THE HONOURABLE SRI JUSTICE A.GOPAL REDDY AND THE HONOURABLE SRI JUSTICE Civil Miscellaneous Appeal No.2375 of 2003

17-03-2010

Nadendla Gopala Rao

M/s.Steel City Securities Ltd.

Counsel for the petitioner : K.S.Murthy

Counsel for the respondents : G.Rama Gopal

:Oral Judgment: (Per Honourable Sri Justice A.Gopal Reddy)

1. This appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (for short "the Act") is directed against the order of the District Judge, Visakhapatnam passed in O.P.No.381 of 1999, dated 31-03-2003 whereunder the Court refused to set aside the award of the sole arbitrator passed in A.M.No.103 of 1998, dated 10-12-1998.

2. The appellant entered into an agreement with the Steel City Securities Limited-respondent, which is a registered trading member of the National Stock Exchange of India

("NSE) on the capital market, on 25-10-1997 as a constituent to trade as a part of the member subject to certain conditions as enumerated in the agreement. The appellant as constituent member sold and purchased stocks of various Companies from Visakhapatnam terminal subject to periodical account with a specified code and subsequently fell out from the respondent and on finality of the accounts, he was shown to be due to a tune of Rs.14,13,051.20 ps. when the appellant failed to get back the amount, the respondent addressed the Arbitration department of the SEBI for arbitration. The appellant objected to the appointment of the arbitrator contending that the dispute does not pertain to any conditions of SEBI as the dispute is between the appellant and the respondent with its own arbitral clause and the arbitrator appointed by SEBI has no jurisdiction. The appellant by his letter dated 01-10-1998 declined to participate in the arbitration proceedings on the ground that there was no dispute as regards the trades on the exchange. The dispute, which had arisen because of the respondent-company was backing out of an understanding, reached previously, that the liability for trades booked in the respondent's name would be written off in annual accounts and requested that the respondent be advised to have the dispute resolved by arbitration as provided in the articles of association of the company for disputes between the respondent-company and any one of its members. After issuing notice and receiving letter from the appellant herein the arbitrator held first hearing on 13-11-1998, on which date the appellant was absent and adjourned the proceedings to 26-11-1998. Meanwhile, the appellant sent another letter dated 14-11-1998 reiterating that there was "no dispute on the NSE trading account" which attracted arbitration and stated that appointment of the arbitrator was null and void. The arbitrator through his letter dated 16-11-1998 informed the appellant as under:

"We are in receipt of the written submission dated November 11, 1998 sent by you. Before taking a view on your argument on lack of jurisdiction, the Arbitrator wishes to hear you and examine such evidence, as you may have to produce in support of your contentions underlying the arguments. He has, therefore, directed you to be present at the next hearing to be held on November 26, 1998."

By the impugned award the arbitrator held as the appellant failed to take the opportunity, he examined the nature of dispute and few provisions of the articles cited by the appellant, which apply to disputes between the company and its members regarding the interpretation of the terms of articles of association, as the dispute does not relate to interpretation of articles and it relates to a business relationship of the company with its client, rightly referred to arbitration under the byelaws of the NSE. None of the grounds put forth by the appellant for not submitting the dispute before the arbitrator as provided in the Bye-laws, Rules and Regulations of NSE is valid or tenable. Therefore, the dispute between the appellant and the respondent is within his jurisdiction. While holding so, the arbitrator passed an award for a sum of Rs.14,13,051.29 ps. being the debit balance in the current account of the appellant in the ledger of the respondent under client code as per the records, documents and correspondence produced by the appellant and accordingly directed the appellant to pay the said amount to the respondent before 01-03-1999 either in one lump sum or in instalments together with interest calculated at the rate of 18% per annum from 05-12-1997 up to the date of payment and fees and charges paid by the respondent to NSE in connection with arbitration matter.

3. On passing the award the appellant moved the District Judge, Visakhapatnam under Section 34 of the Act for setting aside the award, inter alia, contending that arbitrator will not have jurisdiction to entertain the dispute. In the notice dated 16-11-1998 the appellant was informed before taking a view on the contentions raised about the lack of jurisdiction, the arbitrator wishes to hear and examine such evidence, as the appellant may have to produce in support of his contention underlying the arguments and directed to present on

26-11-1998. But it is nowhere stated that he will further consider the dispute between the parties. Even assuming that the arbitrator decided that he has jurisdiction, it is incumbent upon him to call upon the appellant to file his written rebuttal statement to the claims set out by the respondent, but he went on ex-parte which is liable to be set aside.

4. Sri B.Adinarayana Rao, learned counsel for the appellant contended that when the jurisdiction of the arbitrator is questioned, he ruled that he has jurisdiction, on deciding preliminary jurisdiction he has to continue the arbitral proceedings and make an arbitral award; the ex-parte award passed by the arbitrator after ruling his jurisdiction without continuing the arbitral proceedings, namely, by calling upon the appellant to file his rebuttal statement in support of his claim, on the same day, is contrary to sub-section (5) of Section 16 of the Act and the same is liable to be set aside. Except making the above oral submission, he has not substantiated the same with any decided cases on the point.

5. Sri G.Rama Gopal, learned counsel for the respondent would contend that the respondent is a member of recognized stock exchange as per section 2(f) of the Securities Contracts (Regulation) Act, 1956 and the byelaws framed were recognized. Section 9 of the Act recognized that the member could make a byelaw and the byelaws of the NSE contains arbitration clause. Therefore, arbitrator will have jurisdiction to decide the dispute. Further, when the arbitrator decides that he has jurisdiction and existence of arbitration agreement in terms of Section 7 of the Act he can go into the merits of the claim made by the parties, it is not necessary for the arbitrator to decide whether existence of arbitration agreement in terms of Section 7 of the Act and the claim made comes within the purview of clause in the agreement as preliminary issue and decide it first. For the said proposition reliance is placed on MAHARSHI DAYANAND UNIVESITY v ANAND COOP. L/C SOCIETY LTD.1 He further contends that when the appellant failed to present on the dates specified and put forth his arguments about jurisdiction must prove the misconduct of the arbitrator in denial of natural justice and show the prejudice caused to him. For the said proposition he placed reliance on the judgment of the Supreme Court in SOHAN LAL GUPTA v. ASHA DEVI GUPTA2.

6. Before going to the merits of the contentions, we deem it appropriate to notice the statutory provisions.

7. Chapter IV deals with jurisdiction of arbitral tribunal. Section 16 reads thus:

16 Competence of arbitral Tribunal to rule on its jurisdiction (1) The arbitral Tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,-

(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (b) a decision by the arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. (2) A plea that the arbitral Tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator. (3) x x xx

(4) x x xx

(5) The arbitral Tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and, where the arbitral Tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award."

8. Section 34 provides application for setting the arbitral award, which reads thus:

"34 Application for setting aside arbitral award

(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only if- (a) the party making the application furnishes proof that- (i) a party was under some incapacity; or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration."

9. In KONKAN RAILWAY CORPORATION LTD. v. RANI CONSTRUCTION PVT. LTD.3 the Constitutional Bench of the Supreme Court has ruled that if the arbitral Tribunal has been improperly constituted, it would be open to the aggrieved party to require the Arbitral tribunal to rule on its own jurisdiction in view of Section 16 of the Act. It was also observed that the expression used in Sub- section (1) that the "arbitral Tribunal may rule on any objections with respect to the existence or validity of the arbitration agreement" shows that the arbitral Tribunal's authority under Section 16 is not confined to the width of its jurisdiction, but goes to the very root of its jurisdiction and there is no impediment in contending before the Arbitral Tribunal that it had been wrongly constituted.

10. In GAS AUTHORITY OF INDIA LTD. V. KTI CONSTRUCTION (I) LTD.4 the Supreme Court after taking note the corresponding provisions of Article 16 of the UNCITRAL Model Law, namely, Section 16 of the Act held in a case where an Arbitral Tribunal has been constituted by the parties without having recourse to section 11 (6) of the Act, the Arbitral Tribunal will have the jurisdiction to decide all matters as contemplated by Section 16 of the Act.

11. In paras-23 and 25 it was held as under: "(23) So, the commentary on the Model Law which was drafted by UNCITRAL and has been adopted by many countries including India shows that where a party asserts that the arbitral tribunal has not been properly constituted or it has no jurisdiction, then such a plea must be raised before the arbitral tribunal right at the beginning and normally not later than in the statement of defence. (25) Where a party has received notice and he does not raise a plea of lack of jurisdiction before the arbitral tribunal, he must make out a strong case why he did not do so if he chooses to move a petition for setting aside the award under Section 34 (2) (v) of the Act on the ground that the composition of the arbitral tribunal was not in accordance with the agreement of the parties. If plea of jurisdiction is not taken before the arbitrator as provided in Section 16 of the Act, such a plea cannot be permitted to be raised in proceedings under section 34 of the Act for setting aside the award, unless good reasons are shown."

12. From the above, it is clear when the arbitrator is appointed without intervention of the Court who entertained the reference and issued notice to the parties, it is incumbent upon the parties to object to the jurisdiction of the arbitrator to entertain the dispute at the threshold before filing the statement of defence.

13. The appellant after receipt of communication from the NSE, in his letter dated 01-11-1998 raised an objection referring the dispute to the arbitrator, and he is governed by the agreement which provides arbitration. The NSE in its letter dated 16-11-1998 informed the appellant to be present at the next hearing to be held on 26-11-1998 where the arbitrator wishes to hear the appellant and examine such evidence as the appellant may have to produce in support of the contention about lack of jurisdiction. Admittedly after the arbitrator ruled his jurisdiction to decide the dispute has not communicated his decision for enabling the appellant to file his statement of defence against the claim made by the respondent.

14. The Supreme Court in MAHARSHI DAYANAND UNIVESITY v ANAND COOP. L/C SOCIETY LTD. (1 supra) made it clear that the arbitrator, in the first instance, has to decide whether the existence of an arbitration agreement in terms of Section 7 of the Act is established and also to decide whether the claim now made is a claim that comes within the purview of clause 25a of the tender conditions in case it is found to be an agreement within the meaning of Section 7 of the Act. Only on deciding these two aspects can the arbitrator go into the merits of the claim made by the respondent. But we clarify that it does not mean, that he should treat these two aspects as preliminary issues and decide them first; but only that he must decide them without fail while proceeding to finally pronounce his award.

15. In SOHAN LAL GUPTA v ASHA DEVI GUPTA

(2 supra) the Supreme Court in para-23 held that for constituting a reasonable opportunity, the following conditions are required to be observed: "1. Each party must have notice that the hearing is to take place.

2. Each party must have a reasonable opportunity to be present at the hearing, together with his advisers and witnesses.

3. Each party must have the opportunity to be present throughout the hearing

4. Each party must have a reasonable opportunity to present evidence and argument in support of his own case.

5. Each party must have a reasonable opportunity to test his opponent's case by cross-examining his witnesses, presenting rebutting evidence and addressing oral argument.

6. The hearing must, unless the contrary is expressly agreed, be the occasion on which the parties present the whole of their evidence and argument. "

16. After laying down the principles for constituting a reasonable opportunity in para-29 it was held as under:

"The principles of natural justice, it is trite, cannot be put in a straight jacket formula. In a given case the party should not only be required to show that he did not have a proper notice resulting in violation of principles of natural justice but also to show that he was seriously prejudiced thereby. In CHAIRMAN, BOARD OF MINING EXAMINATION AND CHIEF INSPECTOR OF MINES v RAMJEE ((1977) 2 SCC 256), this Court held:

". . . Natural justice is no unruly horse, no lurking land mine, nor a judicial cure-all. If fairness is shown by the decision-maker to the man proceeded against, the form, features and the fundamentals of such essential processual propriety being conditioned by the facts and circumstances of each situation, no breach of natural justice can be complained of. Unnatural expansion of natural justice, without reference to the administrative realities and other factors of a given case, can be exasperating. We can neither be finical nor fanatical but should be flexible yet firm in this jurisdiction. No man shall be hit below the belt - that is the conscience of the matter. "

17. Appellant entering into an agreement with the respondent on 25-10- 1997, the respondent invoking arbitration clause as per its byelaws and arbitrator issuing notice etc. are not disputed. The appellant on receiving the first notice of hearing addressed a letter dated 01-10-1998 declining to participate in the arbitration proceedings on the ground that there was no dispute as regards the trades on the exchange. The arbitrator after adjourning the proceedings to 26-11-1998, received a letter dated 14-11-1998 in which the appellant reiterated his earlier stand communicated in his letter dated 01-10- 1998. Thereafter, NSE of India addressed a letter to the appellant on 16-11-1998 informing the appellant that the arbitrator wished to hear the appellant and examine such evidence as he may produce in support of his contention underlying the argument i.e. lack of jurisdiction and called upon to appear on 26-11-1998. When the appellant on receiving the notice by which he was asked to appear before the arbitrator to participate in the proceeding and adduce evidence about lack of jurisdiction of the arbitrator fails to appear, the arbitrator can only decide the jurisdictional issue. On holding that the arbitrator will have jurisdiction, a notice fixing another date for enabling the appellant to file his rebuttal statement indicating therein if the appellant failed to file such rebuttal statement and produce his evidence on the date so fixed for hearing, he will proceed with the reference ex-parte against him and on that date fixed it is competent for the arbitrator to proceed ex-parte and pass an ex-parte award. The arbitrator has not followed such procedure nor indicated in the notice dated 16-11-1998 that failure of the appellant to substantiate his claim with regard to jurisdiction of the arbitrator, the arbitrator will proceed with the claims ex-parte and pass the award. If that be the case, failure to issue such notice expressing his intention to proceed ex parte vitiates the award as the appellant was not given proper notice of arbitral proceedings incapacitating to present his case.

18. We are fortified with our view from the judgment of Allahabad High Court in THAKUR SINGH v. KANDAI5 wherein it was held when the party on receiving the first notice by which he was asked to appear before the arbitrator to participate in the proceeding fails to appear then the arbitrator has to direct that he shall proceed with the reference ex-parte. This does not entitle the arbitrator to straightaway award the claim against the defaulting party ex- parte. Whereas the Calcutta and Delhi High Courts expressed that when a party fails to appear on receiving the notice, the arbitrator in such case should give notice of his intention to proceed ex-parte. In case of failure to issue such notice expressing his intention to proceed ex-parte, such failure may vitiate the award unless it is apparent that such failure has not caused any prejudice to the party against whom the ex-parte award has been made by the arbitrator. (See JAGGILAL KAMLAPAT v. GENERAL FIBRE DEALERS (AIR 1955 Calcutta 354); LOVELY BENEFIT CHIT FUND AND FINANCE (P) LTD. V. PURAN DUTTA (AIR 1983 DELHI 413). However, Punjab and Haryana High Court also expressed the same view in PREMLAL v. OM PRAKASH (AIR 1956 Punjab 187), namely, arbitrator should adopt the similar procedure before proceeding with the case ex-parte and passing an award ex- parte.

19. Since we have satisfied that the arbitrator has not indicated that failure of the appellant's appearance on the fixed date he will not only decide jurisdictional issue and proceed with the claim of the respondent/applicant and pass ex-parte award, appellant was denied a reasonable opportunity to contest the claim. Hence, the award passed is in violation of principles of natural justice, is liable to be set aside. We accordingly do so. Since no other point with regard to jurisdiction of the arbitrator to entertain the dispute has been urged before us, it is not necessary for us to decide the jurisdiction of the arbitrator, which he already ruled he has jurisdiction to entertain the dispute.

20. For the reasons aforementioned and the conclusions reached by us, we allow the appeal setting aside the judgment and decree passed by the civil court setting aside the award making a rule of court to the extent of the amount awarded together with interest by the arbitrator and allow OP setting aside the award to the said extent. However, the parties are at liberty to avail the remedies in accordance with law. No order as to costs.

?1 (2007) 5 SCC 295

2 (2003) 7 SCC 492

3 (2002) 2 SCC 388

4 (2007) 5 SCC 38