Stic Travels (P) Ltd. vs Ethiopian Airlines on 13 November, 2000

Delhi High Court
Stic Travels (P) Ltd. vs Ethiopian Airlines on 13 November, 2000
Equivalent citations: 2001 (58) DRJ 119
Author: V Sen
Bench: V Sen


JUDGMENT

Vikramajit Sen, J.

1. The controversy that has arisen in this present dispute centres upon the interpretation that is to be given to Section 10 of the Arbitration Act, 1940. Ethiopian Airlines had appointed Messers Stic Travels (P) Ltd. (STIC) as their General Sales Agents (GSA) but this engagement was ended by the Airlines with effect from 20.12.1994. The disputes which consequently arose were to be resolved through arbitration. Since Ethiopian Airlines did not react appropriately, STIC filed Suit No. 2713 of 1994 under Section 20 of the Arbitration Act, 1940. In the course of these proceedings, late Justice G.C. Jain was appointed as an Arbitrator by Ethiopian Airlines and Mr. C.S. Agarwal as an Arbitrator by STIC. Justice Avadh Behari Rohtagi was thereafter agreed upon as the Third Arbitrator and Chairman. These persons thereupon constituted the Arbitral Tribunal. Proceedings commenced on 16.9.1995 and Claims were preferred and evidence by way of affidavits was led by both sides before this Arbitral Tribunal. The numerous hearings held thereafter have virtually been frustrated after the demise of Justice G.C. Jain, who was eventually succeeded by Justice H.L. Anand. Although Learned Counsel for STIC has vehemently argued that the demurrer to be decided herein, was instigated by counsel for Ethiopian Airlines, it was Justice Anand who on 30.12.1998, in terms of his letter dated 30.12.1998, raised the question of the appointment of the Presiding Arbitrator. As a consequence of this stalemate no further hearings of the Arbitral Tribunal took place. Succinctly stated, Justice Anand would have further hearings to proceed under Section 10(1), the effect being that Justice Avadh Behari Rohtagi would not be a constituent of the Arbitral Tribunal. If selected by the two nominated Arbitrators, i.e. Justice Anand and Shri C.S. Agarwal, Justice Avadh Behari Rohtagi would be the Umpire; his participation in the decision-making would arise only if there was no unanimity between the two nominated Arbitrators. Of course it is also possible that these two Arbitrators may not appoint Justice Avadh Behari Rohtagi as the Umpire at all.

2. The Arbitration Clause is Article XVI of the General Sales Agreement dated 5.1.1990 and reads as follows:

ARTICLE XVI

Arbitration:

1. In the event of any dispute concerning the interpretation or application of this Agreement, or concerning any rights or obligations based on or relating to the Agreement, such disputes shall be referred to and finally settled by an arbitral tribunal.

2. If the parties agree to the appointment of a single arbitrator the arbitral tribunal shall consist of him alone.

3. If they do not so agree the arbitral tribunal shall consist of three arbitrators. Each party shall within a reasonable time appoint one of the three arbitrators, and the two arbitrators so appointed shall appoint the third, who shall act as chairman. Both parties shall do all in their powers to expedite the arbitral process.

4. When the arbitral tribunal consists of more than one arbitrator its decision shall be given by a majority vote.

5. The arbitral tribunal shall settle its own procedure and if necessary shall decide the law to be applied. The award shall include directions concerning allocation of costs and expenses of and or incidental to arbitration, including arbitrators’ fees.

6. The award shall be final and conclusively binding upon the parties.

3. It is the contention of Learned counsel for the Respondent, Ethiopian Airlines, that a reading of the Arbitration Clause leads to the conclusion that Sub-section (1) of Section 10 of the Arbitration Act alone was attracted and therefore the proceedings hithertofore were not in conformity with the statutory provisions. This inconsistency, that is, that Justice Avadh Behari Rohtagi had acted as the third Arbitrator rather than the Umpire, was noticed by the nominee Arbitrator of Ethiopian Airlines, namely, Justice H.L. Anand. In order to obviate a possible attack against the Award on this legal ground, Ethiopian Airlines had considered it proper to obtain a judicial ruling on the question. This process would avoid a waste of time and money, it was argued by Mr. Y.P. Narula, learned counsel appearing on behalf of Ethiopian Airlines.

4. Section 10 of the Arbitration Act, 1940 reads as follows:

“10. Provisions as to appointment of three or more arbitrators.–( 1) Where an arbitration agreement provides that a reference shall be to three arbitrators, one to be appointed by each party and the third by the two appointed arbitrators, the agreement shall have effect as if it provided for the appointment of an umpire, and not for the appointment of a third arbitrator, by the two arbitrators appointed by the parties. .

(2) Where an arbitration agreement provides that a reference shall be to three arbitrators to be appointed otherwise than as mentioned in Sub-section (1), the award of the majority shall, unless the arbitration agreement otherwise provides, prevail.

(3) Where an arbitration agreement provides for the appointment of more arbitrators than three, the award of the majority, or if the arbitrators are equally divided in their opinions, the award of the umpire shall, unless the arbitration agreement otherwise provides, prevail.

5. A catena of cases was cited by Learned Counsel for the parties. The decision of the Constitution Bench of the Supreme Court in Khardah Co. Limited v. Raymon & Co. (India) Private Ltd., was relied upon in which it had been observed as follows:

“14 (2) It is next contended for the appellants that even if Clause 14 should be held to be inoperative by reason of the fact that the dispute is one relating to the validity of the contract, the respondents are estopped from now challenging the award on that ground, because they appeared before the arbitrators and took part in the proceedings before them. The decision in Ex parte Wyld, (1860) 30 LJ Bcy 10, is relied on in support of this contention. In that case a dispute between an assignee in bankruptcy and a creditor, Mr. Wyld, was referred to arbitration on the basis of an agreement in writing between them. An award having been pronounced against Mr. Wyld, he disputed its validity on the ground that the assignee had not obtained the leave of the Court for entering into the arbitration. In rejecting this contention the Court observed that under the law the agreement was binding on Mr. Wyld even though the leave of the Court was not obtained and that therefore he was not entitled to take this objection based on the informality of the submission as he had himself acted on it. This decision is clearly of no assistance to the appellants because there was a valid and subsisting submission, on which the jurisdiction of the arbitrators to hear the dispute was complete, and that was not affected by the failure of the assignee to obtain the requisite leave, because that was a matter between him and the court. But here if the agreement dated September 7, 1955 is void then there was no submission which was alive on which the arbitrators could act and the proceedings before them would be wholly without jurisdiction. If there had been another arbitration agreement apart from and independent of Clause 14 of the contract dated September 7, 1955, it might have been possible to sustain the proceedings before the arbitrators as referable to that agreement. But none such has been set up or proved in the present case. All that is alleged is that the respondents acquiesced in, the proceedings. But what confers jurisdiction on the arbitrators to hear and decide a dispute is an arbitration agreement as defined in Section 2(a) of the Arbitration Act, and where there is no such agreement, there is an initial want of jurisdiction which cannot be cured by acquiescence. It may also be mentioned that the decision in (1860) 30 LJ Bcy 10 has been understood as an authority for the position that when one of the parties to the submission is under a disability that will not be a ground on which the other party can dispute the award if he was aware of it. Vide Russel on Arbitration, 16th Edition 320. We are therefore unable to accept the contention of Mr. Sanyal, that the respondents are estopped by their conduct from questioning the validity of the award.”

6. The opinion expressed above is sought to be extrapolated into the matrix of the present case to argue that even if Ethiopian Airlines had acquiesced to the Chairmanship of Justice Rohtagi in the Arbitral Tribunal, since this was allegedly contrary to Section 10, such conduct would not legitimise the proceedings. I am unable to read this decision beyond having laid down that if the Agreement was illegal, the Arbitration Clause contained in the Agreement would perish along with the Agreement, thus invalidating the Arbitral Proceedings even though they were willingly participated in by both adversaries. The Court had noted that “if there had been another arbitration agreement apart from and independent of Clause 14 of the contract dated September 7, 1955 it might have been possible to sustain the proceedings as referable to that agreement.”

7. The same Constitution Bench, again speaking through Venkatarama Aiyar J. reiterated this view in the following words in Waverly Jute Mills Co. Ltd. v. Raymon & Co., .

“Now an agreement for arbitration is the very foundation on which the jurisdiction of the arbitrators to act rests, and where, that is not in existence, at the time when they enter on their duties, the proceedings must be held to be wholly without jurisdiction. And this defect is not cured by the appearance of the parties in those proceedings, even if that is without protest, because it is well settled that consent cannot confer jurisdiction. But in such a case there is nothing to prevent the parties from entering into a fresh agreement to refer the dispute to arbitration while it is pending adjudication before the arbitrators, and in that event the proceedings thereafter before them might be upheld as referable to that agreement, & the award will not be open to attack as without jurisdiction. But it will make all the difference in the result whether the parties have entered into an arbitration agreement as defined in Section 2(a) of the Arbitration Act or have merely taken steps in the conduct of proceedings assumed or believed to be valid. In the former case the award will be valid; in the latter, a nullity”.

8. Mr. Narula also drew support from the decision in Wellington Associates Ltd. v. Kirit Mehta, , possibly from paragraph 12, which is extracted below:

In D. Gobindram v. Shamji Kalidas Co., it was held that the question as to the existence of arbitration clause was for the Court to decide under Section 33 and not for the arbitrators. In Khardah Co. Ltd. v. Raymon & Co. (India) Pvt. Ltd., and in Waverly Jute Mills Co. Ltd. v. Raymon & Co. (India) Pvt. Ltd., , it was held that the question as to the validity of the contract was also for the Court to decide under Section 33 and not for the arbitrator, if there was no arbitration clause at the time of entry of the arbitrators on their duties, the whole proceedings would be without jurisdiction. In Renusagar Power Co. Ltd. v. General Electric Co., it was stated that ordinarily, as a rule, an arbitrator had no authority to clothe himself with power to decide the question of his own jurisdiction unless parties expressly conferred such a power on him.”

9. Courts have, in a number of instances, applied the principle of Waiver and acquiescence to validate arbitral proceedings. In Pannalal Jugatmal v. State of Madhya Pradesh, , the Division Bench held that even assuming that the reference to arbitration was invalid, the parties would be deemed to have made a fresh appointment of the arbitrator. In R. Prince and Co. v. Governor General in Council AIR 795.5 Punjab 240, the Court declined to consider any objection to the legal impropriety of the appointment of the Umpire since the Government was a party to the Reference and failed to demur at the first opportunity, and took the chance of a favourable decision and held that the Government had acquiesced in the appointment and waived objections to any defect in the appointment. In Bokaro and Ramgur Ltd. v. Dr. Prasun Kumar Banerjee, , the Full Bench opined as follows, and then held that since the parties participated in the arbitral proceedings even after the expiry of the period of four months, the Award could not be assailed on this ground.

“What is meant by “estoppel against Statute” has been tersely stated in Article 345 at page 176 of Halsbury’s Laws of England, 3rd Edition, Vol. 15 in these terms:

The doctrine of estoppel cannot be invoked to render valid a transaction which the legislature has, on the grounds of general public policy enacted shall be invalid….Where a statute enacted for the benefit of a section of the public imposes a duty of a positive kind the person charged with the performance of this duty cannot by estoppel be prevented from exercising his statutory powers.”

One of the cases noted in the foot note in support of the second part of the passage extracted above is the case of Maritime Electric Co. Ltd. v. General Dairies Ltd. on which reliance was placed by the learned Advocate General for the petitioner. Lord Maugham delivering the judgment of the Board has quoted with approval at page 117 a passage from Lord Atkin’s judgment in “In re A Bankruptcy Notice” (1924) 2 Ch. 76. I may also quote with advantage only a few lines from that passage which say:

“It seems to me well established that it is impossible in law for a person to allege any kind of principle which precludes him from alleging the invalidity of that which the statute has, on grounds of general public policy, enacted shall be invalid.”

This is a species for the application of the principle that there cannot be any estoppel against Statute which is wholly inapplicable here. To my mind, and I say so with respect, such a principle was wrongly applied in the Allahabad case and so in Lakhmir Singh’s case . On the application of the principle of estoppel, Patto Kumari’s case, 4 Pat LJ 265: (AIR 1919 Pat 93) was rightly decided and must be respectfully approved.”

(19) Principles of waiver and acquiescence can also be pressed into service in support of the view taken above. In Article 1.175 at page 637 of Halsbury’s Laws of England, 3rd Edition, Vol. 14, it is stated:

“Waiver is the abandonment of a right, and is express or implied from conduct. A person who is entitled to the benefit of a stipulation in a contract or of a statutory provision may waive it, and allow the contract or transaction to proceed as though the stipulation or provision did not exist.”

The petitioner Company in this case was entitled to put a stop to the Arbitrator proceeding in the matter on the expiry of 4 months after he entered on the reference because of the stipulation in the arbitration agreement imported under the Act but it waived it and allowed the proceeding to proceed as though the stipulation did not exist. In my opinion, it waived its right. In the same Volume in Article 1177 at page 638, the term ‘acquiescence’ has been stated to imply in its proper legal sense that a person abstains from interfering while a violation of his legal rights is in progress. The next Article says that acquiescence operates by way of estoppel and is an instance of estoppel by words or conduct. Of course, for the application of the principles of waiver and acquiescence and also to a certain extent for the application of the doctrine of estoppel by conduct knowledge of one’s legal rights or true facts must be there. On the facts of the instant case as narrated above. I have no doubt that it was there.”

10. In Union of India v. B.M. Sen, , it was held that since both parties appeared before the Arbitrator fully knowing that he did not answer to the description of the officer referred to in the Arbitration Agreement and that he was not competent to make the Award, the Award could not thereafter be challenged on the grounds of the Arbitrator not fulfillling the description in the Agreement. The Court placed reliance on a Division Bench judgment to the same effect, namely, Union of India v. K.P. Mandal, .

11. The Hon’ble Supreme Court in N. Chettappan v. Secretary, Kerala State Electricity Board and Anr., made the following ruling:

“As we already said, paragraph 5 of the order in O.P. 11 of 1972 leaves no room for doubt that it was a consent order. The Board made no endeavour to have that order vacated by filing a review, if the statement in that order that it was passed on the basis of consent proceeded from a mistake of the court. On the other hand, we find that the Board participated in the proceedings before the umpire without any demur to his jurisdiction. The only inference from this conduct on the part of the Board is that it had no objection to the order revoking the authority of the arbitrators. Therefore, by acquiescence, the Board was precluded from challenging the jurisdiction of the umpire.

“If the parties to the reference either agree beforehand to the method of appointment, or afterwards acquiesce in the appointment made, with full knowledge of all the circumstances, they will be precluded from objecting to such appointment as invalidating subsequent proceedings. Attending and taking part in the proceedings with full knowledge of the relevant fact will amount to such acquiescence” (See “Russell on Arbitration”, 17th Ed., p.215).”

12. In Chowdhri Murtaza Hossein v. Mt. Bibi Bechunnissa, (1876) 3 Ind App 209 (PC) at p. 220 the Privy Council said:

“On the whole, therefore, there Lordships think that the appellant, having a clear knowledge of the circumstances on which he might have founded an objection to the arbitrators proceeding to make their award, did submit to the arbitration going on; that he allowed the arbitrators to deal with the case as it stood before them, taking his chance of the decision being more or less favourable to himself; and that it is too late for him, after the award has been made, and on the application to file the award, to insist on this objection to the filing of the award.”

The High Court said that acquiescence of the Board by participating in the proceeding before the umpire as sole arbitrator would not confer jurisdiction as there was inherent lack of jurisdiction in that the order in O.P. 11 of 1972 was bad in law and that it did not clothe the umpire with any jurisdiction. We are of the view that even assuming that the order in O.P. 11 of 1972 was not passed on consent, the umpire had power to pass the award. As we said, the umpire could have entered upon the reference under Rule 4 of the First Schedule when the arbitrators failed to make the award within the extended time. Neither the fact that the umpire wanted an order from the court to enter upon the reference nor the fact that an application was made by the Board on 5.2.1972 to extend the time for the arbitrators to make the award would denude the umpire of his jurisdiction to enter upon the reference and pass an award under Rule 4 of the First Schedule. Therefore, when the Board without demur participated in the proceedings before the umpire and took the chance of an award in its favour, it cannot turn round and say that the umpire had no inherent jurisdiction and therefore its participation in the proceedings before the umpire is of no avail. The fact that the umpire did not purport to act in the exercise of his jurisdiction under Rule 4 of the First Schedule but under the order of the Court, would not make any difference when we are dealing with the question whether he had inherent jurisdiction. As the umpire became clothed with jurisdiction when the extended period for making the award by arbitrators expired, it cannot be said that he had no inherent jurisdiction. As we said, neither the fact that the umpire expressed his unwillingness to enter upon the reference without an order of the court nor the fact that an application to extend the period for making the award by the arbitrators long after the expiry of the period for making the award had the effect of depriving him of his jurisdiction under Rule 4 of the First Schedule. The High Court was, therefore, clearly wrong in thinking that acquiescence did not preclude the Board from challenging the jurisdiction of the umpire as sole arbitrator. We do not find any substance in the contention of the Board that the application for setting aside the award was not posted for evidence as normally such an application should be disposed of on the basis of affidavits. We do not think that there was any exceptional circumstance in this case so that the court should have allowed the Board to adduce other evidence.”

13. Similar views have been expressed in Neelkantan and Bros. v. Supdt. Engineer, National Highways, .

14. Mr. Y.P. Narula, Learned counsel for Ethiopian Airlines, also cited the decision of the Division Bench in Chouthmal Jivrajee Poddar v. Ramchandra Jivrajee Poddar and Ors., AIR 1955 Nagpur 126, in which it was held that the Umpire was precluded from participating in the deliberations and/or moulding the decision of the two Arbitrators. This would only be relevant if it is concluded that Justice Avadh Behari Rohtagi had been appointed as the Umpire . In this context, it must be kept in perspective that both parties had on 1.6.1996, stated that all disputes arising out of the two agreements dated 1.7.1987 and 5.1.1990 would be referred to the Arbitral Tribunal consisting of Justice Avadh Behari Rohtagi (Chairman), Justice G.C. Jain and Shri C.S. Aggarwal. Thus, even if the Arbitration Clause contemplated Section 10(1) a fresh agreement had been reached by the parties.

15. A distillation of the decision rendered on the point indicates that the preponderant opinion is that the principles of estoppel and waiver would operate so as to validate arbitral proceedings which took place albeit with only the tacit approval of the parties. It has been recognized that it is open to the Court to consider whether, from the conduct of the parties, it could be inferred that a fresh agreement to refer disputes to arbitration had evolved or transpired. In my perception, waiver and acquiescence are only one side of a coin, the obverse side being the evolution of a fresh contract. It is also incumbent on the Court to eschew an approach which would invalidate proceedings held over a period of time without demur. A pedantic approach to statutory provisions is also to be avoided. Law is vibrant and not immutable – power should follow justice, not precede it (sequin debet potential justified non praecedere). Section 10 of the Arbitration Act ought not to be employed to render the Arbitral Proceedings nugatory.

16. A holistic reading of Section 10 of the Arbitration Act discloses that first, sub-rule contemplates a situation where both adversaries appoint one arbitrator each and these Arbitrators thereafter jointly appoint an umpire. The second sub-rule envisages the appointment of three arbitrators. In the former case, the third person/arbitrator has a role to play only if the two arbitrators do not reach a consensus whereas in the latter case, all three persons participate and the decision is by majority. Does the section prohibit the parties from agreeing on an amalgam of the two; or mandate that only where the former cannot be enforced, can the parties move to the latter. I cannot perceive any such prescription. In fact the subject arbitration clause is itself a hybrid of both since it firstly declares that disputes shall be referred to a Sole Arbitrator if they agree to such a person. Thereafter it prescribes that if a Sole Arbitrator is not agreed to “the Arbitral Tribunal shall consist of three arbitrators”. The language is unambiguous and can lead only to the conclusion that Sub-section (2) of Section 10 of the Arbitration Act was in the minds of the parties. This is also indicated from sub Clause (4) of the Arbitration Clause since it refers to a majority decision and makes no reference whatsoever to the third Arbitrator acting as an Umpire, or of his being called upon to act in case of a disagreement between the two nominated Arbitrators. It is only after these words that the Arbitration Clause articulates the manner in which the Arbitral Tribunal is to be constituted. No doubt this selection is on the lines indicated in Sub-section (1) of Section 10, but that is no justification for overriding the clear application of Sub-section (2). The first provision in the Arbitration Clause is not rendered superfluous by the following one. This is in fact the position that the parties, and the very erudite and seasoned lawyers who comprised the Arbitral Tribunal, adhered to for several years till the objection was raised after the demise of Justice G.C. Jain. Both the sub-sections are equally commanding and mandatory. In the light of this interpretation of the Arbitration Clause as well as of Section 10 of the Arbitration Act, there has not been any irregularity in the proceedings of the Arbitral Tribunal over which Justice Avadh Behari Rohtagi presided.

17. Ethiopian Airlines have raised three queries in their reply to OMP 133 of 1999 which in my considered opinion can be answered by stating that Justice Avadh Behari Rohtagi shall continue as the Chairman of the Arbitral Tribunal and the decision of the majority shall prevail, as contemplated in Article XVI (4) of the Agreement and by Section 10(2) of the Arbitration Act, 1940. The two Arbitrators, namely, Justice H.L. Anand and Mr. C.S. Agarwal arc not justified or competent to de novo select an Umpire. The Arbitral Tribunal consists of three Arbitrators of which Justice Avadh Behari Rohtagi is the President/Chairman and to which Justice H.L. Anand has become a member consequent on the demise of Justice Jain,

18. The parties are directed to appear before the Arbitral Tribunal comprising Justice Avadh Behari Rohtagi, President/Chairman, Justice H.L. Anand and Mr. C.S. Agarwal on 4th December, 2000 or on any other date that the Learned Arbitrators may fix according to their convenience. The Arbitral Tribunal shall make and publish its Award within four months from when it recommences its hearings/proceedings, or within the period which may be extended by the mutual consent of the parties. OMP 133 of 1999 is allowed and since the temporary cessation of proceedings was a result of the questions raised by one of Learned Arbitrator, the parties shall bear their respective costs. Suit No. 1893/1995 as well as all the interim applications filed therein are dismissed.

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