Andhra HC (Pre-Telangana)
Able Associates And Anr. vs K.S. Ramakrishna Rao on 26 July, 2007
Equivalent citations: 2007(6)ALD327, 2007(5)ALT317, 2007(4)ARBLR219(AP), AIR 2007 (NOC) 2511 (A. P.)
Author: Ramesh Ranganathan
Bench: Ramesh Ranganathan
ORDER Ramesh Ranganathan, J.
1. These two Applications are filed, under Section 11 of the Arbitration and Conciliation Act, 1996, (hereinafter referred to as the Act), read with Clauses 2 and 3 of the Scheme of appointment of Arbitrators, 1996, for appointment of an Arbitrator. Both Sri V. Hariharan, learned Counsel for the Applicant, and Sri G. Ramagopal, learned Counsel for the respondent, would agree that, in order to decide the questions raised in both these Applications, it would suffice if the facts in Arbitration Application No. 15 of 2007 are noted.
2. The Applicant is the proprietor of M/s. Able Associates, (earlier a partnership firm), engaged in the business of manufacturing, assembling and trading in water treatment equipment, filtrations etc. Applicant would submit that both he and the respondent, hitherto partners of the said firm having entered into a partnership deed on 18.04.2002, had decided to dissolve the partnership, that the respondent retired from the business of the partnership, that a deed of dissolution dated 03.11.2003 was executed between the parties whereby the partnership was held to have been dissolved on 31.10.2003,that the deed, which the respondent had signed in token of his acceptance of the terms stipulated therein, records that he was liable to pay a sum of Rs. 1,37,000/-. Applicant would contend that, despite his repeated demands, the respondent was avoiding making payment on one pretext or the other. The Applicant, vide registered notice dated 18.10.1996, cailed upon the Respondent to pay the amount due and informed him that he would, otherwise, be constrained to institute legal proceedings for redressal of his grievance and for recovery of the amounts due. Placing reliance on the arbitration clause in the dissolution deed, Applicant would seek appointment of an Arbitrator.
3. The Respondent, in his counter affidavit, would submit that as he did not receive any amount, either from M/s. Hindusthan Engineers or M/s. Secure Net Appliances, the question of his making payment did not arise, that these facts were to the knowledge of the Applicant and, as M/s. Able Associates was not a registered firm, legal proceedings were barred under Section 69(1) of the Partnership Act. Respondent would deny receipt of the notice dated 18.10.2006 and would submit that, even otherwise, the alleged notice dated 18.10.2006 was a notice demanding payment of Rs. 1,37,000/- together with Rs. 5,000/- towards costs of the notice and not a request of consent for appointment of an Arbitrator. Respondent would contend that, even if it was held to be such a notice, the Application filed on 02.11.2006, even before expiry of the prescribed thirty day period, was not maintainable.
4. Sri V. Hariharan, learned Counsel for the Applicant, would contend that though the notice dated 18.10.2006 is a demand for payment of the amounts due, the requirements of Section 11(5) were nonetheless satisfied and, even otherwise, the Arbitration Application could itself be treated as a notice of request for appointment of an Arbitrator. Learned Counsel would submit that since the Court is empowered, under Section 8 of the Act, to appoint an Arbitrator even without the consent of the suitor, this Court could do likewise under Section 11(5) of the Act. According to the Learned Counsel, as no orders could be passed in the Arbitration Application without the respondent being put on notice, and given an opportunity of being heard, the requirement of seeking his written consent prior to the filing of the Application was a mere ritual and a needless formality. Learned Counsel would submit that the respondent cannot, therefore, be said to have suffered prejudice and, failure to strictly adhere to the stipulations of Section 11(5), would not necessitate rejection of the Application. Learned Counsel would submit that since the present arbitral proceedings is, in effect, for enforcement of a right for the accounts of the dissolved firm, and for payments agreed upon in the dissolution deed, the Applicant was entitled for protection under Section 69(3)(a) undine bar under Section 69(1) of the Partnership Act would not apply.
5. Sri G. Ramagopal, learned Counsel for the respondent, on the other hand, would submit that non-compliance with the statutory requirements of Section 11(5) of the Act, in not issuing notice to the Respondent seeking his consent to the appointment of an arbitrator, and waiting for thirty days, before filing the Application, was fatal. Learned Counsel would submit that, since compliance with the conditions prescribed under Section 11(5) is a pre-requisite for conferring jurisdiction on the Chief Justice's designate to appoint an Arbitrator, the provision necessitates strict adherence and non-compliance thereof must result in dismissal of the Application. Learned Counsel would place reliance on Datar Switchgears Ltd. v. Tata Finance Ltd. in this regard. Learned Counsel would rely on U.P. State Sugar Corporation Ltd. v. Jain Construction Co. , and on Section 69(1) of the Indian Partnership Act, to contend that arbitral proceedings cannot be maintained by an unregistered firm or any person suing as a partner thereof against any person who is, or has been, a partner of the firm. While contending that the claim itself was barred by limitation, learned Counsel would submit that, since the question of limitation can be adjudicated by the Arbitrator, the respondent was not seeking a decision on this question in the present application and it would suffice if this Court were to decide on the consequences of non-compliance with Section 11 (5) of the Act and Section 69(1) of the Partnership Act.
6. Before examining the consequences, of non-compliance of Section 11(5) of the Act, it is useful to extract the arbitration clause in the deed of dissolution dated 03.11.2003 and the relevant portions of the registered notice sent by the Applicant to the Respondent on 18.10.1996.
7. Clauses 14 of the deed of dissolution dated 03.11.2003 reads thus:
All disputes or differences arising from the Partnership deed or from this Deed of Dissolution or in connection with any past acts of the firm shall be resolved by arbitration of an arbitrator mutually appointed by both the parties. The decision of the Arbitrator shall be final and binding on both the parties and shall not be challenged in any Court of Law.
8. The legal notice dated 18.10.2006, to the extent relevant, is as under:
...My client informs that after audit of the partnership accounts, a copy of the Balance sheet as on 31.10.2003 has been furnished to you and the same was acknowledged by you. As per the audited balance sheet, a sum of Rs. 1,37,000/- is due and payable to my client.
My client informs further that my client has been repeatedly requesting you to pay the said amount to my client, but however you have been evading payment on some pretext or other having admitted the same.
Since you have failed to pay the amounts legally due and lawfully payable by you to my client in terms of the Deed of Retirement dated 03.11.2003, my client has no other option but to issue the instant legal notice.
You are therefore hereby called upon to pay my client the sum of Rs. 1,37,000/-together with a sum of Rs. 5,000/- towards costs of this Notice, within 15 days from the date of receipt of this Notice, failing which my client shall be constrained to take appropriate legal action against you as is advised to him, at your cost and consequences.
9. Except to inform that legal action would be taken if the amount due was not paid, the legal notice makes no reference to the appointment of an arbitrator, let alone requesting the respondent to give his consent for such appointment.
10. Chapter III of the Act prescribes the composition of an arbitral tribunal. Under Section 10(1) parties are free to determine the number of arbitrators provided that such number shall not be an even number. Under Sub-section (2), failing such determination, the arbitral tribunal shall consist of a sole arbitrator. Section 11 relates to appointment of arbitrators. Sub-section (2) thereof provides that, subject to Sub-section (6), the parties are free to agree on a procedure for appointing arbitrators. Under Sub-section (5) failing any agreement referred to in Sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator, within thirty days from receipt of a request by one party from the other party to so agree, the appointment shall be made upon the request of a party by the Chief Justice or any person or institution designated by him.
11. The requirement of a request for appointment of an arbitrator, to be made by one of the parties to the other, is prescribed both in Clause (a) of Sub-section (4) and in Sub-section (5) of Section 11 of the Act. While Sub-section (4) provides for a situation where the arbitration agreement itself prescribes the procedure for appointment of an arbitrator, Sub-section (5) applies where the arbitration agreement does not so prescribe. It is only where the parties to the arbitration agreement do not mutually, or are unable to, agree on the arbitrator would the question of one of the parties requesting the Chief Justice, or the person designated by him, to appoint the arbitrator, arise. These provisions emphasise the importance of appointment of arbitrators by mutual agreement of parties.
12. Section 8 confers power on the judicial authority to refer the dispute, which is the subject-matter of an arbitration agreement, if an action is pending before him, subject to the fulfilment of the conditions precedent. Once the conditions precedent are satisfied, the judicial authority is statutorily mandated to refer the dispute to arbitration. Rashtriya Ispat Nigam Ltd. v. Verma Transport Co. . Where there is an arbitration agreement between the parties and one of the parties, ignoring it, initiates action before a judicial authority and the other party raises an objection that there is an arbitration clause, the judicial authority has to consider that objection and, if the objection is found sustainable, to refer the parties to arbitration. A judicial authority as such is not defined in the Act. It would include the "Court" as defined in Section 2 (e) of the Act and other Courts also. The judicial authority is entitled to, and is bound to, decide the jurisdictional issues raised before it, before making or declining to make a reference. SBP & Co. v. Patel Engineering Ltd. 2005 (7) SCJ 461 : 2005 (6) ALT 37.1 (DN SC) : (2005) 8 SCC 618.
13. Section 11 only covers another situation. Where one of the parties has refused to act in terms of the arbitration agreement, the other party moves the Chief Justice to have an arbitrator appointed. S.B.P & Co. 2005 (7) SCJ 461 : 2005 (6) ALT 37.1 (DN SC) : (2005) 8SCC 618. The distinction between Sections 8 and 11 is that Section 8 relates to a situation where an action has already been brought before a judicial authority in a matter which falls within the scope of an arbitration agreement, whereas Section 11 relates to a situation where such action has not as yet been brought before a judicial authority.
14. The object of Section 11 is to encourage parties to mutually agree upon an arbitrator. In the absence of a specific procedure in the arbitration agreement, it is only when a party requests the other to give his consent to the appointment can an arbitrator be appointed by mutual agreement. The other party is given 30 days to ponder and give his consent. It is only when he fails/refuses to give his consent would an application lie to the Chief Justice's designate. The arbitrator appointed by the Chief Justice's designate is not by consent of parties but is by statutory imposition.
15. Among the purposes, for which the Act was made, is to encourage settlement of disputes between parties through mediation, conciliation or other procedures failing which, alone, was it to be resolved by adjudication by an arbitral tribunal. Arbitration is an alternative dispute resolution mechanism and the Act lays stress on a more congenial procedure for resolution of disputes than the acrimonious adversorial system of litigation in Courts. The underlying scheme of the Act lays emphasis on the parties to the arbitration agreement choosing a person, in whom both of them repose faith and trust, to amicably settle/resolve the disputes between them and it is only when they are not ad idem does the Act provide another mechanism for appointment of an arbitrator.
16. In Datar Switchgears Ltd. (supra), the question which arose for consideration was whether there was a failure of the mechanism provided in the arbitration clause of the agreement whereunder disputes were to be referred to an arbitrator to be nominated by the lessor. The lessor gave notice to the lessee and later appointed an arbitrator. It is in this context that the Supreme Court held:
...When parties have entered into a contract and settled on a procedure, due importance has to be given to such procedure. Even though rigor of the doctrine of "freedom of contract" has been whittled down by various labour and social welfare legislation, still the court has to respect the terms of the contract entered into by parties and endeavour to give importance and effect to it. When the party has not disputed the arbitration clause, normally he is bound by it and obliged to comply with the procedure laid down under the said clause....
(emphasis supplied)
17. While primacy is given to the procedure prescribed, and mutually agreed to by the parties, under the arbitration agreement, in the absence of any such prescription, the statutory procedure must be strictly adhered to and non-compliance thereof must, as of course, result in rejection of the application. Proceedings under Section 11(5) are judicial in nature. It is only if the parties fail to agree on an arbitrator within thirty days from receipt of a request by one party from the other to so agree, would the Chief Justice's designate have jurisdiction, under Section 11(5) of the Act, to appoint an arbitrator. Failure to agree on an arbitrator would only arise after (1) one party to the agreement makes a request to the other; and (2) Thirty days have elapsed from the date when the request was made. Since the jurisdiction of the Chief Justice's designate can be invoked only on compliance of these pre-requisites, it cannot be dispensed with. Strict adherence to the conditions prescribed in Section 11(5) of the Act is essential. As a general rule, statutes which enable persons to take legal proceedings under certain specified circumstances must be accurately obeyed. When a statute confers jurisdiction upon a tribunal of limited authority, and statutory origin, the conditions and qualifications annexed to the grant must be strictly complied with Craies on Statute Law (Seventh Edition). Where the act required by the Statute is a condition precedent to the jurisdiction of a tribunal, compliance cannot be dispensed with. It would not be competent to a Court to dispense with what the legislature has made the indispensable foundation of its jurisdiction Maxwell on the Interpretation of Statutes 12th Edition.
18. Can it be said that the requirement of seeking the consent of a party, for appointment of an arbitrator, as stipulated under Section 11(5) is a mere ritual or an empty formality? Or that no prejudice is caused to the respondent on such noncompliance, as he is put on notice and given an opportunity of being heard by the Chief Justice's designate before an arbitrator is appointed under Section 11(5) of the Act?
19. In SBP & Co. 2005 (7) SCJ 461 : 2005 (6) ALT 37.1 (DN SC) : (2005) 8 SCC 618 (supra), the Supreme Court observed:
...Dragging a party to an arbitration when there existed no arbitration agreement or when there existed no arbitrable dispute, can certainly affect the right of that party, and, even on monetary terms, impose on him a serious liability for meeting the expenses of the arbitration, even if it be the preliminary expenses and his objection is upheld by the Arbitral Tribunal. Therefore, it is not possible to accept the position that no adjudication is involved in the constitution of an Arbitral Tribunal....
...An appointment of an Arbitral Tribunal in terms of Section 11 of the Act, is based on a power derived from a statute and the statute itself prescribes the conditions that should exist for the exercise of that power. In the process of exercise of that power, obviously the parties would have the right of being heard and when the existence of the conditions for the exercise of the power are found on accepting or overruling the contentions of one of the parties it necessarily amounts to an order, judicial in nature, having finality subject to any available judicial challenge as envisaged by the Act or any other statute or the Constitution....
...It is fundamental to our procedural jurisprudence, that the right of no person shall be affected without he being heard. This necessarily imposes an obligation on the Chief Justice to issue notice to the opposite party when he is moved under Section 11 of the Act. The notice to the opposite party cannot be considered to be merely an intimation to that party of the filing of the arbitration application and the passing of an administrative order appointing an arbitrator or an Arbitral Tribunal. It is really the giving of an opportunity of being heard. There have been cases where claims for appointment of an arbitrator based on an arbitration agreement are made ten or twenty years after the period of the contract has come to an end. There have been cases where the appointment of an arbitrator has been sought, after the parties had settled the accounts and the party concerned had certified that he had no further claims against the other contracting party. In other words, there have been occasions when dead claims are sought to be resurrected. There have been cases where assertions are made of the existence of arbitration agreements when, in fact, such existence is strongly disputed by the other side who appears on issuance of notice. Controversies are also raised as to whether the claim that is sought to be put forward comes within the purview of the arbitration clause concerned at all. The Chief Justice has necessarily to apply his mind to these aspects before coming to a conclusion one way or the other and before proceeding to appoint an arbitrator or declining to appoint an arbitrator. Obviously, this is an adjudicatory process. An opportunity of hearing to both parties is a must....
...But the basic requirement for exercising his power under Section 11(6), is the existence of an arbitration agreement in terms of Section 7 of the Act and the applicant before the Chief Justice being shown to be a party to such an agreement. It would also include the question of the existence of jurisdiction in him to entertain the request and an enquiry whether at least a part of the cause of action has arisen within the State concerned. Therefore, a decision on jurisdiction and on the existence of the arbitration agreement and of the person making the request being a party to that agreement and the subsistence of an arbitrable dispute require to be decided and the decision on these aspects is a prelude to the Chief Justice considering whether the requirements of Sub-section (4), Sub-section (5) or Sub-section (6) of Section 11 are satisfied when approached with the request for appointment of an arbitrator....
...It is necessary to define what exactly the Chief Justice, approached with an application under Section 11 of the Act, is to decide at that stage. Obviously, he has to decide his own jurisdiction in the sense whether the party making the motion has approached the right High Court. He has to decide whether there is an arbitration agreement, as defined in the Act and whether the person who has made the request before him, is a party to such an agreement. It is necessary to indicate that he can also decide the question whether the claim was a dead one; or a long-barred claim that was sought to be resurrected and whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations or by receiving the final payment without objection. It may not be possible at that stage, to decide whether a live claim made, is one which comes within the purview of the arbitration clause. It will be appropriate to leave that question to be decided by the Arbitral Tribunal on taking evidence, along with the merits of the claims involved in the arbitration. The Chief Justice has to decide whether the applicant has satisfied the conditions for appointing an arbitrator under Section 11(6) of the Act....
(emphasis supplied)
20. The aforesaid observations, made in the context of Section 11(5) and (6) of the Act, of putting the other party to the agreement on notice, and giving him an opportunity of being heard, would apply equally to a situation prior to the filing of the application i.e., at the stage when a party to the agreement is required to make a request to the other seeking his consent for the appointment of an arbitrator.
21. Complying with the requirement of putting the other party on notice, and waiting for thirty days, before invoking the jurisdiction of the Chief Justice's designate has a salutory purpose. On being put on notice, the respondent may well inform the Applicant that there is no arbitration agreement in existence, that there is no arbitrable dispute, that the claim is long barred or even that the parties could mutually agree on the arbitrator, without the intervention of the Chief Justice's designate under Section 11(5) of the Act and, thereby, avoid needless expenditure involved in such a process. It cannot, therefore, be said that no prejudice would be caused to the respondent, merely because he is entitled to be given an opportunity of being heard after the application under Section 11(5) is filed, for even prior thereto, on his being put on notice, the respondents may well take steps to avoid an Application being filed under Section 11(5) of the Act.
22. Since, in the present case, the requirement of making a request in writing to the respondents seeking his consent for the appointment of an arbitrator, and waiting for a period of thirty days, before filing the application under Section 11(5) of the Act, has not been complied with, the application is liable to be dismissed, leaving it open to the applicant to comply with the aforesaid requirements and proceed thereafter in accordance with law. As the application must be dismissed for failure to comply with the requirements of Section 11(5) of the Act it is wholly unnecessary to examine the question whether these Arbitration Applications are also barred under Section 69(1) of the Partnership Act.
23. Both A.A. Nos. 15 and 16 of 2007 are, accordingly, dismissed.