Procedure for Appointment of Substitute Arbitrator [JUDGMENT]

Arbitration and Conciliation Act, 1996 - Sections 11(2) & 15 - Procedure adopted for the appointment of a substitute arbitrator - Appointment of Substitute Arbitrator is in order as per the Consultancy Agreement and the Act.

ARB.A.No. 32 of 2018
Chitambaresh, J.
1. Non Resident Indians yearn to build houses in their home State. They become crestfallen when their venture does not shape well. The mal-construction of a house is alleged in the instant case. The appellants are the owners and the respondent is the architect.
2. The dispute between the appellants and the respondent in regard to the construction of a house required to be resolved by arbitration by virtue of the Consultancy Agreement executed amongst them. Clause 35 thereof is extracted below:
“35. Any disputes with regard to this agreement shall be decided by an arbitrator fixed by the 1st party at that time. The legal jurisdiction will be at Thiruvalla.”
The appellants being the 1st party in the Consultancy Agreement appointed Mr M.C.Mathew, Assistant Engineer (Retired) as the sole arbitrator which was however objected to by the respondent. Mr M.C.Mathew who was appointed by letter dated 4.10.2012 'relinquished the said arbitratorship for fairness' by letter dated 12.8.2014 on account of the objection raised.
3. The parties are free to agree on a procedure for appointing an arbitrator under Section 11(2) of the Arbitration and Conciliation Act, 1996 ['the Act' for short] which is Clause 35 in the instant case. There is no case that the appellants have failed to act as required under that procedure as per Section 11(6) of the Act since they did appoint an arbitrator. Section 11(5) of the Act also does not apply since the respondent has waived his right to object to the choice of the arbitrator in view of Clause 35 of the Consultancy Agreement. The mandate of Mr M.C.Mathew as an arbitrator has terminated since he has 'withdrawn from his office' by letter dated 12.8.2014 almost two years after his appointment. We cannot appreciate the contention of the respondent that Mr M.C.Mathew has refused to accept the arbitratorship and hence no withdrawal from office occurred.
4. The appellants were well within their right to appoint Mr Justice B.M.Thulasidas (Retired) as a substitute arbitrator in accordance with Clause 35 of the Consultancy Agreement under the circumstances. Section 15(2) of the Act is as follows:
“(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.”
The rule that was applicable to the appointment of the arbitrator being replaced is Clause 35 of the Consultancy Agreement read with Section 11(2) of the Act which was called in aid again. It is in accordance therewith was Mr Justice B.M.Thulasidas (Retired) appointed as the substitute arbitrator by the appellants without reference to the respondent. The appellants rely on a letter addressed to Mr Justice B.M.Thulasidas (Retired) in August, 2015 with a copy marked to the respondent about the appointment. The fact remains that the respondent did appear before the substitute arbitrator - Mr Justice B.M.Thulasidas (Retired) - in the initial stages of hearing. The respondent did file an interlocutory application dated 17.2.2016 before the substitute arbitrator questioning his jurisdiction under Section 16(2) of the Act. There is no whisper in the said interlocutory application that the respondent did not have notice of the appointment of the substitute arbitrator as is now urged in the present proceedings. The objection as regards the jurisdiction was turned down by the substitute arbitrator by interim order dated 15.3.2016 much before the final award dated 15.6.2016. The respondent neither challenged the interim order dated 15.3.2016 appropriately nor participated in the hearing before the substitute arbitrator thereafter.
5. The court below in O.P.(Arb) No.60/2016 filed by the respondent under Section 34(2) of the Act has set aside the award dated 15.6.2016 of the substitute arbitrator by the order impugned in this appeal. The reason stated is that only this Court could have appointed an arbitrator under Section 11(5) of the Act when once the appellants have exhausted their power to appoint. That Section 11(2) of the Act which is applicable to the appointment of an arbitrator applies fortiori to the substitute arbitrator as well is grossly overlooked. Even otherwise the power conferred under a Central Act may be exercised from time to time as occasion arises unless a different intention appears in the context. A reference in this connection to Section 14 of the General Clauses Act, 1897 fortifies our conclusion that the appellants could appoint a substitute arbitrator. This was precisely done by the appellants without recourse to this Court under Section 11(5) of the Act which cannot be faulted with as wrongly done by the court below.
6. In fact SBPP & Co.(2) v. Patel Engineering Limited and another [(2009) 10 SCC 293] clarifies Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd. [(2006) 6 SCC 204] and holds thus:
“30. 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. Subsection (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.
31. 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 subsection 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.” (emphasis supplied)
7. The relevant averments of the respondent in O.P.(Arb)No.60/2016 filed under Section 34(2) of the Act have been extracted in paragraph 6 of the impugned order which are reproduced below:
“For a valid contract to be enforceable, consensus-ad idem is essential. The appointment of Arbitrator is one of the terms of the contract. Therefore before appointment of Arbitrator the claimants ought to have sent notice of nomination as required under Sec. 11 of the Arbitration and Conciliation Act, 1996 and to obtain the consent of the respondent/petitioner. But in the case at hand the claimants failed to comply Sec. 11 and no notice was issued to the respondent before appointing the second Arbitrator (Arbitral Tribunal). Clause 35 of agreement is unilateral and it will not be binding on the respondent/petitioner. For an arbitration there should be consensus-ad idem as to the appointment of an Arbitrator. In the agreement there is no Arbitrator appointed by consent of both sides. In such a situation claimants are having no right to appoint an Arbitrator unilaterally. In the case at hand selection of Arbitrator is unilateral. Hence the same is against public policy. Hence the impugned award is a nullity. The agreement mentioned in this case is against the provisions of Sec. 23 of the Indian Contract Act. It is also contended that the arbitration proceedings initiated in this case is barred by limitation.”
The focal point of attack on the validity of the award is the procedure adopted for the appointment of a substitute arbitrator and there is neither pleading nor finding as regards other vitiating factors. We have already found that the appointment of Mr Justice B.M.Thulasidas (Retired) as substitute arbitrator is in order as per the Consultancy Agreement and the Act. The court below has also turned down the plea of the respondent about the bar of limitation in initiating the arbitration proceedings which finding is unchallenged. We have no other course except to set aside the impugned order and dismiss O.P(Arb)No.60/2016 thereby upholding the award dated 15.6.2016 of the substitute arbitrator. The arbitral award inter alia directs the respondent to pay a sum of 81,35,358/- with interest at 12% per annum from 30.11.2015 to the appellants. The same includes the excess amount paid and the expenses incurred to rectify the defects as well as the escalation cost for completing the construction by the appellants. This is however in addition to the share of remuneration and expenses to be met by the respondent for the conduct of the arbitration proceedings culminating in the award.
8. We appreciate the arguments of Mr Rajiv A. George, Advocate for the appellants as well as Mr C.S.Manilal, Advocate for the respondent which were confined to the cardinal issues shorn of unnecessary details.
The arbitration appeal is allowed. No costs.