Bihar State Mineral Dev. Corpn. & Anr Vs. Encon Builders (I) Pvt.
Ltd  Insc 396 (21
& S.B. Sinha. S.B. Sinha, J :
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.
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.
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.
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.
37, 59 and 60 which, according to the appellants, are relevant for the purpose
of this case read thus :
It will be at the absolute discretion of the Managing Director of the
Corporation to terminate the agreement in the following events :
the excavation work is found to be unsatisfactory.
the agency be involved in any action involving moral turpitude.
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.
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.
the agency fails to pay full wages to workmen as per prevailing act/awards from
the management premises and in presence of Corporation authorised
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."
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
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.
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.
22.6.1995 was the date fixed for hearing of the matter before Appellant No.2
which was subsequently adjourned to 6.7.1995.
respondent herein questioned the validity of clause 60 of the agreement by a
letter dated 15.7.1995.
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.
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.
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,
agreement is in writing;
agreement is to submit a present or a future difference;
is to be referred to a named arbitrator; and
decision of the arbitrator is final.
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].
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].
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
essential elements of an arbitration agreement are as follows :
There must be a present or a future difference in connection with some
There must be the intention of the parties to settle such difference by a
parties must agree in writing to be bound by the decision of such tribunal.
The parties must be ad idem.
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.
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.
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.
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
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.
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.
bias would lead to an automatic disqualification where the decision maker is
shown to have an interest in the outcome of the case.
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.
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].
Judicial Review of Administrative Action, by De Smith, Woolf and Jowell (Fifth
Edition at page 527), the law is stated in the following terms :
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)".
"The Law and Practice of Commercial Arbitration in England by Sir Michael J. Mustill and
Stewart C. Boyd, it is stated :
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 :
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.
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.
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 :
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.
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.
case (supra), this court was concerned with an application under Section 34 of
the Arbitration Act. It was held :
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 :
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.
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 :
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
K.K. Modi's case (supra), clause 9 of a memorandum of agreement came up for
consideration, which was in the following terms :
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.
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 :
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.
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.
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.
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.
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