OMP No.325/2005 Page 1 * IN THE HIGH COURT OF DELHI AT NEW DELHI + OMP NO. 325/2005 Reserved on 17th September,2008 Pronounced on 27th January, 2009 M/s SARA INTERNATIONAL LTD. ..... Petitioner Through : Mr. Siddharth Agarwal with Mr. Simon Benjamin, Advocates. versus ARAB SHIPPING CO. (P) LTD ..... Respondent Through : Mr. Prashant Pratap with Mr. O.P.Gaggar, Advocates CORAM: Mr. Justice S. Ravindra Bhat 1. Whether reporters of local papers may be allowed to see the judgment? Yes 2. To be referred to the Reporter or not? Yes 3. Whether the judgment should be reported in the Digest? Yes Mr. Justice S. Ravindra Bhat * 1. The present proceeding under Section 34 of the Arbitration and Conciliation Act, 1996 (hereafter “the Act”) questions the validity of an award, drawn by an arbitrator, and published on 9th June, 2005 (hereafter called “the impugned award”). 2. The facts, in brief are that the respondent/claimant (referred to as “the claimant”), a company incorporated in Singapore, and disponent owner ( a term which, according to the Maritime dictionary -www.m-i-link.com/dictionary/ OMP No.325/2005 Page 2 means a person or company which has commercial control over a vessel's operation without owning the ship) of the vessel MV ASHA MANAN, entered into a Charter Party with the Petitioner (hereafter called “the Charterer”) whereby 15000 MTs (5% more, or less) of bulk wheat were to be shipped from Kandla, for discharge, in the ports of Salalah and Sultan Qaboos, (the latter port hereafter referred to as “PSQ”) in Oman. It is a matter of record that disputes arose between parties, over settlement of demurrage, dispatch, freight balance as well as damage to and shortage of cargo. The claimant sought recourse to arbitration. Clause 25 of the “Box Condition” in the Charter Party, dated 22.07.2003 embodying general conditions, stated “ARBITRATION IN MUMBAI, ENGLISH LAW TO APPLY”. Clause 32 of the “GENCON” Charter, agreed to by the parties, read as follows: “Any dispute arising under this Charter Party shall be referred to Arbitration in Mumbai, English law to apply, one arbitrator being appointed by each party. On the receipt by a party of the nomination in writing of the other party’s arbitrator, that party shall appoint its arbitrator within fourteen days, failing which the decision of the single arbitrator appointed shall apply. If arbitrators properly appointed shall not agree they shall appoint an Umpire whose decision shall be final and binding. For disputes where the total amount claimed by either party does not exceed the amount of US $ 50000 the arbitrator shall be conducted in accordance with the small claim procedure on the London Maritime Arbitrators.” 3. The petitioner completed loading operations at Kandla on 16th August, 2003. The claimants demanded payment of US$ 63, 295.46 for load port demurrage @ US$ 5250 per day, and also recovery of US $4124.66 as demurrage at first discharge port, Salalah. The claimant further demanded US $ 9241.80 OMP No.325/2005 Page 3 towards balance freight. This was disputed by the petitioner, who alleged short- landing of cargo, and claimed set off. This was referred to arbitration; the resultant impugned award is questioned by the petitioner. 4. On 20.12.2003, the claimant through counsel intimated about appointment of Shri R.S. Cooper as its nominee Arbitrator and called upon the petitioner to follow suit and nominate its Arbitrator. On 02.01.2004, the petitioner nominated one Mr. K.V. Ganesh as its nominee Arbitrator. However, on 02.02.2004, the said Shri Ganesh expressed his unwillingness to accept the assignment. The claimant, therefore, called upon the petitioner to appoint a fresh Arbitrator. The latter wrote back on 05.02.2004 expressing that it would nominate someone else within a few days. On 26.2.2004, the claimant wrote back to the petitioner calling upon the latter to appoint the Arbitrator within 7 days failing which its nominee Shri Cooper was to be treated as Sole Arbitrator. On 3.3.2004, the petitioner by its letter intimated the claimant that it had appointed one Captain Diwan as its nominee Arbitrator. Thereafter the claimant in its letter dated 16.3.2004 voiced its position that Mr. Cooper would be the Sole Arbitrator since the petitioner had not nominated any one. The petitioner, therefore, wrote to the claimant stating that it had already nominated Shri Diwan. On 31.3.2004 Captain Diwan issued a letter accepting his appointment. By letter dated 7.4.2004, counsel on behalf of claimant wrote to Mr. Devinder Diwan previously nominated by the petitioner as its Arbitrator, inter alia, stating as follows: - OMP No.325/2005 Page 4 “…….. as per the Arbitration Clause and applicable English Law, the Charterers were required to appoint an Arbitrator within 14 days. However, the Charterers failed to appointment an Arbitrator and in the circumstances Mr. Cooper, the Arbitrator appointed by the disponent owner stood appointed as Sole Arbitrator. The Charterers were notified accordingly by letter dated 16.3.2004. Accordingly, Mr. Cooper issued directions to the parties by letter dated 20.3.2004 for filing of pleadings and documents. I refer to our telecon this morning when you confirmed that you have been appointed as Arbitrator by Sara International Limited, the respondent and that you have accepted the appointment. Whilst your appointment as Arbitrator by Sara International Limited is out of time, my clients had instructed me to accept your appointment so that the Arbitral Tribunal is duly constituted. I would be grateful for your formal written confirmation that you have accepted appointment as Arbitrator by Sara International Limited. Clause 32 of the Charter Party provides that if the Arbitrator properly appointed do not agree, they shall appoint Umpire whose decision shall be final and binding. Thus, in accordance with the Arbitration Clause and English Law, the reference shall proceed before the two Arbitrators and in the event of any disagreement, the disputes shall be referred to the Umpire. In the circumstances, I would request you to appointment the Umpire in consultation with your Arbitrator Mr. R.S. Cooper………… ……….The Arbitrators are also requested to issue directions for the purpose of filing the pleadings and documents by the parties so that the arbitration can be proceeded with expeditiously. These formal directions are necessary so that the time-table for the arbitration is fixed and the parties are thereafter aware of the time limits within which they have to submit their pleadings and documents.” 5. The above letter dated 7.4.2004 was addressed to the petitioner; a copy of it was also marked to the claimant’s nominee Arbitrator, Mr. Cooper. On 28.4.2004, the claimant’s counsel wrote to the petitioner – with the copy marked OMP No.325/2005 Page 5 to Mr. Cooper stating that the latter would be functioning as the Sole Arbitrator. The relevant part of that letter dated 28.4.2004 reads as follows:- “13. In view of your e-mail dated 24th March, 2004, I contacted Mr. Diwan on 25th March, 2004, who confirmed that he has not accepted the appointment although he had received some communication from your Madras agents appointing him as arbitrator which he would consider. I contracted Mr. Diwan again on 7th April, 2004 when he stated that he had accepted appointment. In the light of this, by my letter dated 7th April, 2004, I requested a formal communication from him that he had accepted appointment in the light of what had transpired on earlier occasions. 14. As I did not hear from the two arbitrators, I contacted Mr. R.S. Cooper to ascertain the position when I was informed that he had contacted Mr. Diwan who had stated that he is not willing to act as an arbitrator unless he receives advance payment towards his fees from you. Subsequently I contacted Mr. Diwan today to ascertain from him whether he is willing to act as arbitrator. Mr. Diwan categorically informed me that he will not act as arbitrator, unless he receives advance towards his fees from you. In the light of this, the position today is that Mr. Devinder Diwan has not accepted appointment as arbitrator by you and consequently you are deemed to have failed to appoint an arbitrator as required by Clause 32 of the charter party and within the time limit provided therein. I do not wish to go into the propriety of the communications between you and Mr. Diwan, suffice it to say that in the light of what Mr. Diwan has stated, there is no question of his appointment as arbitrator. Mr. R.S. Cooper shall now proceed as the Sole Arbitrator and I am marking a copy of this letter to Mr. R.S. Cooper with a request that he would immediately proceed as Sole Arbitrator and issue revised direction on the lines of his earlier directions dated 20th March, 2004.” 6. Mr. R.S. Cooper, on 29.4.2004 wrote to the claimant’s counsel and the petitioner fixing a schedule for filing pleadings and also confirming that he would OMP No.325/2005 Page 6 proceed with the matter as the Sole Arbitrator. On 1.5.2004, the petitioner appears to have addressed a fax message to Mr. Cooper protesting the claimant’s position that they had not appointed Shri Diwan as an Arbitrator. On 6.5.2004, again the petitioner wrote to the claimant’s counsel stating that Mr. Devinder Diwan was their nominee and that Mr. Cooper as well as Mr. Diwan would decide the time frame for appointment of 3rd Arbitrator and stating that further proceedings by Mr. Cooper as a Sole Arbitrator would be contrary to law. The claimant’s counsel by his letter dated 10.5.2004 maintained the position that Mr. Cooper stood appointed as Sole Arbitrator in view of Clause 32 of the Charter Party and the English Arbitration Act, 1996. It is not in dispute that on 7.5.2004 Captain Devinder Diwan addressed a letter to the petitioner confirming acceptance of his appointment; a copy of the letter was sent to claimant’s counsel as well as Mr. R.S. Cooper. The claimants, however, maintained their stated position that the arbitral proceedings had to be conducted only by Mr. R.S. Cooper acting as Sole Arbitrator. The petitioner, therefore, preferred an application under Section 11 (6) of the Act before the Supreme Court being Arbitration Petition No. 9 of 2004. During pendency of that proceeding, the petitioner moved applications under Section 16 and 17 before Mr. R.S. Cooper questioning his jurisdiction. Those applications were heard on 4th & 5.9.2004; the petitioner and the claimant also filed written submissions in support of their arguments. Mr. Cooper by his order dated 18.10.2004 rejected the applications and upheld the contentions of the claimants. The Arbitrator rejected the petitioner’s contentions that proper law governing the arbitration agreement OMP No.325/2005 Page 7 was the Indian Arbitration Act. The Arbitral Tribunal also rejected the argument that appointment of a single Arbitrator was contrary to law. The application under Section 16 was rejected holding that appointment of Mr. Diwan put forth to have been made on 31.3.2004, was contrary to established facts. The application pending before the Supreme Court was disposed of on 14.12.2004 in view of the fact that the Arbitrator had ruled upon its jurisdiction. In the meanwhile, the petitioner’s application under Section 9 preferred before this Court also was disposed of. The parties thereafter went ahead for the proceedings before the Arbitral Tribunal. 7. The petitioner did not dispute the claim for the sum of US $ 72798. The Arbitrator noted in the impugned Award that the petitioner’s counsel had offered on 29.6.2004 to pay US $ 28165.79 without admitting liabilities to any extent whatsoever. The offer being conditional was not accepted by the claimant. Subsequently, during the course of arbitral proceedings, the petitioner paid US $ 38947.79 as undisputed dues of the claimant. The balance claim of US $ 38850.25 was, therefore, subject matter of arbitral proceedings. The petitioner sought to put forward two counter claims for US $ 12,500 and $ 21350.25, effectively pleading set off to the claimant’s demands. The petitioner’s demand for water damage due to cargo at Salalah to the extent of US $ 12,500 was held not to be substantiated. In returning the findings, the Arbitrator held that there was no evidence that damaged cargo was protested immediately on discharge; no notice of claim was given to the Vessel Masters or Agent on discharge; no price claim was ever preferred to the vessels’, Agents at Salalah and importantly the OMP No.325/2005 Page 8 statement of facts jointly signed by the receivers and the vessels’, agents did not mention about any water damage. As regards the second head of counter claim i.e. shortage of 158.766 MT at PSQ, the Arbitrator noted that this shortage could not be denied. However, the Arbitrator reasoned that having parted the bill of lading to the consignee (of the goods) for valuable consideration, the petitioner sought to put forward a claim without disclosing how it had a right to sue or how the cause of action had accrued. It was held that the petitioner had, under its purchase order (with the consignee) undertaken to reimburse the latter in the event of the quantity ascertained at the consignee’s Silo being less than the bill of leading quantity. The purchase order was a contract between the seller i.e. the petitioner and its buyer, to which the claimant ship owner had no privity of contract. It was, therefore, held that loss did not arise under the Charter Party, which was a contract of carriage with the claimant. 8. The Arbitrator found against the petitioner, on the reasoning that a ship owner could not be exposed to concurrent liability from both the Charterer (in this case the petitioner) and the bill of lading holder (the consignee) under the contract. The Arbitrator, therefore, rejected the counter claims and held the petitioner liable to pay US $ 33850.25 with 6 % interest p.a. till payment; in addition the claimant was also held liable for interest @ 6 % p.a. on US $ 38947.79 for the period 7.9.1993 to 10.1.2005. The Arbitral Tribunal awarded cost to the claimant @ Rs.3,70,000/-. OMP No.325/2005 Page 9 9. The petitioner contends that the award is liable to be set aside for the reason that Indian Law has to compulsorily apply to the arbitral proceedings, since they were held at Mumbai. Reliance is placed upon the judgment reported as Bhatia International v. Bulk Trading S.A. 2002 (4) SCC 105 and Venture Global Engineering v. Satyam Computers 2008 (4) SCC 190. It is argued by Mr. Aggarwal on the strength of these decisions that the Petitioner contended about applicability of Indian Law at the earliest available opportunity and was ruled upon by the Arbitrator. Therefore, the ground is available for the proceeding whereby the jurisdiction of the Arbitral Tribunal itself has been questioned under consequent Award, was rendered contrary to the public policy. 10. It was next argued that the composition of the Arbitral Tribunal was not in accordance with the agreement, the arbitration agreement or Part-I of the Act. In support it is urged that Mr. Devinder Diwan who had been nominated by the petitioner to act as his Arbitrator accepted the appointment on 31.3.2004. The claimant’s counsel expressly communicated waiver of all objections and confirmed having spoken to the Arbitrator. The formal written communication only was sought, which was neither mandated in the agreement or in any law. Yet, later on 28.4.2004, the claimant sought to resile from this position to say that its Arbitrator would function as the Sole Arbitrator. It is argued that although there was delay in terms of Clause-32 to appoint the Arbitrator within 14 days, the delay was waived by the claimant through his counsel letter dated 7.4.2004. It is argued that once the Arbitrator’s acceptance was received and the delay in appointment (by the petitioner of his nominee Arbitrator) waived, there was no OMP No.325/2005 Page 10 method by which such nominee Arbitrator’s appointment could be withdrawn. It is contended that the appointment of an Arbitrator is distinct from the acceptance by him. The appointment in this case was made upon the communication by the petitioner and had no co-relation with the claimant’s allegation about Mr. Diwan not having accepted the appointment. Reliance is placed upon the decision reported as Keshav Singh – vs-. Indian Engineering Company, AIR 1969 BOM 227 and Keshav Singh Dwarkadass Kapadia –vs-. Indian Engineering Company, 1971 (2) SCC 706. It is argued in the alternative that even if acceptance were assumed to be mandatory, there was no compulsion that such acceptance of appointment had to be confirmed in writing. Thus, counsel contends that there was no defect in the appointment of Arbitrator and consequently Mr. Cooper could not have proceeded to act as Sole Arbitrator and made the Award. Urging the Court to apply the ratio in Yashwith Constructions v. Simplex Concrete AIR 2006 1798, counsel states that the mandatory nature of Section 15 left no choice with either party to substitute the Arbitrator without intervention of the Court. Therefore, the composition of the Arbitral Tribunal was contrary to law. 11. Mr. Aggarwal next argued that in any event, Clause-32 of the Charter Party provided for two Arbitrators which is contrary to Section 10 of the Act. The composition of the Tribunal was unworkable and did not constitute a valid arrangement for the purpose of Section 11 of the Act. Therefore, the only method of saving the arbitration agreement was to appoint three Arbitrators. Since this was not done, award is unsustainable in law. OMP No.325/2005 Page 11 12. On the merits of the award, the petitioner urges that after having noted that there was a shortage of 158.766 MT at PSQ and in view of the liability in relation to the shortage and an admission in relation to the shortage, the Tribunal could not have non-suited it on the ground that by its endorsement of the bill lading to the third party, it lost its rights to sue the shipper. Counsel relies upon the decision reported as “The Dunelmia” 1969 (2) Lloyds Rep 476. The learned counsel emphasized that Clause 10 of the Charter Party clearly provided that the bill of lading would be signed by the Master “without prejudice to the Charter Party”. He, therefore, submitted that as per the applicable law, i.e., English Law, the relations between the party were governed by the Charter Party and, therefore, the petitioner had the right to sue and recover from the claimant the sum equivalent to the value of the shortfall of cargo 158.766 MT. 13. Mr. Prashant Pratap, learned counsel for the claimant argued that the impugned award is in consonance with law and cannot be interfered with. Disputing the petitioner’s contention about composition of the Arbitral Tribunal, Mr. Pratap urged that according to the agreement of the parties, the proper law governing the contract as well as the proper law governing the arbitration agreement was English Law. Relying upon the decisions of the Supreme Court reported as National Thermal Power Corporation v. Singer Company & Ors 1992 (3) SCC 551 and Shreejee Traco (I) Pvt. Ltd. v. Paperline International Inc 2003 (9) SCC 79, it was argued that the proper law of the arbitration agreement is normally the same as the proper law of the contract and that only in exceptional cases it is different, where the contract or agreement indicates to the contrary. OMP No.325/2005 Page 12 Counsel relied on the observations in the NTPC case that in the absence of an express choice, the law governing the contract is applicable for the arbitration agreement. Reliance was also placed on the decision reported as Sumitomo Heavy Industries Ltd. v. ONGC 1998 (1) SCC 305 to say that the proper law of the contract governs the substantive rights and obligations of the parties out of which disputes arise and further that the curial law is the one governing arbitral proceedings as well as the manner in which the reference can be conducted. It was, therefore, urged that the law governing the arbitration agreement is English Law and not the Indian Arbitration and Conciliation Act. 14. On the question of the number of Arbitrators, the claimants urged that the arbitration agreement cannot be invalidated as it provided for an even number of Arbitrators. Learned counsel relied upon the decision of the Supreme Court reported as Minerals and Metals Trading Corporation v. Sterlite Industries (I) Ltd. 1996 (6) SCC 716 to say that Section 7 of the Act enacts the necessary ingredients which go into the making of the arbitration agreement and that the number of Arbitrators is dealt with Section 10 which is part of the machinery provision. Therefore, providing for even number of Arbitrators would not by itself result in the arbitration agreement being rendered a nullity. It was urged that in any event, the Arbitral Tribunal did not comprise of two Arbitrators to fall foul of Section 10. 15. It was next argued that the composition of the arbitral tribunal was in consonance with the arbitration clause. The initial notice for arbitration by the OMP No.325/2005 Page 13 claimant required petitioner to nominate it’s arbitrator; Sh. Ganesh, who was nominated, failed to enter upon reference. Thereupon Sh. Cooper stood automatically constituted as sole arbitrator in terms of Clause 32 and even issued directions on 20.03.2004. The question of the claimants having waived objections as to appointment of Sh. Diwan as nominee arbitrator by the petitioner would have arisen only if Sh. Diwan accepted the appointment within the time stipulated in the arbitration agreement. He failed to do so; he also confirmed his inability to act as arbitrator, as reflected in the letter on behalf of the claimant on 28.04.2004. Much later, on 07.05.2004, Sh. Diwan purported having accepted appointment. By that stage, Sh. Cooper, in view of the preceding events was deemed to be Sole Arbitrator. Learned counsel submitted that the petitioner’s reliance on so-called letter dated 31.03.2004 was examined and rejected by the arbitrator in the order dated 18.10.2004 where it was reasoned that such a contention was a clear afterthought. Counsel contended that if Sh. Diwan’s letter dated 31.03.2004 was genuine, nothing prevented the petitioner from furnishing it’s copy to the claimant immediately on receipt. 16. Mr. Pratap submitted that in this case, since the law governing the arbitration agreement was English law, acceptance of appointment by the arbitrator had to be necessarily indicated. Learned counsel argued by placing reliance on Russel on Arbitration (21st Edition 1997) that the three requirements for completion of a valid appointment of an arbitrator are: 1. Informing the other party. OMP No.325/2005 Page 14 2. Informing the nominee. 3. Securing the nominee’s agreement to act. 17. He relied on the judgment reported as Tradax Export S.A. v. Volks Wagen Werk A.G. 1970 (1) Lloyd’s Law Rep. 62 in support of the submission. It was submitted that the decision of the Supreme Court relied upon by the petitioner, i.e. Keshavsen Dwarkadas case has no application. In its response, the contention made was that the judgment concerned itself with appointment of an umpire who, unlike an arbitrator, is to act immediately on being appointed and arms jurisdiction only in the event of disagreement by two arbitrators. It was, therefore, argued that Section 14 and 15 of the Arbitration Act, 1996 have no application in the facts of this case. 18. It was contended that the findings of the arbitrator on damage to cargo are based on evidence, such as statement of facts; no notice of damage being served on master or agents and no evidence of any survey of the so-called damaged cargo. Lastly, there was no quantified claim by the receivers on the vessel’s agents. Learned counsel further urged that the arbitrator’s finding regarding right, title and interest in the cargo vesting with the consignee and thus disentitling the petitioner, to put forward a claim, were justified and legal. It was contended that the Bill of Lading issued by the master were endorsed by the petitioner in favour of the consignee/receiver, i.e. Oman Flour Mills, who were the holders of the Bill of Lading. Thus, the title to and property in the case vested in favour