CASE NO.: Appeal (civil) 2025 of 1997 PETITIONER: Bihar State Mineral Dev. Corpn. & Anr. RESPONDENT: Vs. Encon Builders (I) Pvt. Ltd. DATE OF JUDGMENT: 21/08/2003 BENCH: CJI & S.B. Sinha. JUDGMENT:
J U D G M E N T
S.B. SINHA, J :
The appellants before the High Court are in appeal before us
against the judgment and order dated 10.9.1996 passed by the High Court
of Patna, Ranchi Bench, Ranchi, in Misc. Appeal No.176 of 1995 (R)
dismissing an appeal preferred by the appellants herein purported to be
in terms of Section 39(1)(i) of the Arbitration Act, 1940 (‘the Act’
for short), against an order dated 11.9.1995 passed by the Subordinate
Judge-VI, Ranchi, allowing Arbitration (Misc.) Case No.39 of 1995 filed
by the respondent herein.
The basic fact of the matter is not in dispute. Appellant No.1
herein invited tender for removal of soil, sandstone, shale,
conglomerates/coal etc. and stacking it up to a distance of 1. k.m.
Pursuant to or in furtherance of the notice inviting tender issued by
Appellant No.1, the respondent herein submitted his tender which was
accepted. According to the appellants, the respondent failed and
neglected to produce 10,000 M.T. of coal per month and stack the same
in the dump yard which was the subject-matter of the agreement dated
17.3.1992, as a result whereof the balance job was got done by another
agency.
According to the appellants by reason of the aforementioned acts
of omission and commission on the part of the respondent, it suffered a
huge loss. The agreement of the respondent, however, was not expressly
cancelled by Appellant No.2 herein. The respondent herein allegedly
invoked the purported arbitration agreement contained in the said
agreement dated 17.3.1992.
Clauses 37, 59 and 60 which, according to the appellants, are
relevant for the purpose of this case read thus :
“37. It will be at the absolute discretion of the
Managing Director of the Corporation to terminate the
agreement in the following events :
a. If the excavation work is found to be
unsatisfactory.
b. If the agency be involved in any action
involving moral turpitude.
c. If the agency be involved in any action causing
breach of peace indiscipline at the Mines or
stops the work before the expiry of the
agreement period.
d. If the agency fails to comply with any of the
terms and conditions contained herein or that
would be mutually agreed upon for the execution
of the work.
e. If the agency fails to pay full wages to
workmen as per prevailing act/awards from the
management premises and in presence of
Corporation authorised representative.
Before terminating the agreement, one month’s
notice under registered post on the address
given in this agreement will be given to the
agency without prejudice to the right and claim
under the agreement and the corporation; will
have the right to adjust such amount towards
the financial loss that corporation might incur
due to such acts or commissions of the agency
from bills or security deposit or earnest
deposit or through other legal proceedings.”
59. If during course of inspection or on
reports of officers of the Corporation the
Managing Director finds that the working
operation are not carried out in a workman like
manner or payments to workmen are not made
timely and according to provisos of the rules
and regulations he may impose fine on the
agency up to a maximum of rupees five thousand
at a time depending on the gravity of the
violations.
60. In case of any dispute arising out of the
agreement, the matter shall be referred to the
Managing Director, Bihar State Mineral
Development Corporation Limited, Ranchi, whose
decision shall be final and binding.”
The respondent also allegedly made claim against the appellants.
The disputes were said to have been referred to Appellant No.2 herein
purported to be in terms of clause 60 of the said agreement. But who
referred the said dispute and how it was done is not borne out from the
records.
Allegedly, 22.6.1995 was the date fixed for hearing of the matter
before Appellant No.2 which was subsequently adjourned to 6.7.1995.
The respondent herein questioned the validity of clause 60 of the
agreement by a letter dated 15.7.1995.
It thereafter filed an application under Section 33 of the Act in
the Court of the Subordinate Judge-VI, Ranchi. The said application
was allowed by the learned Subordinate Judge, by reason of an order
dated 11.9.1995, whereby and whereunder, Appellant No.2 was restrained
from acting as an Arbitrator. The learned Judge further held that
clause 60 of the agreement cannot be construed to be an arbitration
agreement.
Aggrieved thereby and dissatisfied therewith, the appellants
preferred an appeal before the High Court. By reason of the impugned
judgment, the said appeal was dismissed. The appellants are in appeal
before us against the said judgment.
Mr. Dinesh Dwivedi, learned senior counsel appearing on behalf of
the appellants, would submit that the courts below committed manifest
illegality in passing the impugned judgment insofar as they held that
clause 60 of the agreement does not constitute an arbitration agreement
as the same satisfies the definition thereof as contained in Section
2(a) of the Act, insofar as it contains the following essential
elements of an arbitration agreement, namely, (a) the agreement is in
writing; (b) the agreement is to submit a present or a future
difference; (c) dispute is to be referred to a named arbitrator; and
(d) the decision of the arbitrator is final.
The learned counsel would contend that as the essential elements
of arbitration are satisfied from clause 60 of the agreement, it was
not necessary to specifically use the terminology ‘arbitration’
therefor and no particular form is required therefor. Reliance in this
connection has been placed on Smt. Rukmanibai Gupta vs. The Collector,
Jabalpur and others [AIR 1981 SC 479].
The learned counsel would further submit that the High Court
further erred insofar as it failed to take into consideration the fact
that an employee of the Principal can be named as an arbitrator
wherefor bias on his part cannot be presumed. Strong reliance in this
behalf has been placed on The Secretary to the Government, Transport
Deptt., Madras vs. Munuswamy Mudaliar and others [AIR 1988 SC 2232],
State of U.P. vs. Tipper Chand [(1980) 2 SCC 341], K.K. Modi vs. M.N.
Modi & Ors. [JT 1998 (1) SC 407], Michael Golodetz and Others vs.
Serajuddin and Co. [AIR 1963 SC 1044] and State of Orissa and Others
vs. Narain Prasad and Others [(1996) 5 SCC 740].
The short question which arises for consideration in this appeal
is as to whether the learned court below committed an illegality in
refusing to refer the matter to arbitration.
The essential elements of an arbitration agreement are as follows
:
(1) There must be a present or a future difference in
connection with some contemplated affair.
(2) There must be the intention of the parties to settle
such difference by a private tribunal.
(3) The parties must agree in writing to be bound by the
decision of such tribunal.
(4) The parties must be ad idem.
There is no dispute with regard to the proposition that for the
purpose of construing an arbitration agreement, the term ‘arbitration’
is not required to be specifically mentioned therein. The High Court,
however, proceeded on the basis that having regard to the facts and
circumstances of this case, the arbitration agreement could have been
given effect to. We may, therefore, proceed on the basis that Clause
60 of the Contract constitutes an arbitration agreement.
A finding has been arrived at by the High Court that the Second
Appellant was the only competent authority to arrive at his
satisfaction that the agreement was liable to be terminated. By reason
of the power conferred upon the Managing Director of Appellant No.1, he
is also entitled to impose fine on the contractor depending upon the
gravity of violation of the agreement.
The respondent would contend that although the agreement was not
expressly terminated, the work had illegally been re-allotted to
another agency by the second appellant. The correctness or otherwise of
the said decision on the part of the second appellant was in question.
The High Court, therefore, arrived at a finding that as for all intent
and purport the agreement was terminated by Appellant No.2, he could
not assume the role of an arbitrator.
There cannot be any doubt whatsoever that an arbitration
agreement must contain the broad consensus between the parties that the
disputes and differences should be referred to a domestic tribunal.
The said domestic tribunal must be an impartial one. It is a well-
settled principle of law that a person cannot be a judge of his own
cause. It is further well-settled that justice should not only be done
but manifestly seen to be done.
Actual bias would lead to an automatic disqualification where the
decision maker is shown to have an interest in the outcome of the case.
Actual bias denotes an arbitrator who allows a decision to be
influenced by partiality or prejudice and thereby deprives the litigant
of the fundamental right to a fair trial by an impartial tribunal.
The case at hand not only satisfies the test of real bias but
also satisfies the real danger as well as suspicion of bias. [See
Kumaon Mandal Vikas Nigam Ltd. vs. Girja Shankar Pant and Others
[(2001) 1 SCC 182].
In Judicial Review of Administrative Action, by De Smith, Woolf
and Jowell (Fifth Edition at page 527), the law is stated in the
following terms :
“The various tests of bias thus range along a
spectrum. At the one end a court will require that,
before a decision is invalidated, bias must be shown
to have been present. At the other end of the
spectrum, the court will strike at the decision where
a reasonable person would have a reasonable suspicion
from the circumstances of the case that bias might
have infected the decision. In between these
extremes is the “probability of bias” (this being
closer to the “actual bias” test), and the
“possibility of bias” (this being closer to that of
reasonable suspicion)”.
In “The Law and Practice of Commercial Arbitration in England by
Sir Michael J. Mustill and Stewart C. Boyd, it is stated :
“Since the general principles of law relating
to bias apply in the same way to arbitrations as to
other tribunals, and since instances which are
sufficiently serious to bring about the intervention
of the Court are very rare indeed, there is no need
to deal with the subject in detail.”
In ‘Russell on Arbitration’, 22nd Edition, the law is
stated thus :
“4-030 Actual and apparent bias. A distinction is
made between actual bias and apparent bias. Actual
bias is rarely established, but clearly provides
grounds for removal. More often there is a suspicion
of bias which has been variously described as
apparent or unconscious or imputed bias. In such
majority of cases, it is often emphasized that the
challenger does not go so far as to suggest the
arbitrator is actually biased, rather that some form
of objective apprehension of bias exists.
4-032 Pecuniary interest. There is an automatic
disqualification for an arbitrator who has a direct
pecuniary interest in one of the parties or is
otherwise so closely connected with the party that
can truly be said to be a judge in his own cause.
5-052 Impartial. Section 33(1) of the Arbitration
Act 1996 states that the tribunal must act
“impartially”. An arbitrator must also appear
impartial and if there are justifiable doubts as to
his impartiality this will provide a ground for his
removal by the court under section 24(1)(a) of the
Arbitration Act 1996 or may mean that the award can
be challenged.”
Mr. Dwivedi placed strong reliance in Munuswamy Mudaliar’s case
(supra). In that case an application under Section 5 of the Act was
filed. Furthermore, the fact of the said case is not applicable in the
present case inasmuch as therein actual work by the contract did not
start. In that situation, the risk and cost clause was invoked. The
only contention raised therein was that as the said clause was invoked
by the Chief Engineer; the Superintending Engineer being an inferior
authority to him would not be in a position to dispense with the
justice effectively. It was, in that situation, held by this Court as
under :
“This is a case of removal of a named arbitrator
under S.5 of the Act which gives jurisdiction to the
Court to revoke the authority of the arbitrator.
When the parties entered into the contract, the
parties knew the terms of the contract including
arbitration clause. The parties knew the scheme and
the fact that the Chief Engineer is superior and the
Superintending Engineer is subordinate to the Chief
Engineer of the particular Circle. In spite of that
the parties agreed and entered into arbitration and
indeed submitted to the jurisdiction of the
Superintending Engineer at that time to begin with,
who, however, could not complete the arbitration
because he was transferred and succeeded by a
successor. In those circumstances on the facts
stated no bias can reasonably be apprehended and made
a ground for removal of a named arbitrator. In our
opinion this cannot be, at all, a good or valid legal
ground. Unless there is allegation against the named
arbitrator either against his honesty or capacity or
mala fide or interest in the subject-matter or
reasonable apprehension of the bias, a named and
agreed arbitrator cannot and should not be removed in
exercise of a discretion vested in the Court under
S.5 of the Act.”
Such is not the position here.
In Serajuddin’s case (supra), this court was concerned with an
application under Section 34 of the Arbitration Act. It was held :
“…The Court insists, unless sufficient reason to
the contrary is made out upon compelling the parties
to abide by the entire bargain, for not to do so
would be to allow a party to the contract to
approbate and reprobate, and this consideration may
be stronger in cases where there is an agreement to
submit the dispute arising under the contract to a
foreign arbitral tribunal…”
It was further observed :
“…The Court ordinarily requires the parties to
resort for resolving disputes arising under a
contract to the tribunal contemplated by them at the
time of the contract. That is not because the Court
regards itself bound to abdicate its jurisdiction in
respect of disputes within its cognizance : it merely
seeks to promote the sanctity of contracts, and for
that purpose stays the suit…”
In the said case, the question of bias on the part of the
arbitrator did not fall for consideration.
In Narain Prasad’s case (supra), this Court was not dealing with
an arbitration matter but with the conduct of the parties in relation
to enforcement of a contract in a liquor vend. Therein the respondent
filed a writ petition for coming out his contractual obligation and in
the said fact situation obtaining therein this Court observed :
“…A person who enters into certain contractual
obligations with his eyes open and works the entire
contract, cannot be allowed to turn round, according
to this decision, and question the validity of those
obligations or the validity of the Rules which
constitute the terms of the contract. The
extraordinary jurisdiction of the High Court under
Article 226, which is of a discretionary nature and
is exercised only to advance the interests of
justice, cannot certainly be employed in aid of such
persons. Neither justice nor equity is in their
favour”.
In K.K. Modi’s case (supra), clause 9 of a memorandum of
agreement came up for consideration, which was in the following terms :
“Implementation will be done in consultation with the
financial institutions. For all disputes,
clarifications etc. in respect of implementation of
this agreement, the same shall be referred to the
Chairman, IFCI or his nominees whose decisions will
be final and binding on both the groups.”
It was held that the same did not constitute an arbitration
clause.
Yet again in Tipper Chand’s case (supra) whereupon reliance has
been placed by Mr. Dwivedi, the following clause was not held to be
an arbitration clause :
“For any dispute between the contractor and the
Department the decision of the Chief Engineer PWD
Jammu and Kashmir, will be final and binding upon the
contract.”
As in the instant case, the test of bias on the part of Appellant
No.2 is fully satisfied, the impugned order is unassailable. As bias on
the part of the second Appellant goes to the root of his jurisdiction
to act as an arbitrator, the entire action is a nullity.
As the acts of bias on the part of the second appellant arose
during execution of the agreement, the question as to whether the
respondent herein entered into the agreement with his eyes wide open or
not takes a back-seat. An order which lacks inherent jurisdiction
would be a nullity and, thus, the procedural law of waiver or estoppel
would have no application in such a situation.
It will bear repetition to state that the action of the second
appellant itself was in question and, thus, indisputably he could not
have adjudicated thereupon in terms of the principle that nobody can be
a judge of his own cause.
Furthermore, as the learned Subordinate Judge, inter alia, held
that clause 60 did not constitute an arbitration agreement, the same
could not have been the subject-matter of an appeal under Section
39(1)(i) of the Act inasmuch as thereby the arbitration agreement was
not superseded.
For the reasons aforementioned, there is no merit in this appeal
which is dismissed. As the respondent did not appear, there shall be
no order as to costs.