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Wednesday, October 21, 2015

No doubt, in the instant case, there was no arbitration agreement between the parties when the suit was filed by the respondent herein. However, in the said suit which was filed, parties arrived at an agreement whereby it was agreed between them that the matter be decided through arbitration and not by the court of law.= whenever parties agree for mediation, and even name a specific arbitrator with no specific provision for appointment of another arbitrator on the recusal/withdrawal of the said arbitrator, the said omission is made up by Section 15(2) of the Act and unless arbitration agreement between the parties provides a categorical prohibition or debarment in resolving a question or dispute or difference between the parties by a substitute arbitrator in case of death or the named arbitrator or non-availability of the said arbitrator, Courts have the power to appoint substitute arbitrator, which power is given by Section 15(2) of the Act as this provision is to be given liberal interpretation so as to apply to all possible circumstances under which the mandate of the earlier arbitrator may be terminated.


                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION
                      CIVIL APPEAL NO.  8731    OF 2015
              (Arising out of S.L.P. (Civil) No.19617 of 2015)

SHAILESH DHAIRYAWAN                            …APPELLANT



                        J U D G M E N T

R.F. Nariman, J.

1.    Leave granted.

2.    The respondent had filed a suit in the Bombay High Court,  being  Suit
No.1927  of  2007,  against  the  appellant  and  some  others   seeking   a
declaration that a development agreement dated 27.12.2004  together  with  a
Power of Attorney of even date had stood terminated, and for  certain  other

3.    On 3.10.2008, the parties to  the  suit  entered  into  consent  terms
largely settling the disputes between them.  However,  with  regard  to  two
specific differences, the plaintiff and defendant No.1 agreed to  refer  the
said differences to the arbitration of a  retired  Supreme  Court  Judge  as

“8).  The Plaintiff and the Defendant No.1 agree to and hereby do  refer  to
Arbitration of Mrs. Justice Sujata Manohar (Retd.) the  dispute  as  to  (i)
the difference in carpet area of the 5 flats agreed to be  allotted  as  per
the Development Agreement dated 27-12-2004 being Exhibit-B to the Plaint  by
Defendant No.1 to the Plaintiff and his family members  (i.e.  800  sq.  ft.
area) as provided in the said Development  Agreement  dated  27-12-2004  and
the actual carpet area of the said 5 flats hereby allotted and  handed  over
and (ii) the valuation of the deficient area if any,  and  the  damages  for
the same.  The Learned Arbitrator to  make  an  award  with  regard  to  the
compensation and the damages to be paid by Defendant No.1 to  the  plaintiff
for the deficient area, if any, Defendant No.1 shall not raise  any  dispute
as to the jurisdiction of the arbitrator.  The Arbitrator shall  decide  the
same as expeditiously as possible in  accordance  with  law  and  under  the
provisions of the Arbitration & Conciliation Act, 1996.”

The said consent terms were taken on record by a Single Judge of the  Bombay
High Court who passed an order dated 8.10.2008 disposing of the suit in  the
following terms:

“1.    Pursuant  to  the  suggestion  given  by  this  Court,  parties  were
exploring the possibility of settlement and therefore the  matter  was  kept
part heard.

2.    Today, the parties are tendering Consent  terms.   Consent  terms  are
taken on record and marked “X” for the purpose of  identification.   Consent
Terms are signed by the Plaintiff, Defendant No.1, Defendant No.3 and  their
respective Advocates.  Undertakings, if any, given in the Consent  terms  by
any of the parties is accepted.  Decree is passed in terms  of  the  consent

3.    In respect of  the  dispute  regarding  compensation,  the  matter  by
consent is referred to Mrs. Justice Sujata Manohar (Retd.) for  arbitration.
  The  issue  regarding  the  allotment  of  parking  spaces  or  plaintiffs
returning  the  promissory  note  can  also  be  decided  by   the   learned
arbitrator.   Plaintiff  is  permitted  to  withdraw  the  amount  which  is
deposited by Defendant No.1 and which is lying in the  suspense  account  of
Oriental Bank of Commerce, Khar Branch, Mumbai.

1.    Plaintiff and Defendants are present in court.

2.    Suit is disposed off in the aforesaid terms.

3.    Refund of court fees be paid in accordance with the rules.

4.    Since the suit itself is disposed of, Notice of motion  if  any,  does
not survive and the same is also disposed of.”

4.    Nothing much seems  to  have  materialised  in  the  arbitration,  and
despite several meetings held  by  the  named  arbitrator,  the  arbitration
proceedings continued to drag on, until by a letter  dated  22.01.2011,  the
Arbitrator resigned as arbitrator in the aforesaid matter.

5.    The plaintiff-respondent then applied vide Notice  of  Motion  No.2245
of 2012 in the disposed of  suit  No.1927  of  2007  for  appointment  of  a
substitute arbitrator.  This Notice of Motion was dismissed by  order  dated
20.9.2013 stating that an appointment can only  be  made  for  a  substitute
arbitrator under Section 11(5) of the Arbitration Act and not  by  a  Notice
of Motion in a disposed of suit.

6.    Pursuant to the dismissal of the said Notice of Motion, the  plaintiff
moved the Bombay High Court under Section 11 by an application  of  January,
2014 for appointment of a substitute arbitrator.  By the  impugned  judgment
dated 12.6.2015, the Bombay High Court appointed  a  retired  Judge  of  the
said  High  Court,  namely  Dr.  Justice  S.  Radhakrishnan,  as  substitute

7.    Shri T.R. Andhyarujina, learned senior advocate  appearing  on  behalf
of the appellant, has argued before us that as this was the case of a  named
arbitrator, the arbitration agreement contained in the consent terms in  the
Suit No.1927 of 2007 spent its force when the named arbitrator resigned,  it
being clear that the said clause would only apply to  the  named  arbitrator
and nobody else, parties having faith  only  in  the  named  arbitrator.  He
cited three decisions of this Court to buttress his submission  and  further
argued that under Section 15(2) of the  Arbitration  and  Conciliation  Act,
1996, where the mandate of a named arbitrator  terminates,  there  being  no
rules that would apply to the appointment of the arbitrator being  replaced,
the said Section would, therefore, not  apply  and  the  High  Court  having
missed this vital fact is,  therefore,  wrong  in  appointing  a  substitute

8.    Shri Santosh  Paul,  learned  advocate  appearing  on  behalf  of  the
respondent has, however, supported the judgment of  the  Bombay  High  Court
and has argued that  the  mandate  of  Section  89  of  the  Code  of  Civil
Procedure (in short “CPC”)  requires a Court to  attempt  to  either  settle
disputes raised in a suit by the means outlined  by  the  Section  or  refer
them to arbitration, in which case the arbitration shall be deemed as if  it
is an arbitration commenced under  the  Arbitration  and  Conciliation  Act,
1996.  He further argued that it is not correct to say that  no  rules  were
applicable to the appointment of the arbitrator in the present case  as  the
appointment was made by the High Court and, therefore, when his client  went
back to the self same High Court to appoint a  substitute  arbitrator,  that
High Court would necessarily have jurisdiction to appoint another person  in
the place of the named arbitrator.

9.    The Arbitration and Conciliation Act, 1996, replaced three other  Acts
dealing with arbitration: the Arbitration  (Protocol  and  Convention)  Act,
1937, the Arbitration Act, 1940, and the  Foreign  Awards  (Recognition  and
Enforcement) Act, 1961.

10.   Since we are concerned with a domestic arbitration  clause,  it  would
be useful to extract Section 8(1)(b) and Section  20  of  the  old  repealed
1940 Act to show what was  the  position  in  law  under  the  1940  Act  on
supplying vacancies created by arbitrators  neglecting,  refusing  or  being
incapable of acting, or dying before  or  in  the  proceedings  referred  to
arbitration. These Sections read as under:-

“Section 8. Power of Court to appoint arbitrator or umpire.
(1) In any of the following cases-
(b) if any appointed arbitrator or umpire neglects or refuses to act, or  is
incapable of acting, or dies, and the arbitration agreement  does  not  show
that it was intended that the  vacancy  should  not  be  supplied,  and  the
parties or the arbitrators, as the case may be, do not supply the vacancy;
any party may serve the other parties or the arbitrators, as  the  case  may
be, with the written notice to concur in the appointment or appointments  or
in supplying the vacancy.
      (2) If the appointment is not made within  fifteen  clear  days  after
the service of the said notice, the Court may, on  the  application  of  the
party who gave the notice and after giving the other parties an  opportunity
of being heard, appoint an arbitrator or arbitrators or umpire, as the  case
may be, who shall have like power to act in the reference  and  to  make  an
award as if he is or they had been appointed by consent of all parties.
Section 20. Application to file in Court arbitration agreement.
(1) Where any persons have entered into an arbitration agreement before  the
institution of any suit with respect to the subject-matter of the  agreement
or any part of it, and where a difference has arisen to which the  agreement
applies, they or any of them, instead of proceeding under  Chapter  11,  may
apply to a Court having jurisdiction in the matter to  which  the  agreement
relates, that the agreement be filed in Court.
(2)  The  application  shall  be  in  writing  and  shall  be  numbered  and
registered as a suit between one or more of  the  parties  5  interested  or
claiming to be interested as plaintiff or plaintiffs and  the  remainder  as
defendant or defendants, if the application has been presented  by  all  the
parties, or, if otherwise, between the applicant as plaintiff and the  other
parties as defendants.
(3) On such application being made, the Court shall  direct  notice  thereof
to be given to all parties to  the  agreement  other  than  the  applicants,
requiring them to show cause within the time specified  in  the  notice  why
the agreement should not be filed.
(4) Where no sufficient cause is shown, the Court shall order the  agreement
to be filed, and  shall  make  an  order  of  reference  to  the  arbitrator
appointed by the parties, whether in the agreement or otherwise,  or,  where
the parties cannot agree upon an arbitrator, to an arbitrator  appointed  by
the Court.
(5) Thereafter the arbitration shall proceed in accordance with,  and  shall
be governed by, the other provisions of this Act so far as they can be  made

11.   The law under the aforesaid repealed  Sections  was  laid  down  in  a
judgment of this Court which has since then been  followed  repeatedly.   In
Parbhat  General  Agencies  v.  Union  of  India,  (1971)  1  SCC  79,   the
arbitration clause in that case was set out as follows:-

“If any question, difference or objection whatsoever shall arise in any  way
connected with or arising out of this or the meaning  or  operation  of  any
part thereof or the rights, dues or liabilities of either party,  then  save
in so far as the decision of any such matter is  hereinbefore  provided  for
and has been so decided, every such matter including  whether  its  decision
has been otherwise provided for and whether  it  has  been  finally  decided
accordingly or whether  the  contract  should  be  terminated  or  has  been
rightly terminated and as regards the rights and obligations of the  parties
as the result of such termination shall be referred for arbitration  to  the
Judicial Commissioner, Himachal Pradesh and his decision shall be final  and
binding and where the  matter  involves  a  claim  for  or  the  payment  or
recovery or deduction of money, only the amount, if  any,  awarded  in  such
arbitration shall be recoverable in respect of the matter so referred.”  [at
para 1]”

After referring to Section 8(1)(b) and Section 20, this Court held:

“Section 20 is merely a machinery provision.  The substantive rights of  the
parties are found in Section 8(1)(b). Before Section 8(1)(b) can  come  into
operation it must be shown that  (1)  there  is  an  agreement  between  the
parties to refer the  dispute  to  arbitration;  (2)  that  they  must  have
appointed an arbitrator or arbitrators or umpire to resolve  their  dispute;
(3) anyone or more of those arbitrators or umpire  must  have  neglected  or
refused to act or is incapable of acting or has died;  (4)  the  arbitration
agreement must not show that it was intended that the vacancy should not  be
filled and (5) the parties or the arbitrators as the case  may  be  had  not
supplied the vacancy.
      In the cases before us it is admitted that there is  an  agreement  to
refer the dispute to arbitration.  It is also admitted that the parties  had
designated the Judicial Commissioner of Himachal Pradesh as  the  arbitrator
for resolving any dispute that may arise between  them  in  respect  of  the
agreement.  The Judicial Commissioner had refused to act as the  arbitrator.
 The parties have not supplied that vacancy.  Therefore  the  only  question
is whether the  agreement  read  as  a  whole  shows  either  explicitly  or
implicitly that  the  parties  intended  that  the  vacancy  should  not  be
supplied.  It may be noted that the language of the provision is  not  “that
the parties intended to supply the vacancy” but on  the  other  hand  it  is
that “the parties did not intend to supply the vacancy”. In other  words  if
the agreement is silent as regards supplying the vacancy, the  law  presumes
that the parties intended to supply the vacancy.  To take the  case  out  of
Section 8(1)(b) what is required is not the  intention  of  the  parties  to
supply the vacancy but their intention not to supply the  vacancy.  We  have
now to see whether the agreements before us indicate such an intention.
      As mentioned earlier, the only relevant provision  in  the  agreements
before us is the provision relating to arbitration. The other provisions  in
the agreements do not throw any  light  as  regards  the  intention  of  the
parties. We have earlier mentioned that the Judicial Commissioner,  Himachal
Pradesh,  could  not  have  been  appointed  as  the  arbitrator   for   any
specialised knowledge possessed by him relating  to  any  dispute  that  may
arise under  the  agreement.  What  the  Judicial  Commissioner  could  have
competently done if he had acted as an arbitrator could  certainly  be  done
by an independent and impartial  person  possessing  adequate  knowledge  of
law.  In  our  opinion  the  language  of  Section  8(1)(b)  is  plain   and
unambiguous and the terms of the agreement before us do  not  in  the  least
show that the parties intended not to supply the vacancy.” [at paras 3, 4  &

12.   This was the state of the law in India until  the  1996  Act  repealed
inter  alia  the  1940  Act.   Since  we  are  concerned  with  the  correct
interpretation of Section 15 of this Act, it is set out hereinbelow:-

“Section 15.Termination of mandate and substitution of arbitrator.-  (1)  In
addition to the circumstances referred to in section 13 or section  14,  the
mandate of an arbitrator shall terminate----
(a) where he withdraws from office for any reason; or
(b) by or pursuant to agreement of the parties.
(2) Where the mandate of an arbitrator terminates, a  substitute  arbitrator
shall be appointed according to  the  rules  that  were  applicable  to  the
appointment of the arbitrator being replaced.
(3) Unless otherwise agreed by the parties, where an arbitrator is  replaced
under sub-section (2), any hearings previously held may be repeated  at  the
discretion of the arbitral tribunal.
(4) Unless otherwise agreed by the  parties,  an  order  or  ruling  of  the
arbitral tribunal made prior to the replacement of an arbitrator under  this
section shall not be invalid solely because there has been a change  in  the
composition of the arbitral tribunal.”

The reason for the change in law under  the  1996  Act  is  because  it  was
modeled on the Uncitral Model Law on International  Commercial  Arbitration.
The Statement of Objects and Reasons for the 1996 Act makes  this  clear  as

“2. The United Nations Commission  on  International  Trade  Law  (UNCITRAL)
adopted in 1985 the Model Law on International Commercial  Arbitration.  The
General Assembly of the United Nations has recommended  that  all  countries
give due consideration to the said Model Law, in view  of  the  desirability
of uniformity of the law of arbitral procedures and the  specific  needs  of
international commercial arbitration practice. The UNCITRAL also adopted  in
1980 a set of  Conciliation  Rules.  The  General  Assembly  of  the  United
Nations has recommended the use of these Rules in cases where  the  disputes
arise in the context of international commercial relations and  the  parties
seek amicable settlement of their disputes by recourse to  conciliation.  An
important feature of the said UNCITRAL Model Law  and  Rules  is  that  they
have harmonised concepts on arbitration and conciliation of different  legal
systems of the world and thus contain  provisions  which  are  designed  for
universal application.
3. Though the said UNCITRAL Model Law and Rules are intended  to  deal  with
international commercial arbitration  and  conciliation,  they  could,  with
appropriate modifications, serve as a  model  for  legislation  on  domestic
arbitration and conciliation. The present  Bill  seeks  to  consolidate  and
amend the law relating to  domestic  arbitration,  international  commercial
arbitration, enforcement of foreign arbitral awards and to  define  the  law
relating to conciliation, taking into account the said  UNCITRAL  Model  Law
and Rules.”

Article 15 of the Model Law, on which  Section  15(2)  is  based,  reads  as

“Where the mandate of an arbitrator terminates under article  13  of  14  or
because of his withdrawal from office for any other  reason  or  because  of
the revocation of his mandate by agreement of the parties or  in  any  other
case of termination  of  his  mandate,  a  substitute  arbitrator  shall  be
appointed according to the rules that were applicable to the appointment  of
the arbitrator being replaced.”

13.   Three judgments of this Court have thrown considerable  light  on  the
correct construction of Section 15(2) of the Act. In Yashwith  Constructions
(P) Ltd. v. Simplex Concrete  Piles  India  Ltd.,  (2006)  6  SCC  204,  the
arbitration clause stated that  the  Managing  Director  of  the  respondent
company was to appoint an arbitrator in  terms  of  the  said  clause.   The
appointed arbitrator resigned, after which  the  Managing  Director  of  the
respondent company promptly appointed another arbitrator.   The  correctness
of the second appointment was challenged in an application made  by  one  of
the parties under Section 11(5) of the Act read with section  15(2)  praying
that  the  Chief  Justice  of  the  High  Court  may  appoint  a  substitute
arbitrator to resolve the disputes between the  parties.   This  application
under Section 11 was dismissed, which dismissal was  upheld  by  a  Division
Bench of the High Court.   This  Court  agreeing  with  the  Division  Bench
judgment held as under:-

“In our view, the learned Chief Justice and the Division Bench have  rightly
understood the  scope  of  Section  15  of  the  Act.  When  the  arbitrator
originally appointed in terms of  the  arbitration  agreement  withdrew  for
health reasons, the Managing  Director,  as  authorised  originally  by  the
arbitration agreement, promptly appointed a  substitute  arbitrator.  It  is
true that in the  arbitration  agreement  there  is  no  specific  provision
authorising the Managing Director to appoint a substitute arbitrator if  the
original appointment terminates or if the  originally  appointed  arbitrator
withdraws  from  the  arbitration.  But,  this  so-called  omission  in  the
arbitration agreement is made up by  the  specific  provision  contained  in
Section 15(2) of the Act. The withdrawal of an arbitrator  from  the  office
for any reason is within  the  purview  of  Section  15(1)(a)  of  the  Act.
Obviously, therefore, Section 15(2) would  be  attracted  and  a  substitute
arbitrator has to be appointed according to the rules  that  are  applicable
for the appointment of  the  arbitrator  to  be  replaced.  Therefore,  what
Section 15(2) contemplates is an appointment of the  substituted  arbitrator
or the replacing of the arbitrator by another according to  the  rules  that
were applicable to the appointment of the original arbitrator who was  being
replaced. The term “rules”  in  Section  15(2)  obviously  referred  to  the
provision for appointment contained in  the  arbitration  agreement  or  any
rules  of  any  institution  under  which  the  disputes  were  referred  to
arbitration. There was no failure on the part of the party concerned as  per
the arbitration agreement, to fulfil his obligation in terms of  Section  11
of the Act so as to attract the jurisdiction  of  the  Chief  Justice  under
Section 11(6) of the Act for appointing a substitute arbitrator.  Obviously,
Section 11(6) of the Act has application only when a  party  or  the  person
concerned had failed to act in terms  of  the  arbitration  agreement.  When
Section 15(2) says that a substitute arbitrator can be  appointed  according
to the rules that were applicable for  the  appointment  of  the  arbitrator
originally, it is not confined to an appointment under  any  statutory  rule
or rule framed under the Act or under the scheme. It  only  means  that  the
appointment of the substitute arbitrator  must  be  done  according  to  the
original agreement  or  provision  applicable  to  the  appointment  of  the
arbitrator at the initial stage. We are not in a position to agree with  the
contrary view taken by some of the High Courts.” [at para 4]

14.   In SBP and Company (2) v. Patel Engineering. Ltd. and Anr., (2009)  10
SCC 293, this Court had to construe  Section  15(2)  in  the  light  of  the
arbitration clause in that case.  The arbitration clause read as follows:-

“19. During the continuance of this piece-work agreement/contract or at  any
time after the termination thereof,  if  any  difference  or  dispute  shall
arise between the parties hereto in regard to the interpretation of  any  of
the provisions herein  contained  or  act  or  thing  in  relation  to  this
agreement/contract, such difference or dispute shall be  forthwith  referred
to two arbitrators for arbitration in Bombay, one to be  appointed  by  each
party with liberty to the  arbitrators  in  case  of  differences  or  their
failure to reach an agreement  within  one  month  of  the  appointment,  to
appoint an umpire residing in Bombay and the award which shall  be  made  by
two arbitrators or umpire as the case may be shall be final, conclusive  and
binding on the parties hereto.

If either party to the difference  or  dispute  shall  fail  to  appoint  an
arbitrator within 30 calendar days  after  notice  in  writing  having  been
given by the parties or shall appoint an arbitrator who shall refuse to  act
then the arbitrator appointed by  the  other  party  shall  be  entitled  to
proceed with the reference as a sole arbitrator and to make  final  decision
on such difference or dispute and  the  award  made  as  a  result  of  such
arbitration shall be a condition precedent to any right  of  action  against
any two parties hereto in respect of any such difference and  dispute.”  [at
para 7]

15.   On the facts in that case, two arbitrators were appointed by  each  of
the parties.  The  arbitrator  appointed  by  respondent  No.1  declined  to
arbitrate in  the  matter  for  the  reasons  stated  by  him.   Thereafter,
respondent No.1 requested  another  person  to  act  as  arbitrator  on  its
behalf, which person communicated his consent.   However,  respondent  No.2,
who was the arbitrator appointed by the petitioner, sent a letter  informing
the parties that in view of respondent No. 1’s arbitrator refusing  to  act,
he had become the sole arbitrator in the case as per the arbitration  clause
between the parties.  It is at this stage  that  respondent  No.1  filed  an
arbitration  application  under  Section  11  for  appointment  of  a  third
arbitrator by asserting that the second person nominated by  it  had  agreed
to be a substitute arbitrator and  that,  therefore,  the  third  arbitrator
should be appointed by  the  Court  under  Section  11.   This  very  matter
travelled all the way up to this Court which in a 7-Judge  Bench  ultimately
decided that the power exercised by the Chief  Justice  of  the  High  Court
under Section 11 of the  Act  is  not  an  administrative  power  but  is  a
judicial power. The matter, on facts, having been  reverted  to  a  Division
Bench of this Court, this Court was then asked to decide as to  whether  the
appointment of the substitute arbitrator by respondent No.1 was  correct  in
law.  After setting out the various provisions of the Arbitration Act,  this
Court held:

“Section 15 specifies additional circumstances in which the  mandate  of  an
arbitrator  shall  terminate  and  also  provides  for  substitution  of  an
arbitrator. Sub-section (1) of this section lays down that  in  addition  to
the circumstances referred to in Sections 13  and  14,  the  mandate  of  an
arbitrator shall terminate where he withdraws from office for any reason  or
pursuant to  agreement  of  the  parties.  Sub-section  (2)  of  Section  15
postulates appointment of a substitute arbitrator  in  accordance  with  the
rules that were applicable to the appointment of the original arbitrator.

What is significant to be noticed in the aforementioned provisions  is  that
the legislature has repeatedly laid emphasis on the necessity  of  adherence
to the terms of agreement between the parties in the matter  of  appointment
of arbitrators and procedure to  be  followed  for  such  appointment.  Even
Section 15(2), which  regulates  appointment  of  a  substitute  arbitrator,
requires that such an appointment shall  be  made  according  to  the  rules
which were applicable to the appointment  of  an  original  arbitrator.  The
term “rules” used in this sub-section is not confined to statutory rules  or
the rules framed by the competent authority in  exercise  of  the  power  of
delegated legislation but also includes the terms of agreement entered  into
between the parties.

There is nothing in Clause 19 from which it can  be  inferred  that  in  the
event of refusal of an arbitrator to accept the appointment or arbitrate  in
the matter, the party appointing such arbitrator has an  implicit  right  to
appoint a substitute arbitrator. Thus, in terms  of  the  agreement  entered
into between the parties, Respondent 1 could not appoint Shri S.L.  Jain  as
a substitute arbitrator simply because Shri S.N. Huddar declined  to  accept
the appointment  as  an  arbitrator.  The  only  consequence  of  Shri  S.N.
Huddar's refusal to act as an arbitrator on behalf of Respondent 1 was  that
Respondent 2 who was appointed as an arbitrator  by  the  appellants  became
the sole arbitrator for deciding the disputes  or  differences  between  the

At the cost of repetition, we consider it  necessary  to  observe  that  the
agreements entered into between  the  appellant  and  Respondent  1  do  not
contain a provision for appointment of a substitute arbitrator in  case  the
arbitrator appointed by either party was to decline  to  accept  appointment
or refuse to arbitrate in the matter. Therefore, Respondent  1  cannot  draw
support from the  ratio  of  the  judgment  in  Yashwith  Constructions  (P)
Ltd. v. Simplex Concrete Piles India Ltd. [(2006) 6  SCC  204].”  [at  paras
30, 31, 40 and 48]

16.   In ACC Ltd. v. Global Cements Ltd., (2012) 7 SCC 71,  the  arbitration
clause with which this Court was confronted read as follows:-

“21. If any question or  difference  or  dispute  shall  arise  between  the
parties hereto or their representatives at any time in relation to  or  with
respect to the meaning or effect of these presents or with  respect  to  the
rights and liabilities of the parties hereto then such question  or  dispute
shall be referred either to Mr. N.A. Palkhivala  or  Mr.  D.S.  Seth,  whose
decision in the matter shall be final and binding on both the parties.”  [at
para 2]

17.   As both Shri Palkhivala and Shri Seth had died, it  was  contended  by
the petitioner before this Court  that  the  arbitration  clause  would  not
survive as the two named arbitrators were the only persons who  the  parties
had reposed their faith in.  In arriving at the conclusion  that  substitute
arbitrators could be appointed, this Court held:

“Section 15(2) of the Act provides that where a  substitute  arbitrator  has
to  be  appointed  due  to  termination  of  the  mandate  of  the  previous
arbitrator, the appointment must be made according to the  rules  that  were
applicable to the appointment of the arbitrator being replaced.  No  further
application for appointment of an independent arbitrator  under  Section  11
will lie where there has been compliance with the procedure for  appointment
of a substitute arbitrator. On appointment of the substitute  arbitrator  in
the same manner as the first, no application for appointment of  independent
arbitrator under Section 11 could be filed. Of course, the procedure  agreed
upon by the parties for  the  appointment  of  the  original  arbitrator  is
equally applicable to the appointment of a substitute  arbitrator,  even  if
the agreement does not specifically say so. Reference may  be  made  to  the
judgment  of  this  Court  in  Yashwith  Constructions  (P)  Ltd. v. Simplex
Concrete Piles India Ltd. [(2006) 6 SCC 204].

Sections 14 and 15 provide the grounds for termination  of  the  mandate  of
the arbitrator on the ground of incapability of the arbitrator to act or  if
he withdraws from his office or when the parties agree  to  the  termination
of the mandate of the arbitrator. Section 15(2)  states  that  a  substitute
arbitrator shall be appointed as per the rules that were applicable  to  the
appointment of the arbitrator being replaced. Section 15(2), therefore,  has
to be given a  liberal  interpretation  so  as  to  apply  to  all  possible
circumstances under which the mandate may be terminated.

The legislative policy embodied in Sections 14 and  15  of  the  Act  is  to
facilitate the parties to resolve the dispute by  way  of  arbitration.  The
arbitration clause if clearly spells out any prohibition or  debarment,  the
court has to keep its hands off and there is no question  of  persuading  or
pressurising the parties to resolve the dispute by a substitute  arbitrator.
Generally, this stands out as an exception and that  should  be  discernible
from the language of  the  arbitration  clause  and  the  intention  of  the
parties. In the absence of such debarment or prohibition of  appointment  of
a substitute arbitrator, the court's duty is to give effect  to  the  policy
of law that is to promote efficacy of arbitration.

The incident of the death of the named arbitrators has no nexus  or  linkage
with the expression “at any time” used in Clause 21 of  the  agreement.  The
time factor mentioned therein is the  time  within  which  the  question  or
dispute or difference between the parties is resolved as per the  agreement.
The arbitration clause would have life so long as any  question  or  dispute
or difference between the parties exists unless the language of  the  clause
clearly expresses an intention to the contrary.

The question may also arise in a given case that the named  arbitrators  may
refuse to arbitrate disputes; in such a situation also, it is  possible  for
the parties to appoint a substitute arbitrator unless  the  clause  provides
to the contrary. Objection can be raised by the parties only if there  is  a
clear prohibition or debarment in  resolving  the  question  or  dispute  or
difference between the parties in case of death of the named  arbitrator  or
their non-availability, by a substitute arbitrator.

We are of the view that Clause 21 does not prohibit or debar the parties  in
appointing a substitute arbitrator in place of the  named  arbitrators  and,
in the absence of any prohibition or debarment,  parties  can  persuade  the
court for appointment of an arbitrator under Clause 21  of  the  agreement.”
[at paras 17, 18, 21, 28 – 30]

18.   Thus, it will be seen that in the  Yashwith  Constructions  case  this
Court construed Section 15(2) liberally and held that  the  expression  “the
rules” that were applicable to  the  appointment  of  the  arbitrator  would
include  the  arbitration  clause  or  agreement  itself,  apart  from   any
institutional rules or other rules which may apply. Since it was clear  that
the Managing Director in the aforesaid case  was  the  appointing  authority
for a particular arbitrator, in case the said arbitrator  appointed  refuses
to act, the Managing Director was stated  to  be  the  authority  under  the
arbitration agreement that could always appoint a substitute  arbitrator  in
terms of Section 15(2).  Similar is the case in the ACC Ltd. judgment  where
this Court held that despite two named arbitrators having  died,  substitute
arbitrators could be appointed in terms of the said clause unless  there  is
a clear prohibition or debarment that could be read on a  true  construction
of the arbitration agreement. It found that the  expression  “at  any  time”
clearly showed that the arbitration clause had no nexus  with  the  lifetime
of the named arbitrator and therefore no such prohibition could be read.  It
also held that the procedure agreed upon by the parties for the  appointment
of the original arbitrator is equally applicable to  the  appointment  of  a
substitute arbitrator, even if the agreement does not specifically  say  so,
as this is the mandate of Section 15(2) of the Act.
19.   On the other hand, in  the  SBP  and  Company  case,  the  arbitration
clause itself indicated that one of two appointed  arbitrators  who  refused
to act would not be liable to be substituted by another  arbitrator  as  the
other appointed arbitrator would then continue with the  reference  as  sole
arbitrator. This Court, therefore, held that since  Section  15(2)  referred
to the arbitration agreement, the arbitration agreement had to  be  strictly
followed which would on the facts of that case indicate that  no  substitute
arbitrator is to be appointed in the place of the arbitrator who refused  to
act  but  the  other  appointed  arbitrator  would  continue  as  the   sole

20.   The scheme of Section 8 of the 1940 Act  and  the  scheme  of  Section
15(2) of the 1996 Act now needs to be  appreciated.  Under  Section  8(1)(b)
read with Section 8(2) if a situation arises in which an arbitrator  refuses
to act, any party may serve the other parties or  the  arbitrators,  as  the
case may be, with a written notice to concur in a fresh appointment, and  if
such appointment is not made within 15 clear days after service  of  notice,
the Court steps in to appoint  such  fresh  arbitrator  who,  by  a  deeming
fiction, is to act as if he  has  been  appointed  by  the  consent  of  all
parties.  This can only be done where the  arbitration  agreement  does  not
show that it was intended that the vacancy caused be not supplied.  However,
under Section 15(2), where  the  mandate  of  an  arbitrator  terminates,  a
substitute arbitrator “shall” be appointed. Had Section 15(2)  ended  there,
it would be clear that in accordance with the object sought to  be  achieved
by the Arbitration and Conciliation Act, 1996 in all cases and for  whatever
reason the mandate of an arbitrator terminates, a substitute  arbitrator  is
mandatorily to be appointed.  This Court, however, in the judgments  noticed
above, has interpreted the  latter  part  of  the  Section  as  including  a
reference to the arbitration agreement or  arbitration  clause  which  would
then be “the rules” applicable to the appointment of  the  arbitrator  being
replaced. It is in this manner that the scheme of the repealed Section 8  is
resurrected  while  construing  Section  15(2).  The  arbitration  agreement
between the parties has now to be seen, and  it  is  for  this  reason  that
unless it is  clear  that  an  arbitration  agreement  on  the  facts  of  a
particular case excludes either expressly or by  necessary  implication  the
substitution  of  an  arbitrator,  whether  named  or  otherwise,   such   a
substitution must take  place.   In  fact,  sub-sections  (3)  and  (4)   of
Section 15 also throw considerable light on the correct construction of sub-
section (2).  Under sub-section (3), when an  arbitrator  is  replaced,  any
hearings previously held by the  replaced  arbitrator  may  or  may  not  be
repeated at the discretion of the newly appointed Tribunal,  unless  parties
have agreed otherwise.  Equally, orders or rulings of the  earlier  arbitral
Tribunal are not to be invalid only because there has been a change  in  the
composition of the earlier Tribunal,  subject,  of  course,  to  a  contrary
agreement by  parties.  This  also  indicates  that  the  object  of  speedy
resolution of  disputes  by  arbitration  would  best  be  sub-served  by  a
substitute  arbitrator  continuing  at  the  point  at  which  the   earlier
arbitrator has left off.

21.   On the facts of the present case, it is clear that  there  is  nothing
in clause  8  of  the  consent  terms  extracted  above  to  show  that  the
resignation of Justice Sujata Manohar would lead to her  vacancy  not  being
supplied.  All that the parties have done by the said clause is to agree  to
refer their disputes to the arbitration  of  an  independent  retired  Judge
belonging to the higher Judiciary. There is  no  personal  qualification  of
Mrs. Justice Sujata Manohar that is required to decide the  dispute  between
the parties.  In fact, she belongs to a pool  of  independent  retired  High
Court and Supreme Court  Judges,  from  which  it  is  always  open  to  the
appointing authority to choose a substitute  arbitrator.  One  example  will
suffice to show that clause 8 in the present case  cannot  be  construed  to
either expressly or by necessary implication exclude the  appointment  of  a
substitute arbitrator. Take the case  of  a  family  dispute  in  which  the
arbitration clause clearly specifies that a  particular  grand  uncle  of  a
joint family is the only person in whom  all  members  of  the  family  have
confidence as a result of which he has been appointed arbitrator to  resolve
their disputes. In the case of resignation or death of such grand uncle,  it
could possibly be contended that by necessary implication  no  other  person
was competent to arbitrate disputes between the  family  members  and  that,
therefore, on such resignation or death, the arbitration clause would  spend
its force.  In the present case, as has been noted above,  we  do  not  have
any such factual scenario nor do we have expressions such  as  “only”  which
would indicate that the confidence of the parties  was  in  only  the  named
arbitrator and in nobody else.

22.   In fact, as has correctly been pointed out by learned counsel for  the
respondent, Section 89  of  the  CPC  specifically  provides  that  a  Court
hearing a suit may formulate terms of settlement  between  the  parties  and
may  either  settle  the  same  or  refer  the  same   for   settlement   by
conciliation, judicial settlement, mediation or arbitration.  On  the  facts
in the present case, it is clear that following the mandate of  Section  89,
the Bombay High Court disposed of the suit between the parties by  recording
the settlement between the parties in clauses 1 to 7 of  the  consent  terms
and by referring the remaining disputes  to  arbitration.   In  the  present
case therefore it is clear that it is the Bombay High  Court  that  was  the
appointing authority  which  had  in  fact  appointed  Mrs.  Justice  Sujata
Manohar as arbitrator in terms of clause 8 of the  consent  terms.  We  must
remember, as was held in C.F. Angadi v. Y.S.  Hirannayya,  [1972]  2  S.C.R.
515 at 523 that an order by consent is  not  a  mere  contract  between  the
parties but is something  more  because  there  is  super-added  to  it  the
command of a Judge. On the facts of the present case, it is clear  that  the
Bombay High Court applied its mind to the  consent  terms  as  a  whole  and
appointed Mrs. Justice Sujata Manohar as arbitrator for  the  disputes  that
were  left to be resolved by the parties.   The  said  appointing  authority
has been approached by  the  respondent  for  appointment  of  a  substitute
arbitrator, which was  then  done  by  the  impugned  judgment.  This  would
therefore  be  “according  to  the  rules  that  were  applicable   to   the
appointment of the arbitrator being replaced”  in  accordance  with  Section
15(2) of the Act.   We,  therefore,  find  that  the  High  Court  correctly
appointed another independent retired  Judge  as  substitute  arbitrator  in
terms of Section 15(2)  of  the  Arbitration  Act,  1996.   The  appeal  is,
therefore, dismissed.


                                             (A.K. Sikri)


                                             (R.F. Nariman)

New Delhi;

October 16, 2015.


                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                       CIVIL APPEAL NO.  8731 OF 2015
                 (ARISING OUT OF SLP (C) NO. 19617 OF 2015)

|SHAILESH DHAIRYAVAN                        |...APPELLANT                 |
|VERSUS                                     |                             |
|MOHAN BALKRISHNA LULLA                     |…RESPONDENT                  |

                               J U D G M E N T

                 I am entirely in agreement with the conclusion  arrived  at
by my learned Brother R.F. Nariman, J. in his accompanying judgment  on  the
interpretation of Section 15(2) of the  Arbitration  and  Conciliation  Act,
1996 (hereinafter referred to as the 'Act').   It  is  held  by  my  learned
Brother that since arbitration agreement that was  arrived  at  between  the
parties  herein  did  not  specifically  bar  the  appointment  of   another
arbitrator on the recusal/withdrawal of the earlier arbitrator appointed  by
the parties with mutual  agreement,  Section  15(2)  of  the  Act  would  be
attracted and a  substitute  arbitrator  could  be  appointed  according  to
'Rules' that govern the field.  In the instant case, it  was  the  agreement
between the parties which is treated as 'Rules' for the purposes of  Section
15(2) of the Act.   My  learned  Brother  has  given  cogent  reasons  while
interpreting the said provision of  law  in  the  aforesaid  manner,  which,
inter alia, includes reliance upon the earlier judgment  of  this  Court  in
ACC Ltd. v. Global Cements Ltd.[1]

While concurring with the judgment authored by my learned Brother,  I  would
like to give some additional reasons in support, which are as under:
            Section 15(2) of the Act is also to be  interpreted  keeping  in
mind the ethos of the arbitration generally and also in  the  light  of  the
spirit behind Section 89 of the Code of Civil Procedure,  1908  (for  short,
'CPC') in  particular.   No  doubt,  in  the  instant  case,  there  was  no
arbitration agreement between the parties when the suit  was  filed  by  the
respondent herein.  However, in the  said  suit  which  was  filed,  parties
arrived at an agreement whereby it was agreed between them that  the  matter
be decided through arbitration and not by the court of law.

It was held in P. Anand Gajapati Raju & Ors. v. P.V.G. Raju  (D)  &  Ors.[2]
that the Arbitration Act governs the case where arbitration is  agreed  upon
before a  pending  suit  by  all  parties.   This  Act,  however,  does  not
contemplate a situation as in Section 89 of the CPC  where  the  Court  asks
the parties to choose one or the other ADR methods,  including  arbitration,
and the parties choose arbitration as their option.  At the same time,  once
the parties agree for arbitration under the Act and the matter  is  referred
to arbitration, thereafter the situation is  almost  at  par  with  what  is
contemplated in Section 89 of the CPC,  to  which  aspect  we  shall  advert
little later.  What is emphasized at this stage is that in a suit  which  is
filed in the Court, when the parties agree  for  deciding  the  disputes  by
means of arbitration, they have obviously agreed that the court of  law  may
stay its hands of such a  dispute  as  the  parties  have  chosen  alternate
method, namely, one of the forms of ADR.

It hardly needs to be emphasized that the parties choose  arbitration  as  a
dispute resolution mechanism keeping  in  view  that  it  offers  a  timely,
private,  less  formal  and  cost  effective  approach   for   the   binding
determination of disputes.  It provides the parties with greater control  of
the process than a court hearing.  The non-judicial  nature  of  arbitration
makes it both attractive and effective for several reasons.  Apart  from  it
being cost effective and speedier  method  of  settling  the  disputes  when
compared  with  court  adjudicatory  method,  the  confidentiality  of   the
arbitration process may appeal to  those  who  do  not  wish  the  terms  of
settlement to be known.  Therefore, first thing  that  has  to  be  kept  in
mind,  when  in  a  pending  suit  the  parties  agree  for   reference   to
arbitration, though there was no arbitration agreement  when  the  suit  was
filed, is that they have consciously preferred arbitration rather  than  the
court process.  It, thus, follows  that  the  intention  is  to  settle  the
disputes through arbitration and not the Court.

Secondly, in such a situation, Section 89  of  the  CPC  also  springs  into
action, which provides for 'settlement of disputes outside the  Court'.   As
per this provision,  where  it  appears  to  the  Court  that  there  exists
elements of a settlement which may be acceptable to the parties,  the  Court
shall formulate the terms of settlement and give them  to  the  parties  for
their observations and after receiving the observations of the parties,  the
Court may re-formulate the terms of a  possible  settlement  and  refer  the
same for -
            a)  arbitration;
            b)  conciliation;

             c)  judicial  settlement,  including  settlement  through   lok
adalat; or
            d)  mediation.

It has been noticed by this Court in some earlier judgments that Section  89
of the CPC is not very happily worded.   Be  that  as  it  may,  Section  89
provides for alternate methods of dispute  resolution,  i.e.  those  methods
which are alternate to the Court and are outside the  adjudicatory  function
of the Court.  One of them with which we are concerned is the settlement  of
dispute  through  arbitration.   Insofar  as   reference   of   dispute   to
arbitration is concerned, it has been interpreted by this Court that  resort
to arbitration in a pending suit by the orders of the Court  would  be  only
when parties agree for settlement of their dispute through  arbitration,  in
contra-distinction to the Alternate Dispute  Mechanism  (for  short,  'ADR')
through the process of mediation where the Judge has the discretion to  send
the parties for  mediation,  without  even  obtaining  the  consent  of  the
parties. Thus, reference to arbitration is by  means  of  agreement  between
the parties.  It is not in dispute that there was an agreement  between  the
parties for reference of dispute to the arbitration and it was so referred.

On making such an application based on  arbitration  agreement  between  the
parties, order is passed in terms of Section 89 of  the  CPC  referring  the
matter to arbitration.  The purpose for enacting Section 89 is to  encourage
the parties to the dispute to settle their dispute by adopting  one  of  the
four methods provided therein. Not only that it  results  in  lessening  the
burden of the court, experience has shown that many cases which come to  the
Court can be resolved more suitably and with better outcomes if the  methods
of ADR prescribed in Section 89 of the CPC are  resorted  to.   It  is  here
that depending upon the nature  of  dispute  and  relationship  between  the
parties etc., the Court may  suggest  a  particular  form  of  ADR,  whether
arbitration or mediation etc. can be chosen. Therefore, what is to  be  kept
in mind is that once arbitration agreement  was  entered  into  between  the
parties, that too in a pending suit, the intention of  the  parties  was  to
settle the matter through arbitration and not to  come  back  to  the  Court
again for decision of the same dispute by court adjudicatory process.

It is in this backdrop we have to decide the applicability of Section  15(2)
of the Act when the arbitrator to whom the matter was referred earlier  with
the consent of the parties withdraws therefrom.

The aforesaid two reasons given by me, in addition to  the  reasons  already
indicated in the judgment of my learned Brother, would  clearly  demonstrate
that  provisions  of  Section   15(2)   of   the   Act   require   purposive
interpretation so that the aforesaid objective/ purpose of such a  provision
is  achieved  thereby.   The  principle  of  'purposive  interpretation'  or
'purposive construction' is based on the understanding  that  the  Court  is
supposed to attach that meaning to the provisions which serve the  'purpose'
behind such a provision.  The basic approach is  to  ascertain  what  is  it
designed to accomplish?  To put it otherwise, by interpretative process  the
Court is supposed to realise the goal that the legal  text  is  designed  to
realise.  As Aharan Barak puts it:
“Purposive interpretation is based on three components:  language,  purpose,
and discretion.  Language shapes the range of semantic possibilities  within
which the interpreter acts as a linguist.  Once the interpreter defines  the
range, he or she chooses the legal  meaning  of  the  text  from  among  the
(express or implied) semantic possibilities.  The  semantic  component  thus
sets the limits of interpretation by restricting the interpreter to a  legal
meaning that the text can bear in its (public or private) language.”[3]

Of the aforesaid three components, namely, language, purpose and  discretion
'of the Court', insofar as purposive component is  concerned,  this  is  the
ratio juris, the purpose at the core of  the  text.   This  purpose  is  the
values, goals, interests, policies and aims that the  text  is  designed  to
actualize.  It is the function that the text is designed to fulfil.

We may also emphasize that the statutory interpretation of  a  provision  is
never static but is always dynamic.  Though literal rule of  interpretation,
till some time ago, was  treated  as  the  'golden  rule',  it  is  now  the
doctrine of purposive interpretation which is predominant,  particularly  in
those cases where literal interpretation may not serve the  purpose  or  may
lead to absurdity. If it brings about an end which is at variance  with  the
purpose of statute, that cannot be countenanced.   Not  only  legal  process
thinkers such as Hart and Sacks rejected intentionalism as a grand  strategy
for statutory interpretation, and in its  place  they  offered  purposivism,
this principle is now widely applied by the Courts not only in this  country
but in many other legal systems as well.

Dynamic  statutory  interpretation  also   persuades   us   to   take   into
consideration ethoes of arbitration process,  including  the  spirit  behind
Section 89 of the CPC.

Once we keep in mind the aforesaid fundamental aspects of  the  arbitration,
the irresistible  conclusion  would  be  that  whenever  parties  agree  for
mediation, and even name a specific arbitrator with  no  specific  provision
for appointment of another arbitrator on the recusal/withdrawal of the  said
arbitrator, the said omission is made up by Section 15(2)  of  the  Act  and
unless arbitration agreement between  the  parties  provides  a  categorical
prohibition or debarment in resolving a question or  dispute  or  difference
between the parties by a substitute arbitrator  in  case  of  death  or  the
named arbitrator or non-availability of the  said  arbitrator,  Courts  have
the power to appoint substitute arbitrator, which power is given by  Section
15(2) of the Act as this provision is to be given liberal interpretation  so
as to apply to all possible circumstances under which  the  mandate  of  the
earlier arbitrator may be terminated.

The aforesaid are my additional grounds to support  the  view  taken  by  my
learned Brother, thus, dismissing the appeal of the appellant herein.

                                                                (A.K. SIKRI)
OCTOBER 16, 2015.
[1]   (2012) 7 SCC 71
[2]   (2000) 4 SCC 539
[3]   Aharan Barak – Purposive Interpretation in Law

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