UNION OF INDIA versus D. M. REVRI & CO.

lJl'ilON OF)NDIA

D. M. REVRI & CO. September 2, 1976

[P. N. BHAGWATI AND S. MURTAZA FAZAL ALI, JJ.]

Arbitration Act, 1940--Contract between lay parties not to be thwarted by narrow pedantic and legalistic interprf?tation-Intendment of parties regardinfi validity of arbitrator's appointment. whether material.

The respondent partnership firm, entered into contract with the· appellant for the supply of- East German sugar. Provision for arbitration was made in clause ( 17) of the contract, and the arbitrator was to be_ nominated by the Secretary in the Ministry of Food & Agriculture. In the present dispute, before an arbitrator was nominated, the Ministry of Food & Agriculture was bifurcated into two separa.te Ministries and the subject-matter of the contract was allotted to the ~finistry of Food. The respondents took the stand that there was no longer any Secretary in the non-existent ~finistry of Food and Agriculture and clause (17) of the contract was dead-letter. The appellant's proposal to amend clause (17) to suit the changed circumstances, was rejected by the res-pondents. Thereafter, the two Ministries were reintegrated into }.finistry of Food & Agriculture and two Secretaries were put incharge of the two depart-ments. The Secretary, Food Department, on request from the appeIIant under clause (17), appointed an arbitrator. The respondents served on the appellant notice under C.P.C. Sec. 80 but instead of proceeding to sue the appellantsf they submitted to the jurisdiction of the. Arbitrator without protest until award was made. The appellant's application to the Sub Judge, Delhi, for passing decree in terms of the award· was resisted by the respondents who sought to set aside the award, challenging the validity of'. the Arbitrator's appointment and contending that the arbitration agreement under clause (17) was made by only one of the partners, and was not binding on the others. The Sub-Judge rejected their objections and made the award rule of the court. An appeal to the High Court was allowed on the ground that on bifurcation of the ~finistries clause (17) of the contract became dead, and could not be revived on their re-integration.

Allowing the appeal, the Court,

HELD : There_ were, after integr3tion, two· Secretaries in the ~Iinistry of Food & Agriculture, but the argument that this event rendered the arbitration - agreement vague and uncertain, is ba<Sed on highly technical and doctrinaire · approach and is opposed ·to plain common sense. contract is commercial document between the parties and must be interpreted in such manner as to give it efficacy rather than tel, invalidate it. It would not be right while inter· preting contract entered into between two lay parties, to apply strict ru1es of constrnction which are ordinarily applicable to formal documents. The mean~ ing of such contract must be gathered by adopting common sense approach and it must not be allowed to be thwarted by narrow pedantid and legalistic interpretation. The Secretary in the Mini~trY of Food and Agriculture in charge of the Department of Food, would be the Secretary in the lfinistry of Food and Agriculture concerned with the subject matter of the contract and under clause (17), he would be the person intended by the parties to exercise the power of nominating the arbitrator. Furthermore, the respondents did not raise any objection to the appointment of the arbitrator and participated in the arbitration proceedings without protest, indicating the clear intendment of the . parties that the Secretary in the Ministry of Food & Agriculture concerned ·with the subject matter of the contract should be the person entitled to--nominate the arbitrator. [488 B-E, 4lW- A-El

CIVIL APPELLATE JURISDICTION.: Civil Appeal No. 135 of 1972. Appeal by Special Leave from the Judgment and Order dated, 12-8-71 of the Delhi High Court in F.A.O. No. 47-D of 1964.

Appeal by Special Leave from the Judgment and Order dated,

Gobind Das and Girish Chandra, for the Appellant.

Bakshi Shiv Charan Singh and Harbans Singh, for the Respon-B dents.

The Judgment of the Court was delivered by

BHAGWATI, J., This appeal, by special leave, is directed against judgment of the High Court of Delhi setting aside an award made by an arbitrator on the ground that he was not validly appointed arbi-trator and hence had no jurisdiction to arbitrate and make an award. The facts giving rise to the appeal are few and may be Qriefly stated as follows.

The respondents-a partnership firm---entered into contract with the appellant for the supply of 30,000 tons of East German sugar at the rate and as the terms- and conditions set out in letter dated 3rd July, 1954 addressed by ihe Secretary to the Governmen.t of India, in the Minis(ry of Food &. Agriculture to the respondents. The Ministry of Food and Agriculture was concerned with the subject-matter of this contract and hen~e clause (9) provided that "superintendence and inspection of quality, weight and packing of sugar shall be made by reputable superintending agency to be approved by the Government of India, in the Ministry of Food&. Agriculture" and clause (10) stipu-lated for delivery to be made to "authorities or parties nomimted by the Minis(ry of Food and Agriculture". There was provision for arbi-tration made in clause (17) and that clause·aJso referred to tlie Minis-trY of Food and Agriculture. It was in the following terms :

"ARBITRATION : All questions, disputes or diffec rences whatsoever which may at any time arise between the parties to the agreement touching the agreement or the sub-ject-matter thereof, arising out of or in relation thereto and whether as to construction or otherwise shall be referred to single arbitrator for decision; Such single arbitrator shall , . be.nominated by the Secretary to the Government of India, in the· Ministry of Food and Agriculture in his absolute dis-cretion and the decision of such arbitrator shall be final and binding upon the parties. The reference to the ar6itrator shall be governed by the provisions of the Indian Arbitration Act, 1940 as amended from time to time and the rules made thereunder." ,

It appears that disputes arose between the appellant anc\ the respon-dents in regard to the fulfilment of this contract. The appellant made claim for payment of Rs. 3,29,107-8-0 against the respondents by letter dated 11th August, 1956 and threatened to recover it from the security furnished· by the respondents through . their bankers. The .respondents disputed the claim of tJie appellant and by iheir letter dated 23rd August, 1956 pointed out that it was not competent to the appellant to recover the amount of the ?emand from the bankers of the

respondents without first establishing its claim by arbitrati~n or suit. The respondents intimated to the ap_Pellant that they we:e l?repared .to go to arbitration and suggested that. 1t wou!d be better st1µ, .1f special case for the opinion of the court were stated under ~ection 90 of the Code of Civil Procedure. The respondents also claimed to recover from the appellant under tht::_ contr~ct diverse amounts aggregating to Rs. 6,05,689. There was no response to this letter from the appellant and no steps were ta~en by the app,ellant to h~ve the d!s~utes referred to an arbitrator nommated by the Secretary m the Mm1stry of Food and Agriculture as provided in claus,e (17) of the ~ontract. In the meantime1 as result of an order made by the President under clause (3) of Article 77 of the Constitution, the Ministry of Food and Agri-culture was bifurcated into two sep!J:rate Ministries, one of Food and the other of Agriculture, with effect from 19th October, 1956 and sugar, the subject-matter of the contract, came to be allotted to the Ministry of Food. The respondents, by their letter dated 9th Novem-ber, 1956., pointed out to the Secretary, Ministry of Food that by reason of this bifurcation, the Ministry of Food and Agriculture has .ceased to exist and there was no Secretary in the Ministry of Food and Agriculture and the arbitration agreement contained. in clause ( 17) of ihe contract had, therefore, become dead letter and was no longer enforceable and once again called upon the appellant to agree in".stating a· special case for the opinion of the court failing which · the .respon-dents would have to file suit against the appellant. . This .Jetter als0 did not evoke any response from the appe1lant and the disputes remain~ ed unresolved.

On 13th/14th February, 1956 the appellant addressed letter to the respondents stating that since the Ministry of Food and Agricul-ture was bifurcated into Ministry of Food and Mini~try of Agriculture, it was necessary to amen_d .clause ( 17) of the Contract so as to pro-vide for arbitration by "the Secretary to the Ministry, Government of India administratively dealing with the subject of contract at the time of reference to arbitration, or if there is no Secretary, the -administra-tive head of such Ministry at the time of such reference" and proposed ·an amendment to that effect for the acceptance of the respondents. The r.espondents, by their letter in reply dated 26th February, 1957, dec-lmed to accept the propos~l for amendment of clause ( 17) of the c011-tr~ct ai;id once again reiterated that the arbitration agreement con-tamed m that clause was "dead and unenforceable". However, withii\ short time there.after, another order was issued by the President under clause ( 3) of Article 77 of the Constitution integrating the 'Ministry of Food and the Ministry of Agriculture into one single Ministry of Food and Agriculture with effect from 23rd April, 1957. This new Ministry of Food and Agriculture had two departments, one of Food and the other of Agriculture, and there was Secretary incharge · of each department. It seems that the appellant requested the Secretary, Department of Food in the Ministry of Food and Agriculture to nomi-nate an arbitration for adjudicating upon the disputes which had arisen between the appellant and the respondents in terms of clause (17) of the Contract a_nd the Secretary, D('!partment of Food in the Ministry of Foo.d and Agr~culture, by letter dated 27th February, 1958, nominated Shn A. V. V1shwanath Shas~i, Advocate, to act as sok arbitrator to

adjudicate upon such disputes. On the saJie day, the respondents served notice on !he appellant under section 80 of the Code of Civil Procedure demanding payment of the amounts due to the respondents and stating that in c~se the appellant failed to meet these demands, the respondents would have to file suit against the appellant. Though respondents gave this notice under section 80 of the Code of Civil ·Procedure, they did not proceed to file suit, but instead filed their statement of claim befor~ the arbitrator and in the statement they claimed payment of an aggregate sum of Rs. 7,89,858/- from the appellant and also prayed for declaration .that the contract stooa "final and properly performed" by the respondents. The appellant ;filed its reply disputing the claim of the respondents. The appellant also field statement making its own claim for Rs .. 3,29,107-8-0 against the respondents. It was stated in paragraph 18 of the state-c ment of claim of the appellant "that under Clause 17 of the contract the Secretary Food and Agriculture Ministry of the Government in his discretion has the right to nominate sole Arbitrator and refer the dis-pute to the Arbitrator an.ct that has been duly done on 27th February, 1958, and the parties have been duly notified under Secretary to the Government letter No. SIMP-3(4C) dated the 27th February, 1958". The respondents filed their written statement denying the claim of the appellant and in paragraph 18 of this written statement they averred "That para 18 of the Statement of. Claim of the Government of India is not objected to". The pr.oceedings in connection with the claim of the respondents and the counter-clai!ll of the appellant were carried on before the arbitrator and the respondents participated in the arbitra-tion proceedings without objection or protest against the jurisdiction of the arbitrator. The arbitrator ultimately made an award against the respondents.

The appellant made an application before the Sub-Judge, Delhi to pass decree in terms of the award. The respondents resisted the application of the appellant and sought to set aside the award mainly on two grounds. One ground was that Daljeet Singh, partner of the respondents, had no power to bind the other partners by an arbitration agreement and hence clause (17) of the contract was not binding on the respondents, and the other was that the arbitrator was not validly appointed and he had, therefore, no jurisdiction to enter upon the reference and adjudicate upon the disputes between the parties. Both these grounds were rejected by the learned Sub-Judge and the award was made rule of the court. The respondents thereupon preferred an appeal to the High Court. The saf!1e two grounds were also urged in the appeal. Out of them, the first ground relating to lack of autl;lority in Daljeet Singh to bind the respondents by clause ( 17) of the con-tract was negatived by the High Court and it was held that clause ( 17) being an integral part of the contract, the authority of Daljeet Singh to enter into the contract on behalf of the respondents extended also to clause ( 17) of the contract and in any event, the conduct of all the partners showed that Daljeet Singh h~d authority on behalf of the other partners to enter into the arbitration agreement contained in clause (17) of the contract. The second ground, however, found favour with the High Court whic!J held that in view of the bifurcation -0f the Ministry of Food and Agriculture into two separate Ministries,

one of Food and the other of Agriculture, by the Presi~en~al Order, which came into effect from 19th October, 1956, the arb1trat1on agree-ment in clause( 17) of the contract became dead and unenforceable and nothing that happened thereafter could revive it and i;11 any ev.ent, even after reintegration of the Ministry of Food and Agriculture mto one single Ministry of Food and ~gricultu.~e, the arbitration agr~eme~t could not be given effect to smce there were then two Secretanes m the Ministry of Food and Agriculture and clause (17) of the contract did not indicate as to which Secretary was to exercise the power of nominating the arbitrator, with the result that the arbitration agree-ment suffered from the fault of vagueness and uncertainty.. The High Court accordingly allowed the apIJeal and set aside the award made by the Arbitrator. Hence the present appeal by the appellant with special leave obtained from this Court.

The only question debated ·before us in this appeal was as to whether the appointment of the arbitrator by the Secretary, Depart-ment of Food in the Ministry of Food & Agriculture was valid appointment. Obviously, if the appointment was invalid, the arbitra-tor would have no jurisdiction to arbitrate upon the disputes between the parties and the award would be invalid. But, an alternative argument was also advanced on behalf of the appellant to sustain the award and it was that the respondents not having raised any objection to the appointment of the arbitrator and participated in the arbitration proceedings without any demur or protest, it was not open to them, after the award was made, to challenge it on the ground of invalidity of appointment of the arbitrator. The respondents, having taken the chance of obtaining the award in their favour, could not denounce the award when it went against them. We will first examine whether the appointment of the arbitrator was valid, for, if it was, the second question, which raises the issue of waiver, would not arise. Now, clause (17) of the contract provided that a1l disputes arising out of the contract shall be resolved by arbitration. It embodied an arbitration agreement between the parties. It also laid down the machinery for appointment of the arbitrator. It provided that the arbitrator shall be nominated by the Secretary in the Ministry of Food & Agriculture in his absolute discretion. There W!IB undoubtedly Ministry of Food & Agriculture at the time when the contract was made and there was one and only one Secretary in that Ministry, so that at the date of the contract there could be no question as to who was the person authorised to nominate the arbitrator. The same position continued to obtain also at the time when disputes arose between the parties. But before an arbitrator could be nominated by the Secretary in the Ministry of Food & Agriculture to adjudicate upon these disputes, the Ministry of Food & Agriculture was bifurcated into two separate Ministries and it ceased to exist as Ministry of Food & Agriculture. Then obviously there was no individual who filled the description of "Secretary in the Ministry of Food & Agriculture" and, consequently the machinery for appointment of the arbitrator became unworkable. If the matter had rested there, question could well have arisen whether, despite the break-down of the machinery for nomination of an arbitrator, the arbitration agreement in clause ( 17) 15-l 104SCI/76

could s~ be enfors;~ by the Court by appointing an arbitrator in proceedmg under section .20 of the Arbitration Act. But the position agam changed ~d the .Milllstry of Food & Agriculture came into being a~ result of mtegrati~n of the M1rustry of Food and the Ministry of Agriculture, with this change, namely, that the new Mimstry of Food & Agriculture had two departments, one of Food and the other of Agriculture and there was Secretary incharge of each department. There were thus, after integration, two Secretaries in the Ministry of Food & Agriculture and the argument of the respondents was-and that argument found favour with the High Court-that this event rendered the arbitration agreement vague and uncertain, inasmuch as it did not specify which of the two Secretaries was to nominate the arbitrator "in his absolute discretion". Though this argument appears attractive at first sight, little scrutiny will reveal that it is unsound. It is based on highly technical and doctrinaire approach and is opposed to plain commonsense.

It must be remembered that contract is commercial document between the parties and it must be interpreted in such manner as to give efficacy to the contract rather than to invalidate it. It would not be right while interpreting contract, entered into between two lay parties, to apply strict rules of consti'Uction which are ordinarily applicable to conveyance and other formal documents. The mean-ing of such contract must be gathered by adopting commensense approach and it must not be allowed to be thwarted by narrow pedantic and legalistic interpretation. Here, at the time when the arbitrator came to be nominated and the reference was made, there was Ministry of Food & Agriculture and there was Secretary in that Ministry, but the only difficulty, according to the High Court, was that there were, instead of one, two Secretaries and it could not be predicated as to which Secretary was intended to exercise the power of nominating an arbitrator. We do not think this difficulty is at all real. Let us consider, for moment, why in clause (17), the power to nominate an arbitrator was conferred on the Secretary in the Minis-F try of Food & Agriculture and not on Secretary in any other Ministry. The reason obviously was that at the date of the contract the Secretary in the Ministry of Food & Agriculture was the Officer dealing with the subject-matter of the contract. If this object and reason of the provision of clause ( 17) is kept in mind, it will become immediately clear that the "Secretary in the Ministry of Food & Agriculture" authorised to nominate an arbitrator was the Secretary incharge of the Department of Food who was concerned with the subject-matter of the contract. The Secretary incharge of the Department of Food filled the description: "Secretary in the Ministry of Food & Agriculture" !riven in clause ( 17). The respondents relied strongly on the use of ihe definite article 'the' before the words "Secretary in the Ministry of Food & Agriculture" and urged that what the parties to the contract had in mind was not Secretary in the Ministry of Food & Agriculture, but the Secretary in the Ministry of Food & Agriculture and that clearly postulated one definite Secretar;: in. the Min!st;Y of Fo<?<1 . & . Agriculture and not one of tw~ Secretanes m t~t MmJStry. This ts, in our opinion, hyper technical argument which seeks to make a,

fortress out of the dictionary and ignores the plain intendment of the contract. We fail to see why the Secretary in the Ministry of Food & Agriculture incharge of the Department of Food could not be described as the Secretary. He would be the Secretary in the Ministry of Food & Agriculture concerned with the subject-matter of the contract and oloo.rly and indubitably he would be the person intended by the parties to exercise the power of nominating the arbitrator. The parties to the contract obviously could not be expected to use the words "a Secretary in the Ministry of Food & Agriculture", because their intendment was not that any Secretary in the Ministry of Food & Agriculture should be ontitled to exercise the power of nominating an arbitrator, but it should only be the Secretary in the Ministry of Food & Agriculture concerned with the subject-matter of the contract. That is why the use of the definite article 'the'. It is also significant to note that when the Secretary in charge of the Department of Food in the Ministry of Food & Agriculture nominated the arbitrator, the respondents did not raise any objection to the appointment of the arbitrator and participated in the arbitration proceedings without any protest. The respondents knew at that time that there were two Secretaries in the Ministry of Food and Agriculture and the appointment of the arbitrator w~_ made by the Secretary in charge of the Department of Food and yet they acquiesced in the appointment of the arbitrator and took part in the proceedings. This circumstance is also clearly indicative of the intend-ment of the parties tlrat the Secretary in the Ministry of Food & Agriculture concerned with the subject-matter of the contract should be the person entitled to nominate the arbitrator. Or else tire respon-dents would have objected to the appointment of the arbitrator and declined ·to participate in the arbitration proceedings or at any rate, participated under protest. We are, tlrerefore, of the view that the arbitrator was validly nominated by the Secretary in charge of the · Department of Food in the Ministry of Food & Agriculture. This view renders it unnecessary for us to consider whether by participating in tire proceedings before the arbitrator without objection or protest and taking the chance of obtaining an award in their favour, the rrspondents could be said to have waived the defect in the appointment of the arbitrator.

We accordingly allow the appeal, set aside tire order of the High Court and whi)e dismissing the application for setting aside the award, pass decree in terms of tire award. Having regard to the peculiar facts· and circumstances of the case, we make no order as . to costs throughout.

Appeal allowed.