Case Study: TBEA v. Al Wasay Construction Company

Introduction

One of the fundamental principles of arbitration is consent, the other being the legally binding nature of an arbitration award. These principles form the very basis of an arbitration agreement.

The arbitration agreement governs the conduct of arbitration, including the appointment of arbitrators; however, there are numerous instances where the arbitration agreement (due to poor drafting) fails to address the issue of arbitrators’ appointment in a clear manner or at all. In those instances, especially if the parties have not elected to conduct the arbitration pursuant to institutional rules, the law of the seat determines the process for the appointment of arbitrators.

Under the Arbitration Act, 1940 (“the Act”), sections 8 to 10, 20 and 22 set out the provisions which govern the appointment of arbitrators in different scenarios. A primary distinction between these sections is that they fall under different chapters of the Act, namely Chapter II – Arbitration without intervention of Court; Chapter III – Arbitration with intervention of Court; and Chapter IV – Arbitration in Suits.

Without delving into the currency of institutional rules in Pakistan-seated arbitrations, this article will consider the role of consent in the appointment of arbitrators and the applicability of the aforementioned provisions of the Act. In doing so, the article analyses a recent judgment of the Lahore High Court in the case of TBEA v. Al Wasay Construction Company.[1]

The case study

By way of brief background, TBEA (“the Petitioner”) entered into a contract with National Transmission and Dispatch Company Limited (“NTDC”) to design, supply, test and commission the plant and equipment (“Main Contract”). The Petitioner and Al Wasay Construction Co. (“the Respondent”) in turn entered into a subcontract (“the Subcontract”) for a part of the scope of work under the Main Contract.

A dispute arose between the Petitioner and the Respondent as to the payment of rental charges, and the ownership and possession of tools and machinery used in the project. The Respondent filed an application in the Civil Court, Lahore, invoking the provisions of section 20 of the Act, seeking referral of the dispute to arbitration. That application was subsequently withdrawn, so that the parties could comply with the pre-arbitral steps agreed in the Subcontract. Thereafter, the Respondent filed another application under section 20, which was dismissed by the Civil Court for being filed prematurely.

After dismissal of the aforesaid second application, the parties appeared before a mediator of the Lahore Chamber of Commerce and Industry on three different dates. However, the parties were unable to reach a settlement.

A third application under section 20 of the Act was then filed before the Civil Court. On this occasion, since the pre-arbitral steps had been satisfied, the Court passed an order appointing a sole arbitrator, who was the Respondent’s nominee. The Petitioner had not nominated its arbitrator nor had it consented to the Respondent’s nominee.

Therefore, the Petitioner filed a revision petition before the Lahore High Court, seeking to set aside the Civil Court’s order, and asking the Lahore High Court to appoint an arbitrator with the consent of both parties. The primary legal issues that the Lahore High Court was asked to consider were: (i) whether under section 20 of the Act a sole arbitrator (who is a party’s nominee) could be appointed by the Court even if the other party does not consent to such nomination; and (ii) if section 8 of the Act was applicable in the circumstances.

Applicability of Section 8 v. Section 20

Challenging the revision application, the Respondent alleged that the arbitrator’s appointment was made in accordance with the Act. The Respondent relied on Section 8(2), and argued that this section does not require the element of consent.

On the other hand, the Petitioner pointed out that the Act contains three chapters pertaining to the manner in which arbitration may be initiated by parties: Chapter II (sections 3-19), dealing with arbitration without intervention of the court; Chapter III (section 20), addressing arbitration with intervention of the court when no suit is pending; and Chapter IV (sections 21-25), relating to an application for arbitration when a suit is pending.[2] The Petitioner’s stance was that section 8 had no bearing in this case, as the application in the Civil Court had been filed by the Respondent itself under section 20, and not section 8. In other words, the scheme and intent of section 8 is distinct from section 20(4), albeit both pertain to the same subject matter, i.e., the appointment of arbitrators.

Further, it was argued that, in Mujtaba Hussain Siddiqui vs. Sultan Ahmed,[3] the Court has held that: “one of the requirements of maintainability of an application under section 20 is that the proceedings under sections 3 to 19 of the Act has not commenced”.

Ultimately, the Lahore High Court allowed the revision by validating the Petitioner’s arguments and reasoning. In short, the Court held that section 8 of the Act did not apply since it is a separate and distinct regime from section 20(4) of the Act. The Court also emphasised the element of consent in arbitration, particularly in the context of the appointment of arbitrators. In so doing, the Court referred to the language of section 20, which unequivocally provides that the parties’ consent is needed for the appointment of arbitrators. Therefore, by proceeding under section 8 and appointing the Respondent’s nominee as the sole arbitrator (without the Petitioner’s consent), the Civil Court acted in excess of its jurisdiction.

Conclusion

In light of this recent judgment, it is clear that consent is a vital element in arbitration, particularly for the appointment of arbitrators. The true intent and meaning of the Act is that, if any party disagrees with the nominee arbitrator of the other party, that arbitrator should not be appointed, and the court should not unilaterally appoint a sole arbitrator proposed by one party in the circumstances. This is an important judgment which lends further clarity to the scheme and application of the Act.

[Note from the author: The article is not legal advice; it is intended to provide information of general interest about a legal issue in the form of a particular case study. The author would also like to acknowledge the contribution of Zainab Kamran, Associate, AHA who assisted in the case and related research.]

References

  1. [2020] CLC 106.
  2. PLD [2016] SC 121.
  3. [2005] YLR 2709.

Author:

Asma Hamid

Ms. Asma Hamid is an Advocate of the Supreme Court of Pakistan and Founder of Asma Hamid Associates. She holds an LL.M. degree from Harvard Law School.