ORDER
1. This appeal is directed against the order of the Principal Subordinate Judge, Vellore, in Arbitration O.P.No.52 of 1996. The respondent in the O.P. is the appellant before this Court.
2. The said petition before the learned Subordinate Judge was filed by the respondent under Section 20 of the Arbitration Act, 1940. The facts which are sufficient for the disposal of the above appeal are aS follows:-
The plaintiff is a group of companies engaged in the manufacture of cotton yarn and sale of yarn to various traders. They used to purchase raw cotton of desired technical specifications for the manufacture of yarn. In the said context, the plaintiff had entered into a contract with the second defendant namely, Cotton Corporation of India, for the purchase of bales of indigenous cotton. The plaintiff had paid a sum of Rs. 46,50,000 towards the deposits representing the 10 per cent value of the entire quantity to be purchased from the first defendant corporation. The first defendant corporation did not have any storage facility and they opted to utilise the plaintiff mill as a storage point. On 16.5.1995 M/s. Swathi Cotton Traders acting as a broker had requested the second defendant to despatch 500 bales of cotton to Kudiyatham where the storage facility had been arranged in one of he plaintiff’s group of mills. The Corporation had so far as deposited 850 bales through the second defendant branch and 398 bales of cotton valued at Rs. 41,51,403 which had been cleared after the payment. The plaintiff further submits that before utilising the cotton, the yarn was tested and found that the quality of the cotton was not in conformity with the sample which was approved by the plaintiff company. This was brought to the notice of the defendant by various communications. The customers who had purchased the yarn from the said cotton mills had lodged complaints about the quality. On 12.10.1995 a detailed representation was made to the first defendant corporation enclosing the complaints of the customers. As there was no response reminders were also sent and on 18.11.1995. The plaintiff wrote a letter calling upon the first defendant to adjust the deposit amount of Rs. 46,50,000 retained by them towards the value of 452 bales held in the mill godown. The first defendant contended that 3768 bales were held in Indore which were despatched to the mill in Kudiyatham had been resulted in the open market and, it was claimed that a loss of Rs. 72,71,690 had resulted. According to the plaintiff, the same had been carried out without notice to the plaintiff company. No notice had
been given to the plaintiff company before selling the cotton in the open market. Therefore, on 29.11.1995 a detailed letter was sent to the first defendant highlighting the various disputes arising between the parties and it was also pointed out that in terms of the agreement without referring the disputes to the Arbitrator the defendant had acted contrary to law. Hence, the petition under Section 20 of the Arbitration Act.
3. In the detailed counter filed by the Branch Manager of the Cotton Corporation, while denying all the allegations, it was contended that Indian Arbitration Act, 1940 had been repealed by an Ordinance 11 of 1996 which had come into force on 23.1.1996 itself and on the said short ground alone, the petition was liable to be rejected. It was mainly contended that no samples were selected as alleged by the plaintiff. But the contract was entered only after final selection on the spot and approval thereof. The godown storage facility was not availed by the defendant. But only as a concession to the plaintiff on specific request by the plaintiff, the defendant granted godown storage facility. The objections relating to the quality of parameters were not true and cannot also because of action as the same cannot be raised before the Arbitrator. The various documents to which the plaintiff had referred are nothing but fabricated documents made for the purpose as spurious claims of the plaintiff. The plaintiff did not invoke the Arbitration Clause on 29.11.1995 as falsely set out in the plaint. In none of the letters of the plaintiff, had the plaintiff requested for the appointment of the Arbitrator. There was no request and there was no justifiable cause for the defendants to invoke the arbitration clause. All the other factual allegations as raised by the plaintiff were also denied.
4. Before the trial court no oral evidence was let in though several documents were marked. After hearing both sides, the learned Subordinate Judge held that the letter dated 29.11.1995 of the respondent was a sufficient notice calling for the appointment of the Arbitrator and hence the provisions of the Arbitration Act 1940 were applicable and there was also a valid demand and request to appoint an Arbitrator. He proceeded further to appoint a retired Judge of the Supreme Court as the Arbitrator. Hence the above appeal by the respondent in the OP.
5. Learned counsel for the appellant had raised the following points:
(i) The new Act, 1996 had come into force on 22.1.1996 whereas the present application under Section 20 of 1940 Act was filed during June, 1996. Therefore, the petition was not maintainable.
(ii) There was no request by the respondent to appoint an Arbitrator and hence the petition filed under Section 20 of the Act was not applicable and was also premature. Section 37(3) of the Act has to be strictly construed.
(iii) At any rate, the dispute raised by the respondent pertains to the quality of the yarn and hence outside the scope of reference to the Arbitrator.
(iv) At any rate, while appointing the Arbitrator, the trial court went beyond the scope of the Arbitration clause in having appointed a third party Arbitrator which was not contemplated under the Arbitration clause. In fact, in terms of the arbitration clause, an Arbitrator was appointed by the Chairman-cum-Managing Director. But the respondent had approached the Civil Court without
proceeding before the appointed Arbitrator. Therefore, the petition filed by the respondent under Section 20 of the Act was not bona fide.
6. Per contra, learned counsel for the respondent/plaintiff contends that the respondent having called upon the appellant to refer the dispute for arbitration on 29.11.1995, the provisions of the old Act were applicable. As regards the request to appoint the Arbitrator, the letter of request and the provisions of the Act should be liberally construed. The appointment of a third party Arbitrator was necessitated because of the opposition by the appellant to the petition under Section 20 of the Act and also due to failure to respond to the request of the respondent for the appointment of the Arbitrator. Therefore, there was nothing wrong in the court itself having appointed a third party Arbitrator.
7. I have considered the submissions of both sides. The following points arise for consideration in this appeal:
(1) Whether petition under Section 20 of the 1940 Act is maintainable after the coming into force of Arbitration and Conciliation Act, 1996, (Act 26 of 1996)?
(2) Whether there was any proper request by the respondent for the appointment of the Arbitrator in terms of Section 37(3) of 1940 Act so as to proceed under Section 20 of the Act.
(3) Whether the appointment of a third party arbitrator was justified.
(4) Whether the dispute arising for consideration relates only to the quality of the yarn and hence outside the scope of the enquiry by the Arbitrator.
8. Points (1) and (2): In the letter dated 29.11.1995, after stating the dispute which had arisen between the parties, the respondent had stated as follows:-
“There is an arbitration clause provided in the contract. When there is a dispute without following the arbitration clause you cannot claim unilaterally a sum specified in your letter 17.11.95 with a condition that payment should be effected before 30.11.1995”.
9. According to learned counsel for the appellant, there is no request as such for the appointment of an Arbitrator. The requirement under Section 37(3) is that an arbitration shall be deemed to be commenced only when one party to the agreement serves notice on the other side requiring the appointment of an Arbitration. In the letter dated 29.11.1995, there is no such demand.
10. I am unable to accept the contention of learned counsel for the appellant. Section 37(3) deals with question of limitation for the purpose of the period of three years as provided under the Limitation Act. The agreement itself is dated 10.4.1995 and there is no question of lapse of period of limitation. For invoking jurisdiction of the Civil Court under Section 20 of the Act, the only requirement is that sufficient cause should be shown to the court to order the agreement to be filed and to make reference to the Arbitrator. Of course sufficient cause has to be shown and it is true that the party approaching the Civil Court should show that in spite of his efforts, no Arbitrator was appointed. Even assuming that the requirement in Section 37(3) of the Act is applicable and it is mandatory to serve a notice on the other side, the terms of the notice cannot be very rigidly construed in a very hyper technical manner. The provisions of
the Arbitration Act are applicable even to lay parties also and hence should be construed and interpreted liberally.
11. In Union of India v. O.N. Revri & Co. , the Supreme Court held that a contract is a commercial document between the parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate the same. It would not be right while interpreting a contract entered into between two lay parties to apply strict rules of construction which are ordinarily applicable to a conveyance and other formal documents. The meaning of such a contract should be gathered by adopting a common sense approach and it may not be allowed to be parted to narrow pedantic legalistic interpretation.
12. To commence the arbitration and to call upon the opposite party to initiate arbitration proceedings what is required is the substance of the stand taken by the party and not the mere format vide The Agios Lazaros (1976 2 Lloyds Rep.47). The letter dated 29.11.1995 clearly indicates that there is an arbitration clause and that without following arbitration clause, the appellant cannot indirectly claim the sum specified in the letter. The intention to refer to the arbitration clause and reliance on the same is made very clear. Therefore, I am unable to uphold the objection that there was no request from the respondent for reference before the Arbitrator.
13. On the question of applicability of 1996 Act, it is not disputed that the new Act came into force on 22.1.1996. Inasmuch as I have held that there is a valid demand on 29.11.1995 by the respondent informing the appellant that they cannot proceed further without approaching the Arbitrator there by making it clear that the appellant should comply with the arbitration clause, I am also inclined to hold that the arbitration proceedings had commenced from the date itself.
14. In Shetty’s Constructions Co. Pvt. Ltd., v. Konkan Railway Construction, , the Supreme Court after referring to the provisions under 1996 Act, held that if such a request had been made prior to the date of the commencement of 1996 Act, the proceedings will be governed only by old Act.
15. The said judgment was quoted with approval in a subsequent judgment by the Supreme Court in Thyssen Stahlunion GMBH v. Steel Authority of India Ltd., 1999 (3) Raj 355 (S.C.).
16. Therefore, having regard to my conclusions as above, I hold both the points in favour of respondents and against the appellant.
17. Point No.(3): On the issue as to whether the Lower Court was justified in appointing a third party Arbitrator, I am inclined to agree with the objections raised by the appellant. It is settled proposition of law and there can be no dispute over the legal position that the scope of the Arbitration clause has to be strictly construed and the Court cannot go beyond the terms specifically mentioned under the Arbitration Clause whether as regards who should be the Arbitrator and what are the issues or disputes to be or not to be
referred to the Arbitrator. Section 20(4) mandates the court to make an order to the Arbitrator appointed by the parties whether in the agreement or otherwise. The liberty of the court to appoint an Arbitrator other than as provided under the agreement, would arise only when the parties cannot agree upon an Arbitrator. Hence that part of the order of the learned Subordinate Judge appointing a third party Arbitrator deserves to be set aside.
18. In M/s. N.P.C. Corpn. Ltd., v. M/s. S.P.Enterprise (P) Ltd, , a Division Bench of Calcutta High Court held that where the arbitration clause provided for reference to the Arbitrator to be chosen by the Chairman of Project Construction Corporation, the opposite party cannot by pass
the Chairman and approach the court seeking directions for the appointment of the Arbitrator.
19. Learned counsel for the respondent however, relied on the judgment of the Supreme Court in G. Ramachandra Reddy & Co. v. Chief Engineer, Madras, M.E.S. . Reference is made to the observation that where despite notice issued by the party to the opposite party to appoint the arbitrator in terms of the contract and no action was being taken, nor any agreement was reached between parties even after the initiation of the proceedings under Section 20 of the Act, it was held that court would get jurisdiction and power to appoint an arbitrator. I am inclined to hold that the facts of the said case cannot be applied to the present case. Firstly, there was no direct approach by the respondent seeking appointment of the Arbitrator. It is true that I have held in favour of the respondent while interpreting the requirements under Section 37(3) of the Act as to whether the letter of the respondent could be termed as a request and I have adopted a liberal approach. At the same time in order to find out as to whether the appellant did or did not act in spite of request, the circumstances under which the appellant failed to act, must also be construed in a manner consistent with Section 20(4). The provisions of Section 20(4) are mandatory and in order to bring a case under the default clause of Section 20(4), a more stronger case should be made out to show that notwithstanding the demand by one of the parties for appointment of the arbitrator, the opposite party deliberately neglected to do so. Secondly, in the present case, as pointed out by learned counsel for the appellant, during the pendency of the proceedings before the Lower court, steps were taken to appoint an arbitrator and was in fact appointed. In the said circumstances, the above judgment of the Supreme Court cannot be held to be applicable. Therefore, the appellant cannot be accused of having failed to act.
20. Learned counsel for the appellant contended that in fact the Arbitrator was actually appointed by the competent authority, but the respondent had chosen to approach this court by filing this appeal. If the facts stated by the appellant are true, the conduct of the respondent in ignoring the same cannot be appreciated. But in this appeal this Court is not called upon to decide any issue as regards the truth or the validity or otherwise of such appointment. Therefore, I refrain from going into the said issue.
21. Point No.4: The appellants contend that the dispute relates only to the quality of the yam and thus outside the scope of the arbitration clause. The arbitration clause under paragraph No.10 is as follows:-
“10. Arbitration:
10.1. No quality arbitration shall be lie after the buyer approves the bales by themselves or through any one of their authorised representatives.
10.2. Subject to Clause (1) herein above in case of any dispute or differences arising out of or in relation to this contract, the same will be referred to arbitration of an Arbitrator to be appointed by the Chairman-cum-Man aging Director of the seller (such arbitrator shall not be an employee of the seller) whose decision shall be final and binding and the arbitration shall abide by the law contained in the Arbitration Act, 1940 as amended from lime to time.
22. I agree that the issue as to whether a dispute was within the jurisdiction of the Arbitrator to try or has to be decided by the Civil Court itself and not by the Arbitrator, under that the 1940 Act vide the following judgments:
(i) Gaya Electricity Supply Co. Ltd., v. State of Bihar, ; (ii) M/s D. Gobindram v. M/s Shamji k & Co. .
23. But in the present case, the learned Subordinate Judge did not go into the issue. It is true that the learned counsel for the appellant contended that on the very face of the respondent’s letter dated 29.11.1995, it would be clear that the dispute raised by the respondent related only to the quality of the yarn supplied by the appellants. At this stage, I do not propose to go into the said issue which is dependent on the appreciation of facts and evidence. Considering that the trial court had not dealt with the said issue, I feel that in the interest of justice, the learned Subordinate Judge be directed to consider the same and proceed further in accordance with law.
24. In the result, the above appeal is partly allowed subject to the following terms:
(i) The findings that the provisions of the Arbitration Act, 1940 is applicable and that the respondent has made a valid request to the appellant to go before the Arbitrator, are confirmed.
(ii) The order appointing the third party Arbitrator is set aside.
(iii) The trial court is directed to consider and decide as to whether the dispute between the parties relates to the quality of the commodity supplied and as such whether the same would be outside the scope of the Arbitrator’s jurisdiction. Both parties are at liberty to adduce such further evidence as may be available with them. Further orders may be passed in accordance with law after dealing with the said issue. The learned Subordinate Judge is directed to dispose of the petition within a period of three months from the date of receipt of a copy of this judgment. The parties are directed to appear before the trial court on 13.8.2001. No costs.