Parganiha and Agnihotri v. Union of India — 1976 DIGILAW 186 (MP)

ORDER Singh, J. 1. The appellant, Messrs Pargaiha and Agnihotri is a partnership firm which carries on business of building contractors. The appellant entered into a contract on 18th January 1966 with the Union of India for the construction of Basha Type Quarters at Mana Camp, Raipur. The appellant claimed a sum of Rs. 4,36,962.94 on the basis of the said contract from the Union of India. The appellant served a notice on 27th October 1970 on the Executive Engineer, Works Division, Mana, demanding appointment of an arbitrator within 15 days in accordance with Clause 25 of the contract. On 16th November 1970, the appellant made an application under section 20 of the Arbitration Act, 1940, praying that the respondents be called upon to file the arbitration agreement and that an arbitrator be appointed. The respondents the Union of India and the Executive Engineer, Works Division, Mana, in reply to the application of the appellant submitted that the application was not maintainable One of the grounds taken by the respondents was that the Additional Chief Engineer or the Head of the Central Public Works Department (C.P.W.D) alone could nominate an arbitrator and as no such nomination had been made, the dispute could not be referred to arbitration and the application under section 20 was not maintainable. The District Judge, Raipur, who tried the application under section 20 dismissed the application. It was held by the District Judge that under Clause 25 of the contract the Additional Chief Engineer in charge of the work or if there be no such Additional Chief Engineer, the Administrative Head of the C.P.W.D could alone appoint an arbitrator and that no appointment of an arbitrator could be made by the Court. There were some other issues relating to the tenability of the application under section 20 of the Act, but those issues were not decided by the District Judge. It is against this order that the appellant has come to this Court in appeal. 2. There were some other issues relating to the tenability of the application under section 20 of the Act, but those issues were not decided by the District Judge. It is against this order that the appellant has come to this Court in appeal. 2. The question in this appeal is whether the District Judge was right in dismissing the application under section 20 of the Act, Clause 25 of the contract which contains the arbitration agreement reads as follows: Clause 25: Except where otherwise provided in the contract all question and disputes relating to the meaning of the specifications designs, drawings and instructions hereinbefore mentioned and as to the quality of workmanship or materials used on the work or as to any other question, claim right matter or thing whatsoever, in estimates instruction, orders or these conditions or otherwise concerning the works or the execution or failure to execute the same whether arising during the progress of the work or after the completion or abandonment thereof shall be referred to the sole arbitration of the persons appointed by the Additional Chief Engineer Central Public Works Department in charge of the work at the lime of dispute or if there be no Additional Chief Engineer, the Administrative head of the said Central Public Works Department at the title of such appointment. It will be no objection to any such appointment that the arbitrator so appointed is a Government servant that he had to deal with the matters to which the contract relates and that in the course of his duties as Government servant he had expressed view on all or any of the matters in dispute of difference. The arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason sue Additional Chief Engineer or administrative head as aforesaid at the time of such transfer, vacation of office or inability to act shall appoint another person to act as arbitrator in accordance with the terms of the contract such person shall be entitled to proceed with the reference from the stage at which it was left by his predecessor. It is also a term of this contract that no person other than a person appointed by such additional Chief Engineer or administrative head to the C.P.W.D. as aforesaid should act as arbitrator and, if for any reason, that is not possible, the matter is not to be referred to arbitration at all. The arbitrator may from time to time with the consent of the parties enlarge the time for making and publishing the award. Subject as aforesaid the provisions of the Arbitration Act, 1940, or any statutory modification or reenactment thereof and the rules made there under and for the time being in force shall apply to the arbitration proceeding under this clause." 3 It is to be noted that in the reply that was submitted by the respondent before the District Judge it was not contended that the Additional Chief Engineer, C.P.W.D., in charge of the work at Mana or the Administrative Head of the C.P.W.D. had refused to nominate any arbitrator and, therefore the arbitration agreement had become ineffective and was not subsisting at the time when the application under section 20 of the Act was made by the appellant. It is also not stated in the reply that the said officers are not prepared to nominate any arbitrator. What is mentioned in the reply is that no arbitrator had till then been appointed by these officers. It is also significant that in paragraph 3 of the reply it is stated that in fact no dispute had arisen which could be covered by the arbitration agreement. A reading of the entire reply goes to show that the contention of the respondents only was that as there was no dispute falling within the arbitration agreement and is no arbitrator had been appointed by the officers named therein when the application under section 20 was made the application was not maintainable. There was also no material placed before the District Judge from which it could have been inferred that the Additional Chief Engineer or the Administrative Head of the C.P.W.D. had refused or were not prepared to appoint the arbitrator. There was also no material placed before the District Judge from which it could have been inferred that the Additional Chief Engineer or the Administrative Head of the C.P.W.D. had refused or were not prepared to appoint the arbitrator. It is true that by Clause 25 of the contract the power to appoint an arbitrator was placed by the parties in the hands of the Additional Chief Engineer or the Administrative Head of the C.P.W.D. It is also true that the parties expressly agreed that no person other than a person appointed by the Additional Chief Engineer or the Administrative Head of the C.P.W.D. could act as arbitrator. The parties also provided in Clause 25 that if for any reason that was not possible the matter could not be referred to arbitration at all. However, as there was no definite refusal on the part of the Additional Chief Engineer or the Administrative Head of the C.P.W.D. to appoint an arbitrator as envisaged in Clause 25 of the contract, it Could not be said that the arbitration agreement bad ceased to subsist and no application could be made under section 20. Simply because the parties under the arbitration agreement leave the appointment of an arbitrator on a third person, it cannot be said that section 20 has no application. In M/S. D. Gobindram v. M/s. Shamji K and Co. AIR 1961 SC 1285 the parties by their agreement had left the power of selecting and arbitrator or arbitrators in the hands of the Chairman of the Board of Directors of the East India Cotton Association Ltd. The arbitration was governed by the statutory Byelaws of the Association. On an application made by a party under section 20 of the Act, one of the contentions raised was that the application was not maintainable as the Court could not appoint an arbitrator. In negativing this contention, the Supreme Court observed as follows: "The powers and duties of the Court in sub-section (4) of section 20 are of two distinct kinds. The first is the judicial function to consider whether the arbitration agreement should be filed in Court or not. That may involve dealing with objections to the existence and validity of the agreement itself. Once that is done and the Court has decided that the agreement must be filed, the first part of its powers and duties is over. The first is the judicial function to consider whether the arbitration agreement should be filed in Court or not. That may involve dealing with objections to the existence and validity of the agreement itself. Once that is done and the Court has decided that the agreement must be filed, the first part of its powers and duties is over. It is significant that an appeal under S. 39 lies only against the decision of this part of sub-section (4). Then follows a ministerial act of reference to arbitrator or arbitrators appointed by the parties. That also was perfectly possible in this case if the parties appointed the arbitrator or arbitrators. If the parties do not agree, the Court may be required to make a decision as to who should be selected as an arbitrator and that may be a function either judicial or procedural or even ministerial; but it is unnecessary to decide which it is. In the present case the parties by their agreement have placed the power of selecting an arbitrator or arbitrators (in which we include also the umpire) in the hands of the Chairman of the Board of Directors of the East India Cotton Association Ltd. and the Court can certainly perform the ministerial act of sending the agreement to him to be dealt with by him." 4. Sub-section (4) of section 20 provides that "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". When an application is made under section 20, the Court has to decide first whether an order should be made that the agreement be filed. In taking this decision, the Court will consider whether there is a valid subsisting arbitration agreement and whether the dispute raised is within the purview of that agreement This part of the function of the Court is referred to as the judicial function in M/s. D. Gobindram's case. After the Court reaches the conclusion that the agreement should be filed the becomes the second stage of making the reference. After the Court reaches the conclusion that the agreement should be filed the becomes the second stage of making the reference. The reference is made 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". The arbitration agreement may specifically name the arbitrator which the parties appoint or it may lay down the machinery for appointment of the arbitrator. For example, the agreement may empower a third person or employees of a party as in the instant case to appoint the arbitrator. If such a third person appoints an arbitrator when called upon to do so, the arbitrator so appointed would be the arbitrator appointed by the parties in accordance with the agreement. In our opinion, the words "the arbitrator appointed by the parties in the agreement" as they occur in sub-section (4) of section 20 will also cover the arbitrator who, though not specifically named in the agreement, is appointed in accordance with the procedure laid down therein Therefore, when the Court decides that the agreement should be filed, it can call upon the person authorised in the arbitration agreement, to appoint an arbitrator and reference can be made to the arbitrator so appointed. This would be a reference to the arbitrator "appointed by the parties in the agreement" within the meaning of sub-section (4). In case the person authorised in the agreement fails or refuses to appoint an arbitrator, the reference can still be made if the parties at that stage agree upon the appointment of a person as arbitrator. This would be a reference to the arbitrator appointed by the parties "otherwise" than in the agreement within the meaning of sub-section (4). Although the arbitration agreement provides that no person other than a person appointed by the Additional Chief Engineer or the Administrative Head of the C.P.W.D. shall act as arbitrator the parties can agree that any other person may act as arbitrator because the parties by consent can always modify their earlier agreement. The difficulty may, However, arise when the aforesaid officers fail to appoint an arbitrator when called upon to do so by the Court and when the parties also fail to agree as co the choice of an arbitrator. The difficulty may, However, arise when the aforesaid officers fail to appoint an arbitrator when called upon to do so by the Court and when the parties also fail to agree as co the choice of an arbitrator. The question then will be whether the Court can appoint an arbitrator under sub-section (4) and make a reference to the arbitrator appointed by it. That question does not, however, arise at this stage and need not be answered. 5. The case of Union of India v. S.V. Krishnarao 1969 JLJ 651 = AIR 1970 MP 49 , also support the view that even where the parties leave the power to appoint the arbitrator on a third person, an application for filing the arbitration agreement is maintainable under section 20 and the Court is competent to make reference to the arbitrator appointed in accordance with the agreement. To the same effect is the case of Green/and Foods Ltd. v. Union of India AIR 1973 Delhi 157, where the arbitration clause was almost similar to the arbitration clause in the instant case. 6. The cases relied upon by the District Judge, namely, Ramkhelawan v. Rabindra Kumar AIR 1961 Patna 128. and Chief Engineer B. & R. Jaipur v. Harbans Singh AIR 1955 Rajasthan 30, relate to the applicability of section 8 of the Act P.G. Agencies v. Union of India AIR 1971 SC 2298 , is also a case relating to appointment of an arbitrator under section 8 after the arbitrator named in the agreement to whom the reference had been made under section 20(4) had refused to act. After a reference is once made under section 20 (4), other provisions of the Act including section begin to apply because of section 20 (5). But until a reference is made, the matter is solely governed by section 20 (4) and section 8 has no application on this point, we agree with the reasoning of the Calcutta High Court in Gannon Dunkerley and Co. v. Union Carbide (India), Ltd. AIR 1962 Cat. 360. P. 366 Para 13. The cases relied upon by the District Judge, therefore, have no relevance at this stage. 7. The appeal is allowed. The order of the District Judge is set aside and the case is remanded to him for fresh decision in accordance with law. There shall be no order as to costs of this appeal.