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First Appeals from Original Orders NoR.120 to 122 of 1983, decided on 23rd April, 1986.

‑‑‑S.8‑‑Appointment of sole arbitrator by Court‑‑Requirements‑‑Where Court intended to appoint nominee of one party as sole arbitrator due to failure of other party to appoint their arbitrator, it would be incumbent on such Court to give a notice of fifteen clear days to defaulting party of its intention for appointment thereof‑‑Violation of legal requirement, held, would render reference to sole arbitrator as invalid.

Abdul Khaleq v. Province of East Pakistan and another P L D 1964 Dacca 166 and Uttamchand Brijlal, v. Balmokand S.L. A I R 1929 Sind 55 ref.

‑‑‑S.8‑‑Appointment of arbitrator‑‑Party agreeing to appoint arbitrator‑‑Trial Court ‑appointing person not contemplated by agreement‑‑Trial Court, held, would have no power to appoint as arbitrator a person who was not contemplated by agreement entered into by parties‑‑Mere appearance before such arbitrator on one date in arbitration proceedings would not amount to acquiescence in appointment of sole arbitrator.

Charles Louis Dreyfus & Co. v. Gurditta. Mal 9 I C 655; Messrs Oil & Gas Development Corporation v. Messrs Karachi Builders 1978 S C M R 278; Province of Punjab and another v. Messrs Industrial Machine Pool, Lahore P L D 1978 Lah. 829 and Province of Sind and another v: Hail Khan P L D 1983 Kar. 601 ref.

‑‑‑O.XLIII, R.1‑‑Arbitration Act (X of 1940), S.39‑‑Appellate jurisdiction, exercise of‑‑Where Trial Court appointed sole arbitrator in derogation of terms of agreement, High Court in appellate jurisdiction set aside judgment and decree of lower Courts as well as award with direction to Trial Court to make fresh reference to arbitrator in accordance with law.

Nayyar Iqbal Ghori for Appellants.

Ch. Muhammad Arif for Respondent.

Dates of hearing: 8th, 15th, 16th March; 9th and 23rd April, 1986.

This judgment shall dispose of F.A.Os. No.120‑83, 121‑83 and 122‑83 which involve identical questions of facts and law.

2. The facts briefly are that on acceptance of tenders offered by the respondent, he was allotted the work of "Construction of a road from Kahna Kacha to mile 16 of Lahore‑ Multan‑Quetta Road alongwith Hadyara drain (Mile 5/0 to 6/0 Group No.II), Mile 7/0 to 8/0 Group‑IV) and (Mile 8/0 to 9/0 Group‑V). The parties entered into formal agreements which inter alia contained a stipulation for reference of any dispute arising out of the contract to arbitration. According to the respondent, he was confronted during execution of the work with certain hindrances which enlarged the scope of the work as a result of which he had to incur extra expenditure. The respondent in accordance with the terms of the agreements submitted his claim for the extra expenditure to the Superintending Engineer Highway Circle, Lahore on 22nd of July, 1976 but he failed to give his decision thereon. The respondent, therefore, filed three applications in the civil Court under sections 8 and 20 of the Arbitration Act, 1940, one in respect of each agreement, praying as follows:‑

"It is, therefore, respectfully prayed that:‑

(a) the respondent No.2 may be directed to file the agreement of the work in question in this honourable Court;

(b) the petitioner has already nominated Mr. Yousaf Hussain, Superintending Engineer as his nominee on the panel of arbitration and the respondent be directed to nominate their nominee on the said panel and the two arbitrators be directed file the award in this Honourable Court within the time allowed to them. In case the respondents fail to nominate their nominee, the nominee of the petitioner may kindly be directed to act as sole arbitrator and file the award in this Honourable Court.

(c) any other relief to which the petitioner is found entitled may be awarded; and

(d) the costs of this application may also be awarded."

3. The appellants while admitting the agreements denied that the respondent was faced with any hindrance in the execution of the work. They alleged that the respondent did not complete the work and being a defaulter, he was bound to pay compensation to the Government. They assailed the tenability of the claim preferred by the respondent.

4. On 15th of March, 1977, the trial Court framed the following issues:‑

(1) Whether there are sufficient grounds for filing the agreement and appointment of arbitrators O.P.P.

(2) Relief.

5. The respondent concluded his evidence on 2nd of January, 1979. The appellants were given adjournments for producing their evidence but they failed to do so and on 23rd of December, 1979, the trial Court after closing their evidence under Order XVII, Rule 3, C.P.C. Passed an order for filing of the agreements and directed the parties to nominate their respective arbitrators by 19th of January, 1980. On this date, the respondent nominated Mr. Muhammad Sharif Ahmad, Director, office of the Chief Engineer, Punjab, Highway Department, Lahore as his arbitrator. No nomination was filed by the appellants. The application was adjourned to 12th of February, 1980 for nomination of their arbitrator: by the appellants. On this date too counsel for the appellants sought an 'adjournment and the application was adjourned to 11th of March, 1980 and then to the Ist of April, 1980. On the last date counsel for the appellants stated that the department had not nominated their arbitrator. The learned trial Court appointed Mr. Muhammad Sharif Ahmad, nominee of the respondent as the sole arbitrator and required .him to submit his award before Ist of July, 1980. Thereafter, some adjournments occurred for awaiting the award. On 15th of November, 1980, the respondent filed an application for substitution of Mr. Muhammad Sharif Ahmad on the ground that he had expressed his inability to carry out the assignment. He proposed the following four names.

"(1) Mr. Muhammad Yousaf Hassan, Superintending Engineer (on leave) Model Town, Lahore.

(2) Mr. Muhammad Ashraf Khan, Managing Partner, International Engineering Consultants, Co‑operative Bank House, Bank Square, Lahore.

(3) Mr. M.S. Bhatty, Superintending Engineer (Retd), 2‑L, Gulberg‑II Lahore.

(4) Mian Badar Din, retired Chief Engineer LMC, Inside Delhi Gate, Lahore.

The counsel for the appellants was directed to file reply to the application on 27‑1‑1981. However, no reply was filed in spite of adjournments and on Ist of April, 1981, the learned Civil Judge passed an order revoking the appointment of Mr. Muhammad Sharif Ahmad as the sole arbitrator and appointed Mr. Muhammad Ashraf Khan, Managing Partner, International Engineering Consultants as the new sole arbitrator. On 13th June, 1981, an application was filed by the appellants under section 151, C.P.C. praying that Mr. Nisar Ahmad Khan, Director Roads, Research and Material Testing Institute, Lahore be appointed as the second arbitrator as the agreements between the parties provided for appointment of two arbitrators, one to be appointed by each party. This application was moved before the filing of the awards by the sole arbitrator. A notice of the application was given to the respondent. On 29th of September, 1981, the appellants filed another application under Order XXXIX, Rules 1 and 2 read with section 151, C.P.C. praying that the proceedings before the sole arbitrator be stayed till the appointment of a second arbitrator. The respondent filed his reply to the latter application. However, no order was passed on either application and both of them were kept pending. On 28th of February, 1982 the awards of the sole arbitrator were filed. On 1st of March, 1982, objections were filed by the appellants. The objections were controverted by the respondent who prayed that the awards be made rule of the Court with costs as well as interest.

6. The following issues were framed on 21st of April, 1982:‑

"(1) Whether the Arbitrator has misconducted himself in the proceedings O.P.O.

(2) Whether the award has been improperly procured or is otherwise invalid O.P.0.

(3) Relief ."

7. The appellants examined one witness namely Ch. Rehmat Ali, an Executive Engineer in support of the issues. No evidence was led in rebuttal by the respondent. On 22nd of January, 1983, the learned Civil Judge, 1st Class, Lahore disallowed the objections filed by the appellants and made the awards as rule of the Court and passed decrees in favour of the respondent accordingly.

8. The main grievance of the appellants is that the reference of the dispute between the parties to the sole arbitrator and that too to Mr. Muhammad Ashraf Khan who was not a serving Superintending Engineer militated against the agreements entered into between the parties as well as the law.

9. The relevant stipulation providing for arbitration is contained in clause 25 (c) of the agreements. It is reproduced below for the sake of facility: ‑-

"(c) In the event of any dispute arising in accordance with the limitation provided in sub‑clause (a) of this clause the same shall be referred, to the decision of a sole Arbitrator to be appointed by the Chief Engineer incharge of the work from among the officers of the Department not below the rank of Superintending Engineer and other than the Superintending Engineer incharge 'of the contract work. In case of claim preferred for an amount upto Rs.1 lakh (Rupees one lakh only), the decision of the sole Arbitrator in such cases shall be final and binding on the parties concerned. In case the amount of claim preferred is over Rs.1 lakh (Rupees one lakh only) the dispute shall be referred to the Award of the two arbitrators to be appointed from the Superintending Engineers of the Department other than the Superintending Engineer incharge of the work one to be nominated by the Chief Engineer, Deputy Chief Engineer of the Region concerned, and the other by the contractor. In the case of the said two Arbitrators not agreeing the case shall be referred to the award of an Umpire who shall be an officer of the Department not below the rank of the Chief Engineer/Deputy Chief Engineer to be appointed by Government in Administrative Department. The decision of the two Arbitrators/ Umpire as the case may be shall be final and binding on the parties concerned, where the matter involved claims for the payment or recovery of reduction of money only the amount if any awarded in Arbitration shall be recoverable in respect of the matter so referred."

10. The amount of claim preferred by the respondent in each case exceeded Rs. One lakh. Therefore, the dispute in respect thereof had to be referred to two arbitrators who were necessarily to be appointed from the Superintending Engineers of the Department other than the one incharge of the work, one to be nominated by the Chief Engineer Deputy Chief Engineer of the Region concerned and the other by the contractor. However, the law provides in section 9 of the Arbitration Act, 1940 a solution of the problem where one party fails to appoint its arbitrator. This reads as follows:‑--

"9. Power of party to appoint new arbitrator or, in certain cases, a sole arbitrator.‑‑Where an arbitration agreement provides 'that a reference shall be to two arbitrators, one to be appointed by each party, then, unless a different intention is expressed in the agreement,‑‑

(a) If either of the appointed arbitrators neglects or refuses, to act, or is incapable of acting, or dies, the party who appointed him may appoint a new arbitrator in his place;

(b) if one party fails to appoint an arbitrator, either originally or by way of substitution as aforesaid, for fifteen clear days, after the service by the other party of a notice in writing to make the appointment, such other party having appointed his arbitrator before giving the notice, the party who has appointed an arbitrator may appoint that arbitrator to act as sole arbitrator in the reference, and his award shall be binding on both parties as if he had been appointed by consent:

Provided that the Court may set aside any appointment as sole arbitrator made under clause (b) and either, on sufficient cause being shown, allow further time to the defaulting party to appoint an arbitrator or pass such other order as it thinks fit.

Explanation.‑‑The fact that an arbitrator or umpire, after a request by either party to enter on and proceed with the reference, does not within one month comply with the request may constitute a neglect or refusal to act within the meaning of section a of this subsection."

11. In this case the procedure outlined above was not observed. It would appear from the resume of the proceedings given above that Mr. Muhammad Sharif Ahmad, the Arbitrator nominated by the respondent was made the sole arbitrator without any notice whatsoever to the appellants of the intention to make the nominee of the respondent as the sole arbitrator. As mentioned above the respondent nominated his arbitrator on 19th of January, 1980. Thereafter, three adjournments were granted to the appellants for nominating their arbitrator. There is no doubt that in spite of these adjournments, the appellants failed to nominate their arbitrator, nevertheless this failure ipso facto did not empower the Court to appoint the nominee of the respondent as the sole arbitrator. If the trial Court intended to appoint the nominee of the respondent as the sole arbitrator, it was incumbent on it to give a notice of fifteen clear days to the appellants of its intention to do so. This was not done. This omission clearly vitiated the appointment of Mr. Muhammad Sharif Ahmad as the sole arbitrator. If an authority is needed for this view, reference may be made to Abdul Khaleq v. Province of East Pakistan and another P L D 1964 Dacca 166.

12. After Mr. Muhammad Sharif Ahmad had expressed his inability to enter upon the reference of arbitration, the respondent applied for appointment of his substitute proposing four names. A notice of the application was given to the appellants. When no reply was filed by the appellants in spite of adjournments, the trial Court vide its order, dated Ist of April, 1981 picked up the name bf Mr. Muhammad Ashraf Khan who was not a serving Superintending Engineer and appointed him as the sole arbitrator in place of Mr. Muhammad Sharif Ahmad. This appointment too was bad in the eyes of law on two grounds; firstly that the procedure laid down in section 9 for appointment of sole arbitrator was not followed and secondly that the agreement between the parties provided for the appointment of arbitrators from the superintending Engineers of the Department which status was not being held by Mr. Muhammad Ashraf Khan at the time of his appointment as the sole arbitrator. When Mr. Muhammad Sharif Ahmad, the earlier: soles arbitrator, had declined to act as, such, the vacancy caused by his refusal could be filled in by repeating the procedure of giving a notice of fifteen clear days of the intention to appoint the nominee of the respondent as the sole arbitrator. In this case, the respondent did note nominate his arbitrator for the second time. He only furnished a list of persons from whom any one could be appointed as his arbitrator. As required by law it was obligatory on him to nominate one person as his arbitrator and on the failure of the appellants to nominate their arbitrator, the nominee of the respondent could be appointed as the sole arbitrator after fifteen days notice. This procedure was not repeated. The violation of law rendered the reference to the sole arbitrator as invalid. Reliance in support of this view may be placed on Uttamchand Brijlal v. Balmokand S.L. A I R 1929 Sind 55 wherein, it has been observed as follows:‑

"Where an arbitrator appointed by one party is made sole arbitrator under section 9, the other party having refused to appoint its own, but he afterwards refuses to act, the procedure to be followed is not that laid down in section 8 (1) (b), but that in section 9 will be repeated and the party, who appointed the arbitrator, who became the sole arbitrator, may appoint a fresh arbitrator after giving notice to the other side."

13. As regards the second ground, the parties had agreed that arbitrators would be appointed by the them, one by each, from the Superintending Engineer of the Department: Mr. Muhammad Ashraf Khan was admittedly not holding the post of a Superintending Engineer in the Department at the tune of his appointment as the sole arbitrator. Therefore, his appointment was not legal. The trial Court had no power to appoint as an arbitrator a person who was not contemplated by the agreements entered into between the parties. In this connection Charles Louis Dreyfus & Co. v. Gurditta Mal 9 I C 655 may be referred to. In that case the parties had agreed to refer their dispute to two European merchants residing in Karachi, each party having the right to nominate one arbitrator. The lower Court observing that the terms of the agreements were ambiguous and that they should have contained the names of arbitrators nominated an Amritsar gentleman to act as arbitrator on behalf of one party. It was held that the lower Court had no Power, in contravention of the express agreements between the parties to appoint as an arbitrator a person who was not a European merchant residing in Karachi and that in so doing the Court committed an irregularity which materially prejudiced the opposite party. The same view prevailed in Messrs Oil & Gas Development Corporation v. Messrs Karachi Builders 1978 S C M R 278. In that case, the parties had agreed to refer their dispute to the Production Manager However, the Deputy Chief Engineer who was performing additional duties of Production Manager of the parties arbitration and decided the case. It was held that the Intention of the parties being to appoint Production Manager as arbitrator and not any other officer performing functions of Production Manager in addition to his own duties, the Deputy Chief Engineer was incompetent to arbitrate. In this view of the matter the award given by him was set aside.

14. The above discussion leads to an inescapable conclusion that the reference of the dispute of the parties to Mr. Muhammad Ashraf Khan was invalid and consequently the awards given by him are liable to be, set aside on this score.

15. Learned counsel for the respondent has, contended that the irregularity in the appointment of Mr. Muhammad Ashraf Khan, as the sole arbitrator stood cured by acquiescence after the appellants submitted to his jurisdiction by participation in the proceedings taken by him, Support for this contention is sought from Messrs Habib & Sons v. Messrs Virak to. P L D 1957 Kar: 245, Province of Punjab and another v. Messrs. Industrial, Machine Pool, Lahore P L D 1978 Lah. 829 Province of Sind and another v. Hap Khan P L D 1983 Kar. 601. According to these authorities, when a party submits to the jurisdiction of an arbitrator by taking part in; the proceedings taken by him it cannot subsequently challenge his jurisdiction on the ground that his appointment was improper. In this case, the appellants never participate in the proceedings before the arbitrator. The arbitrator has mentioned in para. 13 of his award that despite notices sent on various dates nobody appeared on behalf of the appellants except on 30th of May, 1981 and 14th of October, 1981 on which dates an Executive Engineer and an Accountant respectively appeared and sought adjournment. Mere appearance of the Executive Engineer on one date and the Accountant on the other does not at all amount to participation in the arbitration proceedings and indicate the acquiescence of the appellants in the appointment of Mr. Muhammad Ashraf Khan as the sole arbitrator. Here it may be borne in mind that the appellants had filed two applications one on 13th of June, 1981 for appointment of their nominee as the 'second arbitrator and the second on 29th of September, 1981 for a stay order restraining the arbitrator from proceeding with the arbitration till the decision of their application filed on 13th of June, 1981. These applications clearly manifested that the appellants had never acquiesced in the appointment of Mr. Muhammad Ashraf as the sole arbitrator.

16. For the foregoing reasons all the three appeals are accepted, the judgment and decrees of the lower Court as well as the awards are set aside and the cases are remanded to the learned lower Court for making fresh, reference to arbitration in accordance with law. The parties are, however, left to bear their own costs.

A.A.

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