acting he may withdraw the authority given by him to such
person or institution and either deal with the request himself or designate another
person or institution for that purpose.
9. Intimation of action taken on request.- The appointment made or measure
taken by the Chief Justice or any person or institution designated by him in
pursuance of the request under paragraph I shall be communicated in writing to-
(a) the parties to the arbitration agreement;
(b) the arbitrators, if any, already appointed by the parties to the arbitration
agreement;
(c) the person or the institution referred to in paragraph 2(d);
(d) the arbitrator appointed in pursuance of the request.
10. Requests and communication to be sent to Registrar.- All requests under this
Scheme and communications relating thereto which are addressed to the Chief
Justice shall be presented to the Registrar of this Court, who shall maintain a
separate Registrar of such requests and communications.
11. Delivery and receipt of written communications.- The provisions of sub-
sections (1) and (2) of Section 3 of the Arbitration and Conciliation Ordinance,
1996 shall, so far as may be, apply to all written communications received or sent
under this Scheme.
12. Costs for processing requests.- The party making a request under this
Scheme shall, on receipt of notice of demand from-
(a) the Registry of the Court where the Chief Justice makes the appointment of
an arbitrator or takes the necessary measure; or
(b) the designated person or the institution as the case may be, where such
person or institution makes appointment or arbitrator or takes the necessary
measure,
pay an amount of Rs. 15,000 in accordance with the terms of such notice
towards to costs involved in processing the request.
13. Interpretation.- If any question arises with reference to the interpretation of
any of the provisions of this Scheme, the question shall be referred to the Chief
Justice, whose decision shall be final.
14. Power to amend the Scheme.- The Chief Justice may, from time to time,
amend by way of addition or variation any provision of this Scheme."
7. The three Judge Bench whose judgment is to be reconsidered framed the
following two questions for consideration:
"(1) What is the nature of the order that is passed by the Chief Justice or his
nominee in exercise of power under sub-section (6) of Section 11 of the Act?
(2) Even if the said order is held to be administrative in nature what is the remedy
open to the person concerned if his request for appointment of an arbitrator is
turned down by the learned Chief Justice or his nominee, for some reason or
other?"
The three Judge Bench noted that the Act was based upon the UNCITRAL
Model framed by the Commission on International Trade Law established by the
United Nations. It said that if a comparison was made between the language of
Section 11 of the Act and Art. 11 of the Model Law it was apparent that the Act
had designated the Chief Justice of a High Court in cases of domestic arbitration
and the Chief Justice of India in cases of international commercial arbitration to
be the authority to perform the function of appointment of an abritrator whereas
under the model law that power had been vested in the Court. When the matter
was placed before the Chief Justice or his designate under Section 11 it was
imperative for the Chief Justice or his desingate to bear in mind the legislative
intent that the arbitral process should be set in motion without any delay and
leave all contentious issues to be raised before the the arbitral tribunal. At that
stage it was not approriate for the Chief Justice or his designate to entertain any
contentious issues betweeen the parties and decide the same. A bare reading of
Setons 13 and 16 made it clear that questions with regard to the qualifications,
independence and impartiality of the arbitrator and in respect of the jurisdiction of
the arbitrator could be raised before the arbitrator, who would decide the same. If
a contingency arose where the Chief Justice or his desingate refused to make an
appointment, the party seeking the appointment was not without remedy. An
intervention was possible by a Court in the same way as an intervention was
possible against an administrative order of the executive. In other words, it would
be a case of non-performance of his duty by the Chief Justice or his designate
and, therefore, a mandamus would lie. In such an event there would not be any
inordinate delay in setting the arbitral process in motion. The nature and function
performed by the Chief Justice or his designate being essentially to aid the
constitution of the arbitral tribunal, it could not be held to be a judicial function, as
otherwise the legislature would have used the expresson "Court" or "judicial
authority". It was, therefore, held that an order under Section 11 refusing to
appoint an arbitrator was not amenable to the jurisdiction of this Court under Art.
136 of the Constitution.
8. In the referring judgment the Bench of two learned Judges noted the material
relied upon by learned counsel for the appellant before them, which related to the
Model Law, and learned counsel's argument. It then stated, 'In the light of the
above contentions and materials, which in our opinion have a substantial bearing
on the matter, and further inasmuch as this question is one arising almost
constantly in a large number of cases in the various High Courts, it is desirable
that this Court re-examines the matter."
9. It is convenient at this stage itself to deal with the argument based on the
Model Law. The Statement of Objects and Reasons of the Act states, "Though
the said UNCITRAL Model Law and Rules are intended to deal with international
commercial arbitration and conciliation, they could, with appropriate
modifications, serve as a model for legislation on domestic arbitration and
conciliation. The present Bill seeks to consolidate and amend the law relating to
domestic arbitration, international commercial arbitration, enforcement of foreign
arbitral awards and to define the law relating to conciliation, taking into account
the said UNCITRAL Model Law and Rules". That the Model Law was only taken
into account in the drafting of the said Act is, therefore, patent. The Act and the
Model Law are not identically drafted. Under Section 11 the appointment of an
arbitrator, in the event of a party to the arbitration agreement failing to carry out
his obligation to appoint an arbitrator, is to be made by "the Chief Justice or any
person or institution designated by him"; under clause 11 of the Model Law it is to
be made by a Court. Section 34 of the Act is altogether different from clause 34
of the Model Law. The Model Law and judgments and literature thereon are,
therefore, not a guide to the interpretation of the Act and, especially of Section 11
thereof.
10. Learned counsel for the appellants submitted that Section 11 of the Act laid
down conditions precedent to the Chief Justice or his designate naming an
arbitrator in that, as for example, in sub-section (4)(a) the party had to fail to
appoint an arbitrator within thirty days from the receipt of a request to do so from
the other party. If the party who was alleged to have failed to appoint an arbitrator
within thirty days of the receipt of the request contested this position, it was for
the Chief Justice or his designate to decide the issue. Reliance was placed upon
sub-section (7) of Section 11, which refers to a "decision" on the matter entrusted
to the Chief Justice or his designate, and on sub-section (8), which requires the
Chief Justice or his designate to have due regard to the qualifications required of
the abitrator by the agreement of the parties and other considerations as are
likely to secure the appointment of an independent and impartial arbitrator. In
learned counsel submission, these also indicated that the Chief Justice or his
designate had to perform an adjudicatory function in naming an arbitrator.
Learned counsel submitted that Section 16 of the Act enabled the arbitral tribunal
to decide on the width of its jurisdiction but it could not decide whether or not an
arbitrator had no jurisdiction because he had been appointed by the Chief Justice
or his designate even though the period of thirty days of the receipt of the request
to do so had not elapsed, this was an issue which had to be decided by the Chief
Justice or his designate. Reliance was placed upon clause 7 of the Appointment
of Arbitrators by the Chief Justice of India Scheme, it was submitted that the
affected parties had to be given notice by reason of that clause to show cause,
which implied, that, on their showing cause, the issues they raised would be
decided by the Chief Justice or his designate. Reliance was placed upon
Associated Cement Companies Ltd. v. P.N. Sharma and another, (1965) 2 SCR
366 to contend that the Chief Justice or his designate functions as a tribunal so
as to attract Art. 136 to the order naming an arbitrator. It was submitted that the
four essential requirements in this behalf were satisfied, namely the appointment
of the Chief Justice was an appointment by the State, the Chief Justice or his
designate were independent of the executive, there was a duty cast upon them to
decide judicially, and they had the power to enforce their decision.
11. The learned Attorney General, on notice, made submissions that were
adopted by learned counsel for the respondents. The Attorney General drew our
attention to Section 5 of the Act, which mandated that no judicial authority should
intervene exept to the extent provided in the Act, and to Section 8, which
required a judicial authority before which an action was brought in a matter which
was the subject of an arbitration agreement to refer to the parties to arbitration.
The emphasis of the Act, in the learned Attorney General's submission, was to
expedite the proceedings of the domestic tribunal to which the parties had
agreed to submit their disputes. It was in this light that the Act had to be read.
Seciton 11 did not require the Chief Justice or his designate to perform any
adjudicatory function. All that the Chief Justice or his designate was required to
do was to nominate an arbitrator if a party to an arbitration agreement had failed
to do so within the specified time after a request to it to do so had been made,
and in so nominating an arbitrator the Chief Justice or his designate was to have
regard to the qualification that were required of the arbitrator by the agreement of
the parties and to other consideration which were likely to secure the
appointment of an independent and impartial arbitrator. This the Chief Justice or
his designate had to do on an ex facie basis no element of adjudication came
into it. The learned Attorney General drew attention to Sections 12 and 13 which
provided for a challenge to an arbitration in respect of whom there were doubts
about independence or impartiality. The provisions of Sections 12 and 13 applied
even to an arbitrator who had been nominated by the Chief Justice or his
designate under Section 11. In the submission of the learned Attorney General,
the competence of the arbitral tribunal to rule on its own jurisdiction under
Section 16 was not confined to the width of its jurisdiction but extended to
deciding whether it had any jurisdiction at all. Section 34 gave a party adversely
affected by an arbitral award the right to apporach a Court to set in aside on the
stated grounds, which included the composition of the arbitral tribunal. An order
under Section 34 was appealable under Section 37, as was an order accepting
the plea that the arbitral tribunal did not have jurisdiction. The learned Attorney
General drew our attention to the judgment of this Court in The Engineering
Mazdoor Sabha Representing Workmen Employed under The Hind Cycles Ltd.
and another v. The Hind Cycle Ltd., Bombay [1963 Supp (1) SCR 625] and
Jaswant Sugar Mills Ltd., Meerut v. Lakshmichand and others [1963 Supp (1)
SCR 242] to submit that a tribunal was a body that exercised an adjudicatory
function. The Chief Justice or his designate under Section 11 performed neither
an adjudicatory function nor they were exercising the power of the State. They
were not, therefore, tribunals and their orders under Section 11 could not be
made the subject of petitions for leave to appeal under Art. 136. AIR 1963 SC
874.
12. Article 136 empowers this Court to grant special leave to appeal from any
judgment, decree, sentence or order in any cause or matter passed or made by
any Court or tribunal in the territory of India. For the nomination of an arbitrator
by the Chief Justice or his designate under Section 11 of the Act to be subject to
Art. 136 such nomination must be (a) a judgment, decree, determination,
sentence or order (b) passed or made by any Court or tribunal in the territory of
India. The question is whether such nomination is a determination or order and
whether it is made by a tribunal, as contended by learned counsel for the
appellants. There is in the line of authority of this Court on the subject a recurring
theme.
13. In the judgment cited by the learned counsel for the appellants himself,
namely, the case of Associated Cement Companies Ltd., a Constitution Bench
said, "The question which we have to decide in the present appeal is whether the
State Government is a tribunal when it exercises its authority under R. 6(5) or R.
6(6) The main and basic test, however, is whether the adjudicating power which
a particular authority is empowered to exercise has been conferred on it by a
statute and can be described as a part of the State 's inherent power exercised in
discharging its judicial function. Applying this test, there can be no doubt that the
power which the State Government exercise under R. 6(5) and R. 6(6) is a part
of the State's judicial power. It has been conferred on the State Government by a
statutory Rule and it can be exercised in respect of disputes between the
management and its welfare officers. There is, in that sense, a lis; there is
affirmation by one party and denial by another, and the dispute necessarily
involves the rights and obligations of the parties to it." AIR 1965 SC 1595
14. In Jaswant Sugar Mills Ltd., cited by the learned Attorney General, this Court
said, "The expression "determination" in the context in which it occurs in Art. 136
signifes an effective expression of opinion which ends a controversy or a dispute
by some authority to whom it is submitted under a valid law for disposal. The
expression "order" must have also a similar meaning, except that it need not
operate to end the dispute. 'Determination' or 'order' must be judicial or quasi
judicial; purely administrative or executive direction is not contemplated to be
made the subject matter of appeal to this Court. The essence of the authority of
this Court being judicial, this Court does not exercise administrative or executive
powers, i.e. character of the power conferred upon this Court, original or
appellate, by its constitution being judicial, the determination or order sought to
be appealed from must have the character of a judicial adjudication." The Court
went on state that to make a decision or an act judicial, the following criteria must
be satisfied:
"(1) it is in substance a determination upon investigation of a qustion by the
application of objective standards to facts found in the light of pre-existing legal
rule;
(2) it declares rights or imposes upon parties obligations affecting their civil
rights; and
(3) that the invetigation is subject to certain procedural attributes contemplating
an opportunity or presenting its case to a party, ascertainment of facts by means
of evidence if a dispute be on questions of fact, and if the dispute be on question
of law on the presentation of legal argument, and a decision resulting in the
disposal of the matter on findings based upon those questions of law and fact"
The Court added, "But every decision or order by an authority under a duty to act
judicially is not subject to appeal to this Court. Under Art. 136, an appeal lies to
this Court from adjudications of Courts and tribunals only. Adjudication of a Court
or a tribunal must doubtless be judicial but every authority which by its
constitution or authority specially conferred upon it is required to act judicially is
not necessarily a tribunal for the purpose of Art. 136."
15. In the case of The Engineering Mazdoor Sabha, a Constitution Bench said:
"For invoking Art. 136(1), two conditions must be satisfied. The proposed appeal
must be from any judgment, decree, determination, sentence or order, that is to
say, it must not be against a purely executive or administrative order. If the
determination or order giving rise to the appeal is a judicial or quasi judicial
determination or order, the first condition is satisfied. The second condition
imposed by the Article is that the said determination or order must have been
made or passed by any Court or Tribunal in the territory of India. These
conditions, therefore, require that the act complained against must have the
character of a judicial or quasi judicial act and the authority whose act is
complained against must be a Court or a Tribunal. Unless both the conditions are
satisfied, Art. 136 (1) cannot be invoked."
The Court added:
" The Tribunals which are contemplated by Art. 136(1) are clothed with some of
the powers of the Courts. They can compel witnesses to appear, they can
administer oath, they are required to follow certain rules of proceduse; the
proceedings before them are required to comply with rules of natural justice, they
may not be bound by the strict and technical rules of evidence, but, nevertheless,
they must decide on evidence adduced before them; they may not be bound by
other techncial rule of law, but their decisions must, nevertheless, be consistent
with the general principles of law. In other words they have to act judicially and
reach their decisions in an objective manner and they cannot proceed purely
administrative or base their conclusion on subjective test or inclinations".
16. To put it concisely, for an order properly to be the subject of a petition for
special leave to appeal under Art. 136 it must be an adjudicatory order, an order
that adjudicates upon the rival contentions of parties, and it must be passed by
an authority constituted by the State by law for the purpose in discharge of the
State's obligation to secure justice to its people.
17. Section 11 of the Act deals with the appointment of arbitrators. It provides
that the parties are free to agree on a procedure for appointing an arbitrator or
arbitrators. In the event of there being no agreement in regard to such procedure,
in an arbitration by three arbitrators each party is requires to appoint one
arbitrator and the two arbitrators so appointed must appoint the third arbitrator. If
a party fails to appoint an arbitrator within thirty days from the request to do so by
the other party or the two arbitrators appointed by the parties fail to agree on a
third arbitrator within thirty days of their appointment, a party may request the
Chief Justice to nominate an arbitrator and the nomination shall be made by the
Chief Justice or any person or institution designated by him. If the parties have
not agreed on a procedure for appointing an arbitrator in an arbitration with a sole
arbitrator and the parties fail to agree on an arbitrator within thirty days from
receipt of a request to one party by the other party, the nomination shall be made
on the request of a party by the Chief Justice or his designate. Where an
appointment procedure has been agreed upon by the parties but a party fails to
act as required by that procedure or the parties, or the two arbitrators appointed
by them, fail to reach the agreement expected of them under that procedure or a
person or institution fails to perform the function entrusted to him or it under that
procedure, a party may request the Chief Justice or his designate to nominate an
arbitrator, unless the appointment procedure provides other means in this behalf.
The decision of the Chief Justice or his designate is final. In nominating an
arbitrator the Chief Justice or his designate must have regard to the qualifications
required of the arbitrator in the agreement between the parties and to other
considerations that will secure the nomination of an independent and impartial
arbitrator.
18. There is nothing in Section 11 that requires the party other than the party
making the request to be noticed. It does not contemplate a response from that
other party. It does not contemplate a decision by the Chief Justice or his
designate on any controversy that the other party may raise, even in regard to its
failure to appoint an arbitrator within the period of thirty days. That the Chief
Justice or his designate has to make the nomination of an arbitrator only if the
period of of thirty days is over does not lead to the conclusion that the decision to
nominate is adjudicatory. In its request to the Chief Justice to make the
appointment the party would aver that this period of has passed and, ordinarily,
correspondence between parties would be annexed to bear this out. This is all
that the Chief Justice or his designate has to see. That the Chief Justice or his
designate has to take into account the qualifications required of the arbitrator by
the agreement, between the parties (which, ordinarily, would also be annexed to
the request) and other considerations likely to secure the nomination of an
independent and impartial arbirator also cannot lead to the conclusion that the
Chief Justice or his designate is required to perform an adjudicatory function.
That the word 'decision' is used in the matter of the request by a party to
nominate an arbitrator does not of itself mean that an adjudicatory decision is
contemplated.
19. As we see it, the only function of the Chief Justice or his designate under
Section 11 is to fill the gap left by a party to the arbitration agreement or by the
two arbitrators appointed by the parties and nominate an arbitrator. This is to
enable the arbitral tribunal to be expeditiously constituted and the arbitration
proceedings to commence. The function has been left to the Chief Justice or his
designate advisedly, with a view to ensure that the nomination of the arbitrator is
made by a person occupying high judicial office or his designate, who would take
due care to see that a competent, independent and impartial arbitrator is
nominated.
20. It might be that though the Chief Justice or his designate might have taken all
due care to nominate an independent and impartial arbitrator, a party in a given
case may have justifiable doubts about that arbitrator's independece or
impartiality. In that event it would be open to that party to challenge the arbitrator
under Section 12, adopting the procedure under Section 13. There is no reason
whatever to conclude that the grounds for challenge under Section 13 are not
available only because the arbitrator has been nominated by the Chief Justice or
his designate under Section 11.
21. It might also be that in a given case the Chief Justice or his designate may
have nominated an arbitrator although the period of thirty days had not expired. If
so, the arbitral tribunal would have been improperly constituted and be without
jurisdiction. It would then be open to the aggrieved party to require the arbitral
tribunal to rule on its jurisdiction. Section 16 provides for this. It states that the
arbitral tribunal may rule on its own jurisdiction. That the arbitral tribunal may rule
"on any objections with respect to the existence or validity of the arbitration
agreement" shows that the arbitral tribunal's authority under Section 16 is not
confined to the width of its jurisdiction, as was submitted by learned counsel for
the appellants, but goes to the very root of its jurisdiction. There would, therefore,
be no impediment in contending before the arbitral tribunal that it had been
wrongly constituted by reason of the fact that the Chief Justice or his designate
had nominated an arbitrator although the period of thirty days had not expired
and that, therefore, it had no jurisdiction.
22. The schemes made by the Chief Justices under Section 11 cannot govern
the interpretation of Section 11. If the scheme, as drawn, goes beyond the terms
of Section 11 they are bad and have to be amended. To the extent that the
Appointment of Arbitrators by the Chief Justice of India Scheme, 1996, goes
beyond Section 11 by requiring, in clause 7, the service of a notice upon the
other party to the arbitration agreement to show cause why the nomination of an
arbitrator, as requested, should not be made, it is bad and must be amended.
The other party needs to be given notice of the request only so that it may know
of it and it may, if if so chooses, assist the Chief Justice or is designated in the
nomination of an arbitrator.
23. In conclusion, we hold that the order of the Chief Justice or his designate
under Section 11 nominating an arbitrator is not an adjudicatory order and the
Chief Justice or his designate is not a tribunal. Such an order cannot properly be
made the subject of a petition for special leave to appeal under Art. 136. The
decision of the three Judge Bench in Konkan Railway Corporation Ltd. and
others v. Mehul Construction Co., is affirmed. : AIR 2000 SC 2821.
24. We record our appreciation of the assistance rendered by the learned
Attorney General as Amicus Curiae.
25. In the result, the appeals are dismissed. No order as to costs.
Held:
Appeals dismissed.

Narayan Prasad Lohia Vs. Nikunj Kumar Lohia and others - Feb 20 2002


       Citation: AIR 2002 SC 1139
       Honourable Judges: G. B. PATTANAIK, S. N. PHUKAN AND S. N.
        VARIAVA
       Issue: Arbitration and Conciliation Act (26 of 1996), Section 10, Section 4,
        Section 16 and Section 34(2)(v)
       Date Of Judgment: Feb 20 2002
       Case No: Civil Appeal Nos. 1382 with 1384 of 2002 (arising out of S.L.P. (C)
        Nos. 12384, with 13123 of 2000)



More cases on : Arbitration and Conciliation Act (26 of 1996) Total [32]

Judgement
S. N. VARIAVA, J.:- Leave granted.
2. This appeal is against a Judgment dated 18th May, 2000.
3. Briefly stated the facts are as follows:
The Appellant and the Respondents are family members who had disputes and
differences in respect of the family businesses and properties. All the parties
agreed to resolve their disputes and differences through one Mr. Pramod Kumar
Khaitan. Subsequently, on 29th Sept., 1996 they agreed that the said Mr.
Pramod Kumar Khaitan and one Mr. Sardul Singh Jain resolve their disputes. For
the purposes of this order we are not deciding whether these two persons acted
as Arbitrators or Mediators. That is a matter of contention between the parties
which we are, at present, not called upon to decide. For the purposes of this
order we are presuming that the parties had agreed to the Arbitration of these
two persons.
4. The parties made their respective claims before these two persons. All parties
participated in the proceedings. On 6th Oct., 1996 an Award came to be passed
by the said Mr. Pramod Kumar Khaitan and Mr. Sardul Singh Jain.
5. On 22nd Dec., 1997 the 1st respondent filed an Application in the Calcutta
High Court for setting aside the Award dated 6th Oct., 1996. On 17th Jan., 1998
the 2nd respondent filed an Application for setting aside this Award. One of the
grounds, in both these applications was that the Arbitration was by two
Arbitrators whereas under the Arbitration and Conciliation Act, 1996 (hereinafter
called the said Act) there cannot be an even number of arbitrators. It was
contended that an arbitration by two arbitrators was against the statutory
provision of the said Act and therefore void and invalid. It was conteded that
consequently the Award was unenforceable and not binding on the parties.
These contentions found favour with a single Judge of the Calcutta High Court
who set aside the Award on 17th Nov., 1998. On 18th May, 2000 the Appeal was
also dismissed. Hence this Appeal to this Court.
6. When this matter reached hearing on 16th Jan., 2000, the following Order has
been passed by this Court:
"Substitution applications are allowed.
A similar question, as is involved in this case, came up before a Bench of this
Court in the case of Dodsal Pvt. Ltd. v. Delhi Electric Supply Undertaking of the
Municipal Corporation of Delhi (1996) 2 SCC 576. In that case this Court felt that
the question whether a mandatory provision of the Arbitration Act can at all be
waived requires consideration by a larger Bench in view of an earlier judgment of
this Court in Waverly Jute Mills Co. Ltd. v. Raynon and Co. (India) P. Ltd. (1963)
3 SCR 209. In the said view of the matter the Bench referred the question to a
larger Bench of this Court. It is now noticed that the said Constitution Bench
which was seized of the referred case, did not decide that issue as could be seen
from its decision dated 19th July, 1996 in Dodsal Pvt. Ltd. v. Delhi Electric Supply
Undertaking of the Municipal Corporation of Delhi, Civil Appeal Nos. 2372-2374
of 1987 (1996 (7) SCALE (SP) 1), but decided the issue on other grounds. AIR
1996 SC 3229.
Since that question has not yet been decided and question involved is an
important question of law likely to arise in future cases we feel it appropriate that
this issue should be decided by larger Bench, of at least three Hon'ble Judges
and hence, refer the petitions, namely, SLP (C) 12384 and 13123 of 2000 to a
Bench of three Hon'ble Judges.
Accordingly, the Registry is directed to place the papers before Hon'ble the Chief
Justice for suitable orders."
Accordingly, this matter is before this Bench. At this stage we are only deciding
the question of law referred i.e. whether a mandatory provision of the said Act
can be waived by the parties.
7. It would be appropriate to set out, at this stage, the relevant provisions of the
Act. Sections 4, 5, 10, 11, 16 and 34 read as follows:
"4. Waiver of right to object. - A party who knows that -
(a) any provision of this Part from which the parties may derogate or
(b) any requirement under the arbitration agreement,
has not been complied with and yet proceeds with the arbitration without stating
his objection to such non compliance without undue delay or, if a time limit is
provided for stating that objection, within that period of time, shall be deemed to
have waived his right to so object.
5. Extent of judicial intervention. - Notwithstanding anything contained in any
other law for the itme being in force, in matters governed by this Part, no judicial
authority shall intervene except where so provided in this Part.
10. Number of arbitrators. - (1) 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 (1), the arbitral tribunal
shall consist of a sole arbitrator.
11. Appointment of arbitrators. - (1) A person of any nationality may be an
arbitrator, unless otherwise agreed by 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 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 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
(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 the Chief Justice or
any person or institution designated by him.
(5) Failing any agreement referred to in sub-section (2), in an arbitration with a
sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from
receipt of a request 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,-
(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,
a party may request the Chief Justice or any person or institution designated by
him to take the necessary measure, 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 person or institution designated by him is
final.
(8) The Chief Justice or the person or institution designated by him, in appointing
an arbitrator, shall have due regard to-
(a) any qualifications required of the arbitrator by the agreement of the parties;
and
(b) other considerations as are likely to secure the appointment of an
independent and impartial arbitrator.
(9) In the case of appointment of sole or third arbitrator in an international
commercial arbitration, the Chief Justice of India or the person or institution
designated by him may appoint an arbitrator of a nationality other than the
nationalities of the parties where the parties belong to different nationalities.
(10) The Chief Justice may make such scheme as he may deem appropriate for
dealing with matters entrusted by sub-section (4) or sub-section (5) or sub-
section (6) to him.
(11) Where more than one request has been made under sub-section (4) or sub-
section (5) or sub-section (6) to the Chief Justice of different High Courts or their
designates, the Chief Justice or his designate to whom the request has been first
made under the relevant sub-section shall alone be competent to decide on the
request.
(12)(a) Where the matters referred to in sub-Sections (4), (5), (6), (7), (8) and
(10) arise in an international commercial arbitration, the reference to "Chief
Justice" in those sub-sections shall be construed as a reference to the "Chief
Justice of India".
(b) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and (10)
arise in any other arbitration, the reference to "Chief Justice" in those sub-
sections shall be construed as a reference to the Chief Justice of the High Court
within whose local limits the principal Civil Court referred to in Clause (e) of sub-
section (1) of Section 2 is situate and, where the High Court itself is the Court
referred to in that clause, to the Chief Justice of that High Court."
16. Competence of arbitral tribunal to rule on its jurisdiction.- (1) The arbitral
tribunal may rule on its own jurisdiction, including ruling on any objections with
respect to the existence or validity of the arbitration agreement, and for that
purpose,-
(a) an arbitration clause which forms part of a contract shall be treated as an
agreement independent of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the contract is null and void shall not
entail ipso jure the invalidity of the arbitration clause.
(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not
later than the submission of the statement of defence; however, a party shall not
be precluded from raising such a plea merely because that he has appointed, or
participated in the appointment of, an arbitrator.
(3) A plea that the arbitral tribunal is exceeding the scope of its authority shall be
raised as soon as the matter alleged to be beyond the scope of its authority is
raised during the arbitral proceedings.
(4) The arbitral tribunal may, in either of the cases referred to in sub-section (2)
or sub-section (3), admit a later plea if it considers the delay justified.
(5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or
sub-section (3) and, where the arbitral tribunal takes a decision rejecting the
plea, continue with the arbitral proceedings and make an arbitral award.
(6) A party aggrieved by such an arbitral award may make an application for
setting aside such an arbitral award in accordance with Section 34.
34. Application for setting aside arbitral award.- (1) Recourse to a Court against
an arbitral award may be made only by an application for setting aside such
award in accordance with sub-section (2) and sub-section (3).
(2) An arbitral award may be set aside by the Court only if-
(a) the party making the application furnishes proof that-
(i) a party was under some incapacity; or
(ii) the arbitration agreement is not valid under the law to which the parties have
subjected it or, failing any indication thereon, under the law for the time being in
force; or
(iii) the party making the application was not given proper notice of the
appointment of an arbitrator or of the arbitral proceedings or was otherwise
unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling
within the terms of the submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to arbitration;
Provided that, if the decisions on matters submitted to arbitration can be
separated from those not so submitted, only that part of the arbitral award which
contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in
accordance with the agreement of the parties, unless such agreement was in
conflict with a provision of this Part from which the parties cannot derogate, or,
failing such agreement, was not in accordance with this Part; or
(b) the Court finds that -
(i) the subject-matter of the dispute is not capable of settlement by arbitration
under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India."
The said Act was enacted to consolidate and amend the law relating to domestic
and international commercial arbitration and for matters connected therewith and
incidental thereto. One of the objects of the said Act is to minimise the role of
Courts in the arbitration process. It is with this object in mind that Section 5 has
been provided. Judicial authorities should not interfere except where so provided
in the Act. Further Section 34 categorically provides that the award can be set
aside by the Court only on the grounds mentioned therein. Therefore one of the
aspects which would have to be considered is whether the 1st and 2nd
Respondents case fell within any of the categories provided under Section 34.
8. Mr. Venugopal submits that Section 10 of the said Act is a mandatory
provision which cannot be derogated. He points out that even though the parties
are free to determine the number of arbitrators such number cannot be an even
number. He submits that any agreement which permits the parties to appoint an
even number of arbitrators would be contrary to this mandatory provision of the
said Act. He submits that such an agreement would be invalid and void as the
Arbitral Tribunal would not have been validly constituted. He submits that
composition of the arbitral tribunal itself being invalid the proceedings and the
Award, even if one be passed, would be invalid and unenforceable.
9. Mr. Venugopal submits that Section 4 of the said Act would only apply
provided:
(a) a party knew that he could derogate from any provision of this Part or
(b) a party knew that any requirement under the arbitration agreement had not
been complied with
and the party still proceeded with the arbitration. He submits that, this case does
not fall under category (b) above. He submits that even category (a) would not
apply because waiver can only be in respect of a matter from which a party could
derogate. He submits that in respect of provisions which are non-derogable there
can be no waiver. He submits that Section 10 is a provision from which a party
cannot derogate. He submits that matters from which a party cannot derogate
are those provided in Sections 4, 8, 9, 10, 11 (4) and (6), 12, 13 (4), 16 (2), (3)
and (5), 22 (4), 27, 31, 32, 33, 34(2) and (4), 35, 36, 37, 38 (1) and 43 (3). He
submits that as against this matters from which a party can derogate are those
provided under Sections 11 (2), 19 (1), and (2), 20 (1) and (2), 22 (1), 24, 25, 26
and 31 (3).
10. Mr. Venugopal submits that Section 10 compulsorily precludes appointment
of an even number of Arbitrators in public interest and as a matter of public
policy. He submits that if there are an even number of Arbitrators there is a high
possibility that, at the end of the arbitration, they may differ. He submits that in
such a case parties would then be left remediless and would have to start
litigation or a fresh arbitration all over again. He submits that this would result in a
collosal waste of time, money and energy. He submits that to avoid such waste
of time, money and energy the Legislature has, in public policy, provided in a
non-derogatory manner, that the number of arbitrators shall not be even.
11. He submits Section 16 does not provide for any challenge to the composition
of the arbitral tribunal. He submits that a reading of Section 34 (2)(a)(v) shows
that the Legislature contemplated a challenge to the composition of the arbitral
tribunal. He submits that significantly Section 16 does not provide for a challenge
to the composition of the arbitral tribunal. He submits that an invalid composition
of the arbitral tribunal goes to the root of the jurisdiction. He submits that an
arbitral tribunal which has been illegally constituted would have no jurisdiction or
power to decide on the question of its inherent lack of jurisdiction. He submits
that Section 16 does not cover and would not govern such a challenge. Mr.
Venugopal submits that the High Court was right in setting aside the Award on
this ground. He submits that this Court should not interfere.
12. On the other hand, Mr. Dwivedi submits that Sections 4, 10 and 16 are part of
the integrated scheme provided in the said Act. He submits that the provisions
have to be read in a manner whereby there is no conflict between any of them or
by which any provision is not rendered nugatory. He submits that undoubtedly
Section 10 provides that there should not be an even number of arbitrators. He
points out that Section 10 starts with the words. "The parties are free to
determine the number of arbitrators". He submits that arbitration is a matter of
agreement between the parties. He submits that generally, in an arbitration, the
parties are free to determine the number of arbitrators and the procedure. Parties
could agree upon an even number of arbitrators. He submits that even after a
party has agreed to an even number of arbitrators he can still object to the
composition of the arbitral tribunal. He submits that such objection must be taken
before the arbitral tribunal not later than the date of submission of the statement
of defence. He points out that under Section 16 (2) such an objection can be
taken even though the parties had appointed or participated in the appointment
of the arbitrator. He submits that the wording of Section 16 are wide enough to
cover even an objection to the composition of the arbitral tribunal. He submits
that a conjoint reading of Sections 4, 10 and 16 indicates that if an objection is
not taken before the arbitral tribunal, within the time laid down under Section 16
(2), then the party would be deemed to have waived its right to object by virtue of
Section 4. He submits that an award could be challenged on ground of
composition of the arbitral tribunal only provided that an objection is first taken
before the arbitral tribunal under Section 16 and the arbitral tribunal has rejected
such an objection.
13. Mr. Dwivedi submits that Section 34 (2) (a) (v) does not permit the setting
aside of an award on the ground of composition of the arbitral tribunal if the
composition was in accordance with the agreement of the parties. He submits
that Section 34 (2) (a) (v) would come into play only if the composition was not in
accordance with the agreement of the parties. He points out that in this case the
composition is in accordance with the agreement of the parties and, therefore,
the award cannot be set aside on this ground. Mr. Dwivedi submits that even
presuming that Section 34 (2) (v) permitted a challenge on the ground of
composition of the arbitral tribunal, still the Court may refuse to set aside the
award. He points out that the words used, in Section 34, are "an arbitral award
may be set aside by the Court". He submits that in this case the Respondents
had entered into such an agreement. He submits that they had participated in the
arbitral proceedings without any objection. He submits that there could be no law
which permits a party who has so appointed and participated to then resile and
seek to have the award set aside. He submits that it would be against public
policy to permit waste of time, money and energy spent in the arbitration by
having the award set aside. He submits that it would also be inequitable to permit
such a party to challenge the award on this ground. He submits that the
impugned Orders of the High Court cannot be sustained and require to be set
aside.
14. We have heard the parties at length. We have considered the submissions.
Undoubtedly, Sections 10 provides that the number of arbitrators shall not be an
even number. The question still remains whether Section 10 is a non-derogable
provision. In our view the answer to this question would depend on question as to
whether, under the said Act, a party has a right to object to the composition of the
arbitral tribunal, if such composition is not in accordance with the said Act and if
so at what stage. It must be remembered that arbitration is a creature of an
agreement. There can be no arbitration unless there is an arbitration agreement
in writing between the parties.
15. In the said Act, provisions have been made in Sections 12, 13 and 16 for
challenging the competence, impartially and jurisdiction. Such challenge must
however be before the arbitral tribunal itself.
16. It has been held by a Constitution Bench of this Court, in the case of Konkan
Railway Corporation Ltd. v. Rani Construction Pvt. Ltd. (Judgment dated 30th
January, 2002 in Civil Appeals Nos. 5880-5889 of 1997) that Section 16 enables
the arbitral tribunal to rule on its own jurisdiction. It has been held that under
Section 16 the arbitral tribunal can rule on any objection with respect to existence
or validity of the arbitration agreement. It is held that the arbitral tribunals
authority under Section 16, is not confined to the width of its jurisdiction but goes
also to the root of its jurisdiction. Not only this decision is binding on this Court,
but we are in respectful agreement with the same. Thus it is no longer open to
contend that, under Section 16, a party cannot challenge the composition of the
arbitral tribunal before the arbitral tribunal itself. Such a challenge must be taken,
under Section 16 (2), not later than the submission of the statement of defence.
Section 16 (2) makes it clear that such a challenge can be taken even though the
party may have participated in the appointment of the arbitrator and/or may have
himself appointed the arbitrator. Needless to state a party would be free, if he so
choose, not to raise such a challenge. Thus a conjoint reading of Sections 10
and 16 shows that an objection to the composition of the arbitral tribunal is a
matter which is derogable. It is derogable because a party is free not to object
within the time prescribed in Section 16 (2). If a party chooses not to so object
there will be a deemed waiver under Section 4. Thus we are unable to accept the
submission that Section 10 is a non-derogable provision. In our view Section 10
has to be read along with Section 16 and is, therefore, a derogable provision.
reported in 2002 AIR SCW 426.
17. We are also unable to accept Mr. Venugopal's argument that, as a matter of
public policy, Section 10 should be held to be non-derogable. Even though the
said Act is now an integrated law on the subject of Arbitration, it cannot and does
not provide for all contingencies. An arbitration being a creature of agreement
between the parties, it would be impossible for the Legislature to cover all
aspects. Just by way of example Section 10 permits the parties to determine the
number of arbitrators, provided that such number is not an even number. Section
11 (2) permits parties to agree on a procedure for appointing the arbitrator or
arbitrators. Section 11 then provides how arbitrators are to be appointed if the
parties do not agree on a procedure or if there is failure of the agreed procedure.
A reading of Section 11 would show that it only provides for appointments in
cases where there is only one arbitrator or three arbitrators. By agreement
parties may provide for appointment of 5 or 7 arbitrators. If they do not provide
for a procedure for their appointment or there is failure of the agreed procedure,
then Section 11 does not contain any provision for such a contingency. Can this
be taken to mean that the Agreement of the parties is invalid. The answer
obviously has to be in the negative. Undoubtedly the procedure provided in
Section 11 will mutatis mutandis apply for appointment of 5 or 7 or more
arbitrators. Similarly even if parties provide for appointment of only two
arbitrators, that does not mean that the agreement becomes invalid. 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. This would
ensure that on a difference of opinion the arbitration proceedings are not
frustrated. But if the two Arbitrators agree and give a common award there is no
frustration of the proceedings. In such a case their common opinion would have
prevailed, even if the third arbitrator, presuming there was one, had differed.
Thus we do not see how there would be waste of time, money and expense if a
party, with open eyes, agrees to go to Arbitration of two persons and then
participates in the proceedings. On the contrary there would be waste of time,
money and energy if such a party is allowed to resile because the Award is not of
his liking. Allowing such a party to resile would not be in furtherance of any public
policy and would be most inequitable.
18. Even otherwise, under the said Act the grounds of challenge to an arbitral
award are very limited. Now an award can be set aside only on a ground of
challenge under Sections 12, 13 and 16 provided such a challenge is first raised
before the arbitral tribunal and has been rejected by the arbitral tribunal. The only
other provision is Section 34 of the said Act. The only ground, which could be
pressed in service by Mr. Venugopal, is that provided under Section 34 (2) (a)
(v). Section 34 (2) (a) (v) has been extracted hereinabove. According to Mr.
Venugopal if the composition of the arbitral tribunal or the arbitral procedure,
even though it may be in accordance with the agreement of the parties, is in
conflict with a provision of the Act from which the parties cannot derogate, then
the party is entitled to have the award set aside. He submits that the words
"unless such agreement was in conflict with a provision of this Part from which
the parties cannot derogate" as well as the words "failing such agreement" show
that an award can be set aside if the agreement is in conflict with a provision of
Part I of the said Act or if there is no agreement which is in consonance with the
provisions of Part I of the said Act. In other words, according to Mr. Venugopal,
even if the composition or procedure is in accordance with the agreement of the
parties an award can be set aside if the composition or procedure is in conflict
with the provisions of Part I of the said Act. According to Mr. Venugopal the
words "failing such agreement" do not mean that there should be no agreement
in respect of the composition of the tribunal or the arbitral procedure. According
to Mr. Venugopal, an agreement in respect of the composition of the arbitral
tribunal or arbitral procedure which is not in consonance with a provision of Part I
of the said Act would be invalid in law and therefore would be covered by the
phrase "failing such agreement". He submits that the words " failing such
agreement" mean failing an agreement which is in consonance with a provision
of Part I of the said Act. He submits that Section 34 (2) (a) (v) entitles the
Respondents to challenge the award and have it set aside.
19. In our view, Section 34 (2) (a) (v) cannot be read in the manner as
suggested. Section 34 (2) (a) (v) only applies if "the composition of the arbitral
tribunal or the arbitral procedure was not in accordance with the agreement of
the parties". These opening words make it very clear that if the composition of
the arbitral tribunal or the arbitral procedure is in accordance with the agreement
of the parties, as in this case, then there can be no challenge under this
provision. The question of "unless such agreement was in conflict with the
provisions of this Act" would only arise if the composition of the arbitral tribunal or
the arbitral procedure is not in accordance with the agreement of the parties.
When the composition or the procedure is not in accordance with the agreement
of the parties then the parties get a right to challenge the award. But even in such
a case the right to challenge the award is restricted. The challenge can only be
provided the agreement of the parties is in conflict with a provision of Part I which
the parties cannot derogate. In other words, even if the composition of the arbitral
tribunal or the arbitral procedure is not in accordance with the agreement of the
parties but if such composition or procedure is in accordance with the provisions
of the said Act, then the party cannot challenge the award. The words "failing
such agreement" have reference to an agreement providing for the composition
of the arbitral tribunal or the arbitral procedure. They would come into play only if
there is no agreement providing for the composition of the arbitral tribunal or the
arbitral procedure. If there is no agreement providing for the composition of the
arbitral tribunal or the arbitral procedure and the composition of the arbitral
tribunal or the arbitral procedure was not in accordance with Part I of the said Act
then also a challenge to the award would be available. Thus so long as the
composition of the arbitral tribunal or the arbitral procedure are in accordance
with the agreement of the parties, Section 34 does not permit challenge to an
award merely on the ground that the composition of the arbitral tribunal was in
conflict with the provisions of Part I of the said Act. This also indicates that
Section 10 is a derogable provision.
20. Respondents 1 and 2 not having raised any objection to the composition of
the arbitral tribunal, as provided in Section 16, they must be deemed to have
waived their right to object.
21. For the reasons aforesaid, the Judgments of the learned single Judge and
the Division Bench on the question of law discussed cannot be sustained. They
are accordingly set aside.
22. The Appeal be now placed before a Bench of two Judges for consideration of
other aspects which are stated to have been raised.
Civil Appeal No. 1384 of 2002 (arising out of SLP (C) No. 13123 of 2000).
23. The question of law having been decided in the Judgment dated 20th
February, 2002 passed in Civil Appeal No. 1382 of 2002 (arising out of SLP (C)
No. 12384 of 2000) this Appeal be now placed before a Bench of two Judges for
consideration of other aspects which are stated to have been raised.
Held:
Order accordingly.

				
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