Arbitration Application No. 7 of 2012

8th May, 2012

Petitioner Counsel: Mr. PRAVIN SAMDANI, Mr. KEZER KHANRAWALA
Respondent Counsel: Mr. D.D. MADON, Mr. HOMA PETIT, Mr. CYRUS ARDESHIR, Mr. MIHAIL BEHL, Mr. ASHWIN BHAGWAT

Cases Cited:
Jagdish Chander Vs. Ramesh Chander, 2007 ALL SCR 1328 = 2007 (5) SCC 719 [Para 5]
San-A Tradubg Co. Ltd. Vs. I.C. Textiles Ltd., Arbitration Applications Nos.8, 9 of 2005, Dt.28/4/2006 [Para 8]
Smt.Satya w/o.Kailashchandra Sahu Vs. Vidarbha Distillers, 1998(1) ALL MR 601=1998(2) Bom.C.R. 627 [Para 9]
Khorshed E.Nagarwalla Vs. Daryus Soley Panthakey, 2010(3) ALL MR 373=2010 (4) ALL MR 568 [Para 11]
Ashok M.Kataria Vs. Motiwala Trust for Human Resource Development, 2011(7) ALL MR 57 =2011(2) Bom.C.R. 704 [Para 11]
S.B.P. & Co. Vs. Patel Engineering Ltd, 2009(6) ALL MR 1000 (S.C.) =(2009) 10 SCC 293 [Para 12]
Godhra Electricity Co.Ltd. Vs. State of Gujarat, (1975) 1 SCC 199 [Para 14]

JUDGMENT

JUDGMENT :- These proceedings arise out of an application under Section 11 of the Arbitration and Conciliation Act, 1996.

2. On 16 December 1989, the Applicant entered into an agreement for sale with the Respondent by which the Respondent agreed to transfer lands, plant and machinery, structures and buildings and fixed and current assets situated on the lands for consideration. On 24 January 2002 and 3 February 2003 an order was passed by the Collector, Porbunder and by the Secretary (Appeals) in the Revenue Department of the State of Gujarat that some part of the land has been resumed by the State Government as a result of a breach by the Respondent of certain terms and conditions of a lease agreement and that by entering into an agreement with the Applicant, the Respondent had committed a breach of the terms of the lease. The Respondent filed writ proceedings (Special Civil Applications 1975 of 2003 and 1992 of 2003) challenging the order passed by the Collector and Secretary (Appeals) before the High Court of Gujarat. Those proceedings were dismissed by a judgment dated 15 December 2009. On 17 May 2011, the Applicant addressed a letter of demand to the Respondent stating that it had been induced to part with a huge sum by way of consideration though it had neither obtained a conveyance, nor had it obtained land of which possession had been resumed by the Collector, Porbunder. On 20 July 2011, the Applicant addressed a notice invoking the arbitration agreement contained in Clause 21 of the Agreement dated 16 December 1989. Eventually, these proceedings were instituted on 8 December 2011 under Section 11 of the Arbitration and Conciliation Act, 1996.

3. Clause 21 of the Agreement dated 16 December 1989 is to the following effect :

"21. If any question or difference or dispute shall arise between the parties hereto or their representatives at any time in relation to or with respect to the meaning or effect of these presents or with respect to the rights and liabilities of the parties hereto then such question or dispute shall be referred either to Mr.N.A.Palkhivala or Mr.D.S. Seth, whose decision in the matter shall be final and binding on both the parties."

4. The defence to the application under Section 11 is two fold. Firstly, it has been urged on behalf of the Respondent that Clause 21 does not embody an arbitration agreement at all. Secondly, it has been submitted that even if Clause 21 is construed to be an agreement to refer disputes to arbitration, both the Arbitrators named in Clause 21 have died. The defence is that the disputes between the parties could only be referred to one of the two named Arbitrators and in their absence, there can be no arbitral proceedings. Each of the two defences will be taken up for consideration separately.

5. An arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996 is defined to mean an agreement between parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. Under the provision, an arbitration agreement may be in the form of an arbitration clause of a contract or in the form of a separate agreement. An arbitration agreement is required to be in writing. If it is not in writing, it can be contained in a document signed by the parties, in an exchange of communications or in an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. In a judgment of the Supreme Court in Jagdish Chander Vs. Ramesh Chander, 2007 5 SCC 719 : [2007 ALL SCR 1328], the law has been settled on the subject of when an arbitration agreement can be construed to exist between parties to a contract. The principles which have been laid down by the Supreme Court are as follows :

(i) The intention of the parties to enter into an arbitration agreement shall have to be gathered from the terms of the agreement. If the terms of the agreement clearly indicate an intention on the part of the parties to the agreement to refer their disputes to a private tribunal for adjudication and a willingness to be bound by the decision of such tribunal on such disputes, it is arbitration agreement. While there is no specific form of an arbitration agreement, the words used should disclose a determination and obligation to go to arbitration and not merely contemplate the possibility of going for arbitration. Where there is merely a possibility of the parties agreeing to arbitration in future, as contrasted from an obligation to refer disputes to arbitration, there is no valid and binding arbitration agreement.

(ii) Even if the words 'arbitration' and 'arbitral tribunal (or arbitrator)' are not used with reference to the process of settlement or with reference to the private tribunal which has to adjudicate upon the disputes, in a clause relating to settlement of disputes, it does not detract from the clause being an arbitration agreement if it has the attributes or elements of an arbitration agreement. They are : (a) The agreement should be in writing. (b) The parties should have agreed to refer any disputes (present or future) between them to the decision of a private tribunal. (c) The private tribunal should be empowered to adjudicate upon the disputes in an impartial manner, giving due opportunity to the parties to put forth their case before it. (d) The parties should have agreed that the decision of the Private Tribunal in respect of the disputes will be binding on them.

(iii) Where the clause provides that in the event of disputes arising between the parties, the disputes shall be referred to Arbitration, it is an arbitration agreement. Where there is a specific and direct expression of intent to have the disputes settled by arbitration, it is not necessary to set out the attributes of an arbitration agreement to make it an arbitration agreement. But where the clause relating to settlement of disputes, contains words which specifically excludes any of the attributes of an arbitration agreement or contains anything that detracts from an arbitration agreement, it will not be an arbitration agreement. For example, where an agreement requires or permits an authority to decide a claim or dispute without hearing, or requires the authority to act in the interests of only one of the parties, or provides that the decision of the Authority will not be final and binding on the parties, or that if either party is not satisfied with the decision of the Authority, he may file a civil suit seeking relief, it cannot be termed as an arbitration agreement.

(iv) But mere use of the word 'arbitration' or 'arbitrator' in a clause will not make it an arbitration agreement, if it requires or contemplates a further or fresh consent of the parties for reference to arbitration. For example, use of words such as "parties can, if they so desire, refer their disputes to arbitration" or "in the event of any dispute, the parties may also agree to refer the same to arbitration" or "if any disputes arise between the parties, they should consider settlement by arbitration" in a clause relating to settlement of disputes, indicate that the clause is not intended to be an arbitration agreement. Similarly, a clause which states that "if the parties so decide, the disputes shall be referred to arbitration" or "any disputes between parties, if they so agree, shall be referred to arbitration" is not an arbitration agreement. Such clauses merely indicate a desire or hope to have the disputes settled by arbitration, or a tentative arrangement to explore arbitration as a mode of settlement if and when a dispute arises. Such clauses require the parties to arrive at a further agreement to go to arbitration, as and when the disputes arise. Any agreement or clause in an agreement requiring or contemplating a further consent or consensus before a reference to arbitration, is not an arbitration agreement, but an agreement to enter into an arbitration agreement in future.

6. In the present case, applying these principles, it is evident that parties contemplated that if any question or difference or dispute would arise between them, in relation to or with respect to the meaning or effect of the contract or with respect to their rights and liabilities, the question would be referred to one of the two named Arbitrators. In the present case, parties did not record a mere possibility of agreeing to an arbitration in future, but there was an affirmative obligation on their part to refer such dispute as would arise to one of the two named persons whose decision, the parties accepted, would be final and binding. Evidently, parties agreed in writing that they would refer any disputes that may arise to arbitration. The decision of the adjudicatory forum consisting of one of the two named Arbitrators was to be final and binding. It is now settled by the above quoted judgment of the Supreme Court that the mere use of the word "arbitration" or "Arbitrator" in a clause is not sufficient to constitute an arbitration agreement, nor would the absence of those words detract from the existence of an agreement when otherwise, the intent of the parties to have their disputes settled by a private adjudication before an arbitral tribunal is made clear. In the present case, there is absolutely no manner of doubt that Clause 21 of the Agreement did constitute an agreement to refer disputes to arbitration.

7. The second defence is that upon the death of the two persons who were named as Arbitrators, the arbitration agreement would not subsist any further. Now, Section 14 of the Arbitration and Conciliation Act, 1996 provides that the mandate of an Arbitrator shall terminate inter alia if he becomes de jure or de facto unable to perform his functions. Section 15 provides that in addition to those circumstances listed out in Sections 13 and 14, the mandate of an Arbitrator shall terminate where he withdraws from office for any reason or by or pursuant to agreement between the parties. Under Sub-section (2) of Section 15 where the mandate of an Arbitrator terminates, a substitute Arbitrator shall be appointed according to the rules that were applicable to the appointment of the Arbitrator being replaced. The provisions in the Act of 1996 can be analysed in contrast with the earlier provisions that were contained in Section 8 of the Arbitration Act, 1940. Section 8(1)(d) provided that parties may serve a notice on the other parties or Arbitrators to concur in the appointment of an Arbitrator or in supplying a vacancy, if any appointed Arbitrator 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. The Court was empowered to act if an appointment was not made within fifteen clear days of the service of the notice. Under the provisions of the present Act of 1996 Section 15(2) specifically provides that where the mandate of an Arbitrator terminates, a substitute Arbitrator shall be appointed according to the rules that were applicable to the appointment of the Arbitrator being replaced.

8. The issue that arises before the Court is of the jurisdiction of the Court to appoint an Arbitrator, when an Arbitrator who is named by the parties refuses or is incapable of acting or has died. There is a decision on the subject of a Learned Judge of the Supreme Court, acting as designate of the Chief Justice of India, in San-A Tradubg Co. Ltd. vs. I.C. Textiles Ltd. Arbitration Applications 8 and 9 of 2005 decided on 28 April 2006. In that case, parties agreed under a Deed of Contract to refer disputes, differences or issues arising under or concerning or in connection with the deed to arbitration of a named Arbitrator. The named Arbitrator expressed his desire to relinquish his role as Arbitrator. The Learned Designate of the Chief Justice of India held as follows :

"It, therefore, follows that in 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 then the provisions of Section 15 would be attracted and it would be for the Court under Section 11(6) to appoint an arbitrator on the procedure laid down in Section 11(6) being followed unless there is an agreement in the contract where the parties specifically debar appointment of any other arbitrator in case the named arbitrator refuses to act. In the present case, I do not find any such stipulation in the contract entered into between the parties whereudner the parties have specifically debarred appointment of a fresh arbitrator if the named arbitrator refuses to act and perform his function as arbitrator. In the absence of any specific condition debarring appointment of a fresh arbitrator, it cannot be said that the arbitration clause in the contract agreement stands obliterated on the named arbitrator's refusal to perform his function."

9. The principle of law which has been laid down in this decision is that unless there is a specific stipulation in the contract under which parties have debarred the appointment of a new Arbitrator if the named Arbitrator refuses to act or perform his function, the arbitration clause in the contract would not stand obliterated and the jurisdiction of the Court to appoint a fresh Arbitrator can be invoked. A decision of Chief Justice M.B. Shah, as His Lordship then was, on an application under Section 11 of the Arbitration and Conciliation Act, 1996 in Smt.Satya w/o.Kailashchandra Sahu vs. Vidarbha Distillers, 1998(2) Bom.C.R. 627 : [1998(1) ALL MR 601] is also of significance. In that case, parties had agreed in a Deed of Partnership to refer their disputes, if any, that may arise to two named Arbitrators and in the event of the death of one, to the sole arbitration of the other. It was urged before the Court that the clause would indicate that the parties did not intend to supply any vacancy if the Arbitrator named in the arbitration agreement could not function. The Learned Chief Justice, while rejecting the contention held as follows :

"In the present case, in view of the clause in the Deed of Partnership, it is clear that there is an arbitration agreement as provided in section 7 read with section 2(1)(a) of the act. When an arbitration agreement makes a provision for appointment of named persons as Arbitrators and when the named persons refuse to act as Arbitrators, then the procedure which is required to be followed is provided in section 11 of the Act, that is to say, if the named persons refuse to act as Arbitrators, the arbitration clause is not wiped out. What is exhausted is the authority of the named persons to act as Arbitrators."

10. The decision holds that the Court would be precluded from exercising its power only if the parties specifically 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.

11. The judgment of Chief Justice M.B. Shah in Vidarbha Distillers was cited with approval in a judgment of a Division Bench of this Court in Khorshed E.Nagarwalla vs. Daryus Soley Panthakey 2010(4) ALL MR 568 : [2010(3) ALL MR 373]. The Division Bench held that if a named Arbitrator died or refused to proceed with the arbitration, the procedure in Section 11(6) of the Act will have to be followed. These two decisions were followed in a judgment of a Learned Single Judge of this Court in Ashok M.Kataria vs. Motiwala Trust for Human Resource Development 2011(2) Bom.C.R. 704 : [2011(7) ALL MR 57].

12. Counsel appearing on behalf of the Respondent, however, sought to place reliance on a judgment of the Supreme Court in S.B.P. & Co. vs. Patel Engineering Ltd. (2009) 10 SCC 293 : [2009(6) ALL MR 1000 (S.C.)]. Now in that case, the arbitration agreement inter alia provided that differences or disputes between the parties shall be referred to two Arbitrators one to be appointed by each party. The arbitration agreement then provided as follows:

"If either party to the difference or dispute shall fail to appoint an arbitrator within 30 calendar days after notice in writing having been given by the parties or shall appoint an arbitrator who shall refuse to act then the arbitrator appointed by the other party shall be entitled to proceed with the reference as a sole arbitrator and to make final decision on such difference or dispute and the award made as a result of such arbitration shall be a condition precedent to any righ of action against any two parties hereto in respect of any such difference and dispute."

Clearly, therefore, the parties stipulated that if one of the two Arbitrators refused to act, then the Arbitrator appointed by the other party shall be entitled to proceed with the reference as a sole Arbitrator. It was in view of this clause that the Supreme Court observed as follows :

"There is nothing in Clause 19 from which it can be inferred that in the event of refusal of an arbitrator to accept the appointment or arbitrate in the matter, the party appointing such arbitrator has an implicit right to appoint a substitute arbitrator. Thus, in terms of the agreement entered into between the parties, Respondent 1 could not appoint Shri S.L. Jain as a substitute arbitrator simply because Shri S.N.Huddar declined to accept the appointment as an arbitrator. The only consequence of Shri S.N.Huddar's refusal to act as an arbitrator on behalf of Respondent 1 was that Respondent 2 who was appointed as an arbitrator by the appellants because the sole arbitrator for deciding the disputes or differences between the parties."

The judgment, therefore, is based on the terms of the agreement as embodied in the arbitration clause.

13. But, in the present case, it has been submitted on behalf of the Respondent that Mr.N. A. Palkhivala and Mr. D.S. Seth were named as Arbitrators in Clause 21 of the Agreement - since the former was the Chairman of the Respondent while the latter was a Director. It has been submitted that both the named Arbitrators were referred to in clause 21, being closely connected with the Respondent and, the intent of the parities was that in their absence, there should be no arbitration at all. The Arbitration Application was amended during the pendency of these proceedings. In paragraph 14A of the Application, the Applicant has stated that at the time when the agreement was drawn up, the Respondent suggested the name of Mr.Palkhivala which the Applicant accepted in view of the fact that Mr.Palkhivala was an eminent jurist and a person of repute. Similarly, it is stated that the Applicant suggested in addition, the name of Mr.D. S.Seth, in view of his familarity and impartiality in all commercial transactions and since the Applicant and its group of Companies had dealt with him prior to entering into the agreement. In a further affidavit of the applicant dated 27 March 2012, reliance has been placed on an affidavit of Mr.Bijoy Kumar Sharma, General Manager (Administration) who has stated that Mr. D.S. Seth was instrumental in the deal with the Respondent and that for the aforesaid reason, he was named as an Arbitrator in the agreement. The issue before the Court is as to whether these circumstances are indicative of the fact that parties agreed that the arbitration should take place only before one of the two named Arbitrators and that in their absence, there would be no arbitration at all. In dealing with the defence which has been set up on behalf of the Respondent, the Court must first and foremost bear in mind the legislative policy which is embodied in Sections 14 and 15 of the Arbitration and Conciliation Act, 1996. Upon the termination of the mandate of an Arbitrator where the Arbitrator inter alia becomes de jure or de facto unable to perform his functions, the statute makes a specific provision for the appointment of a substitute Arbitrator. The termination of the mandate of an arbitrator does not efface the arbitration agreement. Where parties desire that not merely should an arbitration be before a named Arbitrator, but that in the absence of that Arbitrator, there would be no arbitration at all, clear and express language to that effect must be incorporated in the terms of the agrement. In the absence of any prohibition or debarment, there is no reason for the Court to presume an intent on the part of the parties to the effect that a vacancy which arises on account of a failure or inability of a named Arbitrator to act cannot be supplied by the Court under Section 11. Such a consequence would constitute an exception to the principle ordinarily applicable under which the Court has jurisdiction to appoint a fresh arbitrator in place of a named Arbitrator who has died or has refused to act or is incapable of acting. It may well be, that one of the circumstances which was borne in mind by the parties when they named the Arbitrators was that Mr.N. A. Palikhivala was a jurist of repute. It may well also be that Mr.D. S. Seth was familiar with the parties and had been associated in the dealings between them prior to the execution of the agreement. That however, does not give rise to an inference that the parties intended that there should be no arbitration at all if one of the two named Arbitrators was not available. No such words are to be found in the arbitration agreement, nor would the Court presume such an intent in the absence of clear indicative words. On the contrary, the Court must unless parties have expressly preclued such a course being followed, give effect to the policy of the law which is to promote the efficacy of arbitration. The efficacy of commercial arbitration must be preserved particularly when business dealings are based on an agreement which provides recourse to arbitration.

14. On behalf of the Applicant, it was sought to be submitted, relying upon the decision of the Supreme Court in Godhra Electricity Co.Ltd. vs. State of Gujarat, (1975) 1 SCC 199 that in any event in the absence of any ambiguity oral evidence would not be allowed to elucidate the intent of the parties. As a matter of first principle, I have come to the conclusion that parties did not evince a specific intent that in the absence of one of the named Arbitrators, there would be no arbitration or that the arbitration clause would perish.

15. For these reasons, the Arbitration Application will have to be allowed. Mr Justice S.N. Variava, former Judge of the Supreme Court, is appointed as sole Arbitrator under the Arbitration and Conciliation Act, 1996 to adjudicate upon the disputes and differences between the parties. The Arbitration Application is disposed of. There shall be no order as to costs.

16. The Registrar (O.S.) is requested to expeditiously forward a copy of this order to the Sole Arbitrator together with a Memorandum containing the addresses of the parties.

Application allowed.