Narayan
Prasad Lohia Vs. Nikunj Kumar Lohia & Ors [2002] Insc 87 (20 February 2002)
G.B.
Pattanaik, S.N. Phukan & S.N. Variava S. N. Variava, J.
Leave
granted.
This
Appeal is against a Judgment dated 18th May, 2000.
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
September 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.
The
parties made their respective claims before these two persons. All parties
participated in the proceedings. On 6th October, 1996 an Award came to be passed by the
said Mr. Pramod Kumar Khaitan and Mr. Sardul Singh Jain.
On 22nd December, 1997 the 1st Respondent filed an
Application in the Calcutta High Court for setting aside the Award dated 6th October, 1996. On 17th January, 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 contended 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 November, 1998. On 18th May, 2000 the Appeal was also dismissed. Hence this Appeal to this
Court.
When
this matter reached hearing on 16th January, 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 Private Ltd. vs. 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. vs. Raymon 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 Private Ltd. vs. 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.
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.
It
would be appropriate to set out, at this stage, the relevant provisions of the
said 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 time 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 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-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.
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.
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 Section 11(2),
19(1) and (2), 20(1) and (2), 22(1), 24, 25, 26 and 31(3).
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.
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 illegal 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.
On the
other hand, Mr. Dwivedi submits that Section 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 nugetory. 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.
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)(a)(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.
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.
In the
said Act, provisions have been made in Sections 12, 13, and 16 for challenging
the competence, impartiality and jurisdiction.
Such
challenge must however be before the arbitral tribunal itself.
It has
been held by a Constitution Bench of this Court, in the case of Konkan Railway
Corporation Ltd. vs. Rani Construction Pvt. Ltd. (Judgment dated 30th January,
2002 in Civil Appeal 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.
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.
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 proceudre 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.
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.
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.
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.
The
Appeal be now placed before a Bench of two Judges for consideration of other
aspects which are stated to have been raised.
...J.
(G.B.
PATTANAIK) ...J.
(S.N.
PHUKAN) ..J.
(S. N.
VARIAVA) February 20,
2002.
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