Composition of an Arbitral Tribunal:
Inconsistencies in Lohia Case
Arbitration, not only internationally but
domestically as well, is now becoming a highly preferred means to resolve
disputes in a private forum. One of the primary reasons for introducing this Alternative
Dispute Resolution Mechanism was to provide for justice in a speedy,
efficacious and cost-effective manner. It is in pursuance of this object in
terms of avoiding a ‘hung arbitration’, the Legislature, in its wisdom, incorporated
a provision with respect to the composition of the Arbitral Tribunal in Section
10 of the Indian Arbitration and Conciliation Act, 1996 (hereinafter ‘The Act 1996’), which
states:
“Number of arbitrators: (1) The parties are free to determine the number
of arbitrators, provided that such number shall not be an even number.”[2]
Though seemingly unambiguous in its meaning
and object, this provision has been a subject of constant debate as issues have
been raised regarding the soundness of the judicial discourse relating to it. The
Supreme Court of India in the case of Naryan Prasad Lohia v Nikunj Kumar Lohia[3]
had held the aforementioned provision to be a derogable provision.
This post is its restricted scope aims to analyse the reasoning
used therein and present conclusions.
Lohia Case and its Analysis
In the Lohia
case, the appellants and the respondents belonged to a single family unit and
had decided to take recourse to arbitration for resolving disputes relating to family
business and properties. An arbitral tribunal consisting of two arbitrators was
constituted to adjudicate on the disputes. The said tribunal delivered a unanimous
award, against which one of the parties filed objections under Section 34 of
the Act 1996. The objector prayed for setting aside the arbitral award on the
ground that the statutory provision under Section 10 of the Act, 1996 was non-derogable and, therefore, non-compliance
thereof had rendered the award nugatory. The High Court accepted the plea,
which resulted in the award being set aside. The aggrieved party thereafter
approached the Apex Court by way of Special Leave Petition. The Supreme Court,
after consideration of the law and precedents on this issue, set aside the High
Court judgment, by holding that objections regarding non-compliance of Section
10 was a jurisdictional issue, which necessarily had to be raised in the first
instance before the Arbitral Tribunal under Section 16 of the Act 1996,[4] and since Section 16 itself
stipulated a time frame within which the objection relating to the jurisdiction
could be raised, i.e. before the submission
of statement of defence, the Supreme Court held that once the stipulated period
had elapsed, the party could not plead absence of jurisdiction at a later
stage. Accordingly, the Supreme Court
arrived at the conclusion that the provision was derogable.[5]
Inconsistencies in the Lohia case
It
is most respectfully submitted that the Lohia
judgment suffers from many inconsistencies, which are being amplified hereinafter.
Firstly, keeping in view the legislative intent and the plain language of
Section 10 and other provisions of the Act 1996, the interpretation of Section
10 of the Act 1996 seems to be erroneous. Sub-clause (1) of Section 10 vide its proviso imposes a restriction
on the parties vis-a-vis the number
of arbitrators, i.e. the number should not be an even number, whereas, the Supreme
Court in the Lohia case has rather validated
composition of an even-member arbitral tribunal if none of the parties objects
to the same within the time frame provided in Section 16 of the Act 1996. In
fact, a bare reading of Section 10 would reveal beyond even an iota of doubt that
the Legislature consciously provided for an uneven numbered arbitral tribunal
to ensure finality of the decision by majority, even if there was disagreement
amongst the members.
On
the aspect of legislative intent, it is interesting to also note the words used
in Sections 15(1) and 15(2) of the English Arbitration Act, 1996[6] which read as under:
“The arbitral tribunal.
(1) The parties are free to agree on the number of arbitrators to form the
tribunal and whether there is to be a chairman or umpire.
(2) Unless otherwise
agreed by the parties, an agreement that the number of arbitrators shall be
two or any other even number shall be understood as requiring the
appointment of an additional arbitrator as chairman of the tribunal...” (Emphasis
supplied)
Section 10 of the Act 1996 uses the words ‘provided that such number shall not be an
even number’, which expressly renders nugatory an even numbered arbitral tribunal
even if the same is provided for in the agreement between the parties, unlike
the English Arbitration Act as mentioned above. Thus, the deliberate deviation
from the English Arbitration Act clearly evinces the intention of the
Legislature to provide for an odd-member arbitral tribunal in all arbitrations,
without any exception.
Now adverting to the Act 1996, it is
apparent that in case the Legislature intended to uphold composition of an even
number of arbitrators by way of an agreement between the parties, Section 10 of
the Act 1996 would have been worded as ‘unless
agreed by the parties’ or the type as provided by the Legislature in
various other provisions of the Act 1996. For instance, Section 3 of the Act 1996
which opens with the words ‘unless
otherwise agreed by the parties’. On comparing the words used in Section 3
and Section 10 of the Act, 1996, it is submitted that had the intent of the Legislature
been to leave the number of arbitrators to the agreement of the parties, specific
words to that extent would have been mentioned expressly. There would have been
a saving provision in the Section itself.
Secondly, the Apex Court has not
reasoned out the application of test for derogability. The
Supreme Court held that Section 10 was derogable
in nature merely because an objection that the composition of the arbitral
tribunal was not in accordance therewith had not been raised before the
submission of first statement of defence, and since such an objection had not been
raised within the prescribed time mentioned,[7] the right to object stood waived
off[8].
In this context, it would be pertinent to understand the meaning of Section 4 of the Act 1996, which has been succinctly explained in the case of Smt. Veena W v Seth Industries Limited[9] (hereinafter referred as the Veena case). Section 4 stipulates the circumstances in which the party, who knowingly fails to object the non-compliance of any non-mandatory provisions of Part-I or any requirement under the arbitration agreement by the other party, is deemed to have waived his right to object. This Section is based on general principles of law such as "estoppel" or "venire contra factum proprium". The intention of this provision is to prevent any bottlenecks in the smooth and efficient proceedings before the arbitral tribunal. If there is non-compliance of any non-mandatory provision of Part I or of any requirement of the arbitration agreement by a party to an arbitration agreement of which the other party to the agreement has the knowledge but does not object without undue delay, or if a time limit is provided for stating that objection and no objection is taken within that period of time, such a party later on can neither raise objection about that non-compliance of any provision of Part I nor any requirement of the arbitration agreement since such party shall be deemed to have waived its right to object. Though, in order to apply the doctrine of waiver by invoking Section 4, the first condition is that the non-compliance must be of non-mandatory provision of Part I of any requirement under the arbitration agreement, certain mandatory provisions of the Act also provide for a grant of waiver in the event of failure to object, e.g. sub-sections (2) and (3) of Section 16 of the Act 1996. Section 16(2) provides that a plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence. Section 16(3) provides that a plea that the Arbitral Tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings."[10]
An
analysis of Section 4 of the Act would reveal that there are two conditions to
be fulfilled in order to waive off a party’s right to object: (a) the provision
must be derogable; and (b) the
objection has to be raised within the stipulated time or without undue delay. The
first condition of Section 4 of the Act 1996 not been clearly reasoned in the Lohia case. The Supreme Court in the Lohia case held that as an objection
regarding the jurisdiction of the arbitral tribunal could be raised under
Section 16 of the Act 1996 within a stipulated time frame as [Section 16(2)] and
since no such objection had been raised, it would render Section 10 to be derogable in nature and thus, would
amount to waiver. The Court, in its judicial wisdom, did not take notice of the
test of derogability and various factors
that needed to be taken into account for arriving at the conclusion that Section
10 was derogable. The Supreme Court
has taken the second condition hereinabove to prove the first, which is against
the letter of law. It has to be understood that only if sub-section (a) [or (b),
irrelevant for present purpose] of Section 4 of the Act 1996 is satisfied i.e. ‘parties may derogate has not been complied
with’ that the provisions following thereafter would come into play. The
reasoning for second condition also appears to be flawed as Section 16 can only
be invoked before a validly constituted arbitral tribunal. In other words, the Supreme Court did not provide
for any basis or mechanism of testing and proving that the provision was
actually derogable in nature. Thus,
there exists a huge void in proving a waiver of right to object.
Thirdly, Section 10 of the Act 1996 is,
in fact, a provision from which one cannot derogate.
Section 10(1) is a mandatory provision because: (a) an illegally constituted arbitral tribunal cannot clothe itself
with jurisdiction merely because any party has not raised any objection;, and (b)
the mandate of an arbitrator(s) of an illegally constituted arbitral tribunal stands
terminated forthwith.
Section
10 of the Act 1996 is, undoubtedly, a machinery provision, but it cannot be
said that it is a derogable provision
in the light Section 16 of the Act 1996. Section 16(1), which imbibes in it the
concept of the arbitral tribunal ruling on its own jurisdiction, comes into
operation only when the composition of the tribunal is legal and with due
jurisdiction. As a natural corollary thereof, it can be safely said that an
arbitral tribunal which has been illegally constituted would have no
jurisdiction or power to decide on the question of its inherent lack of
jurisdiction.[11]
Thus, Section 16 would be applicable only before an odd-member arbitral
tribunal. In fact, on a proper and harmonious interpretation of Section 16 read
with Section 10, would lead to the logical conclusion that rather than making
Section 10 derogable, Section 16 acts
as a rider to it. Moreover, an important point which has been discussed by the Bombay
High Court in the case Atul R.Shah v Vrijlal Lalloobhai
& Co.[12] is that
if an arbitral tribunal has not been not properly constituted but no objection
has not been raised by the aggrieved party before the Tribunal, it cannot
result in the arbitral tribunal exercising jurisdiction if its constitution by
its very inception was in contravention of Section 10 of the Act,1996.[13] Hence, there can no
waiver of the right even if the parties have not objected to it, stating it to be
a mandatory provision.
The reasoning employed to hold s 10 derogable as above seen seems to suffer from various inconsistencies. An alternative view could be to invoke Section 14(1)(a) of the Act 1996 which states
that an arbitrator who is a part of
an illegally constituted arbitral tribunal is de jure restrained from carrying out his/her function. Thus,
applying this to every arbitrator of such a tribunal, consisting of even
number, would result in termination of the arbitral tribunal as a whole, till a
new one is constituted (irrespective of the same being a part of it) or the
arbitral proceedings itself are vitiated by the party. This has been highlighted
by the Bombay High Court in the case of Ashalal
S Lahoti v Hiralal L Tiladhar[14].
The Bombay High Court rejected the contention that no petition would lie before
the Court as there was no award which could be challenged under Section 34 or
for that matter an order passed under sub-sections (2) or (3) of Section 16,
which is appealable under Section 37 of the Arbitration and Conciliation Act,
1996. The Court has held in clear and categorical terms that if an arbitral tribunal is constituted
contrary to Section 10 of the Act of 1996, the arbitrators de jure would not be able to perform any function.[15]
Thus, in the Lohia case, the arbitral tribunal admittedly said to be in contravention
of Section 10 of the Act 1996, could be said be illegal ab
inito, and not possessing requisite jurisdiction to proceed in the matter. Hence, the view of the Apex
Court in Lohia case being contrary to the statute, cannot be
said to have laid down the correct law in holding Section 10 to be derogable in nature. It is hoped that
the Supreme Court would remedy the anomalous situation sooner rather than
later.
Conclusion
In view of the aforementioned statutory
provisions and judicial precedents, it is submitted that Section 10(1) should
be held to be a mandatory provision and non-compliance thereof can be cured by having
recourse to Section 10(2), i.e. by appointing a sole arbitrator. In the humble
submission of the author, the Lohia case
incorrectly interprets the law, resulting in many even numbered arbitral
tribunals now adjudicating as a matter of common practice.
The post is based on a paper titled 'Composition of the Arbitral Tribunal' published in Statute Law Review.[1]
[8] Section 4 of the Act
1996 states:
“Waiver
of right to object- A party who knows that-a)any provision of this Part from
which the parties may derogate,or b)..has not been complied with and yet
proceeds with the arbitration without stating his objection to such
non-compliance without undue delay or, if a time limit is provided for stating
that objection, within that period of time, shall be deemed to have waived his
right to so object.”
[10] Smt. Veena W v Seth Industries Limited, Arbitration Petition No. 180 Of 2007, In The High Court Of Judicature at Bombay
