Supreme Court of India on whether an Umpire has to hear the matter de novo on a Reference or from the stage of disagreement between the Arbitrators ?

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As mentioned in my previous post (The Arbitration and Conciliation (Amendment) Bill, 2018 of India), India is moving towards amending its Arbitration legislature with new schemes to stimulate effective and speedy arbitration process. The current Indian Arbitration and Conciliation Act, 1996 was enacted repealing the 1940 Act. Matters arising under the Arbitration Act, 1940, have been the subject matter of decisions by the High Courts and the Supreme Court of India. The Act of 1940, faced much criticism as it distinguishes between an application for setting aside an award under its Section 30 and application for setting aside an award due to nullity under Section 33. In 2018, the Supreme Court of India, in M/s Oswal Woollen Mills Ltd. vs M/s Oswal Agro Mills Ltd. (Civil Appeal No. 3776 of 2018) addressed some of the lacuna of this Act as discussed below. Read the judgement here.

Background

Oswal Woolen appointed Oswal Agro as its agent in order to advise it on importing production material under the representative licences for a CIF value (Cost, Insurance and Freight) with a remuneration of 5% of CIF value of imported goods. Out of the total value of CIF, certain value of material could not be imported which gave rise to dispute between the parties.

Parties filed application in High Court to trigger arbitration under Section 20 of the Indian Arbitration Act, 1940 (the ‘Old Act’). Section 20 of the ‘Old Act’ is as follows:

20. Application to file in Court arbitration agreement.

(1) Where any persons have entered into an arbitration agreement before the institution of any suit with respect to the subject matter of the agreement or any part of it, and where a difference has arisen to which the agreement applies, they or any of them, instead of proceeding under Chapter II, may apply to a Court having jurisdiction in the matter to which the agreement relates, that the agreement be filed in Court.

(2) The application shall be in writing and shall be numbered and registered as a suit between one or more of the parties interested or claiming to be interested as plaintiff or plaintiffs and the remainder as defendant or defendants, if the application has been presented by all the parties, or, if otherwise, between the applicant as plaintiff and the other parties as defendants.

(3) On such application being made, the Court shall direct notice thereof to be given to all parties to the agreement other than the applicants, requiring them to show cause within the time specified in the notice why the agreement should not be filed.

(4) Where no sufficient cause is shown, the Court shall order the agreement to be filed, and shall make an order of reference to the arbitrator appointed by the parties, whether in the agreement or otherwise, or, where the parties cannot agree upon an arbitrator, to an arbitrator appointed by the Court.

(5) Thereafter the arbitration shall proceed in accordance with, and shall be governed by, the other provisions of this Act so far as they can be made applicable.

For the clarification of readers, I want to make a comparison between Indian Arbitration and Conciliation Act, 1996 (the ‘New Act) and the Old Act with regard to the meaning of an Umpire

Who is an Umpire under the Old Act?

Under the Old Act, if more than one Arbitrator was contemplated it was incumbent that the forum shall consist of an Umpire to be appointed by the Nominated, Appointed Arbitrators and the Umpire should enter on reference upon the disagreement between the Arbitrators. Under the new Indian Arbitration and Conciliation Act, 1996 (the ‘New Act), the Umpire will be the Chairman of the tribunal who shall also sit with the Arbitrators and take part in the proceedings unlike under the old Act.

Coming back to the factual matrix, the arbitrators, could not reach to a consensus on the Award which paved way for appointment of an Umpire under the Old Act. Oswal Woolen filed an application before the Umpire urging de novo proceedings thereby inter alia asking not to consider the proceedings before the arbitrators including the evidence recorded. Umpire passed an award in favor of Oswal Agro. Aggrieved Oswal Wool went to the High Court challenging this award under Section 30 and 33 of the Old Act which was rejected.

Issue

  1. Whether in a case where the matter has been referred to the Umpire owing to disagreement between the Arbitrators, the Umpire has to confine himself only to hear the issues on which the arbitrators disagreed or he has to hear the matter afresh.
  2. What does the word de novo hearing mean? Does the party have the right to call for de novo hearing when the matter is referred to an Umpire?

Contentions

Oswal Wool contended Article 4 to Schedule 1 of the Old Act has been wrongly interpreted by the High Court to mean that the Umpire has to hear the Reference only from the stage at which the Arbitrators disagreed and not de novo. As per Oswal Wool that when Umpire enters into Reference “in lieu of Arbitrators” he steps in the shoes of the Arbitrators and has the same duties as that of Arbitrators. Accordingly, the Umpire cannot depart from the requirement that an arbitrator should personally record the evidence on which he is to rely for the purpose of giving his decision. The Umpire cannot refuse to hear the witness again; and if on request of a party for the same, fails to do so, the Award would be bad for misconduct.

Oswal Agro contented that the Umpire cannot sit over or review the order of the Arbitrators which was unanimous the understanding and interpretation of Article 4 has to be in consonance with reason and logic, meaning thereby, the stage at which the Arbitrators disagree would be the stage at which the Umpire commences upon and proceeds with the reference. Therefore, the Umpire is not duty bound to record the same evidence all over again, more so, when both the parties were given ample opportunities for presenting their case.

Relevant Provision in Question

Article 4 of the First Schedule of the Old Act

“4. If the arbitrators have allowed their time to expire without making an award or have delivered to any party to the arbitration agreement or to the umpire a notice in writing stating that they cannot agree, the, umpire shall forthwith enter on the reference in lieu of the arbitrators.”

Conclusion

On Issue 1

  1. On reference of the matter to the Umpire, the Arbitrators become functus officio.
  2. Either going by the very nature of functions entrusted to the Umpire or by the provisions of the First Schedule, it is crystal clear that there is no qualitative difference between the Arbitrators and the Umpire with regard to the methodology and modalities to be adopted for reaching a just and fair conclusion.
  3. It is illogical to contend that the Umpire has to start de novo ipso facto. The very essence of the law of arbitration is to settle the matter efficiently in a time bound manner. Hence, when the Umpire enters upon a Reference and replaces the arbitrators, he is needed to review the evidence and submissions only on those matters about which the arbitrators have disagreed unless either party applies for the rehearing of the evidence of the parties or their witnesses.
  4. The Umpire can surely go through the evidence recorded by the previous arbitrators but without being influenced by the opinion expressed by them in that regard and even the notes taken by previous arbitrators can be relied if there exist special provisions in the agreement permitting him to do so. However, if the party makes an application for de novo hearing, the Umpire is bound to allow the same, subject to the condition that the application is made at the earliest and the applicant is not using it as last armory to turn the case around.
  5. An objection on the ground that the Umpire has not reheard the evidence may be waived by the conduct of the parties; the evidence already recorded before the previous arbitrator would remain valid and it would not be open for the parties to get the same recorded afresh later on.
  6. Where a party seeking to impeach an Award has made no application to the Umpire for rehearing of the evidence, the same would generally operate as a waiver by conduct.

On Issue 2

  1. The word de novo hearing should be given a purposive interpretation and it should be understood as a fresh hearing of the matter on the basis of pleadings, evidence and documents on record. If the party wants to re-examine a witness or objects to the documents admitted, the Umpire is to hear the parties and decide the application in the interest of justice.
  2. Parties do have a right to call for de novo hearing subject to the waiver of the same by conduct.

 

 

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