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Bhagwan Industries Ltd. Vs. Union of India - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtDelhi High Court
Decided On
Case NumberOriginal Miscellaneous Petition No. 33 of 1979
Judge
Reported inAIR1984Delhi44; 1983(5)DRJ131; 1983RLR460
ActsArbitration Act, 1940 - Sections 32
AppellantBhagwan Industries Ltd.
RespondentUnion of India
Advocates: D.K. Sayal and; Rekha Sharma, Advs
Cases ReferredKovur Parvthmma v. Kovur Subbamma and
Excerpt:
arbitration act, 1940 - sections 32 and 33. arbitration clause provided reference of disputes to an officer of the law ministry nominated by the respondent and if that is not possible there shall be no reference to arbitration at all. the petitioner challenged the validity of the clause.; that when a party agrees to the acting of an employee of the other as arbitrator, it cannot later turn round and seek setting at nought such mutually agreed arbitration clause. - - in the meanwhile respondent failed to make available the requisite raw-material and did not fully abide by the term relating to the increases in price from time to time, and as such the petitioner was rendered in position as not to make further supplies. increases in price were as well allowed on the petitioner furnishing..........been pointed out that there has been nothing unusual in the present arbitration clauses as such clauses generally exist in most of the government contracts and they have been acted upon by all sundary and accepted by the courts. large number of awards given by such arbitrators it is next pointed out, have gone against the .government, and this by itself negatives bias or the arbitrators not acting without fear or favor. the service careers of no such arbitrators have been adversely affected, and not a single case has been brought out which can show that any such arbitrator was subsequently victimised for the award given by him. the ministry of law is an independent wing of the government and is not subject to the control or supervision of the director general of supplies and disposals.....
Judgment:

D.R. Khanna, J.

(1) THIS is a petition under Sections 32 and 33 read with Section 35 of the Arbitration Act, seeking revocation of the arbitration agreement existing inter-se parties and for declaring the same as void and invalid.

(2) BRIEFLY stated the background of the facts is that the petitioner's tender for the supply of tie bars worth Rs. 26,04,030.00 was accepted by the Union of India i.i the year 1971. there under according to the petitioner, the respondent Union of India was to supply raw-material in the form of M.S. billets and also revise price from time to time in the given circumstances. Petitioner contends that as a result of this contract, substantial expenses were incurred from its side in installing special types of machines and employing additional skilled and semi-skilled technical staff. Some supplies were thereafter effected. In the meanwhile respondent failed to make available the requisite raw-material and did not fully abide by the term relating to the increases in price from time to time, and as such the petitioner was rendered in position as not to make further supplies. In this manner, the petitioner suffered a loss of Rs. 17.86 lacs. However, respondent without appreciating the genuine difficulties of the petitioner cancelled the contract in June, 1973 and later raised a demand of Rs. 14.13 lacs for breach of contract from the petitioner by letter dated 4.5.1974.

(3) THE petitioner then filed a writ petition bearing No. 1367 of 1974 in this Court seeking quashing of the letter dated 4-5-1974 and the demand of Rs. 14.13 lacs as being vocative of the petitioner's fundamental rights and restraining the respondent from recovering or adjusting the same. Respondent instead of moving an application under Section 34 of the Arbitration Act for the stay of the proceedings, took steps in the same by filing an affidavit by way of written statement. That writ petition is still pending.

(4) HOWEVER, inspire of this, the Director General of Supplies and Disposals by letter dated 30-6-1976 appointed Shri N.S. Mehta as the sole aroitrator. This was purported to be under clause 24 existing in the contract which is as under :-

'24.In the event of any question, dispute or difference arising under these conditions or any special conditions of contract, or in connection with this contract (except as to any matters the decision of which is specially provided for by these or the special conditions) the same shall be referred to the sole arbitration of an officer in the Ministry of Law, appointed to be the Arbitrator by the Director General of Supplies and Disposals. It will be no objection that the arbitrator is a government servant, that he had to deal with the matters to which the contract relates or that in the course of his duties as a Government servant he has expressed views on all or any of the matters in dispute or differences. The award of the arbitrator shall be final and binding on the parties to this contract. In the event of the arbitrator dying, neglecting or refusing to act or resigning or being unable to act for any reason, or his award being set aside by the court for any reason, it shall be lawful for the Director General of Supplies and Disposals to appoint another arbitrator in place of the outgoing arbitrator in the manner aforesaid. It is further a term of this contract that no person other than the parson appointed by the Director General of Supplies and Disposals as aforesaid should act as arbitrator and that, if for any reason that is not possible, the matter is not to be referred to arbitration at all. The arbitrator may from time to time with the consent of all the parties, to the contract enlarge the time for making the award. Upon every and any such reference, the assessment of the costs incidental to the reference and award respectively shall be in the discretion of the arbitrator. Subject as aforesaid, the Arbitration Act, 1940 and the rules there under and any statutory modifications thereof for the time being in force shall be deemed to apply to the arbitration proceedings under this clause. Work under the contract shall, if reasonably possible, continue during the arbitration proceedings and no payment due to or payable by the purchaser shall be withheld on account of such proceedings The venue of arbitration shall be the place from where the acceptance note is issued or such place as the arbitrator at his discretion may determine. In this clause the expression ''The Director General of Supplies & Disposals' means the Director General of Supplies and Disposals for the time being and includes, if there be no Director General of Supplies and Disposals the officer who is for the Supplies Organisation, whether in addition to other functions or otherwise.'

(5) THE petitioner asserts that this clause is void ab-initio inasmuch as the Union of India is made competent to appoint one of its employees as the sole-arbitrator. Such an employee it is pleaded has an inherent bias in favor of his employer government and is constantly in fear of audit vigilance and public accounts committee etc. In the circumstances the petitioner carries a reasonable apprehension that he would not be able to dispense justice without fear or favor and as such the arbitration agreement vitiates the very fundamental principles of fair and just arbitral adjudication and of public policy. It is also against the principles of natural justice as a person cannot act as a judge in his own cause. All claims of Union of India, it is next pointed out, are made or rejected after consulting the Law Ministry, and an officer of this Ministry nominated as an arbitrator would try to uphold the earlier opinion given in the matter by his Ministry. Rather the opinion of the Law Ministry is considered as a precedent binding upon the officers of the Ministry and in the circumstances they cannot act with open mind. The arbitration clause is further pleaded to be vague inasmuch as it permits the respondent to fill up the vacancies at all times which is arbitratory. The basic principle of arbitration is to appoint a forum of parties and not confer unilateral power with one of them. In the present case, the arbitration clause providing that if for any reason the appointment of arbitrator by the Director General of Supplies and Disposals is not possible, the matter is not to be referred to arbitration derogates the opinion of the legis'ation embodied in Section 8 and 12 of the Arbitration Act which vests power in the court of law to appoint an arbitrator. The clause is also pleaded to bs mala-fide and discriminatory inasmuch as unlike the C.P.W.D. arbitration clauses providing for a reasoned award where the amount claimed is of more than Rs. 50,000.00 , this is not en- joined in the present case. No choice has been left to the petitioner to select an arbitrator.

(6) SUBSEQUENTLY the Director General of Supplies and Disposals is said to have appointed Dr. Bakhshish Singh, Additional Legal Advisor, Ministry of Law as the sole arbitrator in place of Shri N.S. Mehta vide his letter dated 28-8-1977. He has proceeded to enter upon the reference. Hence the present petition.

(7) THE respondent Union of India, has contested this application and has pointed out that the petitioner having voluntarily entered into the contract which included the arbitration clause was bound by the same and if now estopped from challenging that in any manner. It has been admitted that the tender of the petitioner for the supply of tie bars was accepted. However, it is pointed out that out of the total quantities of 2176 MT of billets supplied by the respondent to the petitioner, tie bars consuming 800 Mts. of billets only were supplied leaving a balance 1,375 billets of raw-material retained unutilised by the respondent. Increases in price were as well allowed on the petitioner furnishing supporting sale-purchase vouchers. The petitioners, however, failed to honour the commitments under the contract and as such the same had to be cancelled and risk purchase was effected. In this process, the respondent suffered a loss of Rs. 14.13 lacs. The demand for the same is pleaded to be justified. In any case the claims of both sides have gone to arbitration and they will receive adjudication in due course. The subject-matter of the wait petition it is further pleaded, was different from the claim of the respondent in arbitration.

(8) THE following issues were framed :

1.Is the arbitration clauses void on the grounds alleged in paragraph 14 of the petition 2. Has the reference to arbitration been rendered void, and inoperative for the reasons stated in paragraphs 18 and 19 of the petition 3. Relief. Is it's No. 1

(9) THE sun and substance of the case of the petitioner assailing the validity of the arbitration clause is that it confers unilateral power on the Director General of Supplies and Disposals to appoint any officer of the Law Ministry of the Union of India as the sole arbitrator and this is arbitrary, mala fide and against the principles of natural just'.ce. Such an employee of the Government acting as an arbitrator in its own cause is bound to carry bias in favor of his employer, and even otherwise cannot independently act without fear and favor, as his career itself depends upon the goodwill of the employer and is subject to the latter's constant vigil. The exclusion of the petitioner in the choice of the arbitrator and the incumbency enjoined that if no officer of the Law Ministry is available for acting as an arbitrator, the arbitration clause would not be operative, amply brings out the one sided clause directed by the respondent and this shows that they have confidence in their own employee only. The petitioner had little choice to not agree to such a clause as it had to undertake contracts in the course of its business, and in the present state of set-up in the country in which large scale commercial and semi-commercial activities are embarked upon by the Government, the citizen has to willy-nilly agree to the dictates of such arbitrary clauses in order to earn his livel.hood and operate his business.

(10) FROM the side of the respondent on the other hand, it has been pointed out that there has been nothing unusual in the present arbitration clauses as such clauses generally exist in most of the government contracts and they have been acted upon by all sundary and accepted by the courts. Large number of awards given by such arbitrators it is next pointed out, have gone against the .government, and this by itself negatives bias or the arbitrators not acting without fear or favor. The service careers of no such arbitrators have been adversely affected, and not a single case has been brought out which can show that any such arbitrator was subsequently victimised for the award given by him. The Ministry of Law is an independent wing of the government and is not subject to the control or supervision of the Director General of Supplies and Disposals who had placed the contract with the petitioner. Highly qualified legal minds, some of whom are chosen from the judicial and 'legal professional background are officials of the Law Ministry, and generally senior officers are assigned the work of arbitration. The apprehension formulated by the petitioner are thereforee pleaded to be entirely misplaced. Rather it is contended that the petitioner is designedly acting to not allow the arbitratration to proceed so that the determination of the large claim of the respondent is thwarted.

(11) A number of decisions have been cited from both the si les In the case of Registrar of Cooperative Societies v. Dhararn Chand reported as : [1962]2SCR433 , there were allegations of defalcations by 'hare holders of a cooperative bank against the members of the managing committee. the allegations were brought to the notice of the Registrar of the Cooperative Societies who appointed an Inspector to hold an immediate enquiry. A firm of chartered accountants was also appointed to investigate and audit the accounts. Later a show-cause notice was issued to the members of the managing committee why they should not be suspended and even an administrator of the bank was appointed after removing the managing committee. In the mean while on an application moved under rule 18 which authorised the Registrar to decide any dispute brought before him under rule either himself or through the appointment of one or more arbitrators, the Registrar appointed an advocate as an arbitrator. However, later on the arbitrator expressing his inability to proceed with the reference on the ground of ill-health, the Registrar set aside the order order of his appointment and informed the parties that he would decide the dispute himself. This was challenged by a petition before the Judicial Commissioner Ajmer, and one of the grounds given was that the Registrar was in the position of a party and had expressed his opinion unequivocally against the respondent and other members of the managing committee. Allegations of official bias were as well made. All this was accepted. The Supreme Court, however, while reversing the decision of the Judicial Commissioner dismissed the petition after observing that there could not be any official bias in the Registrar on ground that he had earlier given notice for the purpose of removal of the managing committee a':d further that such a bias did not disentitle him to act as a Judge or arbitrator under rule 18. It was also observed that even if the Registrar was the administrative head of the department, there was nothing inherent in the situation which showed any official bias whatsoever in him so far as the adjudication of the dispute was concerned. There was no reason to suppose that if any of his subordinates or the auditors appointed by him were in any way found to be connected with the fraud, he would on put the responsibility where it should lie. thereforee, there was nothing in the situation which made the Registrar a biased person who could not act as a Judge or arbitrator in the case.

(12) IN Ives & Barker v. Willans (1894) 2 Ch. D. 473, the validity of an arbitration clause refering disputes to the Engineer of one party was upheld, and it was not accepted that the Engineer was in substance a judge in his own case unless there was sufficient reason to suspect that he would not act fairly. The other side was found to have voluntarily agreed to that arbitration clause. In 1975 MP 40, Shivlal Prasrdv. Union of India, the nomination of two high ranking railway officers as arbitrators by the' General Manager of the Railway was accepted as legal, and this circum- stance alone could not be considered as unduly favoring the railway in the absence of anything to show that they were favorably inclined towards the department or prejudicially disposed towards the contractor or had secret consultations with the people of the Arbitration Cell to dupe the contractor of his legitimate price for the work don--. As such the award was upheld.

(13) SIMILARLY in Daulat Ram Rala Ram v. State of Punjab, , it was observed that normally the parties to an arbitration are entitled to have their deputes settled by an unbiased arbitrator with no interest in the result of the proceedings. The fact that the Superintending Enigneer was interested to the extent that he was employed and paid by the government would, by itself, be sufficient to disqualify him from acting as arbitrator in a contract relating to government work. Rather it was observed that where it had not been shown that the Superintending Engineer was biased or that there was a probability that he would be biased the presumption was that the gentleman, holding such a high officer would keep in mind the duties and responsibilities of an arbitrator and would act as an honest, disinterested and impartial tribunal, absolutely uninfluenced by the fact that he was the head of the department to which the dispute related. The Calcutta High Court in AIR 1965 Cul 404, Union of India v. M/s. Himco (India) Private L t d.. reversed the appointment of a third person by the Court, and observed that when the general conditions of the contract envisaged appointment of an arbitrator by the Director General of Supplies and Disposals, the reference should accordingly be made. The facts of that case show that in reply to the query whether the contractor agree I to sole arbitration by the Director General of Supplies and Disposals, or his nominee, the contractor had while submitting tender, stated that they felt that there should be an unattached arbitrator. However, they later concluded under the general conditions of contract which provided for arbitration by the Director General of Supplies and Disposals or his nominee. This was upheld. In Commander, Bangahre Area and another v. Armugam Nagarthnam & Co. AIR 1954 Mys 46, the Mysore High Court has also upheld the legality of the appointment of a Military Officer as arbitrator in a contract with department. It was observed that the arbitrator could not be said to have secret interest in the subject matter of submission or in any of the parties. In President of India v. Kedar Singh AIR 166 J&K; 113, the Court as well observed that the arbitration clause giving power to one party to appoint anybody as arbitrator was valid and the mere fact that the arbitrator was servant of the party could not vitiate the proceedings AIR 1935 Mad 349, Kovur Parvthmma v. Kovur Subbamma and another, on which the petitioner placed reliance, is distinguishable inasmuch as one of the parties was an illiterate woman who was not thought aware of the implications and consequences of the reference to arbitrator It was observed that it was incumbent upon the party desiring to uphold the reference, to show that not only was the plaintiff dimly conscious of the fact that the arbitrator had an interest but that she throughly comp ended the transaction and was made aware of the full implications thereof.

(14) IT is thus obvious that in all these cases it has been unanimously held that where parties willingly enter into an arbitration ageement, permitting one of the parties to appoint an arbitrotor, the same cannot be struck down. In the present case that party is none other than a vast body, like the Union of India. The petitioner had specifically agreed to appointment of an arbitrator by the Director General of Supplies and Disposals. The arbitrator has to be an official of the Ministray of Law which is not connected with the Director General of Supplies and Disposals. As pleaded from the side of the respondent that ministry has number of senior officers, well versed in legal matters and such arbitrations. Not unoften they have delivered wards against the government. They do not have any personal interest one way or the other. Not a singe instance has been brought out where an officer giving award in favor of the government, was given undue promotion, or the other deciding against the government, was victimised. The allegations of the petitioner are vague and generlised, and I do not find any basis for carrying reasonable apprehension that the petitioner would not get due justice. I am conscious in this regard that in the matter of arbitration, persons who command the mutual confidence of both sides should act as arbitrator. However when a party agrees to the acting of an employee of other party as arbitrator, it has to be taken that the former fully understanding the implication thereof, displayed confidence in such arbitrator. It cannot later turn round and seek setting at naught such mutually agreed arbitration clause. There can be further no dispute that reasonable apprehension does not necessarily mean that specific instances should be brought out to show bias. An apprehension which appears to be reasonable is sufficient to revoke the authority of an arbitrator. However, what is reasonable, cannot be relegated to vague surmises, fanciful generalisations or giving vent to surreptitious design to thwart arbitration.

(15) LAM further of the opinion that simply because in C.P.W.D. contracts. requirements of reasoned awards are enjoined where the disputes involved exceed Rs. 50,000.00 , would not render the contracts entered into by other departments as invalid. In case the law of arbitration as presently prevalent in India, permits an arbitrator to give his award in any particular manner, reference cannot be issued with some fetters attached. Moreover, the unilateral appointment of arbitrator and filling up of vacancies finds its base in the mutually agreed contract between the parties.

(16) I, thereforee, decide issue No. 1 in the negative and against the petitioner. Issue No. 2:

(17) THE contention of the petitioner under this issue is that since a writ was brought from its side, which is still pending, and the Union of India did not seek stay of the proceedings there under Section 34 of the Arbitration Act, it should be treated to have waived arbitration. Section 34 it is pointed out, is not confined to suits only, but covers all types of legal proceedings. The filing of a counter affidavit by the respondent in that writ, amounted to submission of a sort of written statement, and, thereforee was a step in proceedings. In support reliance has been placed upon : [1974]1SCR31 . The State of Uttar Pradesh and another v. M/s. Janki Swan Kailash Chandra and another.

(18) I however, find that the scope of the writ filed by the petitioner has been altogether different. By that time the respondent had just communicated to the petitioner of the risk purchase loss of Rs. 14.13 lacs suffered by it for breach of contract by the petitioner, and it was required to be paid. The petitioner disputed the same and rather raised a counter-claim of Rs. 17.86 lacs. The respondent thereforee, could not have straightaway proceed to recover the amount of risk purchase loss without obtaining adjudication from a duly appointed arbitrator. What the petitioner, thereforee, sought in the writ was to prevent the attempt by the respondent to unilaterally enforce its claim otherwise. The Director General, thereforee, rightly saw the futility of the same and proceeded to act on the arbitration clause in the year 1976. Thereby the apprehensions of the petitioner in the writ were removed It has still to be decided after going into the respective claims of the claims of the parties which of them is entitled to any amount. Nothing can be pre-judged, though the respondent has, of course, urged that what basis the petitioner has to recover the large amount of Rs. 17.86 lacs is reflected by its inactivity to commence any legal proceedings for its recovery, and rendering any suit now brought any suit now brought as barred by time, and further that large stock of raw-material supplied by the respondent has been withheld by the petitioner. I, however, do not express any opinion on these contentions, as the petitioner may as well have much to say. It is for the arbitrator to adjudicate on them.

(19) IN my considered opinion, the filing of the counter-affidavit in the writ proceedings, the purpose of which was to prevent the respondent from unilaterally recovering the amount of its claim under letter dated 4.5.1974 without due adjudication, cannot render any reference to arbitration, now as invalid under Section 35 of the Arbitration Act. The issue is decided against the petitioner.

(20) THE result thereforee, is that the petition is dismissed with costs. Counsel fee Rs. 1,000.00 .


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