Mathai and Others vs Mani

Mathew, J.—This civil revision petition was referred to a Division Bench for decision by one of us, and it arises from an order passed by the lower court u/s 8 of the Indian Arbitration Act. The respondent, who was the petitioner in the court below filed an application praying that an arbitrator may be appointed for deciding the six matters mentioned in the application. There were five counter- petitioners to the application. The petitioner in the court below and the counter-petitioners there, have entered in to a partnership under an agreement dated 1--12--1961 for running a business in engineering contracts and supplies. According to the terms of the agreement the works of contract undertaken by the partnership have to be properly executed and accounts maintained and the profit and loss of every year to be taken after submission of accounts for auditing to the auditors approved by the partners. The parties got on amicably for some time, but subsequently differences arose among them. Alleging that counter-petitioners 2 to 5 are only the nominees of the 1st counter-petitioner, that the 1st counter petitioner is managing the partnership affairs without consulting the petitioner, and that the 1st counter-petitioner has diverted the funds of the partnership unauthorisedly to other purposes without consulting the petitioner, the petitioner sent a registered notice on 14--7--63 expressing his intention to retire from the partnership after the expiry of three months in accordance with the provisions contained in the deed of partnership and requesting the 1st counter-petitioner to concur in the appointment of an arbitrator to decide the matters in dispute between the parties. As there was no agreement among the partners with regard to the nomination of an arbitrator, the petitioner filed the petition for the appointment of an arbitrator to decide these matters. The petition was opposed by the counter-petitioners. Their case was that the business of the partnership was being carried on by the 1st counter-petitioner in consultation with the petitioner, that the funds of the partnership have not been diverted for other purposes, that the 1st counter-petitioner has intimated that there was no objection for the appointment of an arbitrator to settle the disputes which may arise in the course of the winding up of the partnership, that the counter-petitioners 3 and 4 have sent similar notices, that Section 8 of the Act was not applicable, and that the majority of the partners have nominated an arbitrator in accordance with the provisions of the partnership deed. Clause (17) of the partnership agreement provides:

All disputes between the Partners in relation to any whatsoever touching the Partnership affairs or the construction of this agreement and whether before or after the termination of the agreement shall be referred to a single arbitrator to be appointed by the majority of the partners and such arbitrator shall have full power at his discretion to dissolve the Partnership.

According to the petitioner the Court was competent to appoint an arbitrator as the counter-petitioners have failed to concur in the appointment of an arbitrator in pursuance of the notice sent by him. The main question which arose for consideration in the court below was whether the provisions of Section 8 of the Arbitration Act were attracted and the court was competent to appoint an arbitrator to decide the disputes between the parties. The court below came to the conclusion that an arbitrator should be appointed under the provisions of Section 8 (1) (a) of the Arbitration Act, without, however, adverting to the scope of the section and appointed an arbitrator. It is against this order that this revision petition has been filed.

It is unnecessary in the circumstances of this case to consider the other points in dispute between the parties in the view which we are taking about the applicability of Section 8 (1) (a) to the facts of this case. Section 8 of the Arbitration Act reads as follows:

(1). In any of the following cases:

(a) Where an arbitration agreement provides that the reference shall be to one or more arbitrators to be appointed by the consent of the parties and all the parties do not after differences have arisen, concur in the appointment or appointments; or

(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; or

(c) Where the parties or the arbitrators are required to appoint an umpire and do not appoint him;

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.

(2) If the appointment is not made within fifteen clear days after the service of the said notice, the Court may, on the application of the party who gave the notice and after giving the other parties an opportunity of being heard, appoint an arbitrator or arbitrators or umpire, as the case may be, who shall have like power to act in the reference and to make an award as if he or they had been appointed by consent of all parties.

In order that section may apply the arbitration agreement must provide for reference to one or more arbitrators to be appointed with the consent of the parties, and that all the parties do not, after differences have arisen, concur in the appointment or appointments. Sub-section (a) of Section 8 (1) can apply only to a case where the arbitration agreement provides for reference to an arbitrator or arbitrators without specifying the method of appointing him or them. In such a case the concurrence of all the parties would be necessary for his or their appointment or appointments. Even if it is not stated in the arbitration agreement that the appointment of an arbitrator is to be made with the concurrence of the parties to the agreement, it has to be implied that such was the understanding between them. So whether it is expressly mentioned in the arbitration agreement that the consent of all the parties is required for the appointment of an arbitrator or not it has been held that such a consent ought to be implied. In this case, according to clause (17) of the partnership agreement an arbitrator has to be appointed by a majority of the partners and therefore it has to beheld that section 8 (1) (a) will not apply as the concurrence of all the partners is not required for his appointment after the differences have arisen between the parties. Sub-section (2) of section 8 makes it clear that clause (1) (a) of the section visualises a case where the arbitrator has to be appointed with the consent of all the parties. Sub-section (2) says that when a court makes an appointment on the failure of the party or parties to make the appointment within 15 clear days after the service of the notice, the effect of that appointment is that the arbitrator has been appointed with the consent of all the parties.

In India Hosiery Works Vs. Bharat Woollen Mills Ltd., Chakravarti C. J., and Sankar J., have held that section 8 (1) will apply only to a case where the consent of all the parties is necessary to the appointment of an arbitrator after differences have arisen between the parties. Chakravarti C. J., said:

Consent of the parties is the very essence of arbitration. Where the agreement provides for more than one arbitrator and they are not each to be appointed by all parties, it is necessary to provide expressly which of them will be appointed by whom, as in the case of the agreements contemplated by Ss. 9 & 10. But where different arbitrators are not to be appointed by different parties, and the intention is that all of them must concur in the appointment of the sole arbitrator or each of the arbitrators where there are more than one, it is not necessary to make any express provision in the agreement that the appointment or appointments are to be made by consent of the parties. Without such consent, no arbitrator can be appointed or can act in such a case.

where therefore, the agreement does not assign the right of appointment distributively to different parties in respect of different arbitrators, it is inherent in the agreement that the appointment of the arbitrator or each of the several arbitrators must be by the consent of all parties. There may be an express provision to such effect, but even in the absence of any express provision, such a provision must be taken to be necessarily implied. It is for that reason that were the agreement does not specify the number of arbitrators, nor specified the mode of appointment, the Court first takes the agreement as providing for reference to a single arbitrator by reason of the provisions of Rule 1 of Schedule 1, then takes the mode of appointment intended necessarily to be appointed by consent of the parties and, next, if it finds that the parties cannot concur in the appointment of an arbitrator, it appoints one itself. It takes and can take agreement to be an effective agreement, because the mode of appointment by consent of the parties is implied in it and it is not required to supply the mode of appointment and does not require any provision enabling it to do so

In C. Raj v. Union of India (A. I. R. 1957 JK 27) it was held that section 8 (1) (a) will not apply to a case where the parties have provided for the method of appointment of the arbitrator in the agreement. The agreement is that case specifically provided that, "should any dispute or difference arise out of or concerning the subject matter of these presents or any covenant clause or thing therein contained or otherwise arising out of this lease, the same shall be referred to an arbitrator to be appointed by the Government of India and the decision of the said arbitrator shall be conclusive and binding on the parties thereto. The provisions of Arbitration Act, 1940, shall apply to such arbitration". As the Government of India failed to nominate an arbitrator in pursuance of this clause an application was filed under sections 20 and 8 (1) (a) of the Act for appointing an arbitrator. The court held that Sec. 8 (1) (a) was not attracted as the arbitration agreement provided for reference of the dispute between the parties to an arbitrator to be appointed by the Government of India.

The applicant had agreed to an absolute power being given to the Union of India for making the appointment of an arbitrator whose decision had to be final, and binding upon the parties. A reference to S. 8 of the Arbitration Act would make it clear that it is only when common consent of the parties is needed for the appointment of an arbitrator and that there is disagreement between the parties that the provisions of S. 8 would be attracted". (See para 3 at page 28).

In Subal Chandra Bhur Vs. Md. Ibrahim and Another, S. R. Das J. as he then was, indirectly considered the scope of Section 8 (1) (a). In that case there were three parties to a deed of partnership which provided for reference of the disputes among them to a single arbitrator in case the parties agree upon one, otherwise to two arbitrators, one to be appointed by each party to the difference. It was held that the agreement cannot be construed as an agreement to refer the disputes to a single arbitrator simpliciter so as to attract the provisions of Section 8 (1) (a) of the Act, that reference to a single arbitrator is conditional on all the parties agreeing to do so, that as there is an alternative mode of appointment to two arbitrators provided in the agreement. Section 8 (1) (a) will not apply, and that to construe the arbitration agreement in such a way as to cancel the alternative provision altogether will amount to the making of a new contract for the parties, which is not permissible.

These rulings, in our opinion, would show that Section 8 (1) (a) can apply only to a case where the parties agreed to refer the matter to an arbitrator without mentioning the name of the arbitrator or the method of appointing him. In such a case the appointment can only be made with the concurrence of ail the parties and if there is no concurrence among the parties, the court is given the power to appoint one. Mr. Krishnamurthy Iyer, appearing for the respondent, has brought to our attention the ruling reported in Union of India(UOI) Vs. D.P. Singh, in support of his contention that Section 8 (1) (a) will apply to the case in hand. There the arbitration agreement provided that the difference between the parties shall be settled by an arbitrator to be nominated by the General Manager of the Northern Railway. The General Manager in spite of receiving the notice to appoint an arbitrator did not take any steps for appointing him. The opposite party thereupon filed an application u/s 8 of the Act for appointment of an arbitrator by the court and for referring the matter in dispute to his arbitration. The court held that Section 8 (1) (a) applied to the facts of the case and ''appointed an arbitrator. We are unable to agree with the reasoning given by the learned Judge for applying Section 8 (1) (a) to the facts of that case. The only reason given by the learned Judge for coming to the conclusion that Section 8 (1) (a) applied is that by the agreement of submission it was provided for the appointment of the arbitrator by the General Manager, Northern Railway, and that his decision would be final, conclusive and binding on the parties. The learned Judge observed at page 230 as follows:

Only the General Manager of the petitioner had to nominate an officer of the Railway Administration as the sole arbitrator, and, on such a nomination by the General Manager, the arbitrator so nominated was to, and must, be deemed to be the (arbitrator appointed by consent of the opposite party also. By this Arbitration Clause, the opposite party, so to say, surrendered his consent and gave his consent in advance to the General Manager of the petitioner and left to his discretion and delegated his own consent and power to appoint an arbitrator to him, who was given the sole power to nominate the arbitrator and on his nomination of such an arbitrator under the terms of the arbitration agreement, the arbitrator shall be deemed to have been appointed as an arbitrator ''by consent of the parties'' as contemplated by and within the meaning of S. 8 (1) (a) of the Act. It was, therefore, the duty of the General Manager to nominate an officer of the Railway Administration for the arbitration of the respective rights and obligations of the parties in respect of the disputed two wagons of sand.

We think that the reasoning in the judgment fails to give due weight to the terms of Section 8 (1) (a) especially the latter part of it. Looking at Section 8 (1) (a) it is clear that it contemplates (1) an agreement for arbitration containing a clause (for referring the matter in dispute to an arbitrator or arbitrators without specifying the method of appointing him, or them (2) that the appointment of the arbitrator or arbitrators is to take place after differences have arisen between the parties, and (3) that the concurrence of all the parties is required either expressly or impliedly to the appointment of the arbitrator or arbitrators. It is only if these conditions are satisfied that Section 8 (1) (a) would come into play. With respect we think that the ruling referred to above does not lay down the correct proposition of law. We therefore hold that the court below had no jurisdiction to entertain the application u/s 8 (1) (a) and appoint an arbitrator as the conditions necessary to be satisfied were not fulfilled in this case.

The main question to be considered in this case was whether Section 8 (1) (a) would apply to the facts of this case. The court below has not considered that question at all, and without considering that question, has arrived at the conclusion that the application was maintainable. We think that the lower court had no justification in making the assumption that Section 8 (1) (a) would apply to the facts of this case and in appointing an arbitrator. We think that the order discloses a jurisdictional error. We therefore set aside the order of the court below and allow this revision Petition. In the circumstances, we do not make any order as to costs.