Western Coalfields Ltd. and another vs Harichand Rai (A Registered Firm)

M.S. Deshpande, J.—By these two revision applications, the applicants challenge the orders dated 17.12.1979 and 29.7.1980 by which the trial Courts, acting u/s 8 of the Indian Arbitration Act, appointed arbitrators by virtue of clause 9 which was an arbitration clause in two agreements between the applicants and the opponents in the two cases.

In Civil Revision Application No. 107 of 1980, the position was that the parties entered into an agreement on 4.6.1976 for transporting sand for Chanda Rayatwari Colliery which was owned by the applicants. The work commenced and was completed on 27-1-1977. The Final Bill was also paid to the opponent in that case and the bank guarantee for Rs. 50,000/- was also released. However, about one-and-a-half years after that was done, the opponent�M/s Harichand Rai sent a notice dated 16-9-1978 contending that there was a dispute and calling upon applicant No. 1 to appoint an arbitrator for settlement of the alleged dispute. A reply was sent by the applicants on 28-2-1979 contesting the notice. An application was thereafter made by the opponent for appointment of an arbitrator to the learned Judge, and by an order passed on 17.12.1979, Shri Kamal D. Kanal, an Engineer from Nagpur, was appointed as an Arbitrator and he was directed to file his award within four months from the date of the order.

In Civil Revision Application No. 470 of 1980, the transportation contract between the opponent�Tilakraj Kesarlal Thapar and the applicants was executed on 13.4.1978. Tilakraj Thapar was to furnish a security of Rs. 57,120/�, for due performance of the contract. As he was unable to perform the contract within the time prescribed, the time being of the essence of the contract, a notice was sent to him. In order to avoid forfeiture of the bank guarantee, Tilakraj Thapar sent a notice on 1.4.1980 to the applicants, urging that there was a dispute regarding the contract and that he was entitled to Rs. 50,000/- as damages and asking applicant No. 1 to appoint an Arbitrator, pursuant to clause 9 of the agreement dated 13.4.1978. Applicant No. 2, by his letter dated 24.4.1980, repudiated the claim and Tilakraj Thapar filed an application for appointing an arbitrator. Though this application was resisted, an order came to be passed on 17-12-1979 appointing Shri R.K. Tambe as an Arbitrator and directing him to submit his award.

These two orders are being challenged by the two revision applications on identical grounds. The arbitration clause No. 9 in the two agreements runs as follows:

Arbitration:

If any dispute, question of controversy, the settlement of which is not herein specifically provided for, shall any time arise between the Western Coalfields Ltd., and the contractor/Contractors, touching this agreement or any clause of anything herein contained on the construction thereof or any matter connected with this agreement or the operation of the same or the rights or duties or liabilities of either party, then and in ever) such case either party, shall forthwith give to the other notice of such difference and such dispute or difference shall be referred to an arbitrator nominated by the Managing Director of the Western Coalfields Ltd. and the award of such arbitrator shall be final and binding on the parties. Progress of the work shall not be suspended or delayed on account of the reference of any dispute or difference to arbitration under this clause.

The trial Courts took the view that the opponents were entitled, by virtue of section 8 of the Arbitration Act, to appoint an arbitrator. 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 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 that the vacancy should not be supplied and as the case may be, the parties or the arbitrators do not supply, or the person designated does not under sub-section (3) of section 4 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 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 the instant case, the dispute or difference had to be referred to an arbitrator nominated by the Managing Director of the Western Coalfields Limited. The question that arises is whether by virtue of this clause, it could be said that an arbitrator was to be appointed by consent of the parties so as to invoke the application of section 8(1)(a) of the Arbitration Act. As I read section 8(1)(a), it seems to me that it refers to the actual appointment of the arbitrators by consent, which means that for the appointment of the individual arbitrators, the consent should be available.

On behalf of the opponents, reliance was placed on the observations in Union of India(UOI) Vs. D.P. Singh, , State of Orissa Vs. Gobind Choudhury and Sons, , Surendranath Paul Vs. Union of India (UOI), , State of Rajasthan Vs. M/S Mehta Chetan Dass Kishan Dass 1978 R.L.W. 380, Union of India (UOI) Vs. Harpal Dass Madhyani, , A.K. Ghosh Vs. State of West Bengal 1975 (1) Cal L.J. 53 and Chander Bhan Harbhajan Lal Vs. State of Punjab, .

In Union of India Vs. D.P. Singh, it was observed that it is inherent in a case where a party has the sole power under an agreement to appoint the only arbitrator, that the nomination of the arbitrator by the party who is given the sole power to appoint him shall be deemed to have been made by the consent of both the parties and hence it was not necessary to make any express provision that the appointment should be made by the consent of the parties. Reliance was placed by the learned Judge for this view on the observations in India Hosiery Works Vs. Bharat Woollen Mills Ltd., But a look at the arbitration agreement in the Calcutta case would show that there what was agreed was that all disputes whatsoever arising in or out of or in connection with the said contract or arising in any way whatsoever in connection with any other contract for the supply of goods by the Company to the Buyers shall be referred to arbitration at Calcutta. The decision of its Tribunal of Arbitration shall be final and binding on both parties, either of whom may make the same a Rule of Court. There was nothing in the agreement to exclude the First Schedule, and the question was how that single arbitrator was to be chosen, and it was held that an arbitration agreement, neither specifying. the number of arbitrations, nor specifying the mode of appointment, was perfectly effective, and where the parties do not concur in making an appointment, it could be made by the Court. Considering the plain meaning, which is obvious from the provisions of section 8(1)(a) of the Arbitration Act, I find it difficult to agree with the view taken by the learned Judge in Union of India(UOI) Vs. D.P. Singh, .

In State of Orissa Vs. Govinda Choudhury (Supra), it was observed that the crucial test as to whether consent could be implied in the agreement itself was to find out if any discretion was left to one of the parties to the agreement to object to the actual selection of arbitrator when the the option was exercised. There, the arbitrator was to be nominated by the concerned Chief Engineer. The learned Judge followed the test as prescribed in Surendra Nath Paul Vs. Union of India (Supra). There the arbitrator under the arbitration clause was to be the Secretary to the Government of India, Ministry of Works, Housing and Supply and if the Secretary to the Government of India was unable or unwilling to act, the arbitrator was to be some other person appointed by the Secretary to the Government of India. In fact, as the facts stated there would show that the dispute had been referred to the Secretary to the Government of India, but no reply was received from him and then an application was made to the Court for the appointment of an arbitrator u/s 8 of the Arbitration Act. During the pendency of the application, the Secretary Secretary appointed an arbitrator. The question raised was, once the power was exercised by the Secretary by appointing one Shri Desai as the arbitrator, his power was exhausted, and this contention was negatived: The position is made clear by the observations in paragraph No. 17 of the report that if it were to be held that the power of the Secretary was exhausted after the appointment of Shri Desai and the second appointment of Shri Iyer could not be made, still there appeared to be no impediment to arbitration because the Court in the circumstances can make an appointment of the Arbitrator u/s 8(1)(b) of the Arbitration Act. It is apparent from the observations in para�6 in State of Orissa Vs. Gobind Choudhury and Sons, that the Court proceeded on the basis that there was an implied consent amongst both the parties that the concerned Chief Engineer would make the selection out of the two groups referred to in the arbitration clause and, therefore, the agreement came within the ambit of section 8(1)(a) of the Act.

In State of Rajasthan Vs. M/S Mehta Chetan Dass Kishan Dass, (Supra), the learned Judge relied on the observations in Union of India(UOI) Vs. D.P. Singh, and Chander Bhan Harbhajan Lal Vs. State of Punjab, . Reliance was placed on those very cases also in Union of India (UOI) Vs. Harpal Dass Madhyani, , and it, therefore becomes necessary to understand what was the proposition laid down by their Lordships of the Supreme Court in Chander Bhan Harbhajan Lal Vs. The State of Punjab (Supra). There the arbitration clause in a contract for construction work provided that in the matter of dispute, the case shall be referred to the Settlement Committee consisting of a Superintending Engineer, an officer of the Finance Department of the rank of at least Deputy Secretary and an Accounts Officer, all to be nominated by the Government for arbitration whose decision will be final. On a dispute arising the State Government appointed the first committee who took up the dispute but before the conclusion of its work the Government unilaterally abolished the committee and subsequently appointed the second committee who entered upon arbitration and passed the award. The appellant thereupon challenged the validity of the award and got it set aside through a civil suit and the second committee also ceased to function. Thereafter the Government gave notice u/s 8(1) Arbitration Act to the appellant to concur in the appointment of a fresh committee to arbitrate the matter and the appellant not having replied, applied u/s 8(2) of the Act and the Court appointed the fresh committee suggested by the Government. Their Lordships observed that on their finding that the Government was entitled to appoint a committee under a new agreement, the Government could have very well appointed a committee by itself without coming to Court. But may be by way of abundant caution, the Government came to the Court and the Court appointed a committee as suggested by the State. It was found that u/s 8, the Court was entitled to act and appoint a committee, and when the second Settlement Committee ceased to function the Committee became incapable of acting and, therefore, it was within the competency of the Court to proceed to appoint a new committee. It was, therefore, observed that equally untenable was the contention that section 8 was not applicable to cases where the condition stipulated the appointment of a Settlement Committee by one of the parties. It is apparent that their Lordships were considering a case which fell u/s 8(1)(b), of the Arbitration Act which enabled the Court, if any appointed arbitrator or umpire neglected or refused to act, or was incapable of acting or died, to serve notice on the other parties or arbitrators. The provisions of clauses (a), (b) & (c) of section 8(1) of the Arbitration Act are disjunctive and sub-section (2) of section 8 applies to any of the three contingencies mentioned therein.

On behalf of the opponent, reliance was placed on the observations of their Lordships which are as follows:�

Equally untenable is the contention that section 8 is not applicable to cases where the condition stipulates the appointment of a settlement committee by one of the parties.

That submission there was made relying on the wording of the section that 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. Their Lordships observed that this part of the section, no doubt, contemplates two parties, but the section cannot be read as not being applicable where the agreement provides for the nomination of the committee by one of the parties, for the section itself, says that any party may serve the other parties. "May serve the other parties" will include in serving other parties in cases in which the service on the other parties is not contemplated.

But what is overlooked is that these observations were made in respect of the provisions which would apply to any one of the three clauses (a), (b) & (c) and not particularly to clause (a). Their Lordships were clearly not considering the provisions of clause (a) of section 8(1) and the proposition laid down in the State of Rajasthan Vs. M/s Mehta Chetan Das (Supra) and Union of India Vs. MIS Harpal Dass (Supra) with respect, cannot be accepted.

On the other hand, it was held in Brij Bhushan Lal Vs. Chief Engineer, North Western Zone (Central Government) and Another, that section 8(1)(a) will be attracted only if the arbitration agreement specifically provides that the appointment of the actual person as an arbitrator must have the consent of both the parties. It will not be enough if the parties agree only to the person or authority who will subsequently appoint an arbitrator, even if he is told to make only that one who had some special qualifications without, of course, mentioning the particular individual. This was also the view taken in Sunil Mukherjee Vs. Union of India (UOI), where a Division Bench of that Court held that section 8 was applicable only in a case where the arbitration agreement provided for reference to arbitrators to be appointed by consent of parties. In C. Rai Vs. Union of India (UOI), where the arbitration agreement provided that one of the parties alone had the power to appoint an arbitrator, it was held that the other party''s consent or no consent was immaterial and that clause (a) of section 8(1) (gives power to a Court to appoint an arbitrator on failure of the parties to do so, where there is a provision in the arbitration agreement for appointment of an arbitrator by consent of the parties, and all the parties do not concur in the appointment of an arbitrator.

It follows, therefore, that clause (a) of section 8(1) will have application only when the agreement provides that the arbitrators are to be appointed by the consent of the parties, which means that the individual arbitrators are to be appointed by consent, which is quite different from their nomination by one of the parties, in pursuance of the express terms of the agreement. I am fortified in this by an unreported decision of a learned single Judge of this Court in Union of India Vs. New India Conduction Company F.A. No. 128 of 1983 decided on 26.10.1983 Having regard to the language, of the arbitration clause here under which the dispute or difference had to be referred to an arbitrator nominated by the Managing Director of the Western Coalfields Limited, it would not come within the purview of section 8(1)(a) of the Arbitration Act.

In this view of the matter, the orders passed by the learned Judges of the Courts below in the two cases cannot be supported. The applications were clearly not maintainable u/s 8(1)(a) of the Arbitration Act.

In the result, both the revision applications are allowed. The orders passed by the Courts below are set aside and the applications are dismissed. There will, however, be no order as to the costs throughout.

In Civil Revision Application No. 470 of 1980, there will be an order permitting the applicants to en cash the bank guarantee, if it is realisable under the contract.