PETITIONER: NANDYAL CO-OP. SPINNING MILLS LTD. Vs. RESPONDENT: K.V. MOHAN RAO DATE OF JUDGMENT05/03/1993 BENCH: RAMASWAMY, K. BENCH: RAMASWAMY, K. SAHAI, R.M. (J) CITATION: 1993 SCR (2) 280 1993 SCC (2) 654 JT 1993 Supl. 89 1993 SCALE (2)8 ACT: Arbitration Act, 1940 Section 8. Contract--Arbitration covenant--Agreement authorising a party to nominate Arbitrator--Nomination of Arbitrator--Right of other party to challenge nomination on the ground of biaa--Held by the convenant of arbitration in the agreement bias is not waived. Power of Court to appoint Arbitrator--Agreement providing appointment of Arbitrator by a party--notice by other party to appoint Arbitrator--Authorised party not appointing Arbitrator within 15 days--Appointment of Arbitrator by Court held valid--Conditions for applicability of Section 8--Discussed. HEADNOTE: The respondent entered into a building-contract with the appellant-mill., Clause 65.1 of the contract provided "except where otherwise provided in the contract all disputes or questions relating to...... shall be referred to the sole Arbitration of the person appointed by the Ad- ministrative Head of owner. There will be no objection to any such appointment that the Arbitrator so appointed is the owner's representative, that he had to deal with the matters to which the contract relates and that in the course of his duties as owner's representative he had had expressed views. on all or any of the matters in dispute or differences". Differences having arisen during the execution of the contract the respondent gave notice twice requesting the appellant to nominate an Arbitrator within 15 days. time but no action thereunder was taken except replying that the matter was under consideration. Thereafter the respondent riled a petition under Section 8 of the Arbitration Act, 1940 in the Court to appoint an Arbitrator. In the meantime, the appellant informed the respondent that a Superintending Engineer of B.H.E.L. Hyderabad was appointed as sole Arbitrator to which the respondent objected on the ground of bias. The Civil Court appointed a retired Judge of the High 280 281 Court as Arbitrator. The appellant's revision petition "Us dismissed by the High Court. In appeal to this Court it was contended on behalf of tile Appellant that (1) by the covenant of arbitration in the agreement the respondent had waived bias; (2) under the terms or the contract the respondent was to abide by the appointment of Arbitrator by the Administrative Head of the appellant and, therefore, the Civil Court lacked jurisdiction to appoint Arbitrator under Section 8(a) of the Act. Dismissing the appeal, this Court, HELD- 1. The appointment of the Arbitrator by the trial court as upheld by the High Court is perfectly legal and valid. [290A] 2. Under the contract all questions and disputes relating to the contract were to be referred to the sole arbitration of the person appointed by the Administrative Head of the appellant. The right to suit available under Section 9 of the Code of Civil Procedure has been contracted out. The waiver expressly engrafted was only of the Arbitrator appointed by the Administrative Head of the appellant one who was its representative who had had occasion to express views on all or any of the matters in dispute or difference, on which he had had earlier dealt with to which the contract related to. But there was noncontract to arbiter by named Arbitrator the 3. Justice must not only be done but seemingly appears to have been done. The Arbitrator must not only be impartial but also be objective circumspect and honest in rendering his decision. 'Many a time the award is not a speaking Award which would inspire confidence for acceptance only when the above perspectives are. present. It is invalidity would be tested on grounds available in law. Admittedly the Arbitrator nominated, by the appellant acted on earlier occasions as appellant's Arbitrator. Therefore, the respondent rightly objected to the nomination of, Arbitrator. Such nomination, therefore, does not bind him. [286D-E] Manak Lal v. Dr. Prem Chand, [1957] S.C.R. 575; C. Santa v. University of Lucknow & Ors.[1977] 1 S.C.R. 64 and V. Raghunadha Rao v. State of A.P., 1988 (1) A.L.T. 461, held inapplicable. Judicial Review of Administrative Action by S.A. Desmith, 3rd Edn. 282 p.223, referred to. 3.1.It is of the first importance that judicial tribunals should be honest, impartial and disinterested. This rule applies in full force to arbital tribunals, subject only to this exception, that parties who are free to choose their own tribunal may, provided they act with full knowledge, choose dishonest partial or interested Arbitrators (though this exception is in its turn subject to a statutory exception which gives parties who have so choosen a locus poenitentiae in certain circumstances). Apart from this exception, arbitrators who are in all other respects suitably qualified are disqualified by dishonesty, partiality or interest. [285C-D] Russell's Arbitration, 19th Edn. p.116, referred to. 4. The application for appointment of an Arbitrator is not maintainable when an Arbitrator has already been appointed and the applicant has been informed of the said facts before the expiry of 15 days as envisaged under Section 8(1)(a). [287E] 4.1.Admittedly the respondent did gave notice twice requesting the appellant to nominate an Arbitrator within 15 day's time but no action thereunder had been taken. If no Arbitrator had been appointed in terms of the contract within 15 days from the date of the receipt of the notice, the Administrative Head of the appellant had abdicated himself of the power to appoint Arbitrator under the contract. Therefore, the Court had jurisdiction to appoint an Arbitrator in place of the contract by operation of Section 8(1)(a). The contention, therefore, that since the agreement postulated preference to Arbitrator appointed by the Administrative Head of the appellant and if he neglects to appoint, the only remedy open to the contractor was to have recourse to civil suit is without force. Had the contract provided for appointment of a named Arbitrator and the named person was not appointed, certainly the only remedy left to the contracting party was the right to suit But that is not the case on hand. Therefore, the order of the High Court needs no interference. [287G, 288E-G, 283D] Union of India v. Prafulla Kumar Sanyal, [1979] 1 S.C.C. 631, relied on. Chander Bhan Harbhajan Lal v. State of Punjab, [1977] 3 S.C.R. 38; M/s Boriah Basavish & Sons v. Indian Telephone Industries Ltd., A.I.R. 1973 283 Mysore 309; V.K Construction Works (P) Ltd. v. Food Corporation of India, A.I.R. 1987 Pb. & Haryana 97 and Union of India v. Ajit Mehta & Associates, A.I.R. 1990 Bombay 45, held inapplicable. JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil appeal No. 938 of 1993.
From the Judgment and Order dated 12.10.92 of the Andhra
Pradesh High Court in C.R.P. No.1381 of 1991.
P.P. Rao and Mrs. Sarla Chandra for the Appellant.
K. Madhava Reddy and G. Prabhakar for the Respondent.
The Judgment of the Court was delivered by
K. RAMASWAMY, J. Leave granted.
Having heard the learned Senior counsel M/s. P.P. Rao and
K. Madhava Reddy on either side and having given our anxious
consideration to their contentions, we find in final
analysis that the order of the High Court needs no
interference. The facts lie in a short compass, are as
stated under
The respondent concluded a contract with the appellant on
February 11, 1986 to construct a building at a cost of
Rs.1.00 Crore. During its execution since differences had
arisen the respondent by his letter dated July 27, 1987
requested the Administrative Head of the appellant to
appoint an Arbitrator within 15 days from the date of its
receipt. On August 8 and 18, 1987 the respondent was
informed that the matter was under consideration. His
renewed request in letter on August 17, 1987 evoked no
action. Finding it futile to await, on July 27, 1988, the
respondent filed O.P. No.167 of 1988 in the Court of the
Subordinate Judge, at Nandyal to appoint an Arbitrator. The
notice was issued to the appellant therein. By letter dated
July 27, 1988 the respondent was informed of the appointment
of Sri Yethiraj, Superintending Engineer of B.H.E.L.,
Hyderabad as sole Arbitrator. After giving opportunity to
both sides by Order dated March 12, 1991, the Civil Court
appointed Sri Justice C. Sriramulu, a retired Judge of the
High Court as Arbitrator. The High Court dismissed C.R.P.
No.1381 of 1991 on October 25, 1992.
284
Sri P.P. Rao, learned Senior counsel conteded that the
concurrent finding that Sri Yethiraj had bias against the
respondent as he had acted on earlier occasions as an
Arbitrator of the appellant is vitiated by legal error since
bias can always be waived. By the covenant of arbitration
in the agreement, the respondent had waived bias, Secondly,
it is confended that Sri Yethiraj had no personal bias
against the respondent and the contract postulated of
appointment of an Arbitrator, the contract cannot be nul-
lified on the plea of bias, as the endeavour of the court
would be to give effect to the contract. We find no force
in the contentions. Clause 65.1 of the Contract reads thus:
“Except where otherwise provided in the
contract ail disputes or questions relating
to…….shall referred to the sole
Arbitration of the person appointed by the ad-
ministrative Head of onwer. There will be no
objection to any such appointment that the
Arbitrator so appointed is the owner’s
representative, that he had to deal with the
matters to which the contract relates and that
in the course of his duties as owner’s
representative he had had expressed views on
all or any of the matters in dispute or
differences…….
It is also a term of this contract that no
person other than a person appointed by such
Administrative Head as aforesaid should act as
Arbitrator and if for any reason it is not
possible the matter is not referred to the
arbitration at all……..
Clause 65.2. Subject to as aforesaid the
provisions of the Arbitration Act, 1940 (for
short ‘the Act’ added) or any statutory
modication or re-enactment thereof and the
rules made thereunder and for the time being
in force shall apply to the arbitration
proceedings ‘under this cluase.”
It would thus be clear that all questions and disputes
relating to the contract shall be referred to the sole
arbitration of the person appointed by the Administrative
Head of the appellant. The right to suit available under
Sec.9 of the Code of Civil Procedure has been contracted
out. The waiver expressly engrafted was only of the
Arbitrator appointed by the
285
Administrative Head of the appellant one who was its
representative who had had occasion to express views on all
or any of the matters in dispute or differences on which he
had had earlier dealt with to which the contract related to.
There is no contract to arbiter by a named Arbitrator the
dispute or differences that had arisen under the Contract.
Justice must not only be done but seemingly appears to have
been done. Contracting parties agreed to abide by the
Arbitrator, i.e. chosen forum. Russell’s Arbitration, 19th
Edition at p.116 stated that there is universal agreement
amongst jurists of all countries that it is of the first
importance that judicial tribunals should be honest,
impartial and disinterested. This rule applies in full
force to arbital tribunals, subject only to this exception,
that parties who are free to choose their own tribunal may,
provided they act with full knowledge, choose dishonest,
partial or interested arbitrators (emphasis supplied)
(though this exception is in its turn subject to a statutory
exception which gives parties who have so choosen a locus
poenitentiae in certian circumstances). Apart from this
exception, arbitrators who are in all other respects
suitably qualified are disqualified by dishonesty,
partiality or interest.
When the arbitration tribunal was chosen by the contracting
parties, undoubtedly they had chosen to avail of the
adjudiction by the Tribunal and to abide by the decision.
Having so chosen and taken a decision it would no loger be
open to turn around and contend that the tribunal was biased
against the party. This was the view laid by this court in
Manak Lai v. Dr. Prem Chand [1957] SCR 575 at 589 thus:
“It seems clear that the appellant wanted to
take a chance to secure a favourable report
from the tribunal which was constituted and
when he found that he was confronted with an
unfavourable report, he adopted the device of
raising the present technical point.”
This ratio was followed in G. Sama v. University of Lucknow
& Ors., [1977] I SCR 64 at pp. 69-70. The above ratio bears
no relevance since the contract was not to appoint Sri
Yethiraj as arbitrator nor the respondent stood by any award
being made by him. Only an officer, representative of the
appellant who had had an occassion to deal with the matter
or expressed an opinion on the matter in dispute or
difference, if appointed
286
later, such an appointment (though open to debate but needs
no occasion to decide) cannot be questioned as the
respondent had contracted to waive that objection.
The decition relied on by the High Court in V. Raghunatha
Rao v.State of A.P., (1988) 1 ALT 461 was in relation to the
appointment of an Engineer of the Department, the party to
the contract. In the dotted lines contract it was held that
the consensus ad idem was absent and the element of bias
would be inherent from the facts situation. It bears no
relevance to the facts of the case. In Judicial Review of
Administrative Action by S.A. DeSmith (3rd Edition) at p.223
it is stated that “In a private law an independent
commercial arbitrator must observe strictly judicial stand-
ards”. At p.229 he further stated that “It is open to a
party to lead evidence to prove that an independent
arbitrator has shown altered bias. in favour of the other
party or that an arbitrator who is an employee of the other
party has prejudged the issue.” Admittedly Yethiraj acted on
earlier occasions as appellant’s arbitrator. Justice must
not only be done but seemingly appears to have been done.
The arbitrator must not only be impartial but also be
objective, circumspect and honest in rendering his decision.
Many a time the award is not a speaking award which would
inspire confidence for acceptance only when the above
perspectives are present. Its invalidity would be tested on
grounds available in law. Therefore, the respondent rightly
objected to the nomination of Yethiraj. Such nomination,
therefore, does not bind him. We find force in the stand
taken by the respondent supported by Sri K. Madhava Reddy.
It is next contended by Sri Rao that s.8(1)(a) of the
Arbitration Act does not apply to the facts of this case as
the contract abstracted hereinbefore makes the respondent to
abide by the appointment of an arbitrator by the
Administrative Head of the appellant. It he had an
objection to the nomination of Yethiraj, he would have had
requested for another arbitrator. The Civil Court lacked
jurisdiction. The exercise of the jurisdiction by Civil
Court under s.8(1)(a), is hedged with existence of the
contract. Section 8(1)(a) of the Arbitration Act reads
thus:
“where an arbitration agreement provides that the reference
shall be to one or more arbitrators to be appointed by
consent of the parties and all the parties do not, after
diferences have arisen, concur in the appointment or
287
appointments;or……..
Any party may serve the other parties or the arbitrators, as
the case may be, with a written notice to concur in the
appointments or in supplying the vacancy.”
For its applicability, the following conditions must be
fulfilled.
(1) There must be an arbitration agreement.
(2) The agreement must provide that in case of difference
one or more arbitrators to be appointed by consent of
parties and did not concur in the appointment of the
arbitrator/arbitrators.
(3) Disputes have arisen to which the agreement applies.
(4) The parties had been consented in the appointment or
appointments.
(5) The appointment is not made within 15 clear days of the
srevice of the written notice to do so-, and
(6) The application is made to the court by any party to the
agreement.
The application for appointment of an arbitrator is not
maintainable when an arbitrator has already been appointed
and the applicant has been informed of the said facts before
the expiry of 15 days as envisaged under s.8(1)(a).
We have seen the arbitral agreement in Clause 65.1, and of
applicability of the Act in Clause 65.2 thereof. The
agreement provided that after the disputes had arisen and
notice given by either party, power has been given to the
Administrative Head of the appellant to appoint an
arbitrator. Admittedly the respondent did gave notice twice
requesting the appellant to nominate an arbitrator and
within 15 day’s time no action thereunder had been taken.
The replies thereto were only that the matter was under con-
sideration. After the expiry of the period prescribed the
Administrative Head denuded his power under clause 65.1 of
the contract to appoint the arbitrator. Long after the
expiry of 15 day’s time the respondent had invoked the
jurisdiction of the trial court which is competent to deal
with the matter.
288
It had given an opportunity to the appellant to contest the
claim. Appellant had intimated the appointment of Yethiraj
only long after the expiry of the period. In Union of India
v. Prafulla Kumar Sanyal, [1979] 1 SCC 631 construing
s.20(4) of the Act this court held in paragraph 4 thus:
“If no such arbitrator had been appointed and
when the parties cannot agree upon an
arbitrator itself, the court shall make an
order of reference to him. In this case,
clause 29 of the Agreement provides that every
dispute shall be referred to the sole
Arbitration of the person appointed by the
President of India or if he is unwilling to
act to the person appointed by the arbitrator.
An arbitrator, in fact, has not been appointed
by the President of India though provisions
has been made for such ap-
pointment…………..
If an arbitrator had not been appointed, the
court is to find whether the parties could
agree upon an arbitrator. If the parties
agree, the court has to appoint the person
agreed as an arbitrator. If there is no such
agreement, the court will have to appoint
arbitrator of its choice.”
It would thus be clear that if no arbitrator had been
appointed in terms of the contract within 15 days from the
date of the receipt of the notice, the Administrative Head
of the appointment had abdicated himself of the power to
appoint arbitrator under the contract. The court gets
jurisdiction to appoint an arbitrator in place of the
contract by operation of s.8(1)(a). The contention of Sri
Rao, therefore, that since the agreement postulated
preference to arbitrator appointed by the Administrative
Head of the appellant and if he neglects to appoint, the
only remedy open to the contractor was to have recourse to
civil suit is without force. It is seen that under the
contract the respondent contracted out from adjudication of
his claim by a civil court. Had the contract provided for
appointment of a named arbitrator and the named person was
not appointed, certainly the only remedy left to the
contracting party was the rights to suit. That is not the
case on hand. The contract did not expressly provide for
the appointment of a named arbitrator. Instead power has
been given to the Administrative Head of the appellant to
appoint sole arbitrator. When he failed to do so within the
stipulated period of 15 days enjoined under
289
s.8(1)(a), then the respondent has been given right under
clause 65.2 to avail the remedy under s.8(1)(a) and request
the court to appoint an arbitrator. If the contention of
Sri Rao is given acceptance, it amounts to put a premium on
inaction depriving the contractor of the remedy of
arbitration frustrating the contract itself.
The ratio in Chander Bhan Harbhajan Lal v. State of Punjab,
[1977] 3 SCR 38 at 41E & D relied on by Sri Rao is not
applicable to the facts of this case. Therein no bar was
created in the contract to appoint a fresh Committee for
going into the dispute as stipulated in the condition. The
appellant who had applied to the Govt. to nominate a
Settlement Committee the Govt. moved the court for
appointment of the Committee. Thus the Govt. itself was
entitled to have the committee appointed under the agreement
and instead had taken recourse to s.8(1)(a).
The ratio in M/s. Boriah Basavish & Sons v. Indian
Telephone lndustries Ltd., AIR 1973 Mysore 309 is also
inapplicable to the facts in this case. Therein the
contract expressly provided for appointment of an arbitrator
by consent of parties. Since the parties did not agree, it
was held that s.20(4) and not s.8 that would be applicable.
The case of VK Construction Works (P) Ltd. v. Food
Corporation of India, AIR 1987 Pb. & Haryana 97 is equally
inapplicable. Therein the terms of the contract was that no
person other than a person appointed by the Managing
Director or Administrative Head of the Corporation should
act as an Arbitrator. If for any reason it is not possible,
the matter is not to be referred to the arbitration at all.
In terms of that contract the invocation power of the court
under s.8 was taken.
The case of Union of India v. Ajit Mehta & Associates, AIR
1990 Bombay 45 renders little assistance. Clause 70 of the
contract therein provided an arbitration clause which
postulated that all disputes between the parties to the
contract shall, after written notice given by either parties
to the contract to either of them, will be referred to the
sole arbitration of an Engineering Officer to be appointed
by the authority mentioned in the tender documents.
Engineer-in-Chief was the authority concerned. On those
facts it was held that the contract excluded the invocation
of the jurisdiction of the court under s.8 of the Act and
the arbitration award
290
made pursuant thereto was held to be a nullity.
Thus we hold that the appointment of the arbitrator by the
trial court as upheld by the High Court is perfectly legal
and valid warranting no interference. The appeal is
accordingly dismissed, but without costs.
T.N.A.
Appeal dismissed.
291