A.M. Ahmadi, J.
1. The short question which arises for our decision in this appeal has been formulated by our learned brother Surti, J. in his referring judgment of 17th November, 1976, thus:
Whether on a true and correct reading of Clause 22 of an agreement dt. May 16, 1972 any arbitrators are at all appointed by the parties for solving their disputes?
The few facts which are necessary to answer the above question are that the appellant, a registered partnership firm, had been appointed as the nominee of the respondent, a statutory corporation. The terms and conditions of appointment were incorporated in an agreement, Clause 22 whereof reads as under:
22. In the event of any dispute concerning with or arising out of any matter referred to in this agreement or anything contained therein between the parties the matter shall be referred to the Regional Purchase Advisory Committee of the Corporation for opinion. The nominees of the Corporation in Gujarat shall be represented by co-opting one member from amongst them whenever the Regional Purchase Advisory Committee considers such matters. The Regional Purchase Advisory Committee shall submit its recommendations to the Corporation, whose decision will be final.
The appellant worked as a nominee of the respondent-corporation under the terms and conditions of the contract and claimed a sum of Rs. 24 438.43 ps. from the respondent-corporation. As the respondent Corporation failed to pay the amount, the appellant filed Special Civil Suit No. 139/74 seeking a decree for the aforestated amount together with interest, notice charges and costs.
2. The respondent Corporation on the service of the summons of the suit entered an appearance and on the same day made an application for stay of the proceedings under Section 34 of the Arbitration Act, 1940, hereinafter called the Act relying on Clause 22 of the contract, quoted earlier, which, according to the respondent-corporation, is an arbitration clause The learned trial Judge on interpretation of Clause 22 of the contract came to the conclusion that the further hearing of the suit was required to be stayed under Section 34 of the Act to enable the parties to refer the matter in dispute between them to arbitration as provided by the said clause In other words, the learned trial Judge came to the conclusion that Clause 22 of the contract was an arbitration clause and the respondent Corporation was, therefore, entitled to stay of further proceedings of the suit by virtue of Section 34 of the Act. The learned trial Judge further directed that the costs of the suit shall be costs in the cause.
3. The appellant feeling aggrieved by the impugned order of stay of proceedings passed under Section 34 of the Act by the learned trial Judge has filed the present appeal in this Court. This appeal was placed for final disposal before our learned brother, Surti, J., who, having regard to the fact that the question involved was one of public importance, made a reference to the larger bench and that is how the matter is before us.
4. While making a reference on the question of the true interpretation of Clause 22 of the contract, our learned brother Surti, J. expressed himself in the following words:
On reading the contents of Clause 22, it is not possible For me to accept the view that the contents of Clause 22 carve out any arbitration agreement. Clause 22, no doubt, confers a right on the petitioner to appoint his representative to function on the Regional Purchase Advisory Committee for its opinion. From this view point, when I read the contents of Clause 22.1 am convinced that merely on the basis of the opinion of the Regional Purchase Advisory Committee, a decree in terms of the opinion cannot be obtained by any contesting parties. It is also clear to my mind as to how the other members of the Advisory Committee (whose number in not known) can hear or will hear the petitioner-plaintiff in regard to his grievances. In the instant case, the representative of the plaintiff who will be functioning on the Regional Purchase Advisory Committee under the circumstances of the case can only function as a conduit pipe who will merely voice the grievances of the plaintiff before the Advisory Committee. In this view of the matter, it is impossible, for me to come to the conclusion that even before the Advisory Committee any rules of natural justice or fairplay can ever be followed for the purpose of solving differences or disputes between the parties.
But in i he instant case, there the matter does not rest. As stated above, in terms of the opinion of the Advisory Committee, a decree in terms of the opinion cannot be obtained from any Civil Court by any of the contesting parties. The Advisory Committee is expected to consider the matter, wherein, as stated above, the plaintiff cannot put up his case directly to the oilier members of the Advisory Committee, as the other members of the Committee will be appointed by the defendant Corporation. To my mind, such a device can hardly be resorted to for the purpose of obtaining a fair, just and legal award as contemplated by the Arbitration Act, 1940. It is possible that the Advisory Committee might come to a just decision or the Committee's decision might be tainted with bias in favour of either the plaintiff or the defendant Corporation. When the Advisory Committee submits its recommendations to the Corporation, the Corporation is to act as the Arbitrator, the Corporation itself being one of the contesting parties. Now this position to my mind, is ununderstandable.
It will thus appear from the above observations made by our learned brother Surti, J. that in his opinion, Clause 22 of the contract did not carve out an Arbitration agreement as was contended on behalf of the respondent-corporation. However, having regard to the fact that the question was one of public importance, instead of disposing of the matter, our learned brother thought it wise to refer the matter to a larger bench for decision.
5. It was contended before us by Mr. Shah, the learned advocate for the appellant-plaintiff, that Clause 22, reproduced in the earlier part of this judgment, was not an Arbitration clause and it was impossible to cull out an Arbitration agreement on the language of the said clause He submitted that under the said clause it was only open to the Regional Purchase Advisory Committee of the Corporation to express its opinion in the event of any dispute concerning or arising out of any matter referred to in the agreement but the opinion so expressed could not form the basis of an award to which the Court would superadd its seal. According to the plain language of Clause 22, submitted Mr. Shah, it was open to the Corporation either to accept the recommendations or opinion of the Advisory Committee or to reject the same. If the recommendation was not accepted by the Corporation, the appellant-plaintiff could not impose it on the Corporation by insisting that the recommendation was an award which could be the basis for a decree to be passed by the Civil Court. Mr. Shah, therefore, contended that having regard to the language of Clause 22, It was impossible to carve out an Arbitration agreement and the view expressed by our learned brother Surti, J. was correct.
6. Mr. Pandya, the learned advocate appearing on behalf of the defendant-corporation, on the other hand urged that the parties to the contract had agreed to submit their disputes for the opinion of the Advisory Committee and hence that opinion was binding on them and it could form the basis of a decree by a Civil Court. He submitted that the parties had agreed to the specified machinery for resolving their disputes with open eyes and hence the maxim that no person shall be a Judge in his own cause, cannot apply. In support of this contention, he placed strong reliance on The Secretary of State for India in Council v. Augustus John Arathom I.L.R. 1882(5) Madras 173 Burmah Oil Co. v. Naraindas Dayalsing A.I.R. 1927 Sind 253 and Central Government of India v. Chhotalal Chhaganlal Modi A.I.R. 1949 Bombay 359. Mr. Pandya pointed out that the machinery specified in Clause 22 of the contract conferred a right on the appellant plaintiff to choose his own representative to function as a member of the Advisory Committee and thus care was taken to see that the interest of the nominee was protected. He emphasised the fact that after the submission of the opinion by the Advisory Committee to the Corporation, it is implicit in Clause 22 that the Corporation: shall follow the procedure usually followed by arbitrators in such matters and hence the decision reached would bean award capable of being converted into a decree of a Civil Court by following the procedure laid down in the Act. Mr. Pandya, therefore, submitted that the decision reached by the learned Civil Judge, S.D. Junagadh on the interpretation of Clause 22 of the contract was correct and could not be assailed and, therefore, the learned trial Judge had rightly stayed further proceeding of the suit under Section 34 of the Act.
7. An 'arbitration agreement' as defined by Section 2 (a) of the Act, means, 'a written agreement to submit present or future difference to arbitration, whether an arbitrator is named therein or not'. The essence of arbitration therefore is the real intention of the parties to the contract to refer their disputes or differences arising out of the implementation of the said contract For settlement to a third party or Tribunal of their choice. It is the desire on the part of the contracting parties that their disputes or differences should be determined in a quasi-judicial manner that forms the essence of an arbitration agreement. Therefore, in order to constitute a valid arbitration agreement, three elements are necessary, namely, (i) there is or may arise at a later date a dispute between the contracting parties; (ii) it is submitted for settlement to a third party or Tribunal, and (iii) the decision of that third party or Tribunal, according to his or its judgment, is binding on the parties. Obviously the submission must be to fake a trial decision from the third party or the Tribunal and not a mere advice or opinion. Not every case in which two or more parties seek a decision from a third party can be said to be a reference to arbitration for the simple reason that the parties may seek the advice of a third party i.e. a well-wisher On a given point of difference but such advice is certainly not an award within the meaning of the Act. The essential difference between an arbitrator on the one hand and referee, mediator or well-wisher on the other, must always be kept in mind while deciding the question whether the clause relied on spells out an arbitration agreement. That is why Sulaiman, C.J. in Mt. Akbari Begam v. Rahmal Husain and Ors. : AIR1933All861 , pointed out that an agreement to abide by the statement of a witness is in substance not a reference to arbitration. In such a case the third party as a referee is not authorised to take evidence and then 'announce its decision on the basis of such evidence. The making of a statement by a referee or a third party has no resemblance to a proceeding before an arbitrator and hence no objection as to its validity can be raised under the Act. Having regard to the above general principles, the question which arises for consideration is Whether on a true interpretation of Clause 22 of the contract, an arbitration agreement can be culled out ?
8. Clause 22 reproduced earlier, can be divided in three p Articles The first part of that clause provides that in the event of any dispute, the matter shall be referred to the Regional Purchase Advisory Committee of the Corporation for opinion. The second part of that clause deals with the constitution of the Advisory Committee and provides that the nominees of the Corporation in Gujarat shall be represented by co-opting one member from amongst them whenever the Advisory Committee considers such matters. Therefore, by this provision in Clause 22 of the contract, the nominee of the Corporation would have a representative of its own on the Advisory Committee when it assembles to consider such matters, namely, disputes concerning or arising out of any matter referred to in the agreement or anything contained there in between the parties. 'The last part of Clause 22 provides that the Advisory Committee shall submit its recommendations to the Corporation, whose decision will be final. It becomes immediately clear on a plain reading of this part of the clause that the Advisory Committee has merely to submit its recommendations to the Corporation and it is the decision of the Corporation which is made final. It is, therefore, obvious that the Corporation is not bound to accept the recommendations of the Advisory Committee. It may or may not accept the recommendations, but if it does accept the recommendations, the decision is made final by the last part of Clause 22 of the contract. The above analysis of Clause 22 of the contract shows that in the event of any dispute, such dispute has to be referred to the Advisory Committee of the Corporation for its 'opinion'. Now when the Committee, assembles to consider such matters, it has to co-opt one member from amongst the nominees of the Corporation in Gujarat and thereafter make recommendations as regards the dispute to the Corporation. These recommendations made to the Corporation can never be said to be, an award as the Corporation is not bound to accept the recommendations. Now if the Corporation accepts the recommendation, it becomes final and, therefore, the sole Judge in such matters is the Corporation. There is nothing in Clause (II) of the contract to indicate that the nominee, one of the parties to the dispute, would be apprised of the recommendations of the Advisory Committee or that the nominee will be heard before the Corporation decides either to accept or reject the recommendations. The words 'whose decision will be final' in Clause (22) of the contract, make it clear that the Corporation will be the sole. Judge in the matter and if it finds the recommendation palatable, it may accept the recommendation or otherwise reject it. If it decides' to reject the recommendation, that would be the end of the matterand the dispute would remain unresolved. In that case the nominee would have no alternative but to resort to a suit in the ordinary court. Can animus arbitrandi be inferred from a clause which brings about such a situation? On the other hand, if it decides to accept the recommendation, its decision is sought to be foisted as final on the nominee by virtue of Clause (22) of the contract. The Corporation, as one of the contesting-parties to the dispute, is thus made the sole Judge to determine whether the recommendation of the Advisory Committee should be accepted or not. In these circumstances, can it be said that the Corporation will act impartially and decide objectively the dispute between the parties without committing a breach of the rules of natural justice? For obvious reasons the answer must be in the negative.
9. The powers and duties of an arbritrator are generally those that are set out in the Act as well as those recited in the agreement of parties. In addition, the arbitrator has an implied duty to act in accordance with the essential principles of natural justice unless the duty to so act is expressly excluded by agreement between the parties or by the very nature of the dispute. But even in such cases the duty to act justly, fairly and honestly must be implied and an arbitrator who departs from these basic requirements of administration of justice would be guilty of breach of duty. However, courts frown at agreements which permit departure from these well recognised requirements of administration of justice and are generally loathe to bind a party to such an agreement if it appears from the facts of the case that the arbitrator will not be able to act justly fairly and impartially. If the court minds that this basic requirement is likely tribe sacrificed (as in the circumstances of the present case it is well nigh impossible for the arbitrator to act fairly and honestly) the court shall not enforce the agreement against the party likely to suffer, on the abstract doctrine that a party having accepted one of the contesting parties as an arbitrator with open eyes shall not be heard to say that the decision of such an arbitrator shall not bind it. This is so for the simple reason that the decision of such an arbitrator can always be set aside on the plea that he has misconducted himself. In that, he failed to act justly, fairly and/or honestly. The parties can be expected to accept only those decisions which are fairly and properly made by the arbitrator of their choice.
10. Scanned in the light of the above discussion, Clause (22) of the contract does not and cannot spell out an arbitration agreement. It is Difficult to infer an animus arbifrandi from the language employed in Clause (22) of the contract. In the first place the reference of the dispute is to be made to the Advisory Committee of the Corporation for its opinion. In the constitution of the Advisory Committee one member from amongst the nominees of the Corporation in Gujarat shall be co-opted to represent them. This single representative can hardly be expected to make any effective representation for the nominee as he would be outnumbered. As rightly observed by our learned brother Surti, J. he would, only function as a conduit pips to voice the grievance of the nominee before the Advisory Committee and no more, There is nothing in Clause (22) to suggest that the Advisory Committee will call upon the parties to tender evidence. But even if it is assumed that the Advisory Committee will adhere to the basic requirements of administration of justice and will act fairly, impartially and honestly, it is not intended by Clause (22) of the contract that the opinion or recommendation of the Advisory Committee shall constitute an award binding on both the Corporation and the nominee and enforceable under the provisions of the Act. Clause (22) merely provides that the Advisory Committee 'shall submit its recommendations to the Corporation, whose decision will be final'. This provision makes it clear that the decision of the Advisory Committee is merely recommendatory in nature so far as the Corporation is concerned and the latter may accept it or reject it. Thus the Corporation is given the absolute right to accept or reject the recommendation and hence there fan be no doubt that the recommendation of the Advisory Committee is not intended to operate as an award. Now if the Corporation spurns the recommendation of the Advisory Committee the nominee will be left with no alternative but a law suit. Clause (22) does not lay down any procedure to be followed by the Corporation after the opinion of the Advisory Committee is received. It does not provide that the nominee shall be informed of the recommendation. Thus the nominee has no voice in the matter after the recommendation is made and before it is either accepted or rejected by the Corporation. The Corporation is likely to act in an arbitrary manner having regard to its own interest. How can it act impartially, justly and fairly? In these circumstances, it is impossible to infer an animus arbitrandi on a plain reading of Clause (22) of the contract.
11. We are, therefore, of the opinion that on a true interpretation of Clause (22) of the contract an arbitration agreement, is impossible to cull out. The words 'whose decision will be final' I have reference to the decision of the Corporation to be reached on receipt of the recommendation of the Advisory Committee. We are of the opinion that such decision of the Corporation would be totally arbitrary and against the principles of natural justice. There is no provision in Clause (22) of the contract that the nominee shall be heard before any decision is taken by the Corporation on receipt of the recommendation of the Advisory Committee. The Corporation is, therefore, made the sole Judge to decide whether the recommendation of the Advisory Committee should be accepted or not. It is but natural that the Corporation would accept the recommendation of the Advisory Committee only if it is favourable to it and not otherwise. In a situation like-this, can it be ever expected that the Corporation would act justly and 'not in an arbitrary manner? The Corporation being one of the contesting parties can never be expected to act justly .when it is called upon to decide whether the recommendation of the Advisory Committee should be accepted or rejected. We, therefore, agree with our learned brother Surti, J. that if such a construction is to be placed on the contents of Clause (22) it will result into hazardous and serious consequences which would obviously result in fragrant miscarriage of justice.
11.1. Even if on the decision cited by Mr. Pandya we take the extreme view that the nominee having agreed to the sole arbitration of the Corporation with open eyes is bound by the contract, we would be loathe to exercise our discretion under Section 34 of the Act in favour of the Corporation. In that case we would be acting in vain for the simple reason that in the circumstances the Corporation would not act justly, fairly and honestly in conformity with the principles of natural justice and hence its award would be wholly arbitrary and liable to be set aside on that ground for the mere askance. No useful purpose would be served if the further proceedings of the suit are stayed under Section 34 of the Act in such cases in cases of the present nature, courts would be wholly unjustified in ordering stay of suit proceedings in exercises of its discretionary power under Section 34 of the Act.
12. We, therefore, answer the question referred for our decision as formulated by our learned brother Surti, J., which we have set out in the earlier part of this judgment, in the negative and accordingly allow this appeal and set aside the order of the trial court and direct that the suit be heard on merits. In the circumstances of the case, we make no order as to costs.