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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

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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.  

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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.

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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."

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       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

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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 :

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       "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.