1997 PLP 2419 (MLD)

(i) Ghulam Dastgir (PO 1978 SC‑220) which lays down that the Courts have inherent powers to mould the relief. (ii) Samar Gul v. Central Government and others (PLD 1986 SC 35) which declares that Court can grant reliefs according to justice and circumstances. (iii) Ghulam Hussain and another v. Faiz Muhammad and 7 others (PLD 1991 SC 218), which holds that technicalities should not be applied and the relief should be granted in a case, as required by the circumstances.

11. In the totality of his arguments, the case set up by the learned counsel for the respondent is that the learned lower Court has rightly exercised the discretion available under section 19 of the Act to declare that the arbitration agreement has come to an end and, the aggrieved party can approach the Civil Court before whom the respective, claims of the parties can be dealt with more exhaustively, in accordance with law.

12. Learned counsel for both the parties agree that power to supersede the reference and declare that an arbitration agreement has come to an end is available only under section 19 of the Act. I asked a specific question to them, as to what are the circumstances on the basis of which the Court while, superseding a reference should also supersede the arbitration agreement and refer the parties to take their dispute before the Civil Court. Both the learned counsel have candidly stated that there is no direct case‑law on the point and this appears to be a question of first impression.

13. After considering the contentions raised and having gone through the case‑law cited at the Bar, lam of the opinion that the following questions need to be addressed for the proper decision of this appeal:‑‑ (i) Whether after setting aside the award it was necessary to declare that the arbitration agreement had also come to an end and the aggrieved party should seek his remedy by filing civil suit? (ii) If the answer is in the negative, whether this Court can, in the circumstances of this case, send the reference for fresh arbitration by a new arbitrator?

14. The settlement of disputes between the parties in the instant case is provided by para. 69 of the contract, which reads as under:‑‑ "

69. Settlement of disputes by Arbitration.

‑If any dispute or difference or any kind Whatsoever shall arise between, the Employer and the Contractor in connection with or arising out of the contract or the carrying out of the work (whether during the progress of the works or after the completion and whether before or after termination abandonment or breach of the contract) it shall in the first place be referred to and settled by the Employer who shall give written notice of his decision to the Contractor. If the Employer has given written notice of his decision to the contractor and no claim to arbitration has beets communicated to the Employer by the Contractor within a period , of thirty (30) days from receipt of such notice the said decision shall remain final and binding upon the contractor. If the Contractor .be dissatisfied with any such decision then he may within thirty (30) days after, receiving notice of Employer's decision require that matters in dispute be referred to arbitration. The matter or matters shall then be referred to the award of a sole arbitrator agreed to by both the parties or falling such agreement to the award of two arbitrators one to be' nominated by the Contractor and one to be nominated by the Employer or in case of the said two arbitrators not agreeing between themselves then to the arbitrators in writing before proceedings on the reference. The decision of the sole arbitrator or as the case may be of two arbitrators or in the event of their not agreeing of the umpire so appointed by them shall be final and binding on the arties. The provisions of the Government of Pakistan Arbitration Act in force from time to time shall be deemed to apply to and be made a part of the contract. Reference to arbitration as provided therein shall be a condition precedent to any other action at law. Upon every and any such reference the assessment of costs incidental to the reference and award respectively shall be at the discretion of the sole arbitrator the two arbitrators or the umpire as the case may be." It was in pursuance of the above arbitration clause that the dispute was referred to the arbitration of Mian Abdul Qayyum.

15. Before discussing the matter further it will be fruitful to reproduce some of the provisions of the Arbitration Act, so that the legal controversy in hand may be properly understood. "Section

5. Authority of appointed arbitrator or umpire irrevocable except by leave of Court.‑‑The authority of an appointed arbitrator or umpire shall not be revocable except with the leave of the Court, unless a contrary intention is expressed in the arbitration agreement. Section

11. Power of Court to remove arbitrators or umpire in certain circumstances.‑‑(1) The Court may, on the application of any party to reference remove an arbitrator or umpire who fails to use all reasonable dispatch in entering on and proceeding with the reference and making an award. (2) The Court may remove an arbitrator or umpire who has mis-conducted himself or the proceedings. (3) Where an arbitrator or umpire is removed under this section, he shall not be entitled to receive any remuneration in respect of his service. (4) For the purpose of this section the expression 'proceeding with the reference' includes, in a case where reference to the umpire becomes necessary, giving notice of that fact to the parties and to the umpire. Section

12. Power of Court where arbitrator is removed or his authority revoked.‑‑(1) Where Court removes an umpire who has not entered on the reference or one or more arbitrators (not being all the arbitrators), the Court may, on the application of any party to the arbitration agreement, appoint persons to fill the vacancies. (2) Where the authority of an arbitrator or arbitrators or an umpire is revoked by leave of the Court, or where the Court removes an umpire who has entered on the reference or a sole arbitrator or all the arbitrators, the Court may, on the application of any party to the arbitration agreement, either‑‑ (a) appoint a person to act as sole arbitrator in the place of the person or persons displaced, or (b) order that the arbitration agreement shall cease to have effect with respect to the difference referred. (3) A person appointed under this section as an arbitrator or umpire shall have the like power to act in the reference and to make an award as if he had been appointed in accordance with the arbitration agreement. Section

19. Power to supersede arbitration where award becomes void or is set aside.‑‑Where an award has become void under subsection (3) of section 16 or has been set aside, the Court may by order supersede the reference and shall thereupon order that the arbitration agreement shall cease to have effect with respect to the difference referred. Section

25. Provisions applicable to arbitrations under this Chapter.‑ The provisions of the other Chapters shall, so far as they can be made applicable, apply to arbitrations under this Chapter: Provided that the Court may, in any of the circumstances mentioned in sections 8,10, 11 and 12, instead of filling up the vacancies or making the appointments, make an order superseding the arbitration and proceed with the suit, and where the Court makes an order superseding the arbitration under section 19, it shall proceed with the suit. Section

30. Grounds for setting aside award.‑‑An award shall not be set aside except on one or more of the following grounds, namely‑‑ (a) that an arbitrator or umpire has; (b) that an award has been made after the issue of an order by the Court superseding the arbitration or after arbitration proceedings have become invalid under section 35; (c) that an award has been improperly procured or is otherwise invalid. Section

35. Effect of legal proceedings on arbitration.‑‑(1) No reference nor award shall be rendered invalid by reason only of the commencement of legal proceedings upon the subject‑matter of the reference, but when legal proceedings upon the whole of the subject matter of the reference have been commenced between all the parties to the reference and a notice thereof has been given to the arbitrators or umpire, all further proceedings in a pending reference shall, unless a stay of proceedings is granted under section 34 be invalid. , (2) In this section the expression 'parties to the reference' includes any persons claiming under any of the parties and litigating under the title.

16. The case‑law cited by learned counsel for the parties may now be considered. In the case of Rallis India Ltd (supra), a learned Division Bench of the Madras High Court has taken the view that supersession of an arbitration agreement should not normally be ordered. The relevant observations of the learned Bench are as follows:‑‑ "An order of supersession of an arbitration agreement ought not to be lightly passed. This is particularly so in a case in which arbitration had been resorted to without the intervention of the Court, there being no suit pending. For when a suit is pending no serious harm would be done to the parties if the arbitration agreement were to be superseded since the rights of the parties can be agitated in the suit itself. But where the arbitration was the result of a reference under section 20 of the Arbitration Act, supersession of the arbitration agreement would only compel the parties to resort to the ordinary Courts; questions of limitation would arise, and incalculable harm would be done to a party. Where it is found that there is no valid award in the form of a special case, the Court is not justified in superseding the arbitration agreement. " In the case of Union of India (supra), the Delhi High Court has held as under:‑‑ "Arbitration agreement is a contract between the parties under which they agree to refer their disputes to a domestic forum of their choice. Under the agreement the parties for better or worse agree to have their dispute settled through arbitration and make the arbitrator the final Judge in their dispute. Such a contract cannot be allowed to be evaded unless there are substantial grounds to relieve either of the parties of the obligations incurred by it under the contract. An arbitration agreement like any other agreement is binding on the parties unless it be shown that it is tainted with fraud, coercion, undue influence or that its terms are unconscionable. It is only on such grounds that an arbitration agreement can be avoided like any other agreement. No hard and fast rule can be laid down to suggest in what circumstances reference should be superseded, consequent to which the arbitration agreement shall cease to have effect. The approach in an application for superseding the reference has to be whether the refusal to grant leave would result in miscarriage of justice. " The Honourable Supreme Court in the case of Haji Soomar Haji Hajjan (supra), has held. that the parties contracting settlement of their disputes through arbitration should not normally be allowed to avoid the arbitration agreement. The relevant observations made in this behalf are reproduced below: " . We feel that wherever the parties to an agreement expressly chose, through an arbitration clause, a forum other than a Court of law, for the settlement of their dispute, neither of them should normally be allowed to avoid that forum. The sole purpose of the Arbitration Act is to curtail litigation in Courts and to promote the settlement of the dispute amicably through persons in whom both the parties repose their trust. Therefore, the course that the Courts should generally follow is to encourage the settlement of disputes by this method wherever the parties have themselves agreed to do so." The case of Sardar Haleem (supra) is the Lahore High Court case decided by Cornelius, J. (as his Lordship then was). The relevant facts of the precedent case were like this. The award made by the arbitrator was set aside by the Court on the ground that the award had been made after the expiry of the prescribed period. However, in terms of section 19 of the Arbitration Act, the trial Court after setting aside the award did not make a consequent order superseding the reference and declaring the arbitration agreement to have ceased to have effect. The contractor filed revision in the High Court for the relief that the reference and the Arbitration Agreement be ordered to supersede. This revision petition, however, was dismissed and the following observations were made:‑‑ "It is also sufficiently clear that by the operation of subsection (5) of section 20, to which reference has been made above, the provisions of section 19 are applicable to 'a case falling under section

20. Court has power under section 19 when it has set aside an award made upon reference under subsection (4), of section 20, to supersede the reference and thus avoid the arbitration agreement. It would also seem to follow that where a Court, while making an order under section 19, does not expressly supersede the reference and direct that the arbitration agreement shall cease to have effect, it must be deemed to have declined to exercise the power and consequently that the arbitration agreement notwithstanding that it has been filed in Court, still remains of full force according to its tenor, not only with respect to the difference which was referred to arbitration, but also with reference to all disputes between the parties which properly fall within the agreement. The variant provision in section 25 serves to indicate that section 19 is applicable to a case falling under section 20, where there is no pending suit, but the agreement to refer has been filed in Court, and the Court is invested with power thereafter to make orders of reference on the basis of such agreement. " . In Baranagore Jute Factory Co. Ltd. v. M/s. Hulaschand Rupchand (AIR 1958 Calcutta 490) difference between 'reference' and 'arbitration' has been highlighted in the following words:‑‑-- ...... In the Act, 'reference' is defined in section 2 (e) as ' a reference to arbitration, whereas 'arbitration agreement' is separately defined in section 2(a) as, to quote only the material part, ' a written agreement to submit present or future differences to arbitration'. The confusion that was sometimes created by the use of the word 'submission' under the English Act of 1889 as well, in the sense of both an agreement to refer and an actual submission of a dispute has thus been avoided. Reference in the present Act clearly means the actual submission of a particular dispute under the provisions of an arbitration agreement to the arbitrator contemplated thereby. "

17. The case of Nawab Din (PLD 1954 Lahore 58) proceeds on the following facts. The dispute was referred to the arbitration of one Muhammad Ramzan. The award given by him was set aside on the ground that proper notice of the date of hearing was not served on the appellant. The arbitrator then after service of notice gave an ex parte award against the appellant who did not join the proceedings on the objection that he did not expect justice from the arbitrator. On the refusal of the Civil Court to set aside the second award the appellant approached the High Court on the sole ground that second award could not be given. Kaikaus, J., found that an order for supersession was not necessary to end the arbitrator's authority. The relevant observations made by his Lordship are reproduced below:‑‑ "The reason of the rule that an arbitrator became functus officio on making an award was that an agreement of reference only envisages one decision by the arbitrator and that for a second decision there must be an agreement between the parties. The Legislature interfered with the agreement to this extent that it assumed in it the grant of power to a Court to remit the award for consideration. Two kinds of provisions were inserted in the Arbitration Acts, one empowering the Court to set aside the award, and the other to remit it, so that if it did not exercise the discretion to remit the arbitrator received no authority to give a new award, his authority on the agreement having been exhausted. The English Act of 1989 and the Indian Act of 1899 made no provision for supersession for truly. there was need of supersession of an arbitration which had already terminated and which the Court had only a power to revive by an order of remission. If there was no order of remission, the proceedings remained closed as they were. Such was the established legal position when paragraph 15 of Schedule II was enacted and when this paragraph said 'the Court shall make an order superseding the arbitration' it was only providing for a formal order which declared the termination of the arbitration and not an order which put an end to subsisting reference. Section 19 of the Act of 1940 only refers to such formal order and does not imply that an order for supersession is necessary to end the arbitrator's authority. By an award the arbitrator exhausts his authority. Law gives to the Court power to refer the matter back to the arbitrator in certain cases. But then, as already stated, the arbitrator derives his authority from the order of Court." The Honourable Supreme Court in the case of Messrs A.Z. Company (PLD 1965 SC 505) held that it is discretionary with the Court under section 19 of the Act when it decides to set aside an award, whether it will supersede the reference or not. The relevant observations are given below:‑‑ "The first objection that after setting aside of the second award by the Sub‑Judge the agreement to arbitration was superseded is without any substance. It is true that under section 19 of the Arbitration Act the Court has power when it sets aside an award to supersede the reference and to avoid the arbitration. Section 19 of the Arbitration Act is in these terms: 'Where an award has become void under subsection (3) of section 16 or has been set aside, the Court may by order supersede the reference and shall thereupon order that the arbitration agreement shall cease to have effect with respect to the difference referred'. Thus, this section leaves it to the discretion of the Court when it decides to set aside a ward whether it will supersede the reference or not. It may not decide to supersede the reference at all. In that case in spite of setting aside the award the reference will continue. There is nothing in judgment of the Sub‑Judge to indicate that while setting aside the award he superseded the reference. Nor there is any direction in the judgment to that effect. Furthermore, in this case the reference was not of a kind which had exhausted itself after the reference was made. Hence there is no basis for the argument that the agreement to arbitration was superseded and as such the Association had no power to appoint the third set of Arbitrators."

18. Before the enactment of the Arbitration Act, 1940 the arbitration matters were governed by the IInd Schedule of the Civil Procedure Code. The relevant paras. thereof are reproduced below:‑‑ "

14. The Court may remit the award or any matter referred to arbitration to the reconsideration of the same arbitrator or umpire, upon such terms as it thinks fit,‑‑ (a) where the award has left undetermined any of the matters referred to arbitration, or where it determines any matter not referred to arbitration, unless such matter can be separated without affecting the determination of the matters referred; (b) where the award is so indefinite as to be incapable of execution; (c) where an objection to the legality of the award is apparent upon the face of it. 15.‑‑(1) An award remitted under paragraph 14 becomes void on failure of the arbitrator or umpire to reconsider it. But no award shall be set aside except on one of the following grounds, namely‑‑ (a) corruption or misconduct of the arbitrator or umpire; (b) either party having been guilty of fraudulent concealment of any matter which he ought to have disclosed, or of wilfully misleading of deceiving the arbitrator or umpire; (c) the award having been made after the issue of an order by the Court superseding the arbitration and proceedings with the suit or after the expiration of the period allowed by the Court, or being otherwise invalid. (2) Where an award becomes void or is set aside under clause (1), the Court shall make an order superseding the arbitration and in such case shall proceed with the suit." Under these provisions, on setting aside the award supersession of the arbitration was mandatory as the word used in paragraph 15 is 'shall'. The IInd Schedule of the C.P.C. was, however, repealed by the Act of 1940. Section 19, therefore, substituted the word 'shall' with 'may' thus leaving to the discretion of the Court to order as to whether after setting aside the award the arbitration agreement should also be superseded or not. This legislative change clearly menifests the intention of the Legislature that' supersession of the arbitration agreement was no longer to be taken as automatic. On the other hand, it was left to the discretion of the Court to specifically order after setting aside the award as to whether the arbitration agreement shall cease to exist or not.

19. In the light of the above discussion and particularly in view of the rule laid down by the Honourable Supreme Court in the case of Messrs A.Z. Company (supra). it must be held that it is always discretionary with the Court, under section 19 of the Act to order whether the arbitration agreement will also cease to have effect with respect to the differences referred. On setting aside the award the agreement may still continue. The question then arises, what are the circumstances in which the Court should exercise this discretion to order that the arbitration agreement shall cease to exist after the award is adjudged to have become void or is set aside. As earlier pointed out, the learned counsel for the parties candidly stated that is a question of first impression and that there is no direct case‑law on this point. It is not possible to exhaustively give list of the circumstances and the objective realities on the basis of which the Court must Order the supersession of the arbitration agreement itself on setting aside the sward. However, some of such circumstances are given below:‑ -- (i) Where the arbitration agreement itself contemplates that on particular contingency it shall come to an end. (ii) Where particular person was chosen by the parties to settle the disputes on account of his special knowledge of the circumstances involved in the dispute or otherwise having trust of the parties, and on account of his demise or non‑availability it has become impossible to refer the' matter back to that particular person. (iii) Where the arbitration agreement is found to be tainted with fraud, coercion, undue influence, or its terms are unconscionable or otherwise against law and public policy. (iv) Where the Court in special circumstances of any case may come to the conclusion that the issue in dispute is dependent on intricate questions of law which can more authoritatively be decided by the Court rather than by the arbitrator. For example, where resolution of dispute depends upon the construction/interpretation of a rule or provision of law.

20. The sole purpose of the Arbitration Act is to curtail litigation in Courts and to promote settlement of disputes through persons having trust of the parties. The agreement between the parties for resolution of their dispute through domestic forum of their choice must be allowed to prevail unless Court comes to a definite conclusion that to do so would result in miscarriage of justice. The discretion in the Court to order supersession of the arbitration agreement, as already found above is not automatic. It is to be exercised judiciously. It cannot be exercised mechanically or as a matter of course. Where arbitration agreement is sought to be avoided by the Court, sound reasons, therefore, must be advanced by the Court. It may be observed that where the discretion is not to be exercised for ordering the supersession of the arbitration agreement then the Court need not give any reasons because the agreement of the parties has to be preserved as per their own choice. However, when the agreement is sought to be annulled then the Court must give reasonable grounds justifying the annulment of the agreement.

21. In the circumstances of the present case, it cannot be said that any of the eventualities referred to in para. No. 19 are attracted nor indeed any miscarriage of justice will result, if the arbitration agreement is kept intact. On the other hand, I find that miscarriage of justice will result if the arbitration agreement is scrapped and the parties are driven to file regular suit in the Civil Court. In the instant case the construction work was completed in the year 1981 and the dispute with regard to the payment arose soon thereafter. The arbitration proceedings commenced in 1983 and since 1985 the matter is pending in Court. It will not be appropriate to ask the parties to approach the Civil Court at this belated stage.

22. For what has been discussed above, the appeal is accepted, the judgment and decree of the lower Court are set aside, and the dispute is referred for fresh arbitration. There will be no order as to costs. Justice (Retd.) Sh. Abdul Waheed is appointed as an arbitrator. He shall give the award within 4 months, in accordance with law, after hearing the parties. It may be observed that during the course of hearing it was jointly requested by the learned counsel for the parties that in case this appeal is accepted and the matter is referred to the arbitration afresh, then a retired Judge of the superior Court may be appointed to act as the arbitrator in this case. Mr. Shahid Hamid during the course of hearing some time back had suggested that retired Judge of the Supreme Court may be appointed and a fee of Rs.1,50,000 may be fixed as the respondent in a similar case had paid that much fee. Mr. Jarriullah Khan, Advocate on behalf of the appellant has informed that his clients may not be in a position to share the burden of the aforesaid amount. He suggested that a retired Judge of this Court maybe appointed to act as arbitrator with lower fee. Resultantly, retired Justice Sheikh Abdul Waheed has been appointed as arbitrator in this case. Rs.1,00 000 will be his fee which shall be paid to him by the parties half and half and the proceedings shall be conducted at Lahore, as had been jointly prayed by the learned counsel for the parties previously, while arguing the case. The record received from the previous arbitrator shall be transmitted to the new arbitrator and the period of 4 months shall commence with effect from the date of receipt of the record by him. A.A. /A‑116/L Appeal accepted.