Shahid Jamil Khan, J:- On a simple application for decree in terms of agreement deed, this court is encountered with a complex legal proposition; Whether decree should be passed under Order XXIII Rule 3 CPC or judgment should be pronounced according to the award under Section 17 of the Act of 1940?
2. Facts are that both the parties to this revision petition, had referred their dispute, during a pending suit, to Arbitration without obtaining an order, under Section 21 of the Arbitration Act of 1940 ("the Act of 1940"). It is an admitted fact that the suit was dismissed as withdrawn thereafter.
The Arbitrators rendered their decision in shape of Award dated 28.06.2002. The petitioners moved an application under Sections 14 & 17 of the Act of 1940 for pronouncement of judgment according to the Award. On objections by the respondents, the application was dismissed by Civil Court, declaring the Arbitration Agreement and consequent Award as illegal for not obtaining an order for reference under Section 21. The judgment by the Civil Court was upheld in appeal, which is assailed by invoking revisional jurisdiction of this court.
The matter is pending in this court since 2016. Now the parties before this court have moved an application (C.M. No.1 of 2023) after agreeing to settle their dispute in terms of the Award dated 28.06.2002 by the Arbitrators. The statement of respondent No.1 (Mst. Maridan Bibi) was recorded by this court on 10.10.2023 and the compromise deed is placed on record. The application is for decree, in terms of compromise deed, under Order XXIII Rule 3 of CPC.
3. In this court's opinion, Order XXIII Rule 3 of the Code of Civil Procedure, 1908 ("CPC") is not applicable, because jurisdiction exercised by Civil Court and Appellate Court is under Arbitration Act of 1940. Nevertheless, it is basic jurisprudence that the will of parties to get their disputes settled, out of court, cannot be fettered (proviso to S.47). It is purely an option for a person to approach a court of law, exercising the right of action, for enforcement of a contractual or statuary rights. Right to action is independent of claimed right in dispute, resolution of which through a third party, other than a court of law, is called Alternate Dispute Resolution ("ADR"). However, ADR is also, now increasingly, used as a tool to help settlement of disputes within the court system. Few legal systems require the parties for compulsory resort to an ADR toll, mostly mediation, before processing their cases in the court, like the European Mediation Directive 2008.
In our jurisdiction, the Code of Civil Procedure, 1908 allows private resolution of dispute during a suit, even after invoking jurisdiction of the court under Section 9 of CPC. The plaintiff can withdraw his suit or abandon part of his claim. However, certain restrictions are placed, in Rule 1 and 2 of the Order XXIII, for approaching the court again on same cause of action. Likewise, the parties to a suit, under ordinary jurisdiction, can adjust the suit, wholly or in part, through a lawful agreement or compromise under Rule 3 of the Order XXIII. The court is obliged to record the agreement, compromise or settlement and pass a decree accordingly, if the agreement to settle dispute relates to the suit and is not against the law.
4. Out of court settlement of disputes is recognized under various statutes in our jurisdiction and generally under the Act of 1940, Section 46 of which applies provisions of this Act to Statutory Arbitrations as well. A written agreement to submit, present or future differences to Arbitration, even without naming the Arbitrator is called Arbitration Agreement, under Section 2(a) of the Act of 1940.
It can be independent or in shape of a clause in a contract. The Act of 1940 provides for three types of Arbitration: - i) Arbitration without intervention of Court under, Chapter II, ii) Arbitration with intervention of court where no suit is pending, Chapter III and iii) Arbitration in suit, Chapter VI.
For understanding the three types of Arbitrations under the Act of 1940, its background is examined.
In British Indian, the Arbitration Law was available in the Indian Arbitration Act, 1899 ("Act of 1899") and Second Schedule to the Code of Civil Procedure 1908. Scope of the then Indian Arbitration Act 1899 was confined to "the Arbitration by agreement without the intervention of Court". The rest two types of Arbitration were catered in the Second Schedule, which were outside the operation and scope of the Act of 1899. To consolidate and standardize the law of Arbitration, keeping in view the change in English Law, the Act of 1940 was promulgated. The Statement of Objects and Reasons for the Act of 1940 are reproduced.
STATEMENT OF OBJECTS AND REASONS: The law of arbitration in British India is at present substantially contained in two enactments, the Indian Arbitration Act, 1899 (IX of 1899) and the Second Schedule to the Code of Civil Procedure, 1908. The operation of the 1899 Act is limited to the Presidency- towns and to such other areas as it may be extended by the appropriate Provincial Government: its scope is confined to "arbitration by agreement without the intervention of a Court". The Second Schedule to the Code of Civil Procedure deals with arbitrations outside the operation and scope of the 1899 Act: it relates for the most part to arbitration in suits, though arbitration without intervention of a Court is also briefly provided for. This Schedule also contains an alternative method dispute whereby the parties to a dispute or any of them may file their arbitration agreement before a Court which after a certain procedure, refers the matter to an arbitrator.
2. The question of amending and consolidating this law is not new. The Civil Justice Committee in 1925, recommended several changes in the arbitration law. The Act of 1899, was based largely on the then English law, to which several substantial amendments have been effected by an amending Act of Parliament in 1934 (21 & 25-Geo. 5, e. 14). In 1938 the central Government placed an officer on special duty to examine the question, and the present Bill is the outcome of this examination. The existing law, the amended English law and the recommendations of the Civil Justice Committee have been scrutinized together, and the present Bill, which seeks to consolidate and standardise the law relating to arbitration throughout British India, in its detail extracts from the sources referred to those principles of law which, it is considered, are most suitable to British India.
3. More detailed explanations of the several clauses of the Bill are contained in the notes on clauses appended.
[Emphasis supplied]
5. In Arbitration without intervention of Court, the parties appoint their Arbitrators and get an Award. If both the parties act upon the Award, their differences are finally settled. If one of the parties is reluctant to comply with the Award, the other party, or the Arbitrator on request, shall file the Award in court under the Section 14. The court can modify the Award, without changing the decision, if part of Award is on a matter, not referred to Arbitration; is imperfect in form; contains obvious error or clerical mistake (Section 15). Under Section 16, the court can remit the Award for reconsideration, where any of the matter referred to Arbitration is left undetermined, or a matter determined was not referred and the matter cannot be separated without effecting the other matter competently determined. If the Award is incapable of execution or its illegality appears on its face, it can be remitted by fixing a time, which can be extended. The Award becomes void and can be so declared by the court if it is not reconsidered and submitted within the fixed time. It also becomes void under Section 26A (3), if on remittance to give reasons of the Award, the directions are not complied within the time fixed. The Award can be set-aside, rendered invalid or superseded for the reasons contained in Sections 30, read with Sections 34, 35 and 19 of the Act of 1940. Under Section 31(2), the court as defined in the Section 2(c), has exclusive jurisdiction to entertain all questions regarding validity, effect or existence of an Award or Arbitration Agreement and the jurisdiction shall be exercised only to the extent as provided by the provisions under the Act of 1940.
This is the only and limited jurisdiction for interfering with the Award available to the court, defined under Section 2(c), as compared to its jurisdiction under Section 9 of CPC. Correspondingly, a suit under Section 9 of CPC for specific performance of an Arbitration Agreement is barred under Section 21 (h) of the Specific Relief Act 1877 ("Act of 1877").
The court, exercising jurisdiction under the Act of 1940, cannot sit as or perform a role of a supervisor beyond the mandate, given expressly in its provisions. Appeal against an order by the court, under the Act of 1940, also has limited scope and the Appellate Court cannot go beyond the scope of jurisdiction available to the court under the Act of 1940.
Arbitration with intervention of court, is for enforcement of an Arbitration Agreement, by filing the Arbitration Agreement in court. An application is moved, under Section 20 of the Act of 1940, by a party or parties to the Arbitration Agreement, instead of filing a suit on the issue or matter, subject matter of Arbitration Agreement. The court issues a show cause notice, asking why Arbitration Agreement be not filed in the court. In absence of sufficient cause, the agreement is ordered to be filed in the court and the matter is referred for Arbitration proceedings by the Arbitrator appointed by the parties and on their failure, the court can appoint an Arbitrator. For rest of the proceedings, other provisions of the Act of 1940 apply.
6. The legal proposition, being examined here, apparently relates to the Arbitration in Suits. When parties to a suit, before a court of competent jurisdiction, desire that the matter, or part of a matter, being adjudicated, be referred to Arbitration. Before judgment in the suit, the parties may apply in writing for referring their matter to Arbitration under Section 21 of the Act of 1940. Once the matter is referred to Arbitration, the court shall not deal with the matter (Ss. 22 & 23) and other provisions of the Act of 1940, as applicable, shall apply (S.25). Despite referring matter to Arbitration, the court can supersede the proceedings and order that Arbitration Agreement shall cease to have effect (S.19) and shall proceed in the pending suit. Section 21 is reproduced: - "21. Parties to suit may apply for order of reference. Where in any suit all the parties interested agree that any matter in difference between them in the suit shall be referred to arbitration, they may at any time before judgment is pronounced apply in writing to the Court for an order or reference."
[Emphasis supplied] In this case, there was no application under Section 21, but the matter in the suit was referred and decided in Arbitration through Award dated 28.06.2002. Both the courts, exercising jurisdiction under the Act of 1940, declared the Arbitration Agreement and consequential Award as nullity in the eye of law relying on some judgments, ignoring the important fact that the suit, being withdrawn thereafter, was not pending. Essentially the Arbitration, in question, was no more during pendency of suit.
The judgment in Farmers' Equity Private Limited (FEP) Multan through Chief Executive and 3 others Vs Mehboob Alam (2013 CLC 434) by a Single Bench of this court, is the most relevant, operative part of which is reproduced:- "5. The respondent on 7.1.2000 brought a suit against the appellant for recovery of Rs.3,744,695 which was subsequently referred by them to arbitration without leave of the court, through an agreement dated 27.1.2000. Now a question arises as to whether on the basis of agreement dated 27.1.2000 the proceedings of the suit could be stayed under section 34 of the Act. In my view section 34 of the Act is restricted to cases in which the suit complained of has been instituted after the agreement to refer to arbitration. The procedure for making reference to arbitration in appending suit is provided in the Act. If the parties want to get their suit decided through arbitration, they must resort to the provisions of sections 21 to 25 of the Act. Reference to arbitration and an award procured in a pending suit without intervention of the court, are nullity and such an award cannot be made rule of the court in accordance with the provisions of sections 14 and 17 of the Act. However, an award procured without recourse to the provisions of sections 21 to 25 of the Act are saved by section 47 of the Act from being altogether a nullity, provided the requirements of the proviso to section 47 are complied with. The proviso confers power on the court to take into consideration the award obtained, other than through the procedure prescribed in the Act as the compromise or adjustment of the suit, if all the parties to the award give consent thereto. There is no bar on the parties to get their case decided by mutual agreement at any time prior to the final adjudication. Under Order XXIII, rule 3, C.P.C., if the parties enter into a lawful agreement or compromise adjusting their suits wholly or partly, and the court is satisfied of such adjustment, it is bound to record such compromise and pass a decree in accordance therewith. Thus, in case of a valid adjustment in a pending suit through compromise of the parties, the court cannot pass a decree except in accordance with the terms of the compromise. As per the language of Rule 3 of Order XXIII, C.P.C. existence of lawful agreement is one of the essential prerequisite for applicability of this provision. An arbitration agreement without the orders of the court in a pending suit, being a departure from the mandatory provisions of sections 21 to 25 of the Act cannot be categorized as a lawful agreement. Such an agreement is not enforceable in law and, therefore, application under section 34 of the Act to stay the proceedings of the suit must fail. In this regard reference may be made to the case of Peruri Suryanarayan & Co. v. Gullapudi China Narsingham and others (4 IC 133) and Vvankatesh Mahadev v. Ramchandra Krishna (27 IC 46).
[Emphasis supplied] Facts of the case in Mehboob Alam Case (ibid), are different because the suit was pending and an application for stay of proceedings under Section 34 of the Act of 1940 was moved, after going into Arbitration without obtaining an order of reference under the Section 21. It is correct legal position that provisions of Section 34 apply where Arbitration Agreement is in existence before filing of a suit, by a party to the Arbitration Agreement on the matter agreed to be referred to Arbitration. Any Arbitration Agreement after filing of a suit, has to be with order of the court under the Section 21, therefore, any party to such subsequent agreement for Arbitration cannot invoke provisions of the Section 34.
However, if the suit is withdrawn after the Arbitration Agreement during pending suit, the question of staying the proceedings in suit shall not arise. Such Arbitration Agreement, with due deference, is not an unlawful agreement and consequent Award shall be treated under Chapter II as Arbitration without intervention of Court. Hence the application under Section 14 & 17 of the Act of 1940, for judgment in terms of Award could not be dismissed, simply because an order of reference under Section 21 was not obtained before entering into an Arbitration Agreement.
The judgments from Indian jurisdiction, referred and relied upon in Mehboob Alam Case, are of the period before promulgation of the Act of 1940. Both the judgments are dealing with a situation where private Arbitration is resorted during pendency of suit and stay of the proceedings in suit was sought. The anomaly and complexity of Arbitration Law, under Second Schedule to CPC and Indian Arbitration Act 1899, discussed in these judgments was reconciled through the Act of 1940, as is explained in the Statement of Objects and Reasons, supra.
7. Rule 3 of Order XXIII and proviso to Section 47 of the Act of 1940 depict the basic jurisprudence of unfettered will of the parties to settle their disputes privately, even during a suit. Both the provisions are reproduced.
"Order XXIII. ... ...
Rule 3. Compromise of suit. Where it is proved to the satisfaction of the Court that a suit has been adjusted wholly or in part by any lawful agreement or compromise, or where the defendant satisfies the plaintiff in respect of the whole or any part of the subject matter of the suit, the Court shall order such agreement, compromise or satisfaction to be recorded, and shall pass a decree in accordance therewith so far as it relates to the suit."
"Section 47. Act to apply to all arbitrations. - Subject to the provisions of section 46, and save in so far as is otherwise provided by any law for the time being in force, the provisions of this Act shall apply to all arbitrations and to all proceedings thereunder: Provided that an arbitration award otherwise obtained may with the consent of all the parties interested be taken into consideration as a compromise or adjustment of a suit by any Court before which the suit is pending."
[Emphasis supplied] The sine qua non for treating any informal private agreement to settle a dispute as a compromise or adjustment of a suit is consent of all the parties in a pending suit under ordinary jurisdiction under Section 9 of CPC. The propositions discussed in the judgments, ibid, are based on the facts where either of the parties had not agreed to the result or proceedings of Arbitration during a suit under ordinary jurisdiction and one of the parties had approached for stay of the proceedings in suit. Under such circumstances, the Arbitration Agreement or proceedings thereunder would not be recognized for the purposes of staying the proceedings in a pending suit. But, the Arbitration Agreement or Award cannot be held as nullity if both parties agree, in writing, before the court in a suit to pass a decree in accordance with an Arbitration Award, even if it was reached without following the provisions of the Act of 1940. The decree shall be under Order XXIII Rule 3, taking such Award as a compromise or adjustment of suit as envisaged under proviso to Section 47 of the Act of 1940.
If the Award and Arbitration proceedings were in accordance with the provisions of the Act of 1940 and there is no suit pending; the Award can be filed in the Civil Court, as defined under Section 2(c) of the Act of 1940, and judgment can be pronounced in conformity with such Award under Section 17.
8. For what has been discussed and opined at hereinabove, it is held that both court have wrongly relied upon the judgments and incorrectly held that the Arbitration Agreement and consequent Award, in absence of an order for reference under Section 21 was nullity or illegal.
The application under Sections 14 & 17 of the Act of 1940, filed by the petitioners, shall be deemed pending before the court of first instance. The written compromise deed dated 10.10.2023 filed in this court for a decree under Order XXIII Rule 3 of CPC be returned for placing the same before the court, which shall be taken as consent to accept the application by the petitioners and judgment be pronounced under Section 17 of the Act of 1940 in terms of the Award, if other legal formalities are fulfilled.
9. Both the impugned orders are set-aside and the matter is remanded to the Civil Court, having jurisdiction under Section 2(c) of the Act of 1940, with no order as to cost.
This civil revision petition is allowed in above terms.