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Chief Engineer Madras Zone Military Engineering Services Madras v/s G. Ramachandra Reddy and Company

    O.S. Appeal No. 281 of 1992

    Decided On, 05 January 1993

    At, High Court of Judicature at Madras

    By, THE HONOURABLE MR. JUSTICE P.S. MISHRA & THE HONOURABLE MR. JUSTICE S.M. ALI MOHAMED

    C. Krishnan, T. Raghavan



Judgment Text

P. S. Mishra, J.


for the The defendant in a proceeding under Section 20 of the Arbitration Act has come in appeal against an order setting out the dispute between the parties and referring the same to the sole arbitration of a retired judge of this court. The case in brief of the plaintiff-respondent has been that in pursuance of the notice inviting tenders issued by the defendant-appellant for the work of construction of marriage accommodation for MCPOS/CPOS/POS and junior sailors at Arakkonam, it submitted tender for the said work. The defendant by its letter dated 11.8.1988 accepted the same for a lump sum of Rs. 7, 54, 03, 216/-. During the course of execution of the work, the defendant, according to the plaintiff, acted in a way which was totally opposed to the terms of the contract. The contract period had to be extended due to reasons beyond the control of the plaintiff. Defendant granted extensions from time to time. But, according to the plaintiff, escalations in cost and other claims required additional compensation, which, however, was not accepted by the defendant. As a result of the same, the plaintiff was prevented from completing the contract within the specified time. The plaintiff had completed the work worth nearly Rupees seven crores, when the defendant illegally and without any justification terminated the contract by letter dated 10.7.1991 and seized the plaintiff's plant and equipments. As per Clause 70 of General Conditions of Contract, read with Clause 7(b) of the tender, all disputes between the parties after written notice by either party to the contract to the other, was required to be referred to the sole arbitration of an engineer officer to be appointed by the Engineer-in-Chief. The plaintiff addressed to the defendant invoking the above provisions and requested for appointment of an arbitrator. The defendant, however, failed to take any action. Stating thus that the defendant and the Engineer-in-Chief had lost their right to nominate an arbitrator in terms of the above clause and that a party cannot be an arbitrator in his own cause, the plaintiff moved the court in the suit. The defendant resisted the claim before the learned single Judge stating inter alia that tenders for construction were issued on 5.5.1988 and received back on 18.7.1988; on the basis of the lowest tender submitted by the plaintiff, a contract was concluded by Chief Engineer, Madras Zone, for an amount of Rs. 7, 54, 03, 216/- with a completion period of 21 months. From the beginning of the work, throughout the period of execution, the plaintiff's rate of progress was not at all commensurate with the requirement to achieve the completion within the stipulated period. Despite repeated notices, the plaintiff did not improve the rate of progress to the required extent, though a mobilisation advance of Rs. 3, 485/- lakhs was provided to it. On the stipulated date of completion, the progress of work achieved by the plaintiff was only 50.50 per cent. Provisional extensions were given to the plaintiff; but the plaintiff was not progressing with the work properly. So, the defendant had no other alternative except to cancel the contract, as per condition 54 of the General Conditions of the contract. Before the learned single Judge, the question posed was whether the dispute between the parties was to be referred to the sole arbitration of an engineer-officer to be appointed by the authority mentioned in the contract agreement or the court could appoint an arbitrator for the reason that the defendant-appellant and the Engineer-in-Chief had lost their right to nominate an arbitrator in terms of Clause 70 of General Conditions of contract read with Cl. 7(b) of the tender as well as for the reason of the apprehended bias. The learned single Judge has extracted in his order Clause 70, which for our benefit we too extract as follows :


"All disputes, between parties to the contract (other than those for which the decision of the C.M.E. or any other person is by the contract expressed to be final and binding) shall, after written notice by either party to the contract to the other of them, be referred to the sole arbitration of an engineer-officer to be appointed by the authority mentioned in the tender documents.


Unless both parties agree in writing such reference shall not take place until after the completion or alleged completion of the works or termination or determination of the contract under conditions No. 55, 56 and 57 hereof.


Provided that in the event of abandonment of the works or cancellation of the contract under Conditions Nos. 52, 53 or 54 hereof, such reference shall not take place until alternative arrangements have been finalised by the Government to get the works completed by or through any other contractor or contractors or agencies.


Provided always that commencement or continuance of any arbitration proceeding hereunder or otherwise shall not in any manner militate against the Government's right of recovery from the contractor as provided in condition 67 hereof.


If the arbitrator so appointed resigns his appointment or vacates his office or is unable or unwilling to act due to any reason whatsoever, the authority appointing him may appoint a new arbitrator to act in his place


The arbitrator shall be deemed to have entered on the reference on the date he issues notice to both the parties, asking them to submit to him their statement of the case and pleading in defence.


The Arbitrator may proceed with the arbitration, ex party, if either party, in spite of a notice from the Arbitrator fails to take part in the proceedings.


The Arbitrator may, from time to time with the consent of the parties, enlarge the time up to but not exceeding one year from the date of his entering on the reference, for making and publishing the award.The Arbitrator shall give his award within a period of six months from the date of entering on the reference or within the extended time as the case may be on all matters referred to him and shall indicate his findings, along with sums awarded, separately on each individual item of dispute.


The venue of arbitration shall be such or places as may be fixed by the Arbitrator in his sole discretion.


The award of the Arbitrator shall be final and binding on both parties to the contract".


It is not in dispute that in Clause 7(b) of the tender, this Clause 70 of the contract was extended to the tenderers and under it, it was said,


"To execute all the works referred to in the said documents upon the terms and conditions contained/referred to therein and as detailed in the General Summary and to carry out such deviations as may be ordered, vide conditions 7 of IAFW-2249 upto a maximum of TEN per cent, and further agree to refer all disputes as required by condition 70 to the sole arbitrator of an engineer-officer to be appointed by the Engineer-in-Chief, Army Head Quarters, New Delhi-110011 or in his absence the officer officiating as Engineer-in-Chief or Director General of Works if specifically delegated in writing by Engineer-in-Chief, whose decision shall be final, conclusive and binding."


Learned single Judge, however, has accepted the contention of Mr. T. Raghavan, learned counsel appearing for the respondent before us, that it was a case fit for appointing an arbitrator by the court and for the said purpose relied mainly on two judgments of Supreme Court, namely, State of Karnataka v. Rameshwara Rice Mills Thiruthahall and Union of India v. Prafulla Kumar Sanyal, from which, according to him, the following principles can be detected :(1) Even if the agreement contains an arbitration clause providing that all questions and disputes arising out of the contract shall be referred to the sole arbitration of the person to be appointed by any named authority, it will not be obligatory on the part of the court to make an order of reference to the arbitrator that may be appointed by the said authority; and


(2) an arbitrator should not be one of the parties to the contract. A party to the agreement cannot be an arbitrator in his own case.


2. While learned counsel for the appellant has contended that the learned single Judge has committed an error of law in infring bias without there being anything specific in this behalf brought on the record by any party and the reasonableness of the court appointing an arbitrator merely for the reason of vague allegations of one of the contracting parties, learned counsel for the plaintiff-respondent has reiterated that the underlying principles of the doctrine of bias should give rise to a presumption that a contracting party, who in spite of a demand notice failed to appoint arbitrator would not act fairly in nominating one of its agents or officers and/or the agent or officer nominated to act as arbitrator would not be impartial to be a judge of a cause where the dispute is of a great magnitude. He has submitted that it will not be possible for the appellants to suggest that the court has no power to appoint independent arbitrator and if the court has such power, it is the fit case in which this court should appoint an arbitrator. He has, on that basis, submitted that it is not a case in which it can be said that the learned single Judge has passed any perverse or unreasonable order. This court in appeal should not interfere with the impugned order.


3. We have already taken notice of the facts on which the court is asked to presume the bias or malice of the Engineer-in-Chief in nominating the arbitrator and the arbitrator nominated by him likely to have bias or prejudice. We are benefited by a discussion as to the doctrine of bias attracted in the field of contract by a Bench of this court, to which one of us was a member in the case of M/s. Indian Oil Corporation Ltd. v. M/s. Poppat Jamal and Sons (1991 1 Mad LJ 311). The Court proceeding to consider the bias has said :


"On the question of bais, however, our attention has been drawn to a judgment of the learned single Judge of this court. The two principles of natural justice (1) audi alteram partem and (2) Nemo Jude non cousa sua are well recognised in our system. The latter which means that no person can be a judge in his own cause has been applied as much to the Arbitrators/Administrative Tribunals, etc., as well as courts of law. To extend the principle, bias cannot be readily presumed and that there should be clear and positive evidence to show existence of some interest of the court or the Arbitrator or the authority so as to give basis to think that there is a reasonable apprehension of bias, has held the field without any exception. Mohan J., as he then was in Indian Oil Corporation Ltd. v. S. Ravindran (1986 99 Law Weekly 524), has taken notice of this law and stated in the following words :


'It is a generally accepted principle of law, that when parties enter into contracts, they will honour the commitments under the contracts. This is because, a contract means consensus ad idem. In other words, the obligations under a contract spring from the terms that were agreed to between the parties. Otherwise, the very purpose of entering into a contract becomes negatary once it is settled that there is a binding, enforceable contract between the parties, a contracting party cannot be released from the obligation thereafter. They must be required to complete the bargain under the contract ...'


He has then stated,


'It is well settled by now and I need not labour upon by reference to case law that two well accepted principles constitute the edifice of natural justice. They are (i) audi alterum partem. The meaning is, hear the other side; hear both sides. No man should be condemned unheard, (ii) The second is memo judex non causa sua. No person can be a judge in his own cause. It is the latter of the principles that has been applied to this case holding that inasmuch as the Arbitrator to be nominated under Clause 28 of the agreement is the Managing Director of the petitioner Corporation of his nominee, such a person cannot deal with the case in which one of the parties is the Corporation itself, fairly. In other words, the Corporation having terminated the contract, one of its officers, however high he may be placed, if he deals with that dispute and embarks on an adjudication whether the termination has been validly done or not, would be judging his own cause. Therefore, the principle of nemo judex non causa sua is said to be violated. For my part, such a principle founded upon the theory of natural justice cannot be made applicable to the contracts entered into between the parties otherwise, it is impossible to carry on business. Unless such a power is reserved to one of the contracting parties, he may not enter into the contract at all ...'A Division Bench of this court, however, in Union of India v. Coromandel Engineering Company 1965 AIR(Mad) 488), of which Mohan, J. has also taken notice of, has stated. 'But we find that this view of the law has been superseded by later developments, even in the United Kingdom and by an amendment of the English Arbitration Act. Undoubtedly, principles of natural justice have subsequently received increased recognition in the cases, and, if there is a well founded apprehension of bias on the part of an arbitrator, because of his knowledge of the special facts, or the role that he has played in any negotiations pending the litigation, that would certainly constitute a legitimate justification for avoidance of the clause. It will be a question of fact whether such apprehension is well founded and such bias, or a reasonable possibility of it, may be inferred.'


The two cases, however, do not stand in conflict, as one may accept that an arbitration clause referring a dispute to a particular person cannot be disregarded on the ground that the person concerned is in substance a Judge in his own cause, but it can be so disregarded if there is sufficient reason to suspect that he will act unfairly. One may refer to an authority in IVKS & Barker v. Williams wherein it has been stated :


'An arbitration clause referring dispute to the engineer of one party cannot be disregarded on the ground that the engineer is in substance a Judge in his own case unless there is sufficient reason to suspect that he will act unfairly.'


and another decision is Scersisv v. Mersey Decks & Harbour Board (1894 2 QB 667), in which it has been stated,"


... If it was not for the agreement of the parties - if the rule applicable to judges were to be applied it is obvious that it would be impossible to say that the engineer, under whose superintendence the work has to be done, could act as Arbitrator, because some persons would suspect him of being biased in favour of the parties whose servant he was. But that cannot be the case here because both parties have agreed that the engineer, though he is might be so suspected, shall be the arbitrator. A stranger case then that must, therefore, be shown. It must, in my opinion, be shown if not that he would be biased, that atleast there is a probability that he would be biased. That seems to us distinctly to have been decided in Jackson v. Barry Railway Company 1893 Ch 238).


"After the above, the Bench in M/s. Indian Oil Corporation Ltd. v. M/s. Poppat Jamal & Sons (supra) has said"



we need not multiply the decisions. We must straightway come to the facts and state that for the reason of certain bias that may be flowing from the conduct of the Regional Manager, who according to the plaintiff/respondent was ill disposed towards it, that would not be sufficient to discredit the arbitrator who may not be deemed to be biased only because another officer of the same Corporation acted somewhat prejudicially against the interests of the plaintiff-respondent".


To state thus in the nutshell, the doctrine of bias on the principle nemo judex non causa sua is applied to the arbitrator only when the arbitrator is found to have done some act that would create apprehension or show the existence of bias. Merely for the reason that the arbitration clause assigned the task of nominating the arbitrator from amongst the engineers of the defendant-appellant, it will not be possible to say that any engineer nominated by him shall be deciding his own cause or that he shall be acting unfairly. Had attention of the learned single Judge, who decided the case only on 23.9.1992, been drawn to the authorities on the subject including the Bench decision of this court in M/s. Indian Oil Corporation Ltd. v. Poppat Jamal & Sons (supra), he would not have accepted the contention of the learned counsel for the respondent that the nominee of the Engineer-in-Chief to act as the arbitrator shall be deciding his own cause.


4. It is somewhat intriguing, once it is accepted that the arbitration clause is valid and that it shall bind the parties, how a party will say, reference to the arbitration is an agreement but not reference to the nominee of the Engineer-in-Chief. The plaintiff-respondent has come to the court complaining that the defendant failed to discharge the contractual obligations of referring the dispute to arbitration as agreed to between the parties in terms of Clause 70, above quoted, and Clause 7(b) of the tender notice. There are materials on the record to show that the defendant-appellant was not very keen or prompt in responding to the notice of the plaintiff-respondent. No fault thus can be found with the plaintiff-respondent coming to the court for enforcement of the arbitration clause and the court exercising its jurisdiction under Section 20 of the Arbitration Act. Exercise of any jurisdiction by the court, however, has certain well known limitations of rules of prudence and administration of justice. Merely because the court has got power, it shall not appoint arbitrators ignoring the rule that parties should be asked to act in accordance with the obligations created under the contract to which they were/are willing parties. A Bench of this court in M/s. Ama Corporation, Madras v. Food Corporation, of India 1981 AIR(Mad) 121), in a similar situation found erroneous the appointment of an arbitrator straightway. The court has said as follows :"


We are inclined to agree with the contention of the learned counsel for the appellant that the appointment of an arbitrator contrary to the terms of the arbitration agreement is not possible. Section 20 contemplates any of the parties to an arbitration agreement, coming before the court, for filing that agreement and for setting up a machinery for arbitration, in pursuance of the agreement. Though in this case the learned trial Judge has not specifically passed an order, directing the filing of the arbitration agreement, the fact that he has chosen to appoint an arbitrator on the basis of the arbitration agreement, clearly leads to the inference that the learned Judge has taken the arbitration agreement on file. The order appointing an arbitrator has to naturally follow the filing of an award, once an arbitrator is appointed by the trial court, it will mean that there is a direction also for the filing of the arbitration agreement. Without filing such an arbitration agreement, the order appointing an arbitrator by the court is not legally possible.


Therefore, we construe the order of the trial court as one directing the filing of the arbitration agreement and the appointment of an arbitrator. It is in this view, we hold this appeal as maintainable as directed against an order directing the filing of an arbitration agreement, falling under Clause (iv) of Section 39 of the Arbitration Act."


The Bench has then said :


"One a due consideration of the matter, we are of the view that the order of the trial court, appointing an arbitrator of its choice, cannot be sustained in law especially in the face of the various clauses contained in the arbitration agreement. As already pointed out, the arbitration agreement contemplates the appointment of an arbitrator by the Managing Director of the Food Corporation of India, and if the appointment of such an arbitrator is not possible, there should not be any arbitration at all for resolving the disputes between the parties. In this case, the respondent has not given any reason as to why the arbitration agreement by the parties under the arbitration agreement could not be resorted to and that an arbitration outside the procedure set out in the arbitration agreement is called for.


"5. Mr. Raghavan, however, had drawn our attention to a judgment of the Supreme Court in the case of Union of India v. Prafulla Kumar Sanyal, (supra). We have however, the advantage of the consideration of that very judgment by the Bench deciding of the case in M/s. Ama Corporation, Madras v. Food Corporation of India (supra). The Bench has referred to this judgment of the Supreme Court and said :"*

As pointed out by the Supreme Court in Union of India v. Prafulla Kumar, (supra), normally the court should make an order of reference to the arbitrator appointed by the parties under the arbitration agreement. However, the court after considering the feasibility of appointing an arbitrator according to the terms of the contract finds that it is not feasible, it can refer the disputes to an arbitrator not contemplated by the parties. In this case, the respondent has not approached the Managing Director of the Food Corporation of India for appointing the arbitrator, as provided in the arbitration agreement. It is also not its case that the arbitration contemplated by the parties under the arbitration agreement is not feasible at all. In these circumstances, we have to give effect to the solemn agreement entered into between the parties, as regards the manner and method of appointment of an arbitrator agreed to by them."


The Bench has also referred to an earlier judgment of the Supreme Court in the case of D. Gobindram v. Shamji & Co., in

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which it has been pointed out that while exercising court's power of appointment of an arbitrator under Section 20(4) of the Arbitration Act, if the parties had appointed the arbitrator/arbitrators the reference should be to them and if the parties do not agree, the court may be required to make a decision as to who should be selected as an arbitrator. In principle, since we are in total agreement with the view expressed by a Bench of this court in the case of M/s. Indian Oil Corporation Ltd. v. Poppat Jamal & Sons (supra) and on facts, as we have found it is not possible to presume any bias, we are of the opinion that parties must be asked to abide by the arbitration clause and for the said reason, the appellant must proceed to appoint an arbitrator in terms above mentioned. To facilitate the arbitration and an early disposal of the dispute between the parties, we desired to the appellant to give a list of names of the arbitrators nominated by the Engineer-in-Chief and serve a copy of the same upon the learned counsel for the plaintiff-respondent, so that, if possible, the court could ensure appointment of a person nominated by the Engineer-in-Chief, who was acceptable to the plaintiff-respondent as well. The appellant has filed a list of names and served a copy thereof upon the learned counsel for the respondent-plaintiff. The respondent, however, has not shown any willingness of accepting one or the other of them as the sole arbitrator. As we have found already, it is no longer open to the plaintiff respondent to deny any part of the agreement and if we have found that the defendant-appellant is bound by the arbitration clause of the agreement, we have no reason to hold that the plaintiff-respondent is not bound by it. We propose to adopt the direction of the Supreme Court in the case of Union of India v. Prafulla Kumar (supra), we accordingly direct the appellant to forthwith ensure nomination of an arbitrator by Engineer-in-Chief and the arbitrator nominated by the Engineer-in-Chief to issue notice to the parties and to proceed to decide the dispute aforementioned in accordance with law. The appeal is accordingly allowed. The Engineer-in-Chief will appoint the arbitrator within a period of two weeks from the date of receipt of a copy of this order, failing which the arbitrator appointed by the learned single Judge shall be deemed to have been appointed arbitrator and proceed accordingly, according to law. There shall be no order as to costs in this appeal.
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