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Some Aspects on Arbitration Law
by Rajinder Sachar†
Cite as : (2003) PL WebJour 11
Proposition of arbitration law of far-reaching magnitude has# been laid down in the case of Narayan Prasad Lohia v. Nikunj Kumar Lohia1. In that case the parties agreed to appoint one arbitrator each and the two arbitrators gave their award. This award was challenged by the unsuccessful party on the ground that it is mandatory for the award to be given either by a sole arbitrator by an odd number i.e. three arbitrators and, therefore, the award given by two arbitrators is void.
This matter was examined by the Supreme Court which referred to Section 4 of the Act, namely, that a party who knows any provision of this part from which the parties may derogate has not been complied with and yet proceed with the arbitration and does not raise objections to such a non-compliance, that objection shall deem to have been waived. The Court referred to Sections 10, 11, 16 and 34 of the Act. It took the view that as Section 16 enables the Arbitral Tribunal to rule on its own jurisdiction it means that a party can object to the composition of a Tribunal and it then referred to Section 16(2) which says that a plea that the Arbitral Tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence and as no objection was raised by the party, he must be deemed to have waived it.
The Court further held that so long as the composition of the Arbitral Tribunal is in accordance with the agreement of the parties, Section 34 does not permit a challenge to the award merely on the ground that composition of the Tribunal was in conflict with the provisions of the Act and this shows that objection to the composition of the Tribunal under Section 10 is derogative#. But with respect there are serious reservations as to the correctness of this conclusion.
No doubt, under Section 16(1) the Arbitral Tribunal may rule on its own jurisdiction including ruling on any objections with respect to the existence or validity of the arbitration agreement. Now under Section 16(1) the Arbitral Tribunal can examine the existence and validity of the arbitration agreement which it could not under the old Act where if the arbitration agreement was being challenged the matter had to be referred to the court. But it is significant to note that it is an Arbitral Tribunal which alone can decide under Section 16(1) of the Act. The crucial point, therefore, is what is the Arbitral Tribunal which is mentioned in Section 16.
Now Section 2(d) of the Act defines Arbitral Tribunal to mean a sole arbitrator or a panel of arbitrators. A reference to Section 10 provides that the parties are free to determine the number of arbitrators provided that such number shall not be an even number and sub-section (2) provides that failing the determination referred to in sub-section (1) the Arbitral Tribunal shall consist of a sole arbitrator. Thus it is mandatory under Section 10 of the Act that the Arbitral Tribunal cannot be of even number. In that context, Section 16(1) when it is talking of the power of the Arbitral Tribunal to rule on its own jurisdiction it is obviously contemplating an Arbitral Tribunal as provided by the Act which admittedly cannot be of two arbitrators. It is relevant to note that in Konkan Rly. Corpn. Ltd. v. Rani Construction (P) Ltd.2 relied on by the Court the Arbitral Tribunal consisted of three arbitrators and it was then said that if objection is raised that it is improperly constituted it may decide on its own jurisdiction. But that analogy does not apply to the present case where admittedly the Tribunal consisted of two arbitrators, which in law is not the Arbitral Tribunal as mandated by the Act. It is only if the Tribunal is constituted of three arbitrators and then dispute is raised on the composition of the Arbitral Tribunal, it is competent for the Arbitral Tribunal to rule on it. But if the purported Arbitral Tribunal consists of two arbitrators contrary to the mandate of Section 10, it cannot be considered an Arbitral Tribunal to which objection could have been raised about its competence and principle of waiver under Section 4 is not attracted.
The Court also ruled out that Section 34(2)(a)(v) will not apply. But the most serious part of the judgment which, with respect, seems to lay down the proposition while interpreting Section 11(3) that though under that Section 11 two arbitrators are to appoint a third arbitrator who shall act as the presiding arbitrator, # calls for comment, namely,
“[h]owever, we see no reason, why the two arbitrators cannot appoint a third arbitrator at a later stage i.e. if and when they differ. This would ensure that on a difference of opinion the arbitration proceedings are not frustrated. But if the two arbitrators agree and give a common award there is no frustration of the proceedings. In such a case their common opinion would have prevailed, even if the third arbitrator, presuming there was none, had differed” (SCC p. 583, para 17).
This proposition with respect seems to suggest that two arbitrators can go ahead and if they agree then the appointment of the third arbitrator is a mere formality which has no effect on the award given by two arbitrators in the absence of a third. With respect it is contrary to Section 10 which provides the number of arbitrators not to be an even number. This also seems to suggest that if the two arbitrators agree, it makes no difference even if the third arbitrator dissents and the award can be upheld as having been given by the majority of the two. But this view, with respect runs counter to an earlier decision of the Constitution Bench in the case of Bharat Bank Ltd.3 In that case the disputes had been referred to an Industrial Tribunal of three members and though the matter was heard by all the three the award was signed by only two members because it was claimed that the third was not available — and the plea that it will not affect the award was not accepted by Justice Mahajan (as His Lordship then was) wherein it was held that: (AIR p. 205, para 46)
“Moreover, I do not see why after having heard the reference he could not give the award even if he was in Calcutta or sign the award given by the other two members. The idea of three persons hearing a case and two of them deciding it is repugnant to all notions of fairness. It may well have been that the opinion of the third have influenced the other two or the decision arrived at may have been quite different. … The presence of the third in such a situation may have very vitally affected the result. After a good deal of thought I feel that it would be most dangerous for this Court to condone proceedings of this character.”
With respect it will be seen that Lohia judgment1 creates a gray area which may permit two arbitrators to purport to treat the appointment of the third arbitrator as a formality. This is unacceptable because Section 10 forbids appointment of (two) arbitrators under Section 11(3). Rather mandates the appointment of a third arbitrator who shall act as the presiding arbitrator. This judgment would suggest that the absence of the presiding arbitrator would make no difference as the two arbitrators are agreed on the award — but no agreement can override the mandatory statutory provision. This part of the judgment certainly needs reconsideration.
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