SHAILESH DHAIRYAWAN Vs. MOHAN BALKRISHNA LULLA

Tags Arbitration

Supreme Court of India (Division Bench (DB)- Two Judge)

Appeal (Civil), 8731 of 2015, Judgment Date: Oct 16, 2015

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 …APPELLANT

VERSUS

MOHAN BALKRISHNA LULLA ...RESPONDENT

J U D G M E N T

R.F. Nariman, J.

1. Leave granted.

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, 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.”

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.

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 why
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]”

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
specialised 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 is 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:

“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 Division 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 are 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 provision 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 rules 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 particular 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 arbitration 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 the 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 speedy
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 whom 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 consent 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.

……………………J.

(A.K. Sikri)

……………………J.

(R.F. Nariman)

New Delhi;

October 16, 2015.

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)

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 agreement
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]

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.

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 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.

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 was
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.

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.

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 to
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.

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 pending 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.

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.

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]

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.

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.

Dynamic statutory interpretation also persuades us to take into
consideration ethoes of arbitration process, including the spirit behind
Section 89 of the CPC.

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.

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.
-----------------------
[1] (2012) 7 SCC 71
[2] (2000) 4 SCC 539
[3] Aharan Barak – Purposive Interpretation in Law

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