Find a Lawyer

Miscellaneous Appeal No. 79 of 1953, decided on 3rd January 1959.

Arbitration‑Appointment of arbitrator or umpire‑Alteration of agreement relating to‑Must be in writing‑Mere submission to alteration not enough‑Award by umpire appointed tinder altered agreement which was not in writing, held invalid‑Arbitration Act (X of 1940), S. 2.

The Umpire under the written agreement was to be appointed by the Karachi Cotton Association Ltd. in case the two arbitrators failed to agree on an umpire. The umpire instead was appointed by the Pakistan Cotton Association to whose jurisdiction the parties had submitted by adducing evidence before him. It was urged that in the circumstances the award given by the Umpire was valid.

Held, that alterations relating to the appointment of Umpire or arbitrator are alterations of a substantial condition of the agreement and such alterations are to be evidenced by writing. That is the demand of section 2 of Arbitration Act. The appointment of an arbitrator or Umpire is a matter which pertains to jurisdiction, and when a departure in this respect is made from the written agreement, that departure must be with the consent, in writing, of the parties. Mere submission to the alteration is not enough. It is a material alteration in the agreement and is required to be in writing under section 2 of the Arbitration Act. The Umpire who gave the award had no jurisdiction to enter upon the reference and if the parties submitted to his arbitration by conduct, submission' did not confer jurisdiction upon him. Submission should have been in writing. The award for the aforesaid reasons was illegal and was correctly set aside by the Trial Judge.

A I R 1955 Cal. Notes on unreported Cases; Note No. 2933 ; 2 K B 1909, page 948 and A I R 1955 (Calcutta Notes on unreported cases‑Note No. 2924) ref:

Nathulal for Appellant.

Ibadat Yar Khan for Respondent.

Date of hearing : 13th, 14th and 18th November 1958.

‑Messrs Munawar and Company and Messrs S. A. Rauf and Company are members of the Pakistan Cotton Association Limited, Karachi. There was a dispute between them over a transaction relating to 200 bales of Desi Cotton which Messrs S. A. Rauf and Company agreed to buy from Messrs Munawar and Company and failed to take delivery of the goods. It was one of the terms of the contract that disputes relating to it would be referred to arbitration in accordance with the rules of the Karachi Cotton Association. Rules 39 of the Karachi Cotton Association Rules relates to arbitration. According to that rule two arbitrators are to be appointed, one by each party to the dispute, and if the arbitrators disagree the dispute is referred to an umpire of their selection. If they disagree on the appointment of the umpire as well, an umpire is nominated by the Board of Karachi Cotton Association Limited.

Mr. Abdur Rehman was nominated as arbitrator by Messrs Munawar and Company and Mr. S: A. Mogul by Messrs S. A. Rauf and Company. Both the arbitrators were members of the Karachi Cotton Association.

The two arbitrators failed to come to an agreement and a need therefore arose for the appointment of an umpire, and approach for the purpose was made to the Board of Directors of the Pakistan Cotton Association. The Board on 26‑7‑1951, appointed Mr. Mukhtar Ahmed Khan, a member of their Association as umpire for the settlement of this dispute. On 7‑8‑1951, the umpire gave the award and held Messrs. S. A. Rauf and Company liable for the payment of Rs. 11,520 to Messrs Munawar & Co. The cost of arbitration assessed at Rs. 424 was directed to be paid by parties in equal shares.

Against that award objections were raised by Messrs S. A. Rauf and Company in this Court, and one of our learned brothers, Mr. Justice Bachal, by his order dated 1‑4‑1953, accepted the objections and set aside the award. Against that order the plaintiffs, Messrs Munawar & Co., have come in appeal to this Court.

The main objection to the award was that according to the arbitration agreement the arbitration was to be conducted in accordance with the rules of the Karachi Cotton Association Limited. Rule 39 of the Karachi Cotton Association runs as follows:‑

Any dispute arising out of a ready transaction or out of a forward contract, other than on the question of class and/or staple of the Cotton, tendered but including the constructions of the official forward contract forms, shall be referred to the arbitration of any two disinterested authorised representatives of members. If one of the parties to a contract fails to appoint an arbitrator, after having received seven clear days' notice from the other party to do so, the party who has appointed an arbitrator, shall have the power to appoint the second arbitrator, both of whom shall then proceed to deal with the question at issue. In case the two arbitrators are unable to agree the matter shall then be referred to an Umpire, who shall be nominated by the two arbitrators from amongst the authorised representatives of members, in the event of the two arbitrators being unable to agree as to the person of the Umpire, the Board shall proceed to appoint an Umpire from amongst the authorised representatives of members on the question of being referred to the Board. The decision of the arbitrators or the Umpire as the case may be shall be final and binding on both the parties to a contract."

According to this Rule, the two arbitrators, when they failed to come to an agreement both as to the settlement of the dispute and the appointment of the Umpire, had to approach the Board of Karachi Cotton Association Limited for the appointment of an Umpire But instead of doing that they addressed a request to the Board of Pakistan Cotton Association and an umpire was selected by that Association. The umpire, after receiving documents and other evidence from the parties, gave an award against Messers S. A. Rauf & Co., and held them liable in a sum of Rs. 11,520 to Messrs Munawar & Co. This sum represented the‑difference between the contractual rate and market rate on the date of default.

The main ground of attack on the award was that the umpire was not appointed in the manner provided in the agreement and that his award is not an award in the eye of law, In answer to that it was contended, on behalf of the plaintiff Messrs Munawar & Co., that as the parties arc members of the Pakistan Cotton. Association the intention was to abide by the rules of the Pakistan Cotton Association and request for the appointment of umpire was addressed to the proper quarters . It was further contended that even if in making approach to the Pakistan Cotton Association there was a deviation from the conditions of the agreement, that deviation was with the consent of the parties and to that extent the arbitration agreement be deemed to have been altered with mutual consent. It was further urged that the parties by adducing evidence before the umpire submitted themselves to his jurisdiction and that they are now estopped from questioning his authority to act as umpire.

It is true that according to the conditions of the arbitration agreement the dispute had to be referred to arbitration tai accordance with the rules of the Karachi Cotton Association Limited and upon disagreement between the two arbitrators an umpire had to be selected by the Board of Karachi Cotton Association Limited, and contrary to the terms of agreement approach was made by the two Arbitrators to Pakistan Cotton Association In that respect there was a clear breach of a condition of the agreement. It is also true that when the umpire appointed by the Pakistan Cotton Association entered upon the reference both the parties, with full knowledge of the fact that the umpire came from Pakistan Cotton Association, submitted to his jurisdiction without protest. Not only that but on 8‑8‑1951; a day after the award, Messrs S. A Rauf addressed a letter to the Secretary, Pakistan Cotton Association and asked‑for clarification of certain matters relating to award. On these facts it was urged, on behalf of the plaintiffs, that the defendants are bound by the award because they submitted to the arbitration of the Umpire with full knowledge of the defect in his appointment.

There are two points now before us for consideration and decision, namely :‑

(1) Whether the above mentioned deviation from the arbitration agreement was of such a vital importance that it vitiates the award ; and

(2) Whether by submission to the jurisdiction of the umpire, M/s. S. A. Rauf are now estopped from challenging the award.

The learned counsel for the defendants (Messrs S. A. Rauf) says that the law relating to arbitration is a special law as it creates a new Court and a new jurisdiction, and according to the rules of interpretation a law creating new jurisdiction, and any agree ment made under that law, should be strictly construed. If the agreement enjoined that the umpire should be selected from amongst the members of the Karachi Cotton Association, one should have been selected from that Association alone. The arbitrators and the umpire constitute a Court and they acquire jurisdiction from the consent of the parties. If an umpire has been selected and the selection is not in accord with the original agreement, or subsequent written agreement executed with the consent of the parties, that umpire is not umpire under the terms of the agreement, and if he acts he acts without jurisdiction and his award has no force in law. There is support for this view in A I R 1955 Cal. Notes on unreported Cases ; Note No, 2933, in which it was held that the appointment of an Arbitrator is a matter pertaining to jurisdiction. The proposition is obviously correct. If two persons in the presence of Courts established by the State proceed to get their dispute decided through arbitrators, they by agreement create their own Court, appoint their own judges and invest them with jurisdiction to try the dispute. If a person other than the person contemplated by the agreement enters upon the proceedings and decides the dispute that person is undoubtedly not a judge of the parties choice and is one on whom no jurisdiction has been conferred. This view has been taken in 2 K. B. 1909, page 948. If in the agreement a person of one description was intended to be the umpire of the dispute and later on a person of different description has been brought on the reference, the latter acquires no jurisdiction in the matter unless the alteration is made with the consent of the parties and is evidenced by writing. Such alterations constitute alteration in the agreement and they should, according to section 2 of the Arbitration Act, be in writing as well.

Mr. Mukhtar Ahmed Khan the Umpire, drawn from the Pakistan Cotton Association, was not the person contemplated by the arbitration agreement. According to that agreement an Umpire had to be nominated by the Board of Karachi Cotton Association Ltd., Mr. Mukhtar Ahmed Khan was obviously a stranger to the proceedings and was lacking in jurisdiction to decide this dispute. This view finds support from A I R 1955 (Calcutta Notes on unreported cases‑Note No. 2924).

Against that view it was argued, on behalf of the appellants, that this departure from the condition of agreement is binding on the parties because they submitted to .his jurisdiction and agreed to this alteration by conduct. But we are unable to accept this contention because alterations relating to the appointment of Umpire or arbitrator are alterations of a substantial condition of the agreement and such alterations are to be evidenced by writing. That is the demand of section 2 of Arbitration Act. In our view the appointment of an arbitrator or Umpire is a matter which pertains to jurisdiction, and when a departure in this respect is made from the written agreement, that departure must be with the consent, in writing, of the parties. Mere submission to the alteration is not enough. It is a material alteration in the agreement and is required to be in writing under section 2 of the Arbitration Act. In our view the Umpire who gave the award had no jurisdiction to enter upon this reference and if the parties submitted to his arbitration by conduct, sub mission does not confer jurisdiction upon him. Submission should have been in writing.

The award for the aforesaid 'reasons was illegal and was correctly set aside by the trial Judge. This appeal is dismissed with costs.

A.H. Appeal dismissed.

Find a Lawyer Near You

Dealing with a matter like this? Connect with a verified advocate in your city — free on SJP Lawyers Directory.