Saturday 14 May 2016

When court can appoint substitute arbitrator?

Once we keep in mind the aforesaid fundamental aspects of the
arbitration, the irresistible conclusion would be that whenever parties
agree for mediation, and even name a specific arbitrator with no specific
provision for appointment of another arbitrator on the recusal/withdrawal
of the said arbitrator, the said omission is made up by Section 15(2) of
the Act and unless arbitration agreement between the parties provides a
categorical prohibition or debarment in resolving a question or dispute or
difference between the parties by a substitute arbitrator in case of death
or the named arbitrator or non-availability of the said arbitrator, Courts
have the power to appoint substitute arbitrator, which power is given by
Section 15(2) of the Act as this provision is to be given liberal
interpretation so as to apply to all possible circumstances under which
the mandate of the earlier arbitrator may be terminated.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
 CIVIL APPEAL NO. 8731 OF 2015
(Arising out of S.L.P. (Civil) No.19617 of 2015)
SHAILESH DHAIRYAWAN 

V
MOHAN BALKRISHNA LULLA 
R.F. Nariman, J.
Dated;OCTOBER 16, 2015.
Citation;(2016)3 SCC619,2016(6) MHLJ 13


2. The respondent had filed a suit in the Bombay High Court,
being Suit No.1927 of 2007, against the appellant and some
others seeking a declaration that a development agreement dated
27.12.2004 together with a Power of Attorney of even date had
stood terminated, and for certain other reliefs.
3. On 3.10.2008, the parties to the suit entered into consent
terms largely settling the disputes between them. However, with
regard to two specific differences, the plaintiff and defendant No.1
agreed to refer the said differences to the arbitration of a retired
Supreme Court Judge as follows:-
“8). The Plaintiff and the Defendant No.1 agree to
and hereby do refer to Arbitration of Mrs. Justice
Sujata Manohar (Retd.) the dispute as to (i) the
difference in carpet area of the 5 flats agreed to be
allotted as per the Development Agreement dated 27-
12-2004 being Exhibit-B to the Plaint by Defendant
No.1 to the Plaintiff and his family members (i.e. 800
sq. ft. area) as provided in the said Development
Agreement dated 27-12-2004 and the actual carpet
area of the said 5 flats hereby allotted and handed
over and (ii) the valuation of the deficient area if any,
and the damages for the same. The Learned Arbitrator
to make an award with regard to the compensation and
the damages to be paid by Defendant No.1 to the
plaintiff for the deficient area, if any, Defendant No.1
shall not raise any dispute as to the jurisdiction of the
arbitrator. The Arbitrator shall decide the same as
expeditiously as possible in accordance with law and
under the provisions of the Arbitration & Conciliation
Act, 1996.”
The said consent terms were taken on record by a Single Judge of
the Bombay High Court who passed an order dated 8.10.2008
disposing of the suit in the following terms:
“1. Pursuant to the suggestion given by this Court,Page 3
3
parties were exploring the possibility of settlement and
therefore the matter was kept part heard.
2. Today, the parties are tendering Consent terms.
Consent terms are taken on record and marked “X” for
the purpose of identification. Consent Terms are
signed by the Plaintiff, Defendant No.1, Defendant
No.3 and their respective Advocates. Undertakings, if
any, given in the Consent terms by any of the parties is
accepted. Decree is passed in terms of the consent
terms.
3. In respect of the dispute regarding compensation,
the matter by consent is referred to Mrs. Justice Sujata
Manohar (Retd.) for arbitration. The issue regarding
the allotment of parking spaces or plaintiffs returning
the promissory note can also be decided by the
learned arbitrator. Plaintiff is permitted to withdraw the
amount which is deposited by Defendant No.1 and
which is lying in the suspense account of Oriental Bank
of Commerce, Khar Branch, Mumbai.
1. Plaintiff and Defendants are present in court.
2. Suit is disposed off in the aforesaid terms.
3. Refund of court fees be paid in accordance with
the rules.
4. Since the suit itself is disposed of, Notice of
motion if any, does not survive and the same is also
disposed of.”Page 4
4
4. Nothing much seems to have materialised in the arbitration,
and despite several meetings held by the named arbitrator, the
arbitration proceedings continued to drag on, until by a letter dated
22.01.2011, the Arbitrator resigned as arbitrator in the aforesaid
matter.
5. The plaintiff-respondent then applied vide Notice of Motion
No.2245 of 2012 in the disposed of suit No.1927 of 2007 for
appointment of a substitute arbitrator. This Notice of Motion was
dismissed by order dated 20.9.2013 stating that an appointment
can only be made for a substitute arbitrator under Section 11(5) of
the Arbitration Act and not by a Notice of Motion in a disposed of
suit.
6. Pursuant to the dismissal of the said Notice of Motion, the
plaintiff moved the Bombay High Court under Section 11 by an
application of January, 2014 for appointment of a substitute
arbitrator. By the impugned judgment dated 12.6.2015, the
Bombay High Court appointed a retired Judge of the said High
Court, namely Dr. Justice S. Radhakrishnan, as substitute
arbitrator.Page 5
5
7. Shri T.R. Andhyarujina, learned senior advocate appearing
on behalf of the appellant, has argued before us that as this was
the case of a named arbitrator, the arbitration agreement
contained in the consent terms in the Suit No.1927 of 2007 spent
its force when the named arbitrator resigned, it being clear that the
said clause would only apply to the named arbitrator and nobody
else, parties having faith only in the named arbitrator. He cited
three decisions of this Court to buttress his submission and further
argued that under Section 15(2) of the Arbitration and Conciliation
Act, 1996, where the mandate of a named arbitrator terminates,
there being no rules that would apply to the appointment of the
arbitrator being replaced, the said Section would, therefore, not
apply and the High Court having missed this vital fact is, therefore,
wrong in appointing a substitute arbitrator.
8. Shri Santosh Paul, learned advocate appearing on behalf of
the respondent has, however, supported the judgment of the
Bombay High Court and has argued that the mandate of Section
89 of the Code of Civil Procedure (in short “CPC”) requires a
Court to attempt to either settle disputes raised in a suit by the
means outlined by the Section or refer them to arbitration, in which
case the arbitration shall be deemed as if it is an arbitration
commenced under the Arbitration and Conciliation Act, 1996. He
further argued that it is not correct to say that no rules were
applicable to the appointment of the arbitrator in the present case
as the appointment was made by the High Court and, therefore,
when his client went back to the self same High Court to appoint a
substitute arbitrator, that High Court would necessarily have
jurisdiction to appoint another person in the place of the named
arbitrator.
9. The Arbitration and Conciliation Act, 1996, replaced three
other Acts dealing with arbitration: the Arbitration (Protocol and
Convention) Act, 1937, the Arbitration Act, 1940, and the Foreign
Awards (Recognition and Enforcement) Act, 1961.
10. Since we are concerned with a domestic arbitration clause, it
would be useful to extract Section 8(1)(b) and Section 20 of the old
repealed 1940 Act to show what was the position in law under the
1940 Act on supplying vacancies created by arbitrators neglecting,
refusing or being incapable of acting, or dying before or in the
proceedings referred to arbitration. These Sections read as under:-
“Section 8. Power of Court to appoint arbitrator or
umpire.
(1) In any of the following cases-
(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;
any party may serve the other parties or the arbitrators,
as the case may be, with the 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 is
or they had been appointed by consent of all parties.
Section 20. Application to file in Court arbitration
agreement.
(1) Where any persons have entered into an arbitration
agreement before the institution of any suit with
respect to the subject-matter of the agreement or any
part of it, and where a difference has arisen to which
the agreement applies, they or any of them, instead of
proceeding under Chapter 11, may apply to a Court
having jurisdiction in the matter to which the
agreement relates, that the agreement be filed in
Court.
(2) The application shall be in writing and shall be
numbered and registered as a suit between one or
more of the parties 5 interested or claiming to be
interested as plaintiff or plaintiffs and the remainder as
defendant or defendants, if the application has been
presented by all the parties, or, if otherwise, between
the applicant as plaintiff and the other parties as
defendants.
(3) On such application being made, the Court shall
direct notice thereof to be given to all parties to the
agreement other than the applicants, requiring them to
show cause within the time specified in the notice whyPage 8
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the agreement should not be filed.
(4) Where no sufficient cause is shown, the Court shall
order the agreement to be filed, and shall make an
order of reference to the arbitrator appointed by the
parties, whether in the agreement or otherwise, or,
where the parties cannot agree upon an arbitrator, to
an arbitrator appointed by the Court.
(5) Thereafter the arbitration shall proceed in
accordance with, and shall be governed by, the other
provisions of this Act so far as they can be made
applicable.”
11. The law under the aforesaid repealed Sections was laid
down in a judgment of this Court which has since then been
followed repeatedly. In Parbhat General Agencies v. Union of
India, (1971) 1 SCC 79, the arbitration clause in that case was set
out as follows:-
“If any question, difference or objection whatsoever
shall arise in any way connected with or arising out of
this or the meaning or operation of any part thereof or
the rights, dues or liabilities of either party, then save in
so far as the decision of any such matter is
hereinbefore provided for and has been so decided,
every such matter including whether its decision has
been otherwise provided for and whether it has been
finally decided accordingly or whether the contract
should be terminated or has been rightly terminated
and as regards the rights and obligations of the parties
as the result of such termination shall be referred for
arbitration to the Judicial Commissioner, Himachal
Pradesh and his decision shall be final and binding and
where the matter involves a claim for or the payment or
recovery or deduction of money, only the amount, if
any, awarded in such arbitration shall be recoverable in
respect of the matter so referred.” [at para 1]”Page 9
9
After referring to Section 8(1)(b) and Section 20, this Court held:
“Section 20 is merely a machinery provision. The
substantive rights of the parties are found in Section
8(1)(b). Before Section 8(1)(b) can come into operation
it must be shown that (1) there is an agreement
between the parties to refer the dispute to arbitration;
(2) that they must have appointed an arbitrator or
arbitrators or umpire to resolve their dispute; (3)
anyone or more of those arbitrators or umpire must
have neglected or refused to act or is incapable of
acting or has died; (4) the arbitration agreement must
not show that it was intended that the vacancy should
not be filled and (5) the parties or the arbitrators as the
case may be had not supplied the vacancy.
In the cases before us it is admitted that there is
an agreement to refer the dispute to arbitration. It is
also admitted that the parties had designated the
Judicial Commissioner of Himachal Pradesh as the
arbitrator for resolving any dispute that may arise
between them in respect of the agreement. The
Judicial Commissioner had refused to act as the
arbitrator. The parties have not supplied that vacancy.
Therefore the only question is whether the agreement
read as a whole shows either explicitly or implicitly that
the parties intended that the vacancy should not be
supplied. It may be noted that the language of the
provision is not “that the parties intended to supply the
vacancy” but on the other hand it is that “the parties did
not intend to supply the vacancy”. In other words if the
agreement is silent as regards supplying the vacancy,
the law presumes that the parties intended to supply
the vacancy. To take the case out of Section 8(1)(b)
what is required is not the intention of the parties to
supply the vacancy but their intention not to supply the
vacancy. We have now to see whether the agreements
before us indicate such an intention.
As mentioned earlier, the only relevant provision
in the agreements before us is the provision relating to
arbitration. The other provisions in the agreements do
not throw any light as regards the intention of the
parties. We have earlier mentioned that the Judicial
Commissioner, Himachal Pradesh, could not have
been appointed as the arbitrator for any specialisedPage 10
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knowledge possessed by him relating to any dispute
that may arise under the agreement. What the Judicial
Commissioner could have competently done if he had
acted as an arbitrator could certainly be done by an
independent and impartial person possessing
adequate knowledge of law. In our opinion the
language of Section 8(1)(b) is plain and unambiguous
and the terms of the agreement before us do not in the
least show that the parties intended not to supply the
vacancy.” [at paras 3, 4 & 5].
12. This was the state of the law in India until the 1996 Act
repealed inter alia the 1940 Act. Since we are concerned with the
correct interpretation of Section 15 of this Act, it is set out
hereinbelow:-
“Section 15.Termination of mandate and
substitution of arbitrator.- (1) In addition to the
circumstances referred to in section 13 or section 14,
the mandate of an arbitrator shall terminate----
(a) where he withdraws from office for any reason; or
(b) by or pursuant to agreement of the parties.
(2) 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.
(3) Unless otherwise agreed by the parties, where an
arbitrator is replaced under sub-section (2), any
hearings previously held may be repeated at the
discretion of the arbitral tribunal.
(4) Unless otherwise agreed by the parties, an order or
ruling of the arbitral tribunal made prior to the
replacement of an arbitrator under this section shall not
be invalid solely because there has been a change in
the composition of the arbitral tribunal.”
The reason for the change in law under the 1996 Act isPage 11
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because it was modeled on the Uncitral Model Law on
International Commercial Arbitration. The Statement of Objects
and Reasons for the 1996 Act makes this clear as follows:
“2. The United Nations Commission on International
Trade Law (UNCITRAL) adopted in 1985 the Model
Law on International Commercial Arbitration. The
General Assembly of the United Nations has
recommended that all countries give due consideration
to the said Model Law, in view of the desirability of
uniformity of the law of arbitral procedures and the
specific needs of international commercial arbitration
practice. The UNCITRAL also adopted in 1980 a set of
Conciliation Rules. The General Assembly of the
United Nations has recommended the use of these
Rules in cases where the disputes arise in the context
of international commercial relations and the parties
seek amicable settlement of their disputes by recourse
to conciliation. An important feature of the said
UNCITRAL Model Law and Rules is that they have
harmonised concepts on arbitration and conciliation of
different legal systems of the world and thus contain
provisions which are designed for universal
application.
3. Though the said UNCITRAL Model Law and Rules
are intended to deal with international commercial
arbitration and conciliation, they could, with appropriate
modifications, serve as a model for legislation on
domestic arbitration and conciliation. The present Bill
seeks to consolidate and amend the law relating to
domestic arbitration, international commercial
arbitration, enforcement of foreign arbitral awards and
to define the law relating to conciliation, taking into
account the said UNCITRAL Model Law and Rules.”
Article 15 of the Model Law, on which Section 15(2) is
based, reads as follows:Page 12
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“Where the mandate of an arbitrator terminates under
article 13 of 14 or because of his withdrawal from office
for any other reason or because of the revocation of
his mandate by agreement of the parties or in any
other case of termination of his mandate, a substitute
arbitrator shall be appointed according to the rules that
were applicable to the appointment of the arbitrator
being replaced.”
13. Three judgments of this Court have thrown considerable light
on the correct construction of Section 15(2) of the Act. In Yashwith
Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd.,
(2006) 6 SCC 204, the arbitration clause stated that the Managing
Director of the respondent company was to appoint an arbitrator in
terms of the said clause. The appointed arbitrator resigned, after
which the Managing Director of the respondent company promptly
appointed another arbitrator. The correctness of the second
appointment was challenged in an application made by one of the
parties under Section 11(5) of the Act read with section 15(2)
praying that the Chief Justice of the High Court may appoint a
substitute arbitrator to resolve the disputes between the parties.
This application under Section 11 was dismissed, which dismissal
was upheld by a Division Bench of the High Court. This Court
agreeing with the Division Bench judgment held as under:-
“In our view, the learned Chief Justice and the DivisionPage 13
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Bench have rightly understood the scope of Section 15
of the Act. When the arbitrator originally appointed in
terms of the arbitration agreement withdrew for health
reasons, the Managing Director, as authorised
originally by the arbitration agreement, promptly
appointed a substitute arbitrator. It is true that in the
arbitration agreement there is no specific provision
authorising the Managing Director to appoint a
substitute arbitrator if the original appointment
terminates or if the originally appointed arbitrator
withdraws from the arbitration. But, this so-called
omission in the arbitration agreement is made up by
the specific provision contained in Section 15(2) of the
Act. The withdrawal of an arbitrator from the office for
any reason is within the purview of Section 15(1)(a) of
the Act. Obviously, therefore, Section 15(2) would be
attracted and a substitute arbitrator has to be
appointed according to the rules that are applicable for
the appointment of the arbitrator to be replaced.
Therefore, what Section 15(2) contemplates is an
appointment of the substituted arbitrator or the
replacing of the arbitrator by another according to the
rules that were applicable to the appointment of the
original arbitrator who was being replaced. The term
“rules” in Section 15(2) obviously referred to the
provision for appointment contained in the arbitration
agreement or any rules of any institution under which
the disputes were referred to arbitration. There was no
failure on the part of the party concerned as per the
arbitration agreement, to fulfil his obligation in terms of
Section 11 of the Act so as to attract the jurisdiction of
the Chief Justice under Section 11(6) of the Act for
appointing a substitute arbitrator. Obviously, Section
11(6) of the Act has application only when a party or
the person concerned had failed to act in terms of the
arbitration agreement. When Section 15(2) says that a
substitute arbitrator can be appointed according to the
rules that were applicable for the appointment of the
arbitrator originally, it is not confined to an appointment
under any statutory rule or rule framed under the Act or
under the scheme. It only means that the appointment
of the substitute arbitrator must be done according to
the original agreement or provision applicable to the
appointment of the arbitrator at the initial stage. We arePage 14
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not in a position to agree with the contrary view taken
by some of the High Courts.” [at para 4]
14. In SBP and Company (2) v. Patel Engineering. Ltd. and
Anr., (2009) 10 SCC 293, this Court had to construe Section 15(2)
in the light of the arbitration clause in that case. The arbitration
clause read as follows:-
“19. During the continuance of this piece-work
agreement/contract or at any time after the termination
thereof, if any difference or dispute shall arise between
the parties hereto in regard to the interpretation of any
of the provisions herein contained or act or thing in
relation to this agreement/contract, such difference or
dispute shall be forthwith referred to two arbitrators for
arbitration in Bombay, one to be appointed by each
party with liberty to the arbitrators in case of
differences or their failure to reach an agreement within
one month of the appointment, to appoint an umpire
residing in Bombay and the award which shall be
made by two arbitrators or umpire as the case may be
shall be final, conclusive and binding on the parties
hereto.
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 right of
action against any two parties hereto in respect of any
such difference and dispute.” [at para 7]
15. On the facts in that case, two arbitrators were appointed by
each of the parties. The arbitrator appointed by respondent No.1
declined to arbitrate in the matter for the reasons stated by him.
Thereafter, respondent No.1 requested another person to act as
arbitrator on its behalf, which person communicated his consent.
However, respondent No.2, who was the arbitrator appointed by
the petitioner, sent a letter informing the parties that in view of
respondent No. 1’s arbitrator refusing to act, he had become the
sole arbitrator in the case as per the arbitration clause between the
parties. It is at this stage that respondent No.1 filed an arbitration
application under Section 11 for appointment of a third arbitrator by
asserting that the second person nominated by it had agreed to be
a substitute arbitrator and that, therefore, the third arbitrator should
be appointed by the Court under Section 11. This very matter
travelled all the way up to this Court which in a 7-Judge Bench
ultimately decided that the power exercised by the Chief Justice of
the High Court under Section 11 of the Act is not an administrative
power but is a judicial power. The matter, on facts, having been
reverted to a Division Bench of this Court, this Court was then
asked to decide as to whether the appointment of the substitute
arbitrator by respondent No.1 was correct in law. After setting out
the various provisions of the Arbitration Act, this Court held:
“Section 15 specifies additional circumstances in which
the mandate of an arbitrator shall terminate and also
provides for substitution of an arbitrator. Sub-section
(1) of this section lays down that in addition to the
circumstances referred to in Sections 13 and 14, the
mandate of an arbitrator shall terminate where he
withdraws from office for any reason or pursuant to
agreement of the parties. Sub-section (2) of Section 15
postulates appointment of a substitute arbitrator in
accordance with the rules that were applicable to the
appointment of the original arbitrator.
What is significant to be noticed in the aforementioned
provisions is that the legislature has repeatedly laid
emphasis on the necessity of adherence to the terms
of agreement between the parties in the matter of
appointment of arbitrators and procedure to be
followed for such appointment. Even Section 15(2),
which regulates appointment of a substitute arbitrator,
requires that such an appointment shall be made
according to the rules which were applicable to the
appointment of an original arbitrator. The term “rules”
used in this sub-section is not confined to statutory
rules or the rules framed by the competent authority in
exercise of the power of delegated legislation but also
includes the terms of agreement entered into between
the parties.
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 became the sole arbitrator for deciding
the disputes or differences between the parties.
At the cost of repetition, we consider it necessary to
observe that the agreements entered into between the
appellant and Respondent 1 do not contain a provisionPage 17
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for appointment of a substitute arbitrator in case the
arbitrator appointed by either party was to decline to
accept appointment or refuse to arbitrate in the matter.
Therefore, Respondent 1 cannot draw support from the
ratio of the judgment in Yashwith Constructions (P)
Ltd. v. Simplex Concrete Piles India Ltd. [(2006) 6 SCC
204].” [at paras 30, 31, 40 and 48]
16. In ACC Ltd. v. Global Cements Ltd., (2012) 7 SCC 71, the
arbitration clause with which this Court was confronted read as
follows:-
“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.”
[at para 2]
17. As both Shri Palkhivala and Shri Seth had died, it was
contended by the petitioner before this Court that the arbitration
clause would not survive as the two named arbitrators were the
only persons who the parties had reposed their faith in. In arriving
at the conclusion that substitute arbitrators could be appointed,
this Court held:
“Section 15(2) of the Act provides that where a
substitute arbitrator has to be appointed due to
termination of the mandate of the previous arbitrator,
the appointment must be made according to the rulesPage 18
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that were applicable to the appointment of the
arbitrator being replaced. No further application for
appointment of an independent arbitrator under
Section 11 will lie where there has been compliance
with the procedure for appointment of a substitute
arbitrator. On appointment of the substitute arbitrator in
the same manner as the first, no application for
appointment of independent arbitrator under Section 11
could be filed. Of course, the procedure agreed upon
by the parties for the appointment of the original
arbitrator is equally applicable to the appointment of a
substitute arbitrator, even if the agreement does not
specifically say so. Reference may be made to the
judgment of this Court in Yashwith Constructions (P)
Ltd. v. Simplex Concrete Piles India Ltd. [(2006) 6 SCC
204].
Sections 14 and 15 provide the grounds for termination
of the mandate of the arbitrator on the ground of
incapability of the arbitrator to act or if he withdraws
from his office or when the parties agree to the
termination of the mandate of the arbitrator. Section
15(2) states that a substitute arbitrator shall be
appointed as per the rules that were applicable to the
appointment of the arbitrator being replaced. Section
15(2), therefore, has to be given a liberal interpretation
so as to apply to all possible circumstances under
which the mandate may be terminated.
The legislative policy embodied in Sections 14 and 15
of the Act is to facilitate the parties to resolve the
dispute by way of arbitration. The arbitration clause if
clearly spells out any prohibition or debarment, the
court has to keep its hands off and there is no question
of persuading or pressurising the parties to resolve the
dispute by a substitute arbitrator. Generally, this stands
out as an exception and that should be discernible
from the language of the arbitration clause and the
intention of the parties. In the absence of such
debarment or prohibition of appointment of a substitute
arbitrator, the court's duty is to give effect to the policy
of law that is to promote efficacy of arbitration.
The incident of the death of the named arbitrators has
no nexus or linkage with the expression “at any time”
used in Clause 21 of the agreement. The time factor
mentioned therein is the time within which the question
or dispute or difference between the parties is resolved
as per the agreement. The arbitration clause would
have life so long as any question or dispute or
difference between the parties exists unless the
language of the clause clearly expresses an intention
to the contrary.
The question may also arise in a given case that the
named arbitrators may refuse to arbitrate disputes; in
such a situation also, it is possible for the parties to
appoint a substitute arbitrator unless the clause
provides to the contrary. Objection can be raised by the
parties only if there is a clear prohibition or debarment
in resolving the question or dispute or difference
between the parties in case of death of the named
arbitrator or their non-availability, by a substitute
arbitrator.
We are of the view that Clause 21 does not prohibit or
debar the parties in appointing a substitute arbitrator in
place of the named arbitrators and, in the absence of
any prohibition or debarment, parties can persuade the
court for appointment of an arbitrator under Clause 21
of the agreement.” [at paras 17, 18, 21, 28 – 30]
18. Thus, it will be seen that in the Yashwith Constructions
case this Court construed Section 15(2) liberally and held that the
expression “the rules” that were applicable to the appointment of
the arbitrator would include the arbitration clause or agreement
itself, apart from any institutional rules or other rules which may
apply. Since it was clear that the Managing Director in the
aforesaid case was the appointing authority for a particularPage 20
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arbitrator, in case the said arbitrator appointed refuses to act, the
Managing Director was stated to be the authority under the
arbitration agreement that could always appoint a substitute
arbitrator in terms of Section 15(2). Similar is the case in the ACC
Ltd. judgment where this Court held that despite two named
arbitrators having died, substitute arbitrators could be appointed in
terms of the said clause unless there is a clear prohibition or
debarment that could be read on a true construction of the
arbitration agreement. It found that the expression “at any time”
clearly showed that the arbitration clause had no nexus with the
lifetime of the named arbitrator and therefore no such prohibition
could be read. It also held that the procedure agreed upon by the
parties for the appointment of the original arbitrator is equally
applicable to the appointment of a substitute arbitrator, even if the
agreement does not specifically say so, as this is the mandate of
Section 15(2) of the Act.
19. On the other hand, in the SBP and Company case, the
arbitration clause itself indicated that one of two appointed
arbitrators who refused to act would not be liable to be substituted
by another arbitrator as the other appointed arbitrator would then
continue with the reference as sole arbitrator. This Court,
therefore, held that since Section 15(2) referred to the arbitrationPage 21
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agreement, the arbitration agreement had to be strictly followed
which would on the facts of that case indicate that no substitute
arbitrator is to be appointed in the place of the arbitrator who
refused to act but the other appointed arbitrator would continue as
the sole arbitrator.
20. The scheme of Section 8 of the 1940 Act and the scheme of
Section 15(2) of the 1996 Act now needs to be appreciated. Under
Section 8(1)(b) read with Section 8(2) if a situation arises in which
an arbitrator refuses to act, any party may serve the other parties
or the arbitrators, as the case may be, with a written notice to
concur in a fresh appointment, and if such appointment is not
made within 15 clear days after service of notice, the Court steps
in to appoint such fresh arbitrator who, by a deeming fiction, is to
act as if he has been appointed by the consent of all parties. This
can only be done where the arbitration agreement does not show
that it was intended that the vacancy caused be not supplied.
However, under Section 15(2), where the mandate of an arbitrator
terminates, a substitute arbitrator “shall” be appointed. Had
Section 15(2) ended there, it would be clear that in accordance
with the object sought to be achieved by the Arbitration and
Conciliation Act, 1996 in all cases and for whatever reason thePage 22
22
mandate of an arbitrator terminates, a substitute arbitrator is
mandatorily to be appointed. This Court, however, in the
judgments noticed above, has interpreted the latter part of the
Section as including a reference to the arbitration agreement or
arbitration clause which would then be “the rules” applicable to the
appointment of the arbitrator being replaced. It is in this manner
that the scheme of the repealed Section 8 is resurrected while
construing Section 15(2). The arbitration agreement between the
parties has now to be seen, and it is for this reason that unless it is
clear that an arbitration agreement on the facts of a particular case
excludes either expressly or by necessary implication the
substitution of an arbitrator, whether named or otherwise, such a
substitution must take place. In fact, sub-sections (3) and (4) of
Section 15 also throw considerable light on the correct
construction of sub-section (2). Under sub-section (3), when an
arbitrator is replaced, any hearings previously held by the replaced
arbitrator may or may not be repeated at the discretion of the
newly appointed Tribunal, unless parties have agreed otherwise.
Equally, orders or rulings of the earlier arbitral Tribunal are not to
be invalid only because there has been a change in the
composition of the earlier Tribunal, subject, of course, to a contrary
agreement by parties. This also indicates that the object of speedyPage 23
23
resolution of disputes by arbitration would best be sub-served by a
substitute arbitrator continuing at the point at which the earlier
arbitrator has left off.
21. On the facts of the present case, it is clear that there is
nothing in clause 8 of the consent terms extracted above to show
that the resignation of Justice Sujata Manohar would lead to her
vacancy not being supplied. All that the parties have done by the
said clause is to agree to refer their disputes to the arbitration of
an independent retired Judge belonging to the higher Judiciary.
There is no personal qualification of Mrs. Justice Sujata Manohar
that is required to decide the dispute between the parties. In fact,
she belongs to a pool of independent retired High Court and
Supreme Court Judges, from which it is always open to the
appointing authority to choose a substitute arbitrator. One example
will suffice to show that clause 8 in the present case cannot be
construed to either expressly or by necessary implication exclude
the appointment of a substitute arbitrator. Take the case of a family
dispute in which the arbitration clause clearly specifies that a
particular grand uncle of a joint family is the only person in whomPage 24
24
all members of the family have confidence as a result of which he
has been appointed arbitrator to resolve their disputes. In the case
of resignation or death of such grand uncle, it could possibly be
contended that by necessary implication no other person was
competent to arbitrate disputes between the family members and
that, therefore, on such resignation or death, the arbitration clause
would spend its force. In the present case, as has been noted
above, we do not have any such factual scenario nor do we have
expressions such as “only” which would indicate that the
confidence of the parties was in only the named arbitrator and in
nobody else.
22. In fact, as has correctly been pointed out by learned counsel
for the respondent, Section 89 of the CPC specifically provides
that a Court hearing a suit may formulate terms of settlement
between the parties and may either settle the same or refer the
same for settlement by conciliation, judicial settlement, mediation
or arbitration. On the facts in the present case, it is clear that
following the mandate of Section 89, the Bombay High Court
disposed of the suit between the parties by recording the
settlement between the parties in clauses 1 to 7 of the consentPage 25
25
terms and by referring the remaining disputes to arbitration. In the
present case therefore it is clear that it is the Bombay High Court
that was the appointing authority which had in fact appointed Mrs.
Justice Sujata Manohar as arbitrator in terms of clause 8 of the
consent terms. We must remember, as was held in C.F. Angadi v.
Y.S. Hirannayya, [1972] 2 S.C.R. 515 at 523 that an order by
consent is not a mere contract between the parties but is
something more because there is super-added to it the command
of a Judge. On the facts of the present case, it is clear that the
Bombay High Court applied its mind to the consent terms as a
whole and appointed Mrs. Justice Sujata Manohar as arbitrator for
the disputes that were left to be resolved by the parties. The said
appointing authority has been approached by the respondent for
appointment of a substitute arbitrator, which was then done by the
impugned judgment. This would therefore be “according to the
rules that were applicable to the appointment of the arbitrator
being replaced” in accordance with Section 15(2) of the Act. We,
therefore, find that the High Court correctly appointed another
independent retired Judge as substitute arbitrator in terms of
Section 15(2) of the Arbitration Act, 1996. The appeal is,
therefore, dismissed.Page 26
26
……………………J.
(A.K. Sikri)
……………………J.
(R.F. Nariman)
New Delhi;
October 16, 2015.Page 27
27
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
 CIVIL APPEAL NO. 8731 OF 2015
(ARISING OUT OF SLP (C) NO. 19617 OF 2015)
SHAILESH DHAIRYAVAN ...APPELLANT
VERSUS
MOHAN BALKRISHNA LULLA …RESPONDENT
J U D G M E N T
A.K. SIKRI, J.
I am entirely in agreement with the conclusion arrived at by my
learned Brother R.F. Nariman, J. in his accompanying judgment on the
interpretation of Section 15(2) of the Arbitration and Conciliation Act,
1996 (hereinafter referred to as the 'Act'). It is held by my learned
Brother that since arbitration agreement that was arrived at between the
parties herein did not specifically bar the appointment of another
arbitrator on the recusal/withdrawal of the earlier arbitrator appointed by
the parties with mutual agreement, Section 15(2) of the Act would be
attracted and a substitute arbitrator could be appointed according to
'Rules' that govern the field. In the instant case, it was the agreementPage 28
28
between the parties which is treated as 'Rules' for the purposes of
Section 15(2) of the Act. My learned Brother has given cogent reasons
while interpreting the said provision of law in the aforesaid manner,
which, inter alia, includes reliance upon the earlier judgment of this Court
in ACC Ltd. v. Global Cements Ltd.1
2) While concurring with the judgment authored by my learned Brother, I
would like to give some additional reasons in support, which are as
under:
Section 15(2) of the Act is also to be interpreted keeping in mind the
ethos of the arbitration generally and also in the light of the spirit behind
Section 89 of the Code of Civil Procedure, 1908 (for short, 'CPC') in
particular. No doubt, in the instant case, there was no arbitration
agreement between the parties when the suit was filed by the
respondent herein. However, in the said suit which was filed, parties
arrived at an agreement whereby it was agreed between them that the
matter be decided through arbitration and not by the court of law.
3) It was held in P. Anand Gajapati Raju & Ors. v. P.V.G. Raju (D) & Ors.2
that the Arbitration Act governs the case where arbitration is agreed
upon before a pending suit by all parties. This Act, however, does not
contemplate a situation as in Section 89 of the CPC where the Court
1
(2012) 7 SCC 71
2
(2000) 4 SCC 539Page 29
29
asks the parties to choose one or the other ADR methods, including
arbitration, and the parties choose arbitration as their option. At the
same time, once the parties agree for arbitration under the Act and the
matter is referred to arbitration, thereafter the situation is almost at par
with what is contemplated in Section 89 of the CPC, to which aspect we
shall advert little later. What is emphasized at this stage is that in a suit
which is filed in the Court, when the parties agree for deciding the
disputes by means of arbitration, they have obviously agreed that the
court of law may stay its hands of such a dispute as the parties have
chosen alternate method, namely, one of the forms of ADR.
4) It hardly needs to be emphasized that the parties choose arbitration as a
dispute resolution mechanism keeping in view that it offers a timely,
private, less formal and cost effective approach for the binding
determination of disputes. It provides the parties with greater control of
the process than a court hearing. The non-judicial nature of arbitration
makes it both attractive and effective for several reasons. Apart from it
being cost effective and speedier method of settling the disputes when
compared with court adjudicatory method, the confidentiality of the
arbitration process may appeal to those who do not wish the terms of
settlement to be known. Therefore, first thing that has to be kept in
mind, when in a pending suit the parties agree for reference to
arbitration, though there was no arbitration agreement when the suit wasPage 30
30
filed, is that they have consciously preferred arbitration rather than the
court process. It, thus, follows that the intention is to settle the disputes
through arbitration and not the Court.
5) Secondly, in such a situation, Section 89 of the CPC also springs into
action, which provides for 'settlement of disputes outside the Court'. As
per this provision, where it appears to the Court that there exists
elements of a settlement which may be acceptable to the parties, the
Court shall formulate the terms of settlement and give them to the
parties for their observations and after receiving the observations of the
parties, the Court may re-formulate the terms of a possible settlement
and refer the same for -
a) arbitration;
b) conciliation;
c) judicial settlement, including settlement through lok adalat; or
d) mediation.
6) It has been noticed by this Court in some earlier judgments that Section
89 of the CPC is not very happily worded. Be that as it may, Section 89
provides for alternate methods of dispute resolution, i.e. those methods
which are alternate to the Court and are outside the adjudicatory function
of the Court. One of them with which we are concerned is the settlement
of dispute through arbitration. Insofar as reference of dispute toPage 31
31
arbitration is concerned, it has been interpreted by this Court that resort
to arbitration in a pending suit by the orders of the Court would be only
when parties agree for settlement of their dispute through arbitration, in
contra-distinction to the Alternate Dispute Mechanism (for short, 'ADR')
through the process of mediation where the Judge has the discretion to
send the parties for mediation, without even obtaining the consent of the
parties. Thus, reference to arbitration is by means of agreement between
the parties. It is not in dispute that there was an agreement between the
parties for reference of dispute to the arbitration and it was so referred.
7) On making such an application based on arbitration agreement between
the parties, order is passed in terms of Section 89 of the CPC referring
the matter to arbitration. The purpose for enacting Section 89 is to
encourage the parties to the dispute to settle their dispute by adopting
one of the four methods provided therein. Not only that it results in
lessening the burden of the court, experience has shown that many
cases which come to the Court can be resolved more suitably and with
better outcomes if the methods of ADR prescribed in Section 89 of the
CPC are resorted to. It is here that depending upon the nature of
dispute and relationship between the parties etc., the Court may suggest
a particular form of ADR, whether arbitration or mediation etc. can be
chosen. Therefore, what is to be kept in mind is that once arbitration
agreement was entered into between the parties, that too in a pendingPage 32
32
suit, the intention of the parties was to settle the matter through
arbitration and not to come back to the Court again for decision of the
same dispute by court adjudicatory process.
8) It is in this backdrop we have to decide the applicability of Section 15(2)
of the Act when the arbitrator to whom the matter was referred earlier
with the consent of the parties withdraws therefrom.
9) The aforesaid two reasons given by me, in addition to the reasons
already indicated in the judgment of my learned Brother, would clearly
demonstrate that provisions of Section 15(2) of the Act require purposive
interpretation so that the aforesaid objective/ purpose of such a provision
is achieved thereby. The principle of 'purposive interpretation' or
'purposive construction' is based on the understanding that the Court is
supposed to attach that meaning to the provisions which serve the
'purpose' behind such a provision. The basic approach is to ascertain
what is it designed to accomplish? To put it otherwise, by interpretative
process the Court is supposed to realise the goal that the legal text is
designed to realise. As Aharan Barak puts it:
“Purposive interpretation is based on three components:
language, purpose, and discretion. Language shapes the
range of semantic possibilities within which the interpreter
acts as a linguist. Once the interpreter defines the range,
he or she chooses the legal meaning of the text from
among the (express or implied) semantic possibilities. The
semantic component thus sets the limits of interpretation
by restricting the interpreter to a legal meaning that the
text can bear in its (public or private) language.”3
10) Of the aforesaid three components, namely, language, purpose and
discretion 'of the Court', insofar as purposive component is concerned,
this is the ratio juris, the purpose at the core of the text. This purpose is
the values, goals, interests, policies and aims that the text is designed to
actualize. It is the function that the text is designed to fulfil.
11) We may also emphasize that the statutory interpretation of a provision is
never static but is always dynamic. Though literal rule of interpretation,
till some time ago, was treated as the 'golden rule', it is now the doctrine
of purposive interpretation which is predominant, particularly in those
cases where literal interpretation may not serve the purpose or may lead
to absurdity. If it brings about an end which is at variance with the
purpose of statute, that cannot be countenanced. Not only legal process
thinkers such as Hart and Sacks rejected intentionalism as a grand
strategy for statutory interpretation, and in its place they offered
purposivism, this principle is now widely applied by the Courts not only in
this country but in many other legal systems as well.
12) Dynamic statutory interpretation also persuades us to take into
consideration ethoes of arbitration process, including the spirit behind
Section 89 of the CPC.
3 Aharan Barak – Purposive Interpretation in Law
13) Once we keep in mind the aforesaid fundamental aspects of the
arbitration, the irresistible conclusion would be that whenever parties
agree for mediation, and even name a specific arbitrator with no specific
provision for appointment of another arbitrator on the recusal/withdrawal
of the said arbitrator, the said omission is made up by Section 15(2) of
the Act and unless arbitration agreement between the parties provides a
categorical prohibition or debarment in resolving a question or dispute or
difference between the parties by a substitute arbitrator in case of death
or the named arbitrator or non-availability of the said arbitrator, Courts
have the power to appoint substitute arbitrator, which power is given by
Section 15(2) of the Act as this provision is to be given liberal
interpretation so as to apply to all possible circumstances under which
the mandate of the earlier arbitrator may be terminated.
14) The aforesaid are my additional grounds to support the view taken by my
learned Brother, thus, dismissing the appeal of the appellant herein.
.............................................J.
(A.K. SIKRI)
NEW DELHI;
OCTOBER 16, 2015.
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