Zenith Fire Services (India) Pvt. Ltd., Mumbai v. Charmi Sales, Ahmedabad .

1. The Petitioner, original Respondent, has challenged an ex parte Award dated 31 October, 2011 passed by the sole Arbitrator by invoking section 34 of the Arbitration and Conciliation Act, 1996 (for short, Arbitration Act).

2. The basic events and dates, as per the Petitioner, are as under:

On 18 October, 2007, an agency Agreement was executed between the Petitioner and the Respondent for clearing and forwarding of their products at different locations in Gujarat. On 4 September, 2010, an agency Agreement was terminated by the Respondent. Therefore, the Petitioner was constrained to invoke the Bank Guarantee.

3. On 16 June, 2011, Advocate for the Respondent appointed Shri Shelar as the sole Arbitrator. The learned Arbitrator assumed unilaterally his appointment and on 30 June, 2011 addressed a letter to the Petitioner and the Respondent fixing up the schedule of hearing. Upto 14 September, 2011, the correspondences were exchanged and objections were raised as to the appointment of the Arbitrator.

4. On 8 October, 2011, the Petitioner questioned the jurisdiction and maintainability of the arbitral proceedings. On 10 October, 2011, the learned Arbitrator directed the representative of the Petitioner to furnish the copy to the Respondent. On 13 October, 2011 and 17 October, 2011, the learned Arbitrator conducted the proceedings without notice to the Petitioner. The order was passed on Exhibit 25. The same was not served until certified copy thereof was delivered to the representative of the Petitioner. On 21 October, 2011 and 25 October, 2011, the learned Arbitrator conducted the proceedings without notice to the Petitioner. On 31 October, 2011, the impugned Award was passed.

5. On 11 November, 2011, the Respondent's Advocate forwarded the copy of the Caveat and from that, the Petitioner learnt about passing of the Award. On 14 November, 2011, the Petitioner, by his Advocate's letter, placed the correct facts on record to the Advocate for the Respondent and requested for certified copy of the entire proceedings. On 21 November, 2011, the certified copy of the proceedings was handed over to the Petitioner. On 17 February, 2012 this Petition under section 34 is filed.

6. The relevant clause 25 of the Carrying and Forwarding Agency Agreement dated 18 October, 2077 (the agreement) is as under:

“25 Disputes and Jurisdiction.

All disputes and questions arising whether during the continuance of this Agreement or any time after pertaining to this agreement between the parties hereto or between the legal representatives of either or both the parties, shall be referred to arbitration to be conducted in accordance with the Arbitration and Conciliation Act, 1996. The Arbitration will be conducted by a sole Arbitrator with the mutual consent of the parties. In case of difference between the parties, with reference to the arbitrator, each party shall nominate one arbitrator and a third appointed by mutual decision of the two arbitrators the venue of the arbitration will be Mumbai. And for all matters connected with this Agreement the Courts in Mumbai shall only have the jurisdiction.”

7. Both the counsel read and referred various provisions of the arbitration act and specifically sections 4, 11, 12, 13(2), 16 and 34.

“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 noncompliance 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.

11 Appointment of arbitrators (1)

(2) …………….

(3) …………..

(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.

13 Challenge procedure (1)

(2) Failing any agreement referred to in sub-section (1), a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of any circumstances referred to in sub-section (3) of section 12 send a written statement of the reasons for the challenge to the arbitral tribunal.

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) …….

(4) …….

(5) The arbitral tribunal shall decide on a plea referred to in subsection (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.”

8. The learned counsel appearing for the Respondent has relied on the following judgments in support of the Award.

(1) (2009) 2 SCC 337 : AIR 2009 SC 357, Bharat Sanchar Nigam Ltd. v. Motorola India Pvt. Ltd.

“18 Pursuant to section 4 of the Arbitration and Conciliation Act, 1996, a party who knows that a requirement under the arbitration agreement has not been complied with and still proceeds with the arbitration without raising an objection, as soon as possible, waives their right to object.”

2) 2007 (1) Mh.L.J 825 : 2007 (1) ALL MR 148, Indian Oil Corporation Ltd. v. Artson Engineering Ltd.

This was cited to the proposition that grounds not urged before Arbitrator cannot be considered for the first time by the High Court; and the Arbitrator does not have jurisdiction to make an Award in relation to the claims which are not notified.

3) 2007 (5) Mh.L.J (S.C) 441 : 2007 ALL SCR 2282, Gas Authority of India Ltd. v. Keti Construction (I) Ltd,-

This was in reference to the scheme and purpose of section 16 of the Arbitration Act whereby it is reiterated by the Supreme Court that objection in respect of jurisdiction must be raised at the beginning and, therefore, if not raised, it cannot be permitted to be raised in section 34 Petition for setting aside the Award unless good reasons are shown.

4) 2007 (5) Mh.L.J 230 : 2007 (3) ALL MR 418, Ganesh Benzoplast Ltd. v. Saf Yeast Company Ltd.

This judgment also deals with the aspect of jurisdiction of Arbitral Tribunal to rule on its own jurisdiction, including validity of agreement and/or exclusion of other part of the disputes.

Thereby made arguments supporting the award.

9. Though asked for by letter dated 16-6-2011, the Petitioner never gave consent to appoint Mr. Shelar as an Arbitrator. Mere sending a copy of the Respondent's letter to Arbitrator itself cannot be termed as implied consent as there was no specific objection forwarded. The consent given by the Arbitrator by letter dated 24-6-2011 to the Respondents Advocate and not to the Petitioner is also not sufficient to say that the Arbitrator was appointed by consent of the parties. Even the letter issued by the Arbitrator dated 13-6-2011 whereby directed the parties to file statement of claim and a compilation of documents; and further fixing the date of hearing; and further disclosing to be an independent person that itself is not sufficient to say that the consent was obtained, directly or impliedly, of the Petitioner. Merely because by letter dated 30-7-2011 the Petitioner addressed directly to the Arbitrator and pointed out that no copy of the statement of claim received and therefore unable to file any statement of claim before the fixed date and time sought for six to eight weeks for reply that itself is not sufficient to say that the Petitioner has agreed and/or consented for the appointment of Arbitrator. The Petitioner by letter dated 27 August, 2011 on the contrary pointed out to the Arbitrator that no consent letter was received to settle the dispute in view of Clause 25 of the agreement and asked for adjourned of the hearing on that ground also. It was also mentioned in the letter that they would appoint new Arbitrator if no consent letter is received from the Arbitrator side. By the letter of same date, the Petitioner nominated their Sales Manager to attend the proceedings on 29-8-2011.

10. The Arbitrator by letter dated 14-9-2011 for the first time intimated to the Petitioner about his consent to act as an Arbitrator and thereby also asked for expenses. The Petitioner immediately on 8-10-2011 objected and intimated that they never given consent for such appointment. The Petitioner also pointed out clause 25 where it is specifically agreed by the parties that in case of difference of opinion between the parties with reference to the Arbitrator each party shall nominate one Arbitrator and the third nomination be made by the two already nominated Arbitrators. The Petitioner reserved right to appoint their Arbitrator and requested that they might appoint third Arbitrator by mutual decision and fixed the hearing in Mumbai.

11. The learned Arbitrator, however, on 31-10-2011 has passed the impugned Award by overlooking the above events and objection on record, by observing that no defence statement was filed on behalf of the Petitioner/original Respondent, though the representative appeared. It is recorded that the Petitioner in spite of opportunity failed to appear and the matter was fixed on 10-10-2011 for final hearing. It is observed that there was no objection raised till this date about appointment of the Arbitral Tribunal, by overlooking letter dated 8-10-2011 though recorded the objection in para 6 and ultimately as none appeared for the Petitioner on 13-10-2011 and 17-10-2011, after hearing the Respondent, by speaking order, by treating letter dated 8-10-2011 (Exh. 25) as application under section 16, rejected the objection. The matter was thereafter listed on 21-10-2011 and 25-10-2011. The learned Arbitrator proceeded ex parte against the Petitioner by observing that “no arguments on behalf of the Respondent as none present for the Respondent for the final hearing”. The learned Arbitrator, based upon the only documents filed by the Respondent at Exhibits 10 to 20 and as there was no defence statement and no documentary evidence filed by the Petitioner has passed the impugned Award by treating it to be unchallenged documentary evidence.

12. The fault is not giving hearing and opportunity to the parties and to decide such application of jurisdiction behind their back. The learned Arbitrator failed to appreciate that though asked for by the other side, if failed to appoint Arbitrator within the prescribed period, the unilateral appointment of the Arbitrator by the claimant, cannot be stated to be valid appointment/nomination in view of clause 25 itself. The basic requirement was mutual consent for appointment. There is nothing on record to show that the Petitioner agreed to appointment within 10 days the sole Arbitrator as contended. Section 11 of the Arbitration Act takes care of such situation where the other side in spite of notice, if failed to appoint Arbitrator within 30 days and/or within reasonable time, the remedy is to invoke Section 11 of the Arbitration Act. It is settled that it is mandatory. Assuming for a moment that consent letter was given by the Arbitrator, as asked by the Petitioner that itself in no way can be treated as consent for appointment Arbitral Tribunal to adjudicate the issue/dispute. The fact that the Petitioner wanted to appoint his own Arbitrator also and in fact requested to nominate their Arbitrator as per the agreed clause, this itself further demonstrates that the Petitioner never agreed for settlement in their disputes, through the sole Arbitrator, apart from no direct or implied consent at any point of time. The Arbitrator had also given consent by addressing a letter only to the Respondent. Mere not objecting to the appointment within 15 days from the date of knowledge of the constitution of Tribunal, as provided and as contended by referring to section 13(2) of the Arbitration Act, itself is not sufficient to overlook the mandate of appointment of sole Arbitrator, with the consent of all. The scope and purpose of section 16 cannot be compared with section 13(2) of the Arbitration Act. Both have a distinct and different foundation to invoke and to act upon. There is no question of estoppal from challenging the authority and unilateral appointment of Arbitrator.

13. The appearance of the representative of the Petitioner before the arbitral Tribunal and asked for details for the fees and respective shares and the issuance of such specific letter by the Arbitrator to the Petitioner itself shows that there was no intention and/or any prior consent was given by the Petitioner to nominate and/or appoint the sole Arbitrator to resolve their dispute. There are admitted internal procedural lacuna in respect of appointment of Arbitrator and the continuation of the arbitration proceedings in spite of specific objection raised, which took away substantial right of the aggrieved parties. This has definitely caused injustice and hardship, therefore, unacceptable and illegal.

14. Mere appointment of Arbitrator by one party and admittedly when it was not mutual appointment, that itself also is not sufficient to treat valid appointment of the Arbitrator, as per clause as well as under the provisions of the arbitration act. The mutual consent is a must, even otherwise, to appoint sole Arbitrator. I am inclined to observe that such appointment of the sole Arbitrator cannot be accepted as valid and legal appointment by invoking the Doctrine of Acquiescence and/or Estoppal and/or Waiver. Considering the whole scope and purpose of Arbitration Act and specifically in view of the provisions of section 11 and the judgment of Supreme Court and even otherwise such unilateral appointment of Arbitrator itself is void, unjust and contrary to law. The whole proceedings therefore so initiated and continued also faces the same consequences. The consequential proceedings in view of this illegal appointment of sole Arbitrator is also bad.

15. I am not inclined to accept the finding given by the learned Arbitrator based upon Prasun Roy v. Calcutta Metropolitan Development Authority, (1987) 4 SCC 217 : AIR 1988 SC 205, Rail India Technical and Economic Services Ltd. v. Ravi Construction, 2002 (1) Kar LJ 419 and lnder Sain Mittal v. Housing Board, Haryana, (2002) 3 SCC 175 : AIR 2002 SC 1157 in view of distinguishable facts and circumstances itself. There cannot be quarrel with the proposition of law, but the Court needs to consider the facts and circumstances which in the present case, in no way help the Respondent to get support from these cases. I am not inclined to accept the reasoning that the Petitioner participated without any objection and/or never objected to the unilateral appointment of the Arbitrator. I am inclined to observe that the burden lies upon the party one who appoint unilaterally Arbitrator contrary to the terms and conditions of the agreement that the basic appointment of the sole Arbitrator was valid and binding. The Respondent failed to prove it.

16. I am inclined to observe observe that the unilateral appointment of Arbitrator, in the present facts and circumstances, was illegal, impermissible and contrary to the Arbitration Act itself. Apart from the breach of principles of natural justice and fair play. No equal opportunity was given to the Petitioner to represent the case and/or to resolve the dispute. The Respondent and the Arbitrator never proceeded in accordance with law. Firstly by proceeding without the consent of other side so far as the appointment is concerned and thereafter by passing ex parte orders.

17. On merit also the zerox copies of the documents were taken on record and Award was passed without giving opportunity to the Petitioner to test and/or cross-examine the averments made in the statement of claim and the documents so relied upon.

18. The grant of claim so made by the Respondent with interest at 15%, therefore, also unsustainable. The Award so passed is contrary to law as the unilateral appointment of Arbitrator itself was in breach of settled provisions of law and so also all other further proceedings.

19. However, liberty is granted to the parties to take appropriate steps to nominate the sole Arbitrator or Tribunal as per clause 25 within reasonable time and resolve their dispute, if any, in accordance with law. All points are kept open. The parties are also at liberty to take appropriate legal proceedings, if so advised and/or instructed and or to settle the matter.

20. Resultantly, the following order:

(I) Award dated 31 October, 2011 is quashed and set aside, including all proceedings arising out of the same, if any, with liberty.

(II) The parties are at liberty to settle the matter.

(III) The Arbitration Petition is accordingly disposed of with no order as to costs.

Order accordingly.