MUHAMMAD ATHER SAEED, J. --- This civil petition for leave to appeal has been filed against the judgment of the learned Lahore High Court, Lahore dated 11.1.2001 in F.A.O. No. 63 of 1988 whereby learned High Court upheld the order of the Trial Court dated 18.1.1988 whereby Arbitration Award passed by the Arbitration Committee comprising of two Arbitrators one each nominated by the rival parties and one chairman selected by the two arbitrators, made the award rule of Court.
2. Leave to appeal was granted by this Court vide order dated 26.9.2002 which reads as under:--- "After hearing the learned counsel on either side, we have decided to grant leave to appeal on the following grounds:---
(a) Whether the arbitrators were appointed strictly in accordance with Clause D-43(b) of the contract between the parties.
(b) Whether Sh. Abdul Hamid would be deemed to be a Chairman and thus, an arbitrator or an Umpire.
(c) Whether Sh. Abdul Hamid has participated in the proceedings conducted by two other arbitrators or has conducted separate and independent proceedings. If so or if not, to what effect.
(d) Whether the enormity of difference between the verdicts of two arbitrators required reappraisal."
3. Brief facts of the case available on the record are that present respondent was a contractor and had been assigned to execute the contract for the construction and other works by the appellant in which dispute arose between the parties which led to the filing of application under Section 20 of the Arbitration Act, 1940 by the respondent praying for filing of arbitration agreement in Court and reference of the disputes to the arbitrators. This application was filed in accordance with the provision of clause D-43 of the Agreement which provides resolution of dispute through arbitration.
The application which was initially contested by the appellant was allowed vide order dated 30.6.1983 in terms of clause D-43 of the agreement. The appellant nominated Iftikhar Khan, Managing Director (O&M) WASA as their arbitrator and the respondent nominated Khalifa Shujaat Amin. These persons were appointed as Arbitrators. Vide order dated 13.5.1984 with a direction that they should appoint a Chairman within 15 days: They accordingly appointed Mr. S.A. Hamid, DG (O&M) WAPDA as Chairman. After the culmination of the proceedings Iftikhar Khan made and published his award on 14.9.1985 whereas Khalifa Shujaat Amin did not agree with him and made and published his award on 30.12.1985. Mr. S.A. Hamid, the Chairman agreed with the award and the reasons enumerated in the award passed by Khalifa Shujaat Amin vide his note dated 30.12.1985.
The award was received in Court and opened on 27.2.1986. The respondent did not file objection but the appellant filed objections on 26.3.1986. The objections were contested and after framing of issues and recording of evidence, the objections were rejected and the Trial Court made the award rule of Court vide order dated 18.1.1988 and decreed the same.
4. Being aggrieved by the order of the Trial Court the appellant filed F.A.O. Before the learned Lahore High Court which was dismissed by the impugned judgment. Hence this appeal by the leave of the Court.
5. We have heard Sh. Muhammad Isma il, learned Advocate Supreme Court for the appellants and Syed Najmul-Hassan Kazmi, learned Advocate Supreme Court for the respondent.
6. The main argument of the learned Advocate Supreme Court for the appellant is the same argument which was made by the learned Advocate General Punjab in the Lahore High Court that as per contents of clause D-43 of the agreement between the parties Mr. S.A. Hamid was an umpire and the award is bad in law as he had joined the proceedings and had not given his independent award. He submitted that despite the fact that sub-clause (b) of clause D-43 of the agreement provide appointment of Chairman but sub-section (1) of Section 10 of the Arbitration Act, 1940 provides that in a situation where reference to be made to three Arbitrators one to be appointed by each party and third to be appointed by the Arbitrators the agreement shall have effect as if a provides for the appointment of an umpire and not appointment of third arbitrator. He further submitted that the umpire was not required to sit in the proceedings of the Arbitration and it was his duty that in case of conflicting decision by the two arbitrators, he shall re-hear the case and should give his on award. He should also not take part in the deliberations by Arbitrators and had no right to influence the Arbitrators. In support of his contentions he relied on the following two judgments of the Indian High Courts:---
(1) Chouthmal Jivrajee Poddar v. Ramchandra Jivraijee and others (AIR 1955 Nagpur 126)
(2) Ghasilal Todi v. Biswa nath Kerwal and others (AIR 1964 Calcutta 466)
7. He alleged that Mr. S.A. Hamid, the umpire had participated in all the proceedings of the Arbitration, had recorded the minutes of the proceedings in his on handwriting and actively participated in the proceedings and therefore had not properly conducted himself as an umpire and his conduct had rendered the proceedings in the subsequent award of the Arbitrators illegal and invalid. He further argued that the umpire had not given any reasons for accepting the award passed by Khalifa Shujaat Amin and had just written a one page note indicating that he agreed with the award authored by Khalifa Shujaat Amin whereas as an umpire he should have held fresh proceedings and passed the award himself highlighting the reasons for agreeing with said award.
8. Coming to the merits of the case the learned Advocate Supreme Court submitted that the two items which have been awarded by Khalifa Shujaat Amin, one the claim for escalation amounting to Rs. 10 lacs and other the claim for loss of profit amounting to Rs. 650,000/- were not based on any logic or evidence. He submitted that since the contractor had not fully executed the contract assigned to him but had only executed 3 3 % of the contract, therefore, he was not entitled to escalation. Coming to the loss of profit he argued that no basis had been given for loss of profit and the respondent has only estimate that estimate which has been wrongly allowed in award. He, therefore, prayed that the impugned judgment being against the legal position be set aside and the order of the Trial Court rejecting the objections raised by the appellants and making the award the rule of Court may also be set aside.
9. Syed Najm-ul-Hassan Kazmi, learned Advocate Supreme Court for the respondent opposed the arguments of the learned Advocate Supreme Court for the appellants and supported the impugned judgment. He submitted that arbitration committee was formed strictly in accordance with the provisions of sub-clause (b) of clause D-43 of the agreement between the parties. He submitted that Mr. S.A. Hamid was appointed as Chairman and not as an umpire and basically this clause provides for the appointment of three members arbitration committee headed by a Chairman. He submitted that as the Chairman of the committee Mr. S.A. Hamid had sat in all the proceedings which were more than 18 in number and had observed the arguments of the parties and evidence produced and was thus conversant with the facts of the case and therefore when two dissenting awards reached him, he after examining both the awards in the light of arguments made before him and the evidence produced, reached the conclusion that the award authored by Khalifa Shujaat Amin was in accordance with legal and factual position of the case and therefore, agreed with the award and the reasons given by Khalifa Shujaat Amin in support of the award and adopted the reasons of the award. He submitted that he agreed with the award of one of the arbitrator which was enough to indicate that he agreed with the reasons highlighted by the arbitrator and it was not necessary that he should have passed a detailed order seconding the award and giving his on reasons. Learned ASC then argued that in terms of agreement the 3rd member was to be appointed as Chairman and not as an umpire and therefore, Mr. S.A. Hamid cannot be considered as an umpire. In this connection, he relied on the following cases of this Court:-
(1) Abdul Hamid v. H.M. Qureshi (PLD 1957 SC 145)
(2) Chief Engineer, Building Department v. M/s. Pakistan National Construction (1988 SCM R 723).
He, therefore, prayed that appeal being meritless be dismissed.
10. We have examined the case in the light of the arguments of the learned Advocate Supreme Court for the parties and have perused the records of the case including the impugned judgment, the judgment of the Trial Court, the awards made by the arbitrators and the note given by the Chairman Mr. S.A. Hamid agreeing with one of the arbitrator and also perused the judgments relied on by the learned Advocate Supreme Court, the relevant provisions of the Arbitration Act, 1940 and the agreement between the parties.
11. Sub-clause (b) of clause D-43 of the agreement which deals with the appointment of arbitrator is reproduced below:--- "b. Pakistani Contractors.-- The demand for arbitration shall be in writing, shall be served on the other party and shall specify the arbitrators chosen by the party making the demand, within thirty
(30) days after receipt of the demand, the other party shall appoint an arbitrator by a written notice served on the party making the demand. The two members of the Arbitration Committee thus appointed shall agree upon a third member to act as Chairman. If agreement on the third members cannot be reached within fifteen (15) days from the date of the appointment of the second arbitrator, the case will be referred to the Civil Court having jurisdiction for the appointment of the third member to act as Chairman. Arbitration shall be conducted in Pakistan in accordance with the laws of Pakistan. The award of the Arbitration Committee shall be final and binding on all parties."
12. A perusal of the above clause leads to the conclusion that this sub-clause envisages that both the parties shall nominate one arbitrator each and then within 15 days, these arbitrators shall appoint a Chairman. Now this clause is to be examined in the light of Section 10 of the Arbitration Act, 1940 and the judgments of this Court. Section 10 is reproduced below:--- "10. Provisions as to appointment of three or more arbitrators.-- (1) Where an arbitration agreement provides that a reference shall be to three arbitrators, one to be appointed by each party and the third by the two appointed arbitrators, the agreement shall have effect as if it provided for the appointment of an umpire, and not for the appointment of a third arbitrator, by the two arbitrators appointed by the parties.
(2) Where an arbitration agreement provides that a reference shall be to three arbitrators to be appointed otherwise than as mentioned in sub-section (1), the award of the majority shall, unless the arbitration agreement otherwise provides, prevail.
(3) Where an arbitration agreement provides for the appointment of more than three, the award of the majority, or if the arbitrators are equally divided in their opinions, the award of the umpire shall, unless the arbitration agreement otherwise provides, prevail."
From a cursory glance at the above provision of law, it seems that the appointment has been made as specified in sub-section (1) of Section 10 and therefore, Mr. S.A. Hamid has been appointed as an umpire but without discussing at the moment, the difference between the functions of umpire and Chairman, we would immediately go to judgment of this Court where this point has been discussed. In the case of Abdul Hamid (quoted supra), this Court has held as under:- "It is apparent from the above narration of proceedings before the Civil Judge and in the High Court that the precise purport of the tenth clause in the partnership agreement has not been ascertained at any previous stage of the case. Some confusion has clearly been caused by the statements, made on more than one occasion on behalf of Abdul Hamid, that this agreement provided for appointment of an "umpire". In fact it provided for appointment of a Surpanch, and it is very doubtful indeed whether a Surpanch, as the term is understood in this country, can be thought to occupy a position equivalent to that of an umpire in the law relating to arbitration. For an umpire, in arbitration law, is a person appointed to take over the reference from arbitrators who are unable to agree among themselves, or who have exceeded the time allowed by law for making their award. Under the Arbitration Act, 1940, the umpire acts, not with the arbitrators, but in lieu of the arbitrators. On the other hand, a Surpanch as the expression indicates, is a Punch, or member of the board, like the other members but is invested with the duty of sitting with the board as its Chairman.
Reference may usefully be made in this connection to the judgment delivered in the Oudh Judicial Commissioner's Court in the case Lala Abdus Samad (1). There the agreement of reference to arbitration gave the names of three persons, two of whom were described as Punches and the third as the Surpanch and provided that, whatever decisions was arrived at by the Punches and the Surpanch named therein would be binding on the parties. It was not said that the Surpanch was only to act in case of difference between the Punches. The learned Judge came to the conclusion that the mere use of the word Surpanch in the agreement to refer did not necessarily imply that the Surpanch was to act only in case of difference of opinion among the other arbitrators.
In the present case the tenth clause contains the words which indicate clearly that the decision, which was to be binding upon the parties, was the decision reached after the two arbitrators and the Surpanch had brought about a mutual settlement or understanding. The words employed do not serve to support in any way the conclusion that the function of the Surpanch was to be restricted in the same fashion as is the function of an umpire under the Arbitration Act.
The true construction of the tenth clause, therefore, leads to the conclusion that the intention of the parties was that there should be not two arbitrators and an umpire, but three arbitrators, one of whom should be the Chairman or Surpanch. If the position be otherwise, however, namely that the words of the tenth clause might either carry the meaning indicated above, or might mean that the Surpanch was to act as umpire in the manner of the Arbitration Act, 1940, the result would inevitably be to import a degree of ambiguity into the submission such as would justify the Court in refusing to enforce any award made or purporting to be made under the submission. In the Ninth Edition of the well-known Treatise on the Power and Duty of an Arbitrator by Russell, at page 161 there will be found citation of cases in support of the following statement:- "Thus, where a cause was referred to two arbitrators and such third person as they should nominate as their umpire, and the parties agreed to perform the award to be made by the two and their umpire, the Court refused to enforce by attachment performance of an award made by the two arbitrators alone considering it a doubtful point whether the award was not intended to be the joint act of the three."
"9. Now as a general proposition of law it is correct that the appointment of Arbitrator or Arbitrators is normally governed by the provisions contained in the agreement of parties, subject only to certain provisions which are implied by the Act where the parties do not agree otherwise. However, the question of invalid appointment of Arbitrator as a ground for rendering the award invalid is subject to certain well-settled principles. Two of these principles mentioned by Russell on Arbitration, 19th Edition, are relevant and may be stat under:- "(1) It the parties to the reference either agree beforehand to the method of appointment; or afterwards acquiesce in the 'appointment made, with full knowledge of all the circumstances, they will be precluded from objecting to such appointment as invalidating subsequent proceedings.
Attending and taking part in the proceeding with full knowledge of the relevant fact with amount to such acquiescence.
(2) And acquiescence by the solicitor or agent of a party who is conducting the reference on his behalf will bind that party as much as his on personal acquiescence. Would."
In view of these well-settled principles we find no substance in the argument that a defective appointment of an arbitrator can under no circumstances lead to a valid and binding award. The case of Oil and Gas Corporation does not support the proposition advanced on behalf of the appellant as the award in that case was set aside on the ground that the parties had consented to the appointment of Production Manager as the Arbitrator, whereas the award was made by another officer who was for the time being performing the duties of the Production Manager, which was contrary to the intention of the parties when they made the appointment of the Arbitrator. This was, therefore, a case of an unauthorized person not appointed Arbitrator giving the award. Thus, the case relied upon as a case of inherent lack of jurisdiction in the person who purported to act as the Arbitrator, with the result that such defect was not an irregularity curable by waiver through conduct in submitting to the jurisdiction of such Arbitrator."
In the light of the above judgments which are binding on us it becomes clear that Mr. S.A. Hamid was appointed as a Chairman/Surpanch and not as an umpire and thus award by the majority of the arbitrators being in accordance with the law cannot be set aside merely on the ground that the appointment of arbitrators was not in accordance with law and as held in the case of Chief Engineer (quoted supra) that defective appointment of arbitrators cannot necessarily lead to an invalid and non-binding award.
13. Now we come to the judgment relied by the learned Advocate Supreme Court for the appellants in the case of Chouthmal (quoted supra). The Nagpur High Court has held as under:--- "In our opinion, Nagarmal was appointed an umpire and his position was correctly understood by the parties and by the arbitrators, including Nagarmal. If Nagarmal acted before there was a difference, this would constitute an illegality, though there was no objection to his sitting with the arbitrators; He could not influence their opinion."
Perusal of the above extract reveals that their lordships have held that even the umpire acts when there is difference of opinion between the two arbitrators and in the present case Mr. S.A. Hamid passed his order after the two arbitrators had given dissenting award and after examining them. It has been held in this case that umpire cannot confer or try to influence the arbitrators. This point has been very ably dealt with by the learned Lahore High Court in para. 8 of the impugned judgment which read as under:--- "I have also gone through the objections filed by the appellants on 25.3.1986 and I do not find any allegation that the said Mr. S.A. Hamid had in any manner tried to influence or interfere with the proceedings of the other Arbitrators. This in fact would be evident from the very fact that the two Arbitrators gave their on respective awards. Since Mr. S.A. Hamid was not an Umpire, he cannot be accused of failing to perform the role attributable to an Umpire i.e., he has to decide the matter in case of difference of opinions between the two Arbitrators. He was the third Arbitrator and a Chairman and had agreed with the award of one of the Arbitrators and the reasons stated therein.
To my mind, he was not required to record independent reason of his on. It was thus a majority award and cannot be invalidated on the said objection of the learned Advocate General."
The learned Lahore High Court has also held, that Chairman/Surpanch is not required to record independent reasons of his on and can agree with the reasons highlighted by anyone of the arbitrators as he had sat in all the 18 proceedings of the arbitration and was aware of the arguments facts of the case. We find ourselves in complete agreement with the above view of the learned Lahore High Court and are in respectful agreement with both the judgments of this Court relied on by the learned ASC for the respondent and therefore, hold that the arbitration Committee was properly constituted and the order/memo. Authored by the Chairman Mr. S.A. Hamid is completely in accordance with law and therefore, we are of the considered opinion that the impugned judgment regarding constitution and the procedure adopted by the arbitration committee is unexceptionable and no interference is called from that Court on this point.
14. Regarding the merits of the case, we have examined the award of the arbitrator Khalifa Shujaat Amin. He dealt with the point of loss of profit in the following manner:--- "Regarding claim for losses of profit from the remaining work, the contractors has claimed Rs. 15 lacs for the losses of profit. As it is found that the contract was wrongfully rescinded and by this wrongful act the contractor was deprived of the profit which he could have earn by execution of the balance work. The respondents are therefore bound to compensate the contractor for the losses of profit the contractors has sustained on account of wrongful termination of the contract.
The contractor has claimed 15% profit for the balance work, as compensation. I have carefully examined the evidence on record, amount of work done, nature of work involved, investment, labour involved and amount of balance work and after considering all the circumstances of this case and taking note of the material in record, I am convinced that 6% profit will be a reasonable compensation for the wrongful termination of the contract and on account of the losses sustained by the contractor, due to rescission of the contract.
15. As far as allowing escalation in the award by the arbitrator is concerned, it has been argued that escalation is not allowable as the contract has not been completed. The arbitrator has pointed out that only condition is that in case of increase in prices of material the contractor can get escalation and this finding of the arbitrator has not been rebutted before us nor any evidence has been shown that the escalation is only allowable if the whole contract has been executed. We find that the arbitrator is justified in awarding 6% of the claim of profit against 15% and has rightly awarded compensation for escalation. We, therefore, are of the opinion that no interference is required to be made in respect of above allowance. No other point has been argued before us.
16. Coming to the grounds raised in the leave granting order, we would answer the above grounds in the following manner:---
(a) that the arbitrators were appointed strictly in accordance with sub-clause (b) of clause D-43 of the agreement;
(b) Mr. S.A. Hamid would be deemed to be a Chairman and thus would be an arbitrator;
(c) Mr. S.A. Hamid participated in the proceedings and did not interfere or tried to interfere in the working of the two arbitrators and did not influence them and thus was not required to conduct independent and separate proceedings and thus the proceedings did not vitiate by his agreeing with one of the arbitrator.
(d) The difference between the arbitrators has already been resolved and does not require reappraisal.
7. As a consequence of above discussion, this appeal being meritless is dismissed. No order as to costs.