S.N Andley, J.:— While dealing with this first appeal against order, the learned Single Judge (P.N Khanna J.) did not decide the question about the competency of a unilateral reference. He considered that, —

“this question of unilateral reference to arbitration by one of the parties to an arbitration agreement, the other party having denied the existence of the arbitration agreement, even though unsuccessfully as in this case, or having refused to join the reference, under the relevant provisions *of Chapter II of the Arbitration Act, when disputes arise . . . . .”

was of great importance and he, therefore, referred the said question to a larger Bench. The decision of this question really depends upon the interpretation of the judgment of the Supreme Court reported in A.I.R 1955 Supreme Court 468 in re: Thawardas Pherumal and another v. Union of India (1) and this reference was made because the learned Judge did not agree with the interpretation placed upon this judgment by a Division Bench of the Punjab High Court (Dulat and Harbans Singh JJ.) in the case reported in 1966 (2) Delhi Law Times 123 in re: Madhusudan Limited v. Ram Parkash and another (2).

The facts relevant to the controversy are that the respondent is a member of the Delhi Stock Exchange and is alleged to have entered into certain dealings in securities with the appellant as a result of which certain amounts were claimed by the respondent from the appellant. The respondent appointed Prem Chand, a member of the said Exchange, as his arbitrator and called upon the appellant to appoint his arbitrator. The appellant who is not a member of the said Exchange failed to appoint his arbitrator and thereupon the said Stock Exchange appointed P.S Khambate, another member of the said Exchange, as an arbitrator on behalf of the appellant in accordance with the Rules, Regulations and Bye-laws of the said Stock Exchange. The two arbitrators made their award and filed it in the Court of competent jurisdiction for being made a rule of the Court. The appellant, inter alia, denied the existence of the agreement of reference and asserted that the arbitrators had not been properly appointed.

The arbitration clause appearing in the contract between the parties was in the following terms:—

“In the event of any claim (whether admitted or not), difference or dispute arising between you and me/us out of these transactions the matter shall be referred to arbitration in Delhi as provided in the Rules, Bye-laws and Regulations of Delhi Stock Exchange Association Ltd., Delhi.

This contract constitutes and shall be deemed to constitute as provided overleaf an agreement between you and me/us that all claims (whether admitted or not), differences and disputes in respect of any dealings, transactions and contracts of a date prior or subsequent to the date of this contract (including any question whether such dealings, transactions or contracts have been entered into or not) shall be submitted to and decided by arbitration in Delhi as provided in the Rules, Bye-laws and Regulations of the Delhi Stock Exchange Association Ltd., Delhi.”

The contract between the parties also provided for reference of disputes between a member of the said Exchange and a non-member in the following terms:—

“All claims (whether admitted or not), differences and disputes between a member and a non-member or non-members (the terms ‘non-member’ or ‘non-members’ shall include a remisier, authorised clerk or employee or any other person with whom the member shares brokerage) arising out of or in relation to dealings, transactions and contracts made subject to the Rules, Bye-laws and Regulations of the Exchange or with reference to anything incidental thereto or in pursuance thereof or relating to their construction, fulfilment or validity or relating to the rights, obligations and liabilities of remisiers, authorised clerks, employees or any other persons with whom the member shares brokerage in relation to such dealings, transactions and contracts shall be referred to and decided by arbitration as provided in the Rules, Bye-laws and Regulations of the Exchange.”

In the Supreme Court decision in Thawardas's case, the disputes arose in a contract entered into by Thawardas with the Dominion of India for the supply of 2 crores of pucca bricks which had to be delivered at the kiln site in instalments according to a schedule. The Dominion of India failed to remove the baked bricks which were ready for delivery and removal thereby causing a jam in the kilns and preventing the contractor from placing a fresh stock of unburnt bricks in the kilns with the result that about 88 lacs of unburnt bricks were destroyed by rain. The contractor lodged 17 heads of claim which were referred to the arbitrator who was appointed under clause 14 of the contract. The fifth head of claim was for Rs. 75,900/- as the price of 88 lacs of unburnt bricks that had been destroyed by rain. These bricks were not the subject matter of the contract which was for the supply of baked bricks but the contractor made this claim on the ground that the Government had not removed the baked bricks which were ready for removal and, therefore, delay occurred in the time table and the rains set in with the result that the aforesaid unburnt bricks were destroyed. The Government contended that the damage caused to the unburnt bricks which formed no part of the contract was too remote and that compensation for this loss could not be claimed because of a specific term (clause 6) in the contract that the Department will not entertain any claim for idle labour or for damage to unburnt bricks due to any cause whatsoever. The arbitrator held that clause 6 was not meant to absolve the Department from carrying out their part of the contract and he awarded the contractor Rs. 64,075/-under this head. The Supreme Court held that the arbitrator went wrong in law as his construction of the terms of the contract was at fault. They then posed the question whether the decision of the arbitrator on this point was final despite it being wrong in law. The Supreme Court emphasised that in determining what an error of law apparent upon the face of the award is, —

“a distinction must be drawn between cases in which a question of law is specifically referred and those in which a decision on a question of law is incidentally material (however necessary) in order to decide the question actually referred.

If a question of law is specifically referred and it is evident that the parties desire to have a decision from the arbitrator about that rather than one from the Courts, then the Courts will not interfere, though even there, there is authority for the view that the Courts will interfere if it is apparent that the arbitrator has acted illegally in reaching his decision, that is to say, if he has decided on inadmissible evidence or on principles of construction that the law does not countenance or something of that nature.”

They further observed, —

“If, therefore, no specific question of law is referred, either by agreement or by compulsion, the decision of the arbitrator on that is not final however much it may be within his jurisdiction, and indeed essential, for him to decide the question incidentally.”

Having made these observations, the Supreme Court examined whether the arbitrator in the said case was specifically asked to construe clause 6 of the contract or any part of the contract, or whether any question of law was specifically referred. They stressed the word “specifically” because “parties who make a reference to arbitration have the right to insist that the tribunal of their choice shall decide their dispute according to law, so before the right can be denied to them in any particular matter, the Court must be very sure that both sides wanted the decision of the arbitrator on a point of law rather than that of the Courts and that they wanted his decision on that point to be final.”

On facts the Supreme Court opined that there was no specific reference on a point of law as required by the law of arbitration because there was no reference at all and the question was introduced incidentally by the Dominion Government to repel the claim made by the contractor in general terms under the fifth head of claim and because the submission was of the contractor alone. They then went on to make the following observation which has led to this reference to a larger Bench.:—

“A reference requires the assent of ‘both’ sides. If one side is not prepared to submit a given matter to arbitration when there is an agreement between them that it should be referred, then recourse must be had to the Court under section 20 of the Act and the recalcitrant party can then be compelled to submit the matter under sub-section (4).

In the absence of either, agreement by ‘both’ sides about the terms of reference, or an order of the Court under section 20 (4) compelling a reference, the arbitrator is not vested with the necessary exclusive jurisdiction.

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 a point of law in the course of the proceedings is not enough.”

In the Punjab case [1966 (2) Delhi Law Times 123] the contention was that the meaning of the above quoted passages from. Thawardas's case was only this that a specific question of law cannot be referred to an arbitrator unless both parties agree that it will be so referred. This contention was repelled by the Division Bench on the ground that although the conclusion of the Supreme Court was with reference to a question of law, the observations were of a general nature applicable to any given matter about which there may be a previous agreement to refer to arbitration. The Divisionl Bench explained the decisions reported, in A.I.R 1956 Allahabad 377 in re: Balika Devi v. Kedar Nath 3; A.I.R 1963 Allahabad 242 in re: Om Parkash v. Union of India; A.I.R 1963 Bombay 157 in re: M/s. Vallabh Pitte V. Narsinghdas Govendram Kalani 5 and A.I.R 1964 Allahabad 108 in re: Mangal Prasad V. Lachman Prasad 6 The conclusion of the Division Bench was that a reference must be with the consent of both the parties, and in the absence of such a consent only a Court's order under the arbitration Act, can give jurisdiction to the arbitrator and, apart from these two contingencies, the arbitrator has no jurisdiction.

The question is whether the view of the Supreme Court quoted earlier beginning with the words “a reference requires the assent. . . .” and ending with the words “the arbitrator is not vested with the necessary exclusive jurisdiction” are with respect to all arbitrations or with respect to an arbitration only with reference to a question of law. The Supreme Court has stated in the earlier part of their judgment that “these bricks were not the subject-matter of the contract but the contractor put his claim in this way”, the reference being to unburnt bricks. That being so, the claim with respect to the unburnt bricks would not arise out of the contract and would not, therefore, be referable under clause 14 thereof which contained the arbitration clause. Therefore, a question of law in relation to the claim with respect to these unburnt bricks would also not arise out of the contract and would not be referable under the aforesaid clause 14. In these circumstances, there would be no question of making any application under section 20 of the Arbitration Act because that section pre-supposes the existence of an arbitration agreement. A Court will not have any jurisdiction to entertain an application under section 20 of the Arbitration Act without the existence of an arbitration agreement and will not be entitled to make a reference to an arbitrator. It, therefore, follows that the above quoted observation of the Supreme Court requiring recourse to section 20 of the Arbitration Act could not have been made with reference only to the question of law raised in the appeal. There does not appear to be any doubt that this quotation is a general quotation which covers cases not only of reference of a question of law to arbitration but of all references to arbitration. The last paragraph in the said quotation is only an application of the general observation in the two previous paragraphs to the question of law which was sought to be raised in that case.

In our opinion, no inference can be drawn contrary to the said inference by the mere use of the word “exclusive”. The jurisdiction of the arbitrator in all cases of arbitration whether upon a question of law or otherwise is exclusive in the sense that the jurisdiction of the Courts is ousted except to the extent provided in the Arbitration Art. The first two paragraphs of the aforesaid quotation proceed on the basis that there is an agreement between the parties to submit a given matter to arbitration. Therefore, the existence of an agreement to submit a given matter to arbitration is not enough to make a reference to arbitration a valid reference unless both sides have assented to the reference at the time when the reference is to be made and, in the absence of a reference of the dispute by both parties, approach to the Court under section 20 of the Arbitration Act is, in our view of the aforesaid observations of the Supreme Court, a must.

Now, there may be an agreement to refer present disputes or disputes which have arisen to arbitration. In such a case, the agreement will necessarily have to be mutual and it will be a composite document not only containing the “arbitration agreement” but also the “reference”. In such a case, no approach to the Court will be necessary under section 20 of the Arbitration Act for making a reference to arbitration unless there is no agreement between the parties upon the arbitrator to whom the reference is to be made in which case the parties may proceed either under Chapter II or by means of an application under Chapter III of the Arbitration Act.

In cases where a contract between the parties contains what may be called an arbitration clause to refer future disputes to arbitration the agreement is merely an agreement to submit future differences to arbitration within the meaning of section 2 (a) of the Arbitration Act. If disputes arise in the future, a reference has to be made to arbitration within the meaning of section 2 (e) of the Arbitration Act and at this stage there should be a consent of both the parties. If the consent exisit, it would not be necessary to proceed under Chapter III by making an application under section 20 of the Arbitration Act and the parties, or one of the parties can proceed under Chapter II of the said Act. This view reinforces our earlier view that the above quoted observations of the Supreme Court are of general application and do not contemplate a unilateral reference.

The law laid down by the Supreme Court is binding on all Courts. We are clearly of the opinion that the said quotation covers all references to arbitration and not merely a reference to arbitration only on a question of law. We agree, with respect, with the view taken in the aforesaid decision of the Punjab High Court and because we are bound by the law laid down by the Supreme Court, we do not consider it necessary either to examine the relevant provisions of the arbitration act or the other decisions referred to earlier.

The case will now be sent back to the learned Single Judge for decision in the light of this opinion. Costs of this reference shall be costs in the case.

Reference answered