Bombay High Court
M/S Chhabriya Cloth Stores vs M/S Kamal Synthetics on 21 February, 2025
2025:BHC-AS:8340
F.A. No. 438 of 1997 final.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
CIVIL APPELLATE JURISDICTION
FIRST APPEAL NO. 438 OF 1997.
Messrs. Chhabriya Cloth Stores, Manmad ] ...Appellant.
Versus
Messrs. Kamal Synthetics, Bombay - 400 002. ] ...Respondent.
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Ms. Rukmini Khairnar i/b Mr. P. N. Joshi for Appellant.
None for Respondent.
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Coram : Sharmila U. Deshmukh, J.
Reserved on : 18th February, 2025
Pronounced on : 21st February, 2025.
Judgment :
1. The First Appeal filed under Section 39(1) (iv) of the Arbitration
Act, 1940 [for short, "the Arbitration Act"] challenges the impugned
judgment dated 25th August, 1995 passed by the Bombay City Civil
Court in Arbitration Petition No. 81 of 1995, dismissing the objection to
the Award and making the Arbitration Award rule of the Court under
Section 17 of Arbitration Act.
2. Award No. 168 of 1994 was passed in favor of Respondent for
sum of Rs 35,770.10/-, which was filed in the Court under Section 14 of
Arbitration Act. The Appellant challenged the Award by filing
Arbitration Petition No. 81 of 1995 under Section 30 and Section 33 of
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Arbitration Act, which was dismissed and Award was made rule of the
Court, which is impugned in the present Appeal.
3. The dispute arose between the parties out of alleged claim for
payment of the goods supplied by Respondent to Appellant. The
Respondent invoked the arbitration clause in the invoice which
provided for the dispute to be subject to the Arbitration Rules of
Bharat Merchants' Chamber. The Respondent approached Bharat
Merchants' Chamber and appointed one Mr. Anil Agrawal from the
panel of arbitrators of Bharat Merchants' Chamber vide letter dated
28th March, 1994. On 29th March, 1994, Bharat Merchants' Chamber
called upon the Appellant to appoint its arbitrator from the panel of
arbitrators. In response, Appellant vide communication dated 7 th April,
1994 declined to appoint Arbitrator and refused to participate in
arbitration proceedings. Bharat Merchants' Chamber appointed an
Arbitrator for the Appellant and proceeded with arbitration. The
Appellant did not participate in the arbitration proceedings and Award
came to be passed in favor of Respondent.
4. Upon the Award being filed in the Court, Respondent filed its
objection to the Award being made decree of the Court by filing
Arbitration Petition No. 81 of 1995. It was pleaded that there was no
Arbitration Agreement between the parties and Appellant had
declined to appoint an Arbitrator. It was pleaded that Award was
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invalid, and not binding.
5. The Petition was resisted by Respondent by filing its reply
contending that invoice was signed and terms are binding. The Trial
Court held that terms which are printed on the bills were binding upon
the parties and there was an Arbitration clause, which has been
properly considered by the Arbitrator and that the award passed is
proper. The Trial Court passed a composite order dismissing the
Arbitration Petition and passing Decree in terms of Award No. 168 of
1994.
6. Ms. Khairnar, learned counsel appearing for Appellant would
submit that Arbitration clause was printed overleaf of the bill for
supply of goods and provided for dispute to be subject of the
Arbitration Rules of Bharat Merchants' Chamber, Bombay. She has
fairly stated that the same would constitute an Arbitration agreement.
Her objection, however, is that despite declining to appoint an
Arbitrator, without recourse to Section 20 of Arbitration Act, the
unilateral appointment and unilateral reference is illegal. In support,
she relies upon the decision of Apex Court in the case of Dharma
Prathishthanam vs. Madhok Construction (P) Ltd.1
7. Though the matter was adjourned from time to time, none
appears for Respondent.
1 (2005) 9 SCC 686.
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8. The following point arises for determination:
(i) Whether in facts of present case, there has been an unilateral
appointment and unilateral reference rendering the Award passed by
Arbitrator an illegal award by reason of non-compliance of Section 20
of the Arbitration Act, 1940?
As to Point No. (i) :
9. The present Appeal has been filed under Section 39(1)(iv) of
Arbitration Act. Though Section 17 of Arbitration Act restricts the
nature of appeal against the decree only to the question whether the
decree is in excess or not in accordance with the award, Section 39(1)
(iv) of Arbitration Act provides for appeal against the order refusing to
set aside the Award. In the present case, the order is a composite order
refusing to set aside the award and passing decree in terms of the
Award and the appeal under Section 39(1)(iv) is not restricted to the
nature set out in Section 17 of Arbitration Act. It is thus, open for the
Appellant to challenge the refusal to set aside the Award on all
grounds.
10. Ms. Khairnar has fairly conceded that condition printed overleaf
of the invoice agreeing to dispute being made subject to the
arbitration rules of Bharat Merchants' Chamber constitutes an
Arbitration Agreement. The condition in the invoice was that dispute
relating to transactions will be subject to Arbitration Rules of Bharat
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Merchants' Chamber, Bombay only. The Arbitration Rules of Bharat
Merchants' Chamber are not produced on record. However, the fact
remains that Arbitration clause did not name any Arbitrator and only
provided for the dispute to be subject to Arbitration Rules. From the
communication dated 29th March, 1994 addressed by the Bharat
Merchants' Chamber to the Appellant, calling upon Appellant to
appoint an Arbitrator of his choice and from the Arbitral Award, it is
evident that the Rules provided for appointment of two arbitrators,
one by each party. The Appellant by communication dated 7 th April,
1994 specifically informed Bharat Merchants' Chamber that it is not
willing to appoint an Arbitrator.
11. Chapter II of Arbitration Act provides for arbitration without
intervention of Court and Section 8 which is contained in Chapter II
provides that 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 parties do not concur in the
appointments, the Court may on application of the party who gave
notice and after hearing, appoint an arbitrator to enter upon the
reference. Chapter III deals with arbitration with intervention of Court
and Section 20(4) provides that where no sufficient cause is shown, the
Court shall order the agreement to be filed and make an order of
reference to the arbitrator appointed by the parties and in absence of
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concurrence, to an arbitrator appointed by the court.
12. Admittedly in the present case, the Appellant did not concur in
appointment of arbitrator and in such eventuality, the Respondent
should have taken recourse to Section 20 of Arbitration Act. The
Arbitration Agreement between the parties merely provided that
Arbitration is subject to Rules of Bharat Merchants' Chamber and there
was no named arbitrator. In absence of named arbitrator, Bharat
Merchants' Chamber could not have unilaterally appointed an
Arbitrator for the Appellant. The Appellant did not acquiesce in the
appointment and did not participate in the arbitration proceedings.
13. Ms. Khairnar is right upon relying upon the decision of Apex
Court in the case of Dharma Prathishthanam vs. Madhok Construction
(P) Ltd. (supra) where the Court has held in Paragraph Nos. 7 and 12 as
under:-
"7. 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. 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
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contract between the parties which remains a private
adjudication by a forum consensually chosen by the parties
and made on a consensual reference.
12. 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 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 - 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 Edn., p. 104) -
"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; ...
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."
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14. The Apex Court in the case of Banwari Lal Kotiya vs. P. C.
Aggarwal2 considered the question of validity of reference against the
issue whether an arbitrator can enter upon a reference which is not
consensual and explained the law laid down in Thawardas Pherumal
vs. Union of India3, that 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 the statutory rules, regulations or
bye-laws. The Apex Court noted thus:
"....The expression "arbitration agreement" is wider as it
combines within itself two concepts - (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 absence of
such consensual reference, resorting to Section 20 of the
Arbitration Act will be essential"
15. In the absence of consensual reference, the unilateral reference
and unilateral award would render the reference void ab initio.
16. In the present case, admittedly the petitioner did not concur in
an appointment of Arbitrator, in which case, in absence of any
Application under Section 20 of the Arbitration Act seeking
appointment of Arbitrator, the unilateral appointment and unilateral
reference would be illegal. In the absence of any recourse to Section
20 of the Act, the Arbitrator did not have an inherent jurisdiction to
2 (1985) 3 SCC 255.
3 (1955) 2 SCR 48
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enter into reference. Under Section 30 of Arbitration Act, the Award is
liable to be set aside where the Award is otherwise invalid.
17. The Trial Court has failed to note the settled position in law and
has dismissed the objection by arriving at a finding that there was
Arbitration Agreement between the parties. What had to be
considered is the validity and legality of the unilateral appointment
and unilateral reference, which was not done. Resultantly, Award No.
168 of 1994 is illegal and cannot be made rule of the Court. Point No (i)
is accordingly answered in favor of Appellant.
18. Hence, following order is passed:-
:ORDER:
[i] First Appeal is allowed.
[ii] The impugned judgment dated 25 th August, 1995
passed by the City Civil Court in Arbitration Petition No. 81 of
1995 is hereby quashed and set aside.
[iii] Arbitration Petition No. 81 of 1995 is allowed.
[iv] Award No. 168 of 1994 dated 1 st August, 1994 stands
quashed and set aside.
[Sharmila U. Deshmukh, J.]
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