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CASE NO.: Appeal (civil)  7140 of 2004

PETITIONER: Dharma Prathishthanam

RESPONDENT: M/s. Madhok Construction Pvt. Ltd.

DATE OF JUDGMENT: 02/11/2004

BENCH: CJI R.C. LAHOTI, G.P. MATHUR & P.P. NAOLEKAR

JUDGMENT: J U D G M E N T

(Arising out of Special Leave Petition (C) No. 7835 of 2003)

R.C. LAHOTI, CJI.

       Leave granted.         The appellant-Dharma Prathishthanam is a charitable  institution.  The respondent is a builder engaged in construction  activity.  In the year 1985, the appellant proposed to have a  building constructed for which purpose it entered into a works  contract with the respondent for the construction as per the  drawings and specifications given by the appellant.  We are not  concerned with the correctness or otherwise of the allegations  and counter allegations made by the parties which relate to the  question who committed breach of the agreement.  Suffice it for  our purpose to say that disputes arose between the parties.    Clause 35 of the agreement which is the arbitration clause reads  as under:-         "Settlement of disputes shall be through  arbitration as per the Indian Arbitration Act."

Obviously and admittedly the reference was to the  Arbitration Act, 1940.

       On 12th June, 1989 the respondent appointed one Shri  Swami Dayal as the Sole Arbitrator.  It appears that the  respondent gave a notice to the appellant of such appointment  having been made by the respondent but the appellant failed to  respond.  The respondent made a reference of disputes to the  Arbitrator and the Arbitrator Shri Swami Dayal entered upon the  reference.  The record of the proceedings of the Arbitrator have  neither been produced before the High court nor are they  available before us.  However, it is not disputed that the  appellant did not participate in the proceedings before the  Arbitrator.  On 14th April, 1990 the Sole Arbitrator gave an  award of Rs. 14,42,130.78p. with interest at the rate of 12 per  cent per annum from 14th April, 1990 till realization in favour of  the respondent against the appellant.  The respondent filed an  application in the Court under Sections 14 and 17 of the Act for  making the Award a Rule of the Court.  The notice under Section  14(2) of the Act was published in the Statesman , a daily English  newspaper in its edition dated 6th December, 1991.  the notice  reads as under:-

"Notice to:         Dharma Prathishthanam A, 214, New Friends  Colony, New Delhi \026 65.

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       Whereas Shri Swami Dayal the Arbitrator has  filed the award dated 14.4.90 delivered by the said  Arbitrator with Arbitration proceedings in Court in  disputes inter se you respondent and petitioner for  being made a rule of the Court.   You are hereby  called upon to file objections,  if any, in accordance  with law to the said award within 30 days of the  Service of this notice.

       And petitioner has filed an application I.A. No.  8446/90 under Section 17 of the Arbitration Act,  1940 on 20.9.91.

                               AND

       Whereas it has been shown to the satisfaction  of the Court it is not possible to serve you in the  ordinary way, therefore,  this notice is given by  advertisement directing you to make appearance in  Court on 20.2.92 at 11 a.m.

       Take notice that in default of your appearance  on the day before mentioned,  the suit and I.A. will  be heard and determined in your absence.

       Dated this 18th day of November, 1991."

The appellant appeared in the Court on the appointed date  i.e. 20th February, 1992.  According to the appellant it gathered  only on that date a copy of the Award dated 14th April, 1990.   From 14th March, 1992 to 20th March, 1992 the Court was  closed.  On 21st March, 1992 the appellant filed objections to the  Award.  The objections have been dismissed without any  adjudication on merits and only on the ground that the objection  petition was filed beyond a period of 30 days from 6th February,  1991 i.e. the date of publication of notice in the Statesman.   Having lost before the learned Single Judge of the High Court of  Delhi (Original Side) as also in intra-court appeal preferred  before the Division Bench, the aggrieved appellant has filed this  appeal by special leave.          Though the initial submission of the learned counsel for the  appellant has been that in the facts and circumstances of the  case, the delay in filing the objection petition ought to have been  condoned and the objection petition ought to have been held to  have been filed within the period of limitation calculated from the  date on which copy of the award was made available to the  appellant without which the appellant could not have exercised  its right to file objections and, therefore,  subject to this Court  feeling satisfied of the maintainability of the objection petition  and its availability for consideration on merits, this Court may  remand the objection petition for hearing and decision by the  learned Single Judge on merits.  However, we do not think that  this exercise is at all called for, as we are satisfied that the  Award given by the arbitrator is a nullity and hence the  proceedings must stand terminated fully and finally at this stage  itself.  We proceed to record  our reasons for taking this view.   

An arbitrator or an Arbitral Tribunal under the Scheme of  the 1940 Act is not statutory.  It is a forum chosen by the  consent of the parties as an alternate to resolution of disputes by  the ordinary forum of law courts.  The essence of arbitration  without assistance or intervention of the Court is settlement of  the dispute by a Tribunal of the own choosing of the parties.  

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Further, this was not a case where the arbitration clause  authorized one of the parties to appoint an arbitrator without the  consent of the other.  Two things are, therefore, of essence in  cases like the present one:  firstly, the choice of the Tribunal or  the arbitrator; and secondly, the reference of the dispute to the  arbitrator.  Both should be based on consent given either at the  time of choosing the Arbitrator and making reference or else at  the time of entering into the contract between the parties in  anticipation of an occasion for settlement of disputes arising in  future.  The Law of Arbitration does not make the arbitration an  adjudication by a statutory body but it only aids in  implementation of the arbitration contract between the parties  which remains a private adjudication by a forum consensually  chosen by the parties and made on a consensual reference.          Arbitration Act, 1940 consolidates and amends the law  relating to arbitration.  According to Clause (a) of Section 2 of  the Act, "Arbitration agreement" means a written agreement to  submit present or future differences to arbitration, whether an  arbitrator is named therein or not.  Under Section 3, "arbitration  agreement, unless a different intention  is expressed therein,  shall be deemed to include the provisions set out in the First  Schedule insofar as they are applicable to the reference.  The  First Schedule consists of 8 paragraphs incorporating implied  conditions of arbitration agreements.  Para 1 of the First  Schedule  which  only  is  relevant  for  our  purpose    provides   \026 " Unless otherwise expressly provided, the reference shall be  to a sole arbitrator".  The manner and method of choosing  the  sole arbitrator and making the reference to him is not provided.   That is found to be dealt with in Sections 8, 9 and 20 of the Act.

The relevant parts of the provisions relevant in the context  of a general clause merely providing for arbitration as in the  present case, are extracted and reproduced herein :-  

"Section 8  Power of Court to appoint arbitrator  or umpire \026 (1) In any of the following cases, - (a)     where an arbitration agreement  provides that the reference shall be to one  or more arbitrators to be appointed by  consent of the parties, and all the parties do  not, after differences have arisen;, concur  in the appointment or appointments; or (b)     XXX             XXX             XXX (c)             XXX             XXX             XXX

any party may serve the other parties or the  arbitrators, as the case may be, with a written notice  to concur in the appointment or appointments or in  supplying the vacancy.

[2]  If the appointment is not made within fifteen  clear days after 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 or they had been appointed by   consent of all parties."

Section 9 is irrelevant for our purpose as its applicability is

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attracted to a case where an arbitration agreement provides for  a reference to two arbitrators, one to be appointed by each party  and procedure to be followed in such cases which is not a  situation provided in by the agreement with which we are  dealing.

Sections 8 and 9 are placed in Chapter II of the Act   Section 20 finds place in Chapter III.  According to Section 20 \026

Application to file in Court arbitration  agreement \026  

(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 II,  may apply to a Court having jurisdiction in the  matter to which the agreement relates, that the  agreement be filed in court."   

After noticing all the parties and affording them an opportunity  of being heard, under sub-sections (4) and (5) \026  

"(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."

       In the background of the above said provisions, the  question which arises for consideration is whether, in the light of  a general provision as in clause 35, the respondent could have  unilaterally appointed an arbitrator without the consent of the  appellant and could have made a reference to such arbitrator  again without the reference of disputes having been consented  to by the appellant.   

On a plain reading of the several provisions referred to  hereinabove, we are clearly of the opinion that the procedure  followed and the methodology adopted by the respondent is  wholly unknown to law and the appointment of the sole  arbitrator Shri Swami Dayal, the reference of disputes to such  arbitrator and the ex parte proceedings and award given by the  arbitrator are all void ab initio and hence nullity, liable to be  ignored.  In case of arbitration without the intervention of the  Court, the parties must rigorously stick to the agreement  entered into between the two.  If the arbitration clause names  an arbitrator as the one already agreed upon, the appointment  of an arbitrator poses no difficulty.  If the arbitration clause does  not name an arbitrator but provides for the manner in which the  arbitrator is to be chosen and appointed, then the parties are  bound to act accordingly.  If the parties do not agree then arises  the complication which has to be resolved by reference to the

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provisions of the Act.  One party cannot usurp the jurisdiction of  the Court and proceed to act unilaterally.  A unilateral  appointment and a unilateral reference \026 both will be illegal.  It  may make a difference if in respect of a unilateral appointment  and reference the other party  submits to the jurisdiction of the  arbitrator and waives its rights which it has under the  agreement, then the arbitrator may proceed with the reference  and the party submitting to his jurisdiction and participating in  the proceedings before him may later on be precluded and  estopped from raising any objection in that regard.  According to  Russell (Arbitration, 20th Edition, p. 104) \026

"An Arbitrator is neither more nor less than a private  judge of a private court (called an arbitral tribunal)  who gives a private judgment (called an award).  He  is a judge in that a dispute is submitted to him;\005\005.".  "He is private in so far as (1) he is chosen and paid  by the disputants (2) he does not sit in public (3) he  acts in accordance with privately chosen procedure  so far as that is not repugnant to public policy (4) so  far as the law allows he is set up to the exclusion of  the State Courts (5) his authority and powers are  only whatsoever he is given by the disputants’  agreement (6) the effectiveness of his powers  derives wholly from the private law of contract and  accordingly the nature and exercise of these powers  must not be contrary to the proper law of the  contract or the public policy of England, bearing in  mind that the paramount public policy is that  freedom of contract is not lightly to be interfered  with."          A reference to a few decided cases would be apposite.           In Thawardas Pherumal and Anr. Vs. Union of India  (1955) 2 SCR 48, a question arose in the context that no specific  question of law was referred to, either by agreement or by  compulsion, for decision of the Arbitrator and yet the same was  decided howsoever assuming it to be within his jurisdiction and  essentially for him to decide the same incidentally.  It was held  that \026  

"A reference requires the assent of both sides.  If  one side is not prepared to submit a given matter to  arbitration when there is an agreement between  them that it should be referred, then recourse must  be had to the court under Section 20 of the Act and  the recalcitrant party can then be ;compelled to  submit the matter under sub-section (4).  In the  absence of either, agreement by both sides about  the terms of reference, or an order of the Court  under section 20(4) compelling a reference, the  arbitrator is not vested with the necessary exclusive  jurisdiction."

A Constitution Bench held in Waverly Jute Mills Co. Ltd.  Vs. Raymond and Co. (India) Pvt. Ltd. (1963) 3 SCR 203 that  \026

"An agreement for arbitration is the very foundation  on which the jurisdiction of the arbitrators to act   rests, and where that is not in existence, at the time  when they enter on their duties, the proceedings  must be held to be wholly without jurisdiction.  And  this defect is not cured by the appearance of the

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parties in those proceedings, even if that is without  protest, because it is well settled that consent cannot  confer  jurisdiction."  

Again a Three-Judges Bench held in Union of India Vs.  A.L. Rallia Ram (1964) 3 SCR 164 that it is from the terms of  the arbitration agreement that the arbitrator derives his  authority to arbitrate and in absence thereof the proceedings of  the arbitrator would be unauthorized.

In Union of India Vs. Prafulla Kumar Sanyal  [1979] 3  SCC 631, this Court observed that an order of reference can be  either to an 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.  If no such  arbitrator had been appointed and where the parties cannot  agree upon an arbitrator,  the Court may proceed to appoint an  arbitrator itself.  Clearly one party cannot force his choice of  arbitrator upon the other party to which the latter does not  consent.  The only solution in such a case is to seek an  appointment from the Court.           In Banwari Lal Kotiya Vs. P.C. Aggarwal 1985 (3) SCC  255, the question of validity of a reference came up for the  consideration of the Court in the context of the issue - whether  an arbitrator could enter upon a reference which was not  consensual.  The Court explained the law laid down by this Court  in Thawardas Perumal’s case (supra) that though the  reference to arbitrator has to be accompanied by consent of the  parties but such consent is not necessarily required to be  expressed at the time of making the reference if it is already  provided by the agreement or is sanctioned by statutory rules,  regulations or bye-laws.  The Court held that the expression  "arbitration agreement" is wider as it combines within itself two  concepts \026 (a) a bare agreement between the parties that  disputes arising between them should be decided or resolved  through arbitration and  (b) an actual reference of a particular  dispute or disputes for adjudication to a named arbitrator or  arbitrators.  When the arbitration agreement is of the former  type, namely, a bare agreement, a separate reference to  arbitration with fresh assent of both the parties will be necessary  and in the absence of such consensual reference resorting to  Section 20 of the Arbitration Act will be essential.

The Constitution Bench in Khardah Company Ltd. Vs.  Raymond & Co. (India) Private Ltd. AIR 1962 SC 1810  decided the issue from the view point of jurisdictional  competence  and held that what confers  jurisdiction on the  arbitrators to hear and decide a dispute is an arbitration  agreement and where there is no such agreement there is an  initial want of jurisdiction which cannot be cured even by  acquiescence.  It is clearly spelled out from the law laid down by  the Constitution Bench that the arbitrators shall derive their  jurisdiction from the agreement and consent.   

Thus, there is ample judicial opinion available for the  proposition that the reference to a sole arbitrator as  contemplated by para 1 of the First Schedule has to be a  consensual reference and not an unilateral reference by one  party alone to which the other party does not consent.

We are also inclined to make a reference to a few decisions  by High Courts.  

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In India Hosiery Works Vs. Bharat Woollen Mills Ltd.  AIR 1953 Cal. 488, the Division Bench of the Calcutta High Court  observed \026

"an arbitration agreement neither specifying the  number of arbitrators, nor specifying the mode of  appointment, is perfectly effective and valid and the  incidents of such an agreement are that it is to take  effect as an agreement for reference to a sole  arbitrator, to be appointed by consent of the parties  or, where the parties do not concur in making an  appointment, to be appointed by the Court, except  where the operation of Rule 1 of the First Schedule is   excluded. XX                      XX                      XX XX                      XX                      XX               Where, therefore, the agreement does not assign the  right of appointment distributively to different parties  in respect of different arbitrators, it is inherent in the  agreement that the appointment of the arbitrator or  of each of the several arbitrators must be by the  consent of all parties.  There may be an express  provision to such effect, but even in the absence of  any express provision, such a  provision must be  taken ;to be necessarily implied.  It is for that reason  that where the agreement does not specify the  number of arbitrators, nor specifies the mode of  appointment, the Court first takes the agreement as  providing for reference to a single arbitrator by  reason of the provisions of Rule 1 of Schedule I, then  takes the mode of appointment intended necessarily  to be appointed by consent of the parties and next, if  it finds that the parties cannot concur in the  appointment of an arbitrator, it appoints from itself."                                             [emphasis supplied]  

The view was reiterated by another Division Bench of the  same High Court in  M/s. Teamco Private Ltd. Vs.  T.M.S.  Mani AIR 1967 Cal. 168.

M/s National Small Industries Corpn. Ltd. Vs. M/s.  National Metal Craft, Delhi and others AIR 1981 Del. 189 is  very close to the case at hand.  An arbitration clause -  longish  one, in substance provided that on question, dispute or  difference arising between the parties to the agreement, "either  of the parties may give to the other notice in writing of such  question dispute or difference and the same shall be referred to  arbitration".  One of the parties served a notice on the other  appointing one ’K’ as arbitrator to adjudicate upon the dispute.   The notice ended by saying "you are hereby called upon to agree  to the said reference in accordance with the arbitration  agreement for the settlement of the said disputes."  ’K’ then  commenced the arbitration proceedings.  Following the Division  Bench decision of the Calcutta High Court, the learned Single  Judge of Delhi High Court held \026

"If the agreement merely provides, as here, that the  dispute shall be referred to arbitration, the reference  shall be made to a single arbitrator.  If the  agreement does not provide for the number of  arbitrators and the mode of their appointment, it will  be assumed to be one for reference to a single  arbitrator by reason of para I of the First Schedule,

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and the mode of appointment taken necessarily to be  consent of parties, and if the parties do not concur in  the appointment, as is the case here, the court will  make the appointment".                                                       [emphasis supplied]

Appointment of ’K’ as arbitrator was held to be invalid because it  was unilateral and was made without any application to the  Court either under Section 8 or Section 20 of the Act.

A Division Bench of the High Court of Allahabad held in Om  Prakash Vs. Union of India AIR 1963 All.  242 that a reference  to arbitrator out of Court  must be by both the parties together  and cannot be by one party alone; failing the consent, the  parties or either of them must approach the Court by making an  application in writing.

Consent, of course, is of the very essence of arbitration  said a Division Bench of Madras High Court in The Union of  India Vs. Mangaldas N. Varma, Bombay AIR 1958 Mad. 296.

Failure to give consent or to appoint an Arbitrator in  response to a notice for appointment of an Arbitrator given by  the other party provides justification to the other party for taking  action under sub-section (2) of Section 8 of the Act and then it is  the Court which assumes jurisdiction to appoint an Arbitrator as  held by High Court of Orissa in Niranjan Swain Vs. State of  Orissa and Others AIR 1980 Ori. 142.

The view of the law taken by the several High Courts as  above appeals to us and we find ourselves in agreement  therewith.

In the event of the appointment of an arbitrator and  reference of disputes to him being void ab initio as totally  incompetent or invalid the award shall be void and liable to be  set aside de hors the provisions of Section 30 of the Act, in any  appropriate proceedings when sought to be enforced or acted  upon.  This conclusion flows not only from the decided cases  referred to hereinabove but also from several other cases which  we proceed to notice.

In Chhabba Lal Vs. Kallu Lal and Others AIR 1946 P.C.  72 their Lordships have held that an award on a reference pre- supposes a valid reference.  If there is no valid reference, the  purported award is a nullity.    

On this point, there is near unanimity of opinion as  amongst the High Courts of the country as well.  Illustratively,  we may refer to a few cases.  In Union of India Vs. M/s. Ajit  Mehta and Associates, Pune and Others AIR 1990 Bom. 45  (para 34), the Division Bench held that the Court has suo motu  power to set aside an award on ground other than those covered  by Section 30 such as an award made by arbitrators who can  never have been appointed under Section 8, as such an award  would undoubtedly be ab initio void and nonest.  In Union of  India Vs. South Eastern Railway AIR 1992 M.P. 47 and  Rajendra Dayal Vs. Govind 1970 MPLJ 322, both Division  Bench decisions, the High Court of Madhya Pradesh has held that  in certain situations the Court may set aside an Award even  without there being an application under Section 30 or even if  the petition under Section 30 has not been filed within the period  of limitation if the Court finds that the award is void or directs a  party to do an act which is prohibited by law or is without  jurisdiction or patently illegal.  We need not multiply the number

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of authorities on this point as an exhaustive and illuminating  conspectus of judicial opinion is found to be contained in Law of  Arbitration and Conciliation - Practice and Procedure by S.K.  Chawla (Second Edition, 2004 at pp. 181-184) under the caption  \026 "Whether the Court has suo motu power to set aside an  Arbitral Award - " and the answer given in the discussion  thereunder is in the affirmative.

Though it has been held in  The Union of India Vs. Shri  Om Prakash [1976] 4 SCC 32 that an objection on the ground  of invalidity of a reference is not specifically covered by clauses  (a), (b) and (c) of Section 30, yet it is included in the residuary  expression "or as otherwise invalid" and could have been set  aside on such an application being made.  However, the above  decision cannot be treated as an authority to hold that an award  which is void ab initio and hence a nullity consequent upon an  invalid appointment and an invalid reference in clear breach of  the provisions contained in Sections 8, 9 and 20 of the Act, can  still be held to be valid if not objected to through an objection  preferred under Section 30 of the Act within the prescribed  period of limitation.  Three types of situations may emerge between the parties  and then before the Court.  Firstly, an arbitration agreement,  under examination from the point of view of its enforceability,  may be one which expresses the parties’ intention to have their  disputes settled by arbitration by using clear and unambiguous  language then the parties and the Court have no other choice  but to treat the contract as binding and enforce it.  Or, there  may be an agreement suffering from such vagueness or  uncertainty as is not capable of being construed at all by culling  out the intention of the parties with certainty, even by reference  to the provisions of the Arbitration Act, then it shall have to be  held that there was no agreement between the parties in the eye  of law and the question of appointing an arbitrator or making a  reference or disputes by reference to Sections 8, 9 and 20 shall  not arise.   

Secondly, there may be an arbitrator or arbitrators named,  or the authority may be named who shall appoint an arbitrator,  then the parties have already been ad idem  on the real identity  of the arbitrator as appointed by them before hand; the consent  is already spelled out and binds the parties and the Court.  All  that may remain to be done in the event of an occasion arising  for the purpose, is to have the agreement filed in the Court and  seek an order of reference to the arbitrator appointed by the  parties.   

Thirdly, if the arbitrator is not named and the authority  who would appoint the arbitrator is also not specified, the  appointment and reference shall be to a sole arbitrator unless a  different intention is expressly spelt out.  The appointment and  reference \026 both shall be by the consent of the parties.  Where  the parties do not agree, the Court steps in and assumes  jurisdiction to make an appointment, also to make a reference,  subject to the jurisdiction of the Court being invoked in that  regard.  We hasten to add that mere inaction by a party called  upon by the other one to act does not lead to an inference as to  implied consent or acquiescence being drawn.  The appellant not  responding to respondent’s proposal for joining in the  appointment of a sole arbitrator named by him could not be  construed as consent and the only option open to the respondent  was to have invoked the jurisdiction of Court for appointment of  an arbitrator and an order of reference of disputes to him.  It is  the Court which only could have compelled the appellant to join  in the proceedings.

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In the present case, we find that far from submitting to the  jurisdiction of the Arbitrator and conceding to the appointment of  and reference to the Arbitrator-Shri Swami Dayal, the appellant  did raise an objection to the invalidity of the entire proceedings  beginning from the appointment till the giving of the Award  though the objection was belated.  In ordinary course, we would  have after setting aside the impugned judgments of the High  Court remanded the matter back for hearing and decision afresh  by the learned Single Judge of the High Court so as to record a  finding if the award is a nullity and if so then set aside the same  without regard to the fact that the objection petition under  Section 30 of the Act filed by the appellant was beyond the  period of limitation prescribed by Article 119(b) of the Limitation  Act, 1963.  However, in the facts and circumstances of the case,  we consider such a course to follow as a futile exercise resulting  in needless waste of public time. On the admitted and  undisputed facts, we are satisfied, as already indicated  hereinabove, that the impugned Award is a nullity and hence  liable to be set aside and that is what we declare and also do  hereby, obviating the need for remand.

For the foregoing reasons, the appeal is allowed.  The  impugned Award given by the Arbitrator alongwith the  appointment of the Arbitrator and reference made to him are all  set aside as void ab initio and nullity.  The respondent shall be at  liberty to seek enforcement of his claim, if any, by having  recourse to such remedy as may be available to him under law  and therein pray for condonation of delay by seeking exclusion of  time lost in the present proceedings. No order as to the costs.