Supreme Court Clarifies Umpire’s Role in Arbitration: Oswal Woollen Mills vs. Oswal Agro Mills (2018)

Date of the Judgment: April 13, 2018

Citation: (2018) INSC 324

Judges: R.K. Agrawal, J. and R. Banumathi, J.

Can an Umpire in arbitration proceedings be compelled to conduct a fresh hearing when the appointed arbitrators fail to agree? The Supreme Court of India addressed this crucial question in a dispute between two companies, clarifying the extent of an Umpire’s duties and the meaning of “de novo” proceedings. This judgment provides essential guidance on the procedural aspects of arbitration, specifically concerning the role of an Umpire when arbitrators cannot reach a consensus. The bench comprised of Justice R.K. Agrawal and Justice R. Banumathi, with the judgment authored by Justice R.K. Agrawal.

Case Background

The case involves a dispute between M/s Oswal Woollen Mills Ltd. (the appellant) and M/s Oswal Agro Mills Ltd. (the respondent). Both companies are engaged in manufacturing and trading various products, including vegetable oils, soaps, chemicals, and woolen items. On March 30, 1982, they entered into an agreement where the appellant appointed the respondent as its agent to facilitate the import of materials under REP licenses. The agreement stipulated a 5% commission for the respondent based on the CIF value of the imported goods, along with reimbursement for all incurred costs. The total value of materials to be imported was Rs. 1,85,95,100. However, the respondent could only import materials worth Rs. 1,16,00,800, failing to import the remaining goods valued at Rs. 69,94,300 due to the unavailability of the necessary REP licenses. This failure led to a breach of contract and subsequent legal action.

Timeline

Course of Proceedings

Initially, the dispute was referred to two arbitrators under Section 20 of the Arbitration Act, 1940. However, the arbitrators could not agree on an award. Consequently, the matter was referred to an Umpire. The appellant then applied to the Umpire for de novo proceedings, which was dismissed. The Umpire subsequently issued an award in favor of the respondent for Rs. 64,65,782, along with 18% interest from November 1, 1991, until realization. The appellant challenged this award before a single judge of the High Court under Sections 30 and 33 of the Arbitration Act, 1940, but the objections were largely rejected. An appeal to a Division Bench of the High Court was also dismissed, leading the appellant to approach the Supreme Court.

Legal Framework

The primary legal framework for this case is the Arbitration Act, 1940. Specifically, Article 4 of the First Schedule of the Act is relevant. It states:

“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.”

Section 3 of the Arbitration Act, 1940, stipulates that unless otherwise agreed, the provisions of the First Schedule are deemed to be incorporated in the arbitration agreement. This means that the rules and procedures outlined in the First Schedule apply to the arbitration process.

Arguments

Appellant’s Arguments:

• The appellant contended that the Division Bench of the High Court misinterpreted Article 4 of Schedule 1 of the Arbitration Act, 1940. They argued that the Umpire should have conducted a de novo hearing, starting the proceedings afresh, rather than continuing from the point where the arbitrators disagreed.
• The appellant argued that when an Umpire steps in “in lieu of the Arbitrators,” they assume the same duties as the arbitrators, including the requirement to personally record evidence. The Umpire’s refusal to rehear witnesses was considered misconduct.
• The appellant argued that they had not waived their right to a de novo hearing and had consistently requested it from the Umpire. They cited communications dated 24.05.1999 and 12.01.2000, and an application dated 29.01.2000 as proof.
• Regarding damages, the appellant argued that awarding damages for goods not imported is incorrect since the agreement was for importing goods and paying a 5% commission.

Respondent’s Arguments:

• The respondent argued that the appellant’s application for de novo proceedings was misconceived and not maintainable. They pointed out that the application was filed late, after the hearing before the Umpire had commenced and the respondent had already concluded their arguments.
• The respondent contended that Article 4 should be interpreted logically, meaning the Umpire should start from the point of disagreement between the arbitrators, not conduct a completely new hearing.
• The respondent argued that the Umpire was not obligated to re-record evidence, especially since both parties had ample opportunity to present their case.
• The respondent claimed that the appellant had waived their right to a de novo hearing through their conduct, as they unduly delayed the proceedings.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether an Umpire has to hear the matter de novo on a Reference or from the stage of disagreement between the Arbitrators?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court relied on Ravindra Kumar Gupta and Company vs. Union of India (2010) 1 SCC 409* to emphasize the limited scope of judicial interference in arbitration awards. The court also cited Municipal Corporation of Delhi vs. Jagan Nath Ashok Kumar and Another (1987) 4 SCC 497* to support that the court does not question the arbitrator’s evaluation of evidence. The Court referred to State of Rajasthan v. Puri Construction Co. Ltd.* and Sudarsan Trading Co. v. Govt. of Kerala* to clarify the arbitrator’s finality in decision-making and to distinguish between disputes regarding jurisdiction and the manner of its exercise.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to balance the principles of natural justice with the efficiency of arbitration proceedings. The Court emphasized that while an Umpire must ensure fairness, they are not automatically required to conduct a full de novo hearing. The conduct of the parties, especially the timing of the application for a de novo hearing, played a crucial role in the Court’s reasoning. The Court also reiterated the limited scope of judicial interference in arbitration awards, respecting the arbitrator’s domain in evaluating evidence and awarding damages.

Fact:Law Ratio

The Court’s decision was influenced by both factual aspects of the case (40%), such as the timing of the application for a de novo hearing and the conduct of the parties, and legal considerations (60%), including the interpretation of the Arbitration Act, 1940, and the principles of natural justice.

Logical Reasoning

Key Takeaways

• An Umpire in arbitration is not automatically required to conduct a de novo hearing when arbitrators disagree.
• The Umpire must review the evidence and submissions on the specific points of disagreement.
• A party seeking a de novo hearing must apply for it at the earliest stage of the proceedings before the Umpire.
• The conduct of the parties, especially any delay in seeking a de novo hearing, can be considered a waiver of that right.
• Courts have a limited scope to interfere with arbitration awards, respecting the arbitrator’s domain in evaluating evidence and awarding damages.

Directions

No specific directions were issued by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that an Umpire is not automatically required to conduct a de novo hearing when arbitrators disagree. The Umpire must review the evidence and submissions on the specific points of disagreement. The Court clarified that while an Umpire steps into the shoes of the arbitrators, this does not automatically mean a complete rehearing of all evidence. This judgment clarifies the procedural aspects of arbitration, particularly regarding the role of an Umpire and the meaning of “de novo” proceedings in the context of disagreement between arbitrators. It emphasizes the need for a purposive interpretation of the Arbitration Act, 1940, balancing the principles of natural justice with the efficiency of arbitration proceedings.

Conclusion

The Supreme Court dismissed the appeal, upholding the High Court’s decision. The Court clarified that an Umpire is not obligated to conduct a fresh hearing automatically when arbitrators disagree. Instead, the Umpire must review the evidence and submissions on the points of disagreement, and a request for a de novo hearing must be made at the earliest opportunity. The judgment reinforces the limited scope of judicial intervention in arbitration awards and emphasizes the importance of adhering to the procedural aspects of arbitration.