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Oil Natural Gas Corporation Limited, represented by its Executive Engineer & Another v/s M/s. Rao and Rao Engineering Works, Represented by its Partner Venkataratnam & Another

    C.M.A. No. 1132 of 2001

    Decided On, 26 August 2013

    At, High Court of Andhra Pradesh


    For the Appellants: E. Manohar, Senior Counsel. For the Respondents: D. Prakash Reddy, Senior Counsel.

Judgment Text

L. Narasimha Reddy, J.

This Civil Miscellaneous Appeal under Section 39 of the Arbitration Act, 1940 (for short 'the Act') is filed against the decree and order dated 23-02-2001 in O.P.No.129 of 1998 passed by the learned Principal Senior Civil Judge, Rajahmundry.

The appellants filed the O.P. against the respondents with a prayer to set aside the award dated 02-05-1998 passed by the Arbitrator, the 2nd respondent. The trial Court dismissed the O.P. Through the same order, the trial Court made the award as Rule of Court.

Briefly stated the background is that the appellants awarded a contract to the 1st respondent, in relation to a work of earth filling and internal hardening of Nimakuru-1 Drill site in Chinna Muttevi village, Krishna District. An agreement dated 09-01-1989 was entered into. The value of the work was Rs.11,42,300/-, and the work was supposed to be completed within a period of two months from the date of handing over the site. However, on account of certain reasons, the contract was rescinded, before expiry of the stipulated period.

The 1st respondent got issued a legal notice dated 07-03-1990 claiming a sum of Rs.7,44,638/- under different heads. Request was also made to appoint an Arbitrator for settlement of the dispute, as provided under Clause 25 of the agreement. One Sri A.K. Raju, the Chief Geo Physicist of the appellants was appointed as the sole Arbitrator for resolution of the dispute. However, A.K. Raju retired from service on 31-08-1992 without passing the award. In his place, another Chief Engineer by name A.K. Kundu was appointed.

Stating that the Arbitrator by name A.K. Kundu did not pass the award within four months, stipulated in the order of reference and that he misconducted himself, the 1st respondent filed O.P.No.103 of 1993 under Sections 11 and 12 of the Act with a prayer to appoint another Arbitrator in the place of Mr. Kundu, under Section 13 (2) (a) of the Act. The O.P. was allowed on 30-01-1996 and the 2nd respondent herein was appointed as Arbitrator. The order dated 30-01-1996 in O.P.No.103 of 1993 was challenged by the appellants by filing Civil Revision Petition before this Court and the same was dismissed by this Court. It is also stated that Special Leave Petition filed against the order in the revision was dismissed by the Supreme Court.

The 2nd respondent entered appearance and after hearing both the parties, passed an award for a sum of Rs.5,51,948/- under different heads. The said award was challenged in the O.P. and the O.P. was dismissed.

Sri E. Manohar, learned Senior counsel for the appellants submits that the very appointment of the 2nd respondent as Arbitrator by the trial Court was untenable since the power to appoint Arbitrator is exclusively vested in the appellants and that such a step has already been taken. He contends that Clause 25 of the agreement does not permit appointment of Arbitrator through any other reasons and the view taken by the trial Court cannot be sustained in law. He submits that in view of the judgment of the Apex Court in A. Mohammad Yunus (dead) by L.Rs v. Food Corporation of India and another,(2000 AIR SCW 4953 (2)) the 2nd respondent is "quorum-non-judis" and the award passed by him is liable to be set aside. He placed reliance upon the judgment of the Kerala High Court in Food Corporation of India and another v. A. Mohammed Yunus,( AIR 1987 Kerala 231 (1)) in support of his contention that the very appointment of the 2nd respondent was untenable. He has also advanced arguments on merits, in particular, about the quantum of compensation awarded and the rate of interest.

Sri D. Prakash Reddy, learned senior counsel for the 1st respondent, on the other hand, submits that the power to appoint the Arbitrator is very much vested in the appellants, and in fact, the appellants themselves appointed the Arbitrator for the dispute raised by the respondent. He contends that once an Arbitrator is appointed, the matters pertaining to the misconduct of the Arbitrator can be dealt with only under Sections 11 and 12 of the Act and it is only the Court, which is vested in the power not only to decide the question of misconduct on the part of the Arbitrator, but also to pass orders to replace him with another. He submits that the ratio laid down by the Supreme Court or the Kerala High Court, in the judgments cited above, no bearing on the facts of the present case. He further submits that the appellants challenged the order passed by the trial Court in O.P.No.103 of 1993 appointing the 2nd respondent as Arbitrator and once that was upheld by this Court and the Supreme Court, it is not open to them to raise that very contention.

In O.P.No.129 of 1998, the trial Court framed only one point for consideration viz., whether the award dated 28-05-1998 passed by the Arbitrator-2nd respondent is liable to be set aside. The record does not indicate that any oral or documentary evidence was adduced. Obviously, the award passed by the 2nd respondent is made as rule of court, and the O.P. was dismissed.

In view of the extensive arguments by the learned counsel for the parties, the points that arise for consideration in this appeal are, -

1) Whether the clause 25 of the agreement would regulate the conduct of Arbitrator appointed under it?

2) Whether the power of a Civil Court under Sections 11 and 12 of the Act is in any way eroded, on account of provisions similar to clause 25 of the agreement, in the instant case?

3) Whether the award passed by the 2nd respondent warrants any interference?

Point Nos.1 and 2:

The 1st respondent was entrusted with a civil work of earth filling and hardening of the soil, to be completed within a period of two months. However, much before the expiry of that period, the contract was terminated in exercise of power under clause 3 of the agreement. The relevant portion of clause 3 reads as under:

'The Engineer-in-Charge may without prejudice to his right against the contractor in respect of any delay of inferior workmanship or otherwise or any claims for damage in respect of any breaches of the contract and without prejudice to any right of remedies under any of the provisions of this Contract or otherwise and whether the date for completion has or has not elapsed by notice in writing, absolutely determine the contract in any of the following cases:

Clause-3 (a) reads:

"to determine or rescind the contract as aforesaid (of which termination or rescission notice in writing to the Contractor under the hand of the Engineer-in-Chief shall be conclusive evidence). Upon such determination or rescission the security deposit of the contractor shall be liable to be forfeited and shall be absolutely at the disposal of the Corporation."

That rescission of the contract gave rise to a claim by the 1st respondent under several heads. He got issued a notice claiming a sum of Rs.7,44,638/- and made a request to appoint an Arbitrator in terms of clause 25 of the agreement.

Normally, the agreements or contracts provides for appointment of Arbitrator, who is to be chosen by the parties. There may also be instances of a power to appoint Arbitrator being vested in one of the parties. The clause providing appointment of Arbitrator, in the instant case, is somewhat extraordinary. For all practical purposes, it makes the appellant as the ultimate authority. It prohibits any other person being appointed as Arbitrator. It is brought to notice of this Court that similar clauses are incorporated in the contracts that are entered into by the Central Government Public Undertakings. The clause 25 of the agreement between the appellants and the 1st respondent reads as under:

"Except where otherwise provided in the contract all questions and disputes relating to the meaning of the specification designs, drawings and instructions herein before mentioned and as the quality of workmanship or materials used on the work or as to any other question, claim, right matter or thing whatsoever, in any way arising out of or relating to the contract, designs, drawings specifications, estimates, instruction, orders or their conditions or otherwise concerning the work or the execution of failure to execute the same whether arising during the progress of the work or after the completion of abandonment thereof shall be referred to the sole arbitration of the person appointed by the Chief Engineer (Civil), at the time to dispute. It will be no objection to any such appointment that the arbitrator so appointed is a Commssion's employee, that he had to deal with the matters or to which the contract relates and that in the course of his duties as Commission's employee he had expressed views on all or any of the matters in dispute of difference. The arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason, then Chief Engineer (C) shall appoint another person to act as arbitrator in accordance with the terms of the contract. Such person shall be entitled to proceed with the reference from the stage at which it was left his predecessor. It is also a term of this contract that no person other than a person appointed by such Chief Engineer (C) as aforesaid should act as arbitrator and if for any reason that is not possible, the matter is not to be referred to arbitration at all.

Subject as aforesaid the provisions of the Arbitration Act, 1940, or any statutory modification or re-enactment thereof and the rules made thereunder and for the time being in force shall apply to the arbitration proceeding under this clause.

The arbitrator shall decide in that proportion the arbitrator's fees as well as the cost of arbitration proceedings shall be borne.

The arbitrator may with the consent of parties enlarge the time, from time to time, to make and publish his reward."

After receipt of notice from the 1st respondent, the Chief Engineer of the appellants appointed one Mr. A.K. Raju as Arbitrator. However, he retired from service, without passing the award. Therefore, he was replaced by another, and four months period was stipulated for completion of the arbitration.

The 1st respondent approached the Civil Court by filing O.P.No.103 of 1993 under Sections 11 and 12 of the Act. The said O.P. was allowed and Mr. A.K. Kundu, the Arbitrator, was replaced with the 2nd respondent. The order passed by the trial Court became final with the dismissal of C.R.P. by this Court and S.L.P. by the Supreme Court.

It is strongly urged that the Civil Court lacked jurisdiction to appoint the 2nd respondent and despite the order passed in O.P. No.103 of 2003 having been upheld, the question of want of jurisdiction can be raised at subsequent stage also.

The plea as to lack of jurisdiction on the part of the Civil Court is rather difficult to accept. Clause 25 no doubt reserves to the appellant, the power to appoint an Arbitrator. Even if an O.P. is filed for appointment of an Arbitrator in the first instance itself, dehors such a clause, it is difficult to take the view that the court does not have the jurisdiction to entertain the O.P. The jurisdiction of a Civil Court is almost unqualified and it is only when any specific provision takes away its jurisdiction, that it can be said to be lacking jurisdiction to that extent. Such exclusion must invariably through a provision enacted by the competent legislation. Howsoever important a contract may be, and whatever be the status of the parties thereto, the jurisdiction of a Civil Court cannot be taken away through a clause in a contract.

Even if an O.P. is filed for appointment of an Arbitrator in the teeth of such a clause, it does not, by itself become untenable. It is a different matter that the Court must take into account, the purport of agreement. Since it is filed for enforcement of a clause in the contract, the Court would be guided by relevant clauses. It is in this context, that the Court cannot ignore the specific understanding between the parties and may refuse to take any steps, which run contrary to the clause. It is far from stating that the Court lacks jurisdiction to appoint an Arbitrator.

The O.P.No.103 of 1993 filed by the 1st respondent was not at all for appointment of Arbitrator. By the time it was filed not only the appellants appointed an Arbitrator but also have replaced him on account of his superannuation. The second paragraph of Clause 25 makes it clear that the provisions of the Act would apply, once an Arbitrator is appointed. The obvious reference was to Sections 11 and 12 of the Act. Further, Clause 25 does not, and in fact, cannot deal with the matter pertaining to the misconduct on the part of the Arbitrator. It is squarely covered by Sections 11 and 12 of the Act, which read as under:

Section 11: Power to Court to remove arbitrators or umpire in certain circumstances.

(1) The Court may, on the application of any party to a reference, remove an arbitrator or umpire who fails to use all reasonable dispatch in entering on and proceeding with the reference and making an award.

(2) The Court may remove an arbitrator or umpire who has mis-conducted himself or the proceedings.

(3) Where an arbitrator or umpire is removed under this section, he shall not be entitled to receive any remuneration in respect of his services.

(4) For the purposes of this section the expression" proceeding with the reference" includes, in a case where reference to the umpire becomes necessary, giving notice of that fact to the parties and to the umpire.

Section 12: Power of Court where arbitrator is removed or his authority revoked.

(1) Where the Court removes an umpire who has not entered on the reference or one or more arbitrators (not being all the arbitrators), the Court may, on the application of any party to the arbitration agreement, appoint persons to fill the vacancies.

(2) Where the authority of an arbitrator or arbitrators or an umpire is revoked by leave of the Court, or where the Court removes an umpire who has entered on the reference or a sole arbitrator or

all the arbitrators, the Court may, on the application of any party to the arbitration agreement, either-

(a) appoint a person to act as sole arbitrator in the place of the person or persons displaced, or

(b) order that the arbitration agreement shall cease to have effect with respect to the difference referred.

(3) A person appointed under this section as an arbitrator or umpire shall have the like power to act in the reference and to make an award as if he had been appointed in accordance with the arbitration agreement.

From a perusal of the same, it becomes clear that if a party to arbitration is able to establish that there was misconduct on the part of the arbitrator, the court can appoint another person as arbitrator. That power can never be exercised by a party to the arbitration. When the appellants challenged the order passed by the trial Court in O.P.No.103 of 1993, the C.R.P. as well as the S.L.P. were dismissed. The appellants cannot ignore the same and challenge appointment of the 2nd respondent by taking the plea that the Civil Court lacked jurisdiction.

In Food Corporation of India v. A. Mohammed Yunus (2nd supra), the Kerala High Court dealt with a case where an arbitrator was appointed in application filed under Section 20 of the Act, for the first time, ignoring purport of a clause, which reserved the right of appointment of an arbitrator to one of the parties, Food Corporation of India in that case. The Court appointed arbitrator and he passed the award. At the stage of enforcement of the award, the plea as to the lack of jurisdiction on the part of the Civil Court for appointing the Arbitrator, was raised. It is also noticed that an objection to the very appointment of the Arbitrator was raised in the course of arbitration proceedings. The Court took the view that the appointment of an arbitrator was not in accordance with law. The same judgment was upheld by the Supreme Court in A. Mohammad Yunus v. Food Corporation of India and another (1st supra).

The facts of the case on hand are totally different. The appointment of the 2nd respondent is not under the application under Section 20 of the Act. On the other hand, the Arbitrator was appointed by the appellants themselves and what all the Civil Court has done was that it recorded a finding that the arbitrator appointed by the appellants misconducted and in the exercise power under Section 12 of the Act, replaced him with the 2nd respondent.

There is another impediment in the challenge made by the appellants, to the award. It is only when the challenge to the award or the appointment of Arbitrator is on the touchstone of the provisions of law, as distinguished from the clauses of an agreement, that it can constitute a ground under Section 30 of the Act. In Inder Sain Mittal v. Housing Board, Haryana and others, ((2002) 3 Supreme Court Cases 175) the Hon'ble Supreme Court explained this distinction as under:

'In view of the foregoing discussions, with reference to the provisions of the Act, we conclude thus:

(i) Grounds of objection under Section 30 of the Act to the reference made, with or without intervention of the Court, arbitration proceedings and the award can be classified into two categories, viz., one emanating from agreement and the other law.

(ii) In case the ground of attack flows from agreement between the parties which would undoubtedly be a lawful agreement, and the same is raised at the initial stage, Court may set it right at the initial stage or even subsequently in case the party objecting has not participated in the proceedings or participated under protest. But if a party acquiesced to the invalidity by his conduct by participating in the proceedings and taking a chance therein cannot be allowed to turn round after the award goes against him and is estopped from challenging validity or otherwise of reference, arbitration proceedings and/or award inasmuch as right of such a party to take objection is defeated.

(iii) Where ground is based upon breach of mandatory provision of law, a party cannot be estopped from raising the same in his objection to the award even after he participated in the arbitration proceedings in view of the well settled maxim that there is no estoppel against statute.

(iv) If, however, basis for ground of attack is violation of such a provision of law which is not mandatory but directory and raised at the initial stage, the illegality, in appropriate case, may be set right, but in such an eventuality if a party participated in the proceedings without any protest, he would be precluded from raising the point in the objection after making of the award.

It has been categorically observed that if the objection is on the basis of any clause contained in the agreement, it cannot be raised in a O.P. filed under Section 30 of the Act, once such party has participated in the arbitration, which led to passing of an award. In the instant case, the entire challenge before the trial Court, or this Court is on the basis of clause 25 of the agreement. It has already been mentioned that clause 25 is of no help the ap

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pellants, once the arbitrator was appointed and the exercise undertaken by the trial Court was only to replace him on proof of acts of misconduct. After the appellants were not successful in their challenge to the order of the trial Court in appointing the 2nd respondent, they participated in the arbitration. They cannot once again raise the ground, which is clearly referable to clause 25. Therefore, the point is answered against the appellants. Point No.3: On merits, several contentions are sought to be urged. We have carefully gone through the award as well as the judgment of the trial Court. Each and every claim of the appellants and the 1st respondent are dealt with, with reference to the available material and it is not demonstrated before us that any serious error crept into the findings. However, we find that the rate of interest awarded by the arbitrator or the trial Court is excessive. The interest at 21% up to the date of the presentation of the claim was made before the 2nd respondent. The Arbitrator allowed certain claims and he awarded pendente lite interest at 18% p.a. The same rate of interest was awarded by the trial Court from the date of its order to the date of realization. What was awarded to the 1st respondent, is a work contract. It is difficult to treat it as a commercial transaction. Added to that, the contract was terminated before any considerable part of the work was executed. We are of the view that 12% interest can be awarded for the three periods viz., for the period preceding the presentation of the claim, for the period between the date of presentation of the claim and passing of the award, and from the date of order of the civil Court to the date of realization. Hence, the Civil Miscellaneous Appeal is allowed in part, upholding the award passed by the 2nd respondent and the decree and order dated 23-02-2001 passed by the trial Court in O.P.No.129 of 1998 in all respects, but reducing the rate of interest to 12% p.a. covering all the three periods referred to above. There shall be no order as to costs. Miscellaneous Petitions filed in this appeal shall stand disposed of.