http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

CASE NO.: Appeal (civil)  5159 of 2007

PETITIONER: Larsen & Toubro Ltd

RESPONDENT: Fertilizer & Chemicals Travancore Ltd

DATE OF JUDGMENT: 12/11/2007

BENCH: Dr. ARIJIT PASAYAT & LOKESHWAR SINGH PANTA

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO.    5159           OF 2007 (Arising out of SLP (C) No. 4014 of 2006) [with C.A. No 5160 of  2007  (Arising out of S.L.P. (C) No. 4015 of 2006]

Dr. ARIJIT PASAYAT, J.

1.      Leave granted.  

2.      Challenge in these appeals is to the order passed by the  learned Single Judge of the Kerala High Court disposing of  arbitration request filed before him.   

3.      Background facts in a nutshell are as follows:-

       Appellant and the respondent entered into a contract vide  purchase order no.3020/02-2701/016/1018 dated 7.1.1995.  Alleging that in breach of the terms and conditions of the  purchase order certain amounts were withheld, the appellant  invoked the arbitration agreement purportedly in terms of new  Article 26 of the Special Conditions and suggested three  names for appointment of an independent sole arbitrator and  called upon the respondent to name one out of the three  names.  The respondent took the stand that it is only the  Managing Director of the respondent who can be appointed as  a named arbitrator as per Article 26 of the Standard  Conditions and refused to appoint a sole independent  arbitrator. The High Court of Kerala was moved seeking  appointment of an arbitrator by Arbitration Request 29/99.   Learned Single Judge declined the arbitration request on the  ground that terms and conditions of the purchase order  provides for arbitration by the Chairman and Managing  Director of the respondent. A writ petition was filed under  Article 226 of the Constitution of India, 1950 (in short the  ’Constitution’). During pendency of the said writ petition this  Court in CA Nos. 3777, 4168 and 4169 of 2003 held that the  order passed under Section 11 of the Arbitration and  Conciliation Act, 1996 (in short the ’Act’) is a judicial order  and writ petition challenging the said order under Article 226  of the Constitution is not maintainable.  Therefore, this appeal  has been filed.

4.      In support of the appeals, learned counsel for the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

appellant submitted that the provision contained in Article 26  of the Standard Conditions is not the actual provision for  arbitration. The same is contained in the special terms and  conditions attached to the purchase order and the work order  respectively. The purchase order and the work order contained  special conditions, standard terms and conditions.  By Article  16 of the Special terms and Conditions of the purchase, there  is amendment to the article 25 of the standard conditions.   There is similar amendment to article 26 of the standard terms  so far as it related to commissioning. The provisions contained  in the standard conditions in both the cases, it was submitted  by learned counsel for the appellant, is not actual provision for  arbitration.  The general condition stated that all disputes and  differences are required to be referred to the Chairman and  Managing Director of the respondent-company for his decision  and it will be binding on the parties.  It was further contended  that the provisions contained in the special conditions by  themselves do not have any provision for arbitration.  It does  not have any clause that disputes and difference shall be  settled by arbitration. In both the cases, the special conditions  specifically state that it is by way of amendment of general  condition only and not in supersession of that provision.  The  Chairman and the Managing Director of the respondent- company cannot be treated as independent person to be  appointed as arbitrator.  This was essentially the stand which  did not find acceptance.  It is submitted by learned counsel for  the appellant that certain changes were suggested by the  respondent.    

5.      Learned counsel for the respondent on the other hand  submitted that the High Court view is unexceptionable.   

6.      At this juncture it would be necessary to take note of the  few conditions  :

       Clause 16 of the Work Order reads as follows:- "16. Work Order Conditions: The order shall be governed by the above conditions  as well as by the conditions stipulated in  Attachment I, II and III of this Work Order, except  the following: The order shall be governed by the  present special conditions of work (W.O.  Attachment III) as well as by the  conditions stipulated in Attachment I,  and II of this Work Order, except the  following:     Spec. No.3020/CS/04: Standard Terms and  Conditions of Erection & Commissioning. Art. 4.0.0 Taxes, Duties and Levies (comment) Taxes shall be as per Article 4.0.0.  However, at  present conditions; tax on this Work Order is not  applicable. Art. 13.0.0 Termination (comment) FACT can terminate the Work Order without giving  any reason provided that reasonable cost for  termination and actual out-of-pocket expenses will  be reimbursed. Art. 15.0.0 Changes (Amendment) FACT shall issue amendment orders which provide  for changes in the scope of work required by FACT  under the Work Order, and for equitable adjustment  in the price and delivery/completion time, if any,  hereunder. Art. 21.0.0 Tests on Completion & Taking Over (New

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

Article Added). Art. 21.5.0 (New Article) The Primary Reformer Package under the scope of  this Work Order shall be deemed to be taken over  by FACT immediately after satisfactory pre- commissioning is over within 10 days of  Contractor’s notice to Owner for commencement of  commissioning after pre-commissioning, whichever  is earlier.  In case taking over is delayed due to no  fault of Contractor, after the notice given by  Contractor in this regard about the Completion, the  entire Primary Reformer Package is deemed to be  taken over by FACT. Art. 24.0.0 Indemnification Secondary liability such as indemnification for loss  caused by stoppage of plant of like will be excluded  from Contractor’s liabilities under the Work Order.  

Art. 26.0.0 Applicable Law and Settlement of  Disputes (amendment)  The provisions of the Indian Arbitration Act, 1940  and the rules there under, any statutory,  modifications there for the time being in force will  be applied.  The venue for the arbitration shall be Cochin, and  the language of the proceedings shall be the English  language. During the arbitration proceedings, both parties  shall continue to discharge their obligations under  the Work Order."   7.      There was addition and not substitution of condition.   Without amendment there was arbitration clause and if there  was no amendment the only substitution, then that there was  no arbitration clause.  In the arbitration request in the  statement of facts it has been clearly stated that article 26 of  the standard terms and conditions of purchase form part of  the work order.  The same read as follows:

"Article 26: Work Order shall be subject to and  shall in all respects be governed by Indian law.   Any dispute or difference connected with or  arising out of WORK ORDER which cannot be  settled by mutual agreement of the parties  shall be referred to the Chairman & Managing  Director of FACT, and his decision will be  binding on the parties.  Any legal proceeding  relating to this WORK ORDER shall be limited  to Courts of law under the jurisdiction of the  Kerala High Court at Ernakulam District,  Kerala State, India."      

8.      The stand of the learned counsel for the appellant that  the special conditions of the work order superseded the  standard terms and conditions, is not correct. The mere fact  that the arbitrator was named does not render the arbitration  proceedings invalid.

9.      In Secretary to Government, Transport Deptt., Madras v.  Munuswamy Mudliar and Anr. (1988 Suppl. SCC 651) it was  noted as follow:

"7.     Pursuant to this the Superintending  Engineer of that Circle, at the relevant time,  was previously appointed as arbitrator.  There

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

was succession to that office by another  incumbent and the succeeding Superintending  Engineer wanted to continue the arbitration  proceedings but before that an application was  made under Section 5 of the Arbitration Act,  1940 (hereinafter called ’the Act’) for removal of  the arbitrator, before the learned Judge of the  City Civil Court, Madras."          

10.     Again in paras 11 to 13 it was noted as follows:

"11. This is a case of removal of a named  arbitrator under Section 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 shou1d not be removed in exercise  of a discretion vested in the Court under  Section 5 of the Act.

12. Reasonable apprehension of bias in the  mind of a reasonable man can be a ground for  removal of the arbitrator. A predisposition to  decide for or against one party, without proper  regard to the true merits of the dispute is bias.  There must be reasonable apprehension of  that predisposition. The reasonable  apprehension must be based on cogent  materials. See the observations of Mustill and  Boyd, Commercial Arbitration, 1982 edn., page  214. Halsbury’s Laws of England, 4th edn.,  Volume 2, para 551, page 282 describe that  the test for bias is whether a reasonable  intelligent man, fully apprised of all the  circumstances, would feel a serious  apprehension of bias.

13. This Court in International Authority of  India v. K. D. Bali (1988 (2) SCC 360) held that  there must be reasonable evidence to satisfy  that there was a real likelihood of bias. Vague  suspicions of whimsical, capricious and  unreasonable people should not be made the  standard to regulate normal human conduct.  In this country in numerous contracts with the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

government, clauses requiring the  Superintending Engineer or some official of the  Government to be the arbitrator are there. It  cannot be said that the Superintending  Engineer, as such cannot be entrusted with  the work of arbitration and that an  apprehension, simpliciter in the mind of the  contractor without any tangible ground, would  be a justification for removal.  No other ground  for the alleged apprehension was indicated in  the pleadings before the learned Judge or the  decision of the learned Judge.  There was, in  our opinion, no ground for removal of the  arbitrator.  Mere imagination of a ground  cannot be an excuse for apprehending bias in  the mind of the chosen arbitrator."     

11.     The apprehension that named arbitrator may not act  fairly is without any foundation.  The High Court has rightly  held that by article 16 of the special terms and conditions of  purchase there was an amendment to article 25 which reads  as follows:-

"The provisions of the Indian Arbitration Act,  1940, and the rules thereunder, any statutory  modifications thereof of the time being in force  will be applied.  The venue of the arbitration  shall be Cochin, and the language of the  proceedings shall be the English Language.  During the arbitration proceedings, both  parties shall continue to discharge their  obligations under the Purchase Order."     12.     Similar was the amendment to Article 26 of the  Standard terms and Conditions for erection and  commissioning in Article 16 of the Special Conditions of work  attached to the word order. The special conditions  themselves show that articles 25 and 26 contained provisions  for arbitration. The amendments incorporated by the Special  conditions only provide that the provisions of the relevant  Arbitration Act and the rules made thereunder and any  statutory modifications thereof for the time being in force will  be applicable and the venue of arbitration and language of  the proceedings.   

13.     The appeals are sans merit, deserve dismissal, which we  direct.