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Petitioner: Better Engineered Solutions (Pvt.) Ltd VS Respondent: Balochistan Development JUDGMENT
Court Name: Islamabad High Court Judge(s): N/A Title:Better Engineered Solutions (Pvt.) Ltd vs Balochistan Development
JUDGMENT
Reported As: 2022 IHC 208 Result: Appeal Dismissed Judgment JUDGMENT MIANGUL HASSAN AURANGZEB J. Through the instant appeal, the appellant, Better Engineered Solutions (Pvt.) Ltd., impugns the order dated 02.10.2017 passed by the Court of the learned Civil Judge (West), Islamabad, whereby respondent No.1' s objections filed under Section 30 of the Arbitration Act, 1940 ("the 1940 Act") to the arbitration award dated 15.08.2016 were allowed and consequently the said award was set-aside. Furthermore, the prayer made by the appellant in its reply to respondent No.1's objection for the said award to be made a rule of Court was turned down. 2. The record shows that three agreements were entered into between the appellant and respondent No.1 for the Supply , Installation and Commissioning of Sea Water Intake and Brine Disposal System for Desalination Plants at Gaddani, Pasni and Jiwani in the Province of Balochistan ("the Agreements") . The Agreements contained an identical arbitration clause, which is reproduced herein below:- "In case of any dispute the matter shall be resolved amicably by the parties. In case the matter is not resolved by the parties the same will be subject to Arbitration by Arbitrators to be appointed one each by the parties." (Emphasis added) 3. After disputes and differences arising from and related to the Agreements developed between the parties, respondent No.1 claims to have appointed Mr. Naimatullah as one of the arbitrators and intimated the appellant about such appointment through letter dated 02.04.2016. The appellant, however , asserts that this letter was posted on 03.05.2016 and not received by the appellant until 05.05.2016. Furthermore, the appellant asserts that vide letter dated 13.04.2016 it had informed respondent No.1 about its decision to initiate arbitration proceedings and to have appointed Major (Retd.) Muhammad Asif Zagr Mengal
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("Major Mengal") as one of the arbitrators. 4. Vide letter dated 18.05.2016, the appellant informed respondent No.1 that Major Mengal would not be able to conduct the arbitration due to his preoccupation. Furthermore, respondent No.1 was informed as to the appellant's decision to substitute Major Mengal with Mr. Ghulam Usman Babai ("Mr. Babai") as the sole arbitrator . Respondent No.1 was required to convey its consent to Mr . Babai's appointment as the sole arbitrator . 5. Vide letter dated 03.06.2016, the appellant informed respondent No.1 that in view of the time that would be consumed in the arbitration, it had agreed to resolve the disputes through negotiations. Apparently , the negotiations that ensued between the parties were unsuccessful. Respondent No.1 had accused the appellant of wasting time and delaying the works under the Agreements. 6. Vide letter dated 16.06.2016, the appellant informed respondent No.1 that it had decided to resume the arbitration process which had been temp orarily disrupted in order to give a chance for the disputes to be settled amicably . The appellant addressed another letter dated 16.06.2016 to respondent No.1 informing it that Mr. Ghulam Nabi Mangrio ("Mr. Mangrio") had been appointed as the sole arbitrat or in place of Major Mengal. On the very same day, the appellant addressed a letter to Mr. Mangrio requesting him to act as the sole arbitrator in accordance with Section 9(a) of the 1940 Act. This letter was also copied to respondent No.1. Vide letter dated 24.06.2016, the appellant requested Mr . Mangrio to enter upon reference and commence the arbitration proceedings at the earliest. 7. Mr. Mangrio entered upon reference and issued notices to the contesting parties. Vide letter dated 12.07.2016, respondent No.1 informed Mr. Mangrio that it had neither appointed him as the sole arbitrator nor had it given consent to the appellant for doing so. Vide letter dated 19.07.2016, respondent No.1 informed Mr. Mangrio that it had appointed Mr. Naimatullah as its arbitrator and had informed the appellant about the said appointment; and that the appellant had replaced its arbitrator but respondent No.1's arbitrator remained unchanged. Furthermore, Mr. Mangrio was called upon to withdraw his notices. 8. Mr. Mangrio went ahead with the arbitr ation proceedings and rendered the award on 15.08.2016. Perusal of the said award shows that a notice had been issued by the arbitrator to respondent No.1 that in the event it did not appear before the arbitrator , ex-parte proceedings would be initiated. It is also mentioned in the award that respondent No.1 "participated in the arbitration proceedings by sending some documents and written arguments by mail." 9. On 02.09.2016, Mr. Mangrio filed the award and the record of the arbitration before the learned Civil Court at Islamabad. On 22.11.2016, respondent No.1 filed objections to the award whereas on 30.03.2017, the appellant filed a reply to respondent No.1's objections and prayed for the award to be made a rule of court. 10. Vide order dated 02.10.2017, respondent No.1's objections to the award were allowed by the learned Civil Court and the said award was set-aside. The said order dated 02.10.2017 has been assailed by the appellant in the instant appeal. 11. Learned counsel for the appellant, after narrating the facts leading to the filing of the instant appeal, submitted that on 13.04.2016, the appellant had issued a notice to respondent No.1 clearly informing the latter that Major Mengal had been appointed as the appellant's arbitrator; that since respondent No.1 did not appoint the second arbitrator within a period of fifteen days from the notice dated 13.04.2016, Major Mengal was appointed as the sole arbitrator in terms of Section 9(b) of the 1940 Act; that since Major Mengal had declined to sit as an arbitrator due to his preoccupation, the appellant substituted him on 18.05.2016 with Mr. Babai, who was also substituted with Mr. Mangrio on 16.06.2016; that once the appellant had appointed a sole arbitrator under Section 9(b) of the 1940 Act, it did not need to take respondent No.1's consent to substitute the sole arbitrator; that although respondent No.1 had appointed Mr. Naimatullah as its arbitrator but notice of his appointment was not received until 05.05.2016 by which date Major Mengal already stood appointed as the sole arbitrator; that since Mr. Mangrio is based at Islamabad, there was no legal infirmity in the arbitration proceedings having been conducted at Islamabad; and that neither had the arbitrator misconducted the proceedings nor did the award suffer from any invalidity . Learned counsel for the appellant prayed for the appeal to be allowed and for a judgment and decree to be passed in terms of the award.
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12. On the other hand, learned counsel for respondent No.1 submitted that in the appellant's letter dated 13.04.2016, respondent No.1 was not called upon to appoint the second arbitrator; that nevertheless on 02.04.2016, respondent No.1 had appointed Mr. Naimatullah as its arbitrator; that respondent No.1 had never agreed to the appointment of Major Mengal or any of his substitutes to be appointed as the sole arbitrator; that at no material stage did respondent No.1 submit to the jurisdiction of the sole arbitrator; that vide letters dated 12.07.2016 and 19.07.2016, respondent No.1 had objected to the assumption of jurisdiction by Mr. Mangrio as a sole arbitrator; that in the arbitration proceedings, respondent No.1 had not contested the appellant's claim on merits; that the Agreements were signed at Quetta and the works were performed at Gaddani, Pasni and Jiwani in the Province of Balochistan; that since Islamabad had no nexus with the dispute between the parties, the arbitration proceedings could not have been conducted at Islamabad; that the impugned order dated 02.10.2017 passed by the learned Civil Court does not suffer from any jurisdictional infirmity; and that respondent No.1 is ready , willing and able to participate in arbitration proceedings that may be initiated by the appellant in accordance with the arbitration clause in the Agreements. Learned counsel for respondent No.1 prayed for the appeal to be dismissed. 13. I have heard the contentions of the learned counsel for the contesting parties and have perused the record with their able assistance. The facts leading to the filing of the instant appeal have been set out in sufficient detail in paragraphs 2 to 10 above and need not be recapitulated. 14. The arbitration clause in the Agreements shows that the parties had agreed for their disputes and differences to be resolved through arbitration by two arbitrators "to be appointed one each by the parties ." Where a party to an arbitration agreement, which provides for arbitration by a two-member arbitral tribunal one to be appointed by each party , wants to initiate arbitration proceedings without the intervention of the Court, it must, after appointing its arbitrator , serve a written notice on the other party as to such appointment and require the other party to appoint its arbitrator . If the other party does not appo int its arbitrator within fifteen clear days of the service of such notice, the party which had appointed its arbitrator acquires the right to appoint its arbitrator as the sole arbitrator by invoking the provisions of Section 9(b) of the 1940 Act. The sole arbitrator appointed through this process is treated as having been appointed with the consent of the parties. 15. Arbitration without the intervention of the Court is dealt with in Chapter-II of the 1940 Act, which also contains Section 9. For the purposes of clarity , Section 9 is reproduced herein below:- "9. Power to party to appoint new arbitrator or, in certain cases, a sole arbitrator .-- Where an arbitration agreement provides that a reference shall be to two arbitrators, one to be appointed by each party , then, unless a different intention is expressed in the agreement,-- (a) if either of the appointed arbitrators neglects or refuses to act, or is incapable of acting, or dies, the party who appointed him may appoint a new arbitrator in his place; (b) If one party fails to appoint an arbitrator , either originally or by way of substitution as aforesaid, for fifteen clear days after the service by the other party of a notice in writing to make the appointment, such other party having appointed his arbitrator before giving the notice, the party who has appointed an arbitrator may appoint that arbitrator to act as sole arbitrator in the reference, and his award shall be binding on both parties as if he had been appointed by consent: Provided that the Court may set aside any appointment as sole arbitrator made under Clause (b) and either , on sufficient cause being shown, allow furthe r time to the defaulting party to appoint an arbitrator or pass such other order as it thinks fit. Explanation:-- The fact that an arbitrator or umpire, after a request by either party to enter on and proceed with the reference, does not within one month comply with the request may constitute a neglect or refusal to act within the meaning of section 8 and this section." 16. Section 9 is attracted only when the arbitration agreement requires the disputes between the parties to be referred to two arbitrators, one to be appointed by each party . The essential condit ion for the exercise of the power by a party to appoint a sole arbitrator under Section 9(b) is that the other party fails to appoint an arbitrator for 15 days after service of notice in writing to make an appointment. Before that time a sole arbitrator cannot be
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appointed and if appointed the arbitrator has no jurisdiction. Failure to give requisite number of clear days will be fatal to the appointment and the statutory period should be calculated after the service of the written notice and not from the date of posting of the notice. After the other side to the dispute refuses to appoint or does not appoint its arbitrator within 15 days of the service of notice upon him, it is open to the party issuing the notice to appoint its own arbitrator as the sole arbitrator in the reference. 17. In short the following prerequisites must be fulfilled before there can be a valid appointment of a sole arbitrator under Section 9(b):- (i) There must be a valid arbitration agree ment between the parties providing for reference to two arbitrators, one to be appointed by each party; (ii) The party willing to exercise this powe r must have appointed its own arbitrator before service of notice on the other party; (iii) After appointing its own arbitrator , the party must serve a notice on the other party intimating about the appointment of its own arbitrator and calling upon the other party to appoint its arbitrator; (iv) There must be a default or failure of the other party to appoint its arbitrator for a period of 15 clear days from the date of service of the notice; (v) On the expiry of this period of 15 clear days from the date of service of the notice, the party who had appointed its own arbitrator acquires the right to appoint its own arbitrator as the sole arbitrator; (vi) The right to appoint its own arbitrator as the sole arbitrator has to be exercise d by the party that has already appointed its arbitrator and notice of such appointment has to be given to the other party . The appointment of a sole arbitrator is subject to the contingency that the Court may set-aside any such appointment and allow further time to the defaulting party to appoint an arbitrator or pass such order as it thinks fit. 18. In the case at hand, respondent No.1 claims to have taken the first step for initiating the arbitration proceedings without the intervention of the Court by appointing Mr. Naimatullah as its arbitrator and informing the appellant about the said appointment vide letter dated 02.04.2016. The appellant disputes this and takes the position that the respondent's letter whereby Mr. Naimatullah was appointed as the arbitrator was couriered to the appellant on 03.05.2016 and received by the appella nt on 05.05.2016. The courier tracking report and the courier receipt produced by the appellant in the arbitration proceedings shows that letter dated 02.04.2016 (whereby Mr. Naimatullah was appointed as the arbitrator by respondent No.1) was sent by respondent No.1 on 03.05.2016 and received by the appellant on 05.05.2016 . So it was not until 05.05.2016 that the appellant came to know that respondent No.1 had appointed Mr . Naimatullah as its arbitrator on the two-member arbitral tribunal. 19. The appellant had issued notice to respondent No.1 on 13.04.2016 about its decision to appoint Major Mengal as one of the arbitrators. When the said notice was issued, the appellant did not know about Mr. Naimatullah's appointment as respondent No.1's arbitrator . In none of respondent No.1's plead ings or written arguments did it deny receipt of the said notice dated 13.04.2016. Assuming that the said notice was served on respondent No.1 on 13.04.2016, and that respondent No.1 did not appoint its arbitrator within fifteen clear days of the service of such notice (i.e., by 29.04.2016), this lapse on respondent No.1's part vested the appellant with the right to appoint Major Mengal as the sole arbitrator under Section 9(b). However , it is an admitted position that the appellant did not issue notice to respondent No.1 about Major Mengal's appointment as the sole arbitrator . The mere expiry of the fifteen- day period could not ipso facto result in the appointment of Major Mengal as the sole arbitrator . The acquisition of a right to appoint a sole arbitrator by the appellant under Section 9(b) would not imply that Major Mengal stood appointed as the sole arbitrator on the expiry of the fifteen-day period without him having been duly appointed as the sole arbitrator and notice of such appointment having been served on respondent No.1. 20. There is nothing on the record to show that the appellant had on the expiry of the fifteen-day period issued notice to respondent No.1 as to the appoi ntment of Major Mengal as the sole arbitr ator. The appellant's letter dated 18.05.2016 is not a notice as to the appointment of Major Mengal as the sole arbitrator but an intimation to respondent No.1 that due to Major Mengal's preoccupation "he is not able to conduct the arbitration." Vide the very same letter , the appellant appointed Mr. Babai as the sole arbitrator in place of Major Mengal and sought
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respondent No.1's consent to his appointment as the sole arbitrator . It is not disputed that respondent No.1 had not given its consent for appointment of either Major Mengal or Mr . Babai as a sole arbitrator . 21. The term "may appoint that arbitrator to act as sole arbitrator" in Section 9(b) connotes the appointment of a sole arbitrator by serving a notice about such appointment on the party that failed or refused to appoint its arbitrator within the fifteen-day period. Appointment of arbitrators on a two-member arbitral tribunal or the appointment of a sole arbitrator in terms of Section 9(b) can be validly made only by serving a notice on the other party as to the appointment. The appointment of Major Mengal as the sole arbitrator by the appellant cannot be held to have been complete without communication thereof to respondent No.1. In the case of Thomas Vs. Fredrick (1847 (10) Q.B. 775), Lord Denman held that "[n]either party can be said to have chose n an arbitrator until he lets the other party know the object of his choice." Therefore, it is safe to hold that since at no material stage did the appellant appoint Major Mangal as the sole arbitrator or issued notice to respondent No.1 about such appointment, the question of substituting him with Mr. Babai as the "sole arbitrator" did not arise. Therefore, the appointment of Mr. Babai as the sole arbitrator cannot be held to have been validly made. In the case of Hari Chand Vs. Lachhman Das (AIR 1948 EP 11), the High Court of East Punjab, after making reference to Section 9(b) of the 1940 Act, held as follows:- "It will been seen from clause (b) that after the other side had refused to appoint their arbitrator within fifteen days of the service of the notice upon them, it was open to the appellants' counsel to appoint their own arbitrators as sole arbitrators in the reference, but they did nothing of the kind. The appellants' learned counsel argued that there was no necessity of a formal appointment of the arbitrator previously appointed as sole arbitrator but I do not find it possible to agree with him. The words of clause (b) appear to me to be very clear and as I read them, my opinion is that unless there is a formal appointment in the words of the clause the arbitrator appointed by one party cannot arrogate to himself the functions of a sole arbitrator and has no jurisdiction to proceed with the reference. The words of the proviso to the section strengthen this conclusion. It lays down that after an arbitrator appointed by one of the parties has been appointed as the sole arbitrator under clause (b) a special right accrues to the other party to have that appointment cancelled by the Court and to apply for being granted further time for appointing his own arbitrator , and to hold that no formal appointment need be made, would be to deprive other party of that right." (Emphasis added) 22. Section 9(b) vested the party that appointed its arbitrator with the right to appoint its arbitrator as the sole arbitrator on the other party's failure or refusal to appoint its arbitrator within fifteen clear days of a "notice in writing to make the appointment." In the case of Satya Narayan Agarwall Vs. Baidyanath Mandal (AIR 1972 Patna 29), it was held that "Section 9(b) was an exceptional provision and was in effect a penalty on the defaulting party for his failure to make the appointment on getting notice and caution from the other side." Strict compliance with the requirements of Section 9(b) is required if the defaulting party is to be met with the penalty for its failure to appoint an arbitrator after a notice in writing from the party to make the appointment. Now, the appellant, through its letter dated 13.04.2016, neither required respondent No.1 to appoint its arbitrator nor cautioned respondent No.1 that in the event it does not appoint its arbitrator within fifteen clear days, the arbitrator appointed by the appellant would be appointed as the sole arbitrator . This vital omission in the appellant's letter dated 13.04.2016 cannot be ignored. The mere fact that the appellant had intimated respondent No.1 as to the appoin tment of its arbitrator cannot be treated as requiring respondent No.1 to appoint its arbitrator . Since the appellant's letter dated 13.04.2016 does not fulfill the requirements of a notice requiring respondent No.1 to appoint its arbitrator , I am of the view that the essential prerequisite for penalizing respondent No.1 with the appointment of the appellant's arbitrator as the sole arbitrator had not been fulfilled in the case at hand. In the case of Abdul Khaleq Vs. Province of East Pakistan (PLD 1964 Dacca 166), it was held that one of the conditions precedent to the appointment by a party of his arbitrator as the sole arbitrator under Section 9(b) is that "the party proposing to exercise this power must have served notice on the other party calling upon him to appoint his arbitrator ." 23. There is also nothing on the record to show that Major Mengal had accepted his appointment or agreed to be the appellant's nominee on the arbitral tribunal. Russell on Arbitration (18th Edition), at page 212 reads thus:-
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"Acceptance of offices:- Acceptance of the office by the arbitrator appears to be necessary to perfect his appointment. It has been so decided in the case of an umpire, and it would seem to be only reasonable that an appointment should not be considered effective until the person appointed has agreed either expressly or tacitly to exercise the function of the office." 24. In the case of Tradax Export S.A. Vs. Volkswagenwerk A.G. [1970] 1 All ER 420, the Master of Rolls in the Court of Appeal observed as under:- "So we have to decide: what is necessary to constitute the appointment of an arbitrator? I think the answer is this: First, it is necessary to tell the other side. That is plain from Tew V. Harris (1847) 11 Q.B. 7. Second, it is necessary to tell the appointee himself. That is obvious because he often has to start acting at once. Third, it is necessary that he should be willing to act and have intimated his willingness to accept the appointment." (Emphasis added) Lord Justice Salmon, while agreeing with the Master of Rolls further clarified the matter in the following terms:- "We know from all the evidence in this case that as a general rule anyone who desires to appoint an arbitrator under this clause gets into touch with the proposed arbitrator to ascertain whether he is willing to act as arbitrator in the dispute in question. If he is willing to act, then the party authorises him to act and communicates with the other party , notifying him of the name of the arbitrator . It is argued, in effect, that everyth ing except the notification of the name of the arbitrator to the other party is a ceremonial ritual performed only out of courtesy . I am afraid I cannot agree. In my opinion the ordinary businessman takes the view no doubt what may be considered the prosaic view, which I share that in order to appoint an arbitrator one must first get his consent to act as arbitrator . In my judgment, three things are necessary in order to make an effective appointment under this clause: first of all, the arbitrator must be communicated with and asked if he is willing to act. Secondly , he must express his willingness and be clothed with authority to act. And thirdly , as is apparent from the case of Tew v. Harris in order to perfect the appointment the other side must be notified of the name of the arbitrator . Sometimes these steps are taken by letter or by cable. There is nothing to prevent them being taken over the telephone or by telex." 25. The party willing to exercise the power to appoint a sole arbitrator under Section 9(b) must have "appointed" its own arbitrator before service of notice on the other party . It is only after appointing its own arbitrator that the party must serve a notice on the other party in writing, intimating the other party about the appointment of its own arbitrator and calling upon the other party to appoint its arbitrator . Section 9(b) explicitly requires one party to an arbitration agreement giving notice to the other party , requiring it to appoint its arbitrator to have "appointed his arbitrator before giving the notice." As mentioned above, the appellant,…
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