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Food Corporation Of India v. Bibhutibhusan Patra And Others

Orissa High Court

Sep 15, 1986

Judgment

Subsequent
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Summary of the Court Opinion

Factual and Procedural Background

The matter concerns two civil revisions arising out of orders in the same proceeding relating to appointment of an arbitrator under Section 8(2) of the Arbitration Act, 1940. The petitioner and Opposite Party No. 1 had a contract containing Clause 25, which provided that the arbitrator was to be "the person appointed by the Managing Director, Food Corporation of India" (or, if there was no Managing Director, the administrative head), and that "no person other than a person appointed by such Managing Director ... should act as arbitrator and, if for any reason, that is not possible, the matter is not to be referred to arbitration at all."

Opposite Party No. 1 served notice on the Managing Director requesting appointment of an arbitrator. The Managing Director did not respond or appoint an arbitrator. After the statutory period of 15 days under the Act expired, Opposite Party No. 1 applied in the trial Court under Section 8(2) of the Arbitration Act for appointment of an arbitrator. The petitioner objected in the trial Court, arguing that only the Managing Director could appoint the arbitrator under the contract and that therefore the application was not maintainable.

The trial Court allowed Opposite Party No. 1's application and appointed an arbitrator under Section 8(2). The petitioner challenged that order in Civil Revision No. 200 of 1984. The petitioner then sought review of the trial Court's order (relying on certain precedents); the trial Court refused review on the ground it had become functus officio. That refusal was challenged in Civil Revision No. 199 of 1984. Both revisions are disposed of by the present judgment.

Legal Issues Presented

Whether the trial Court could appoint an arbitrator under Section 8(2) of the Arbitration Act, 1940, when the contract (Clause 25) provided that the arbitrator should be appointed by the Managing Director of the Food Corporation of India and included a proviso that if "for any reason" that was not possible, the matter should not be referred to arbitration.
Whether the trial Court's refusal to entertain a review application against its order appointing an arbitrator constituted an exercise of jurisdiction with material irregularity, particularly given that the Arbitration Act provides for appeals but does not expressly provide for review.
Relatedly, how earlier decisions (cited by the petitioner) interpreting similar arbitration clauses where the appointing authority did not act should apply to the present facts.

Arguments of the Parties

Petitioner's Arguments

The petitioner contended that Clause 25 of the contract gave exclusive power to the Managing Director (or administrative head) to appoint the arbitrator, and therefore there was no jurisdiction for the trial Court to appoint an arbitrator under Section 8(2).
In the trial Court the petitioner maintained that the Managing Director of the Food Corporation of India was the authorised appointing authority and hence the petition for court appointment was not maintainable.
On revision, the petitioner relied on earlier decisions (cited in the judgment) to argue that where an appointing authority has not appointed an arbitrator, the contractual proviso (that if nomination is not possible the matter is not to be referred to arbitration) operates to bar court appointment.
In seeking review, the petitioner argued the trial Court had overlooked the impediment in the contract and had exercised jurisdiction with material irregularity in refusing to review the order.

Opposite Party No. 1's Position (as reflected in the opinion)

Opposite Party No. 1 served a notice on the Managing Director requesting appointment of an arbitrator and, after no response, applied to the trial Court under Section 8(2) for appointment of an arbitrator.
The opinion does not record a detailed, separate statement of Opposite Party No. 1's legal submissions beyond the procedural steps taken (service of notice and filing of S.8(2) application after the Managing Director's silence).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
(1981) 52 Cut LT 146 : AIR 1981 NOC 227 (Union of India v. Lingaraj Dash)	Interpreted a clause similar to Clause 25 and applied where notice for appointment was not replied; in that case a specific objection was taken that appointment by another person was not possible and Clause 25-type provision was relied upon to oppose court appointment.	The Court distinguished this precedent because, unlike that case, in the present matter no objection was taken in the trial Court that it was not possible for any reason for the Managing Director's nominee to act. The present case involved only inaction by the appointing authority, not an asserted impossibility for the nominated person to act.
(1984) 58 Cut LT 472 : AIR 1985 Orissa 298 (Food Corporation of India v. Ghanashyamdas Agarwal)	Applied similar reasoning where the petitioner had specifically objected that, by express contractual term, no person other than the nominee of the Secretary/administrative head should act as arbitrator and if that was not possible the matter should not go to arbitration; on those facts the Court had no jurisdiction to appoint an arbitrator.	The Court distinguished this decision for the same reason: in the present case there was no specific objection before the trial Court that appointment by the Managing Director's nominee was impossible for some reason. Therefore the earlier decision did not control the present outcome.

Court's Reasoning and Analysis

The Court addressed two principal strands of legal reasoning: (A) the nature of review and the trial Court's refusal to review its order, and (B) the proper interpretation of Clause 25 and the Court's power under Section 8(2) of the Arbitration Act to appoint an arbitrator.

(A) Review and the trial Court's refusal to review

The Court observed that review is a substantive right created by statute; the Arbitration Act contains provisions for appeals and bars a second appeal under Section 39 but does not provide for review.
The application of the Code of Civil Procedure to proceedings under the Act does not itself create a right of review in the absence of a specific statutory provision for review under the Act.
The Court noted an important exception: where an order is a nullity the Court may recall it (which is distinct from statutory review and is correction of a clear legal nullity). However, the mere refusal to review an order that is not a nullity does not amount to an exercise of jurisdiction with material irregularity.
Since the order appointing the arbitrator was not a nullity, the trial Court's refusal to entertain the review application (on grounds of being functus officio) did not constitute jurisdictional error. Consequently Civil Revision No. 199 of 1984 failed.

(B) Interpretation of Clause 25 and appointment under Section 8(2)

The Court analysed the contractual provision, focusing on the words "possible" and "for any reason" in the clause stating that if for any reason appointment by the Managing Director's nominee is not possible, the matter is not to be referred to arbitration.
The Court concluded that the phrase "for any reason" contemplates a substantive inability or impossibility (some identifiable reason) preventing the nominated person from acting as arbitrator, not mere inaction by the appointing authority.
Where the Managing Director simply fails to nominate an arbitrator by inaction, the contractual proviso does not automatically come into operation to nullify the agreed arbitration mechanism. The parties did not agree that mere inaction would nullify the arbitration clause.
The Court explained that Section 8(2) confers jurisdiction on the Court to appoint an arbitrator when pre-conditions are satisfied and that the parties cannot by agreement oust the Court's statutory jurisdiction to appoint an arbitrator.
The Court distinguished the two cited precedents because in those cases there was a specific objection in the court proceedings that it was not possible for the nominated person to act; such an objection could lead a court to find the agreement ineffective and decline to appoint. In the present case no such objection was raised; instead the petitioner relied on clause wording but did not argue impossibility in the trial Court.
Therefore, the trial Court could (and properly did) exercise its power under Section 8(2) to appoint an arbitrator. The Court also observed that if, on an application, the court finds as a fact that the agreement has become ineffective because appointment is genuinely impossible for some reason, it may decline to appoint; that is a factual inquiry to be undertaken when an appropriate objection is raised.

Holding and Implications

CORE RULING: Both Civil Revisions are dismissed.

Direct effect on the parties:

The trial Court's order appointing an arbitrator under Section 8(2) of the Arbitration Act, 1940 is upheld; the Court was justified in making the appointment when the contract's appointing authority (the Managing Director) did not act.
The petitioner's challenge to the trial Court's refusal to review its order fails because the order was not a nullity; the Arbitration Act does not provide an express right of review and refusal to review did not amount to a jurisdictional irregularity.
There shall be no order as to costs (as stated in the opinion).

Broader implications:

The Court distinguished earlier decisions that declined court appointment only where a party in the court proceedings specifically established that it was impossible for the contractual appointee to act. Where no such objection is raised and the appointing authority simply fails to act, the court may exercise the statutory power under Section 8(2) to appoint an arbitrator.
The opinion does not assert that it creates a novel rule of law beyond this application of established principles; it distinguishes prior authorities on their facts and applies the statutory jurisdiction conferred by Section 8(2).

Disposition recorded in the opinion: Revisions dismissed. No order as to costs.

Show all summary ...

1. Appointment of an arbitrator in exercise of power under S. 8(2) of the Arbitration Act, 1940 (in short ‘the Act’) is the subject-matter of these two civil revisions which arise out of two orders in the same proceeding. Hence, they are disposed of by this judgment.

2. Petitioner and opposite party No. 1 entered into a contract in which Clause 25 provided for appointment of an arbitrator. It reads as follows:

“Clause 25. Except where otherwise provided in the contract all questions and disputes relating to the meaning of the specifications, designs, drawings and instructions hereinbefore mentioned and as to the quality of workmanship or materials used on the work 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, instructions, orders or these conditions or otherwise concerning the works, the execution or failure to execute the same whether arising during the progress of the work or after the work or after the completion or abandonment thereof shall be referred to the sole arbitration of the person appointed by the Managing Director, Food Corporation of India, at the time of dispute or if there be no Managing Director, the administrative head of the said Corporation at the time of such appointment. It will be no objection to any such appointment that the arbitrator so appointed is a Corporation employee that he had to deal with the matters to which the contract relates and that in the course of his duties as corporation employee he had expressed views on all or any of the matters in dispute or difference. The arbitrator to whom the matter is originally referred being transferred or vacating his office or dying or being unable to act for any reason, such Managing Director or administrative head as aforesaid at the time of such transfer, vacation of office or inability to act, 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 above at which it was left by his predecessor. It is also a term of this contract that no person other than a person appointed by such Managing Director or administrative head of the Corporation 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.

The costs and venues of arbitration shall be at the discretion of the arbitrator.

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 (s) may from time to time with the consent of the parties enlarge the time for making and publishing the award.

It is also a term of the contract that if the contractor does not make any demand for arbitration in respect of any claims in writing within 90 days of receiving the intimation from the F.C.I that the bill is ready for payment.

The claim of the contract will be deemed to have been waived and absolutely barred and the F.C.I shall be discharged and released of all liabilities under the contract in respect of those claims.

It is a term of the contract that the party invoking arbitration shall specify the dispute to be referred to arbitration under this Clause 12 together with the amount (s) claimed in respect of such dispute.”

3. Opposite Party No. 1 called upon the Managing Director of the petitioner for appointment of an arbitrator to give his award on some disputes. The Managing Director, however, remained silent and neither appointed an arbitrator nor gave any answer to the notice. After expiry of the statutory period of 15 days under the Act, Opposite Party No. 1 filed an application in the trial Court for appointment of an arbitrator under S. 8(2) of the Act. An objection was filed by the petitioner in the trial Court. While not disputing the notice by opposite party No. 1, it was urged that there is no dispute for appointment of an arbitrator. In para 5, it was stated thus:

“That the contents of paras 7 and 8 of the petition are not correct and hereby denied. As per the Arbitration clause it is only the Managing Director of Food Corporation of India who would appoint Arbitrator for the arbitration of the disputes referred to in the Arbitration Clause and, therefore, there is no impediment for the appointment of Arbitrator by the Managing Director of Food Corporation of India.”

(Emphasis supplied).

During hearing of the application, it was not also asserted in the trial Court that no one other than the person appointed by the Managing Director or others named can act as arbitrator or that it was not possible for any reason to refer the matter to arbitration. On the other hand it was submitted that the Managing Director of Food Corporation of India was authorised to appoint an arbitrator for deciding the dispute between the parties and hence the petition was not maintainable. The trial Court allowed the application of the opposite party No. 1 filed under S. 8(2) of the Act and held that an arbitrator is to be appointed for adjudication of the dispute between the parties. This order is the subject-matter of challenge in Civil Revision No. 200 of 1984.

After the impugned order for appointment of an arbitrator was passed, an application was filed for review of the order in view of the decision reported in (1981) 52 Cut LT 146 : (AIR 1981 NOC 227) (Union of India v. Lingaraj Dash). The trial Court rejected the application on the ground that it has become functus officio after passing of the order for appointment of an arbitrator. This order of the trial Court is assailed in Civil Revision No. 199 of 1984.

4. Mr. Y.S.N Murty, the learned counsel for the petitioner, submitted that the order having been passed overlooking the impediment in the contract and the same being inconsistent with the decision of this Court while interpreting a similar clause, the trial Court exercised jurisdiction with material irregularity in refusing to review the order.

5. Review is a creature of statute. It is a substantive right and is not procedural in nature. Although the Act provides for appeals and specifically bars a second appeal in S. 39, no whisper has been made by the legislature for review. The application of the Code of Civil Procedure to the enquiries under the Act would not give a right of review without specific provision for the same. Where, however, the order is a nullity, the Court can recall the same which is not review of the order, but correction of its own wrong. A statutory power under S. 8(2) giving jurisdiction to the Court to appoint an arbitrator where the pre-conditions are satisfied cannot be made ineffective by agreement of parties on the principle that the parties can neither vest nor oust the jurisdiction of the Court.

6. The Court can appoint an Arbitrator under S. 8(2) of the Act or may refer the disputes to an Arbitrator under S. 20 of the Act. Where an order is passed on finding wrongly that the pre-conditions are satisfied, the same can be revised by the higher forum. It cannot, however, be reviewed in absence of a right to review in the Act. Therefore, the order not being a nullity, refusal to review the order cannot be said to be exercise of jurisdiction with material irregularity. Accordingly, Civil Revision No. 199 of 1984 has no merit.

7. Civil Revision No. 200 of 1984 is against the order under S. 8(2) of the Act. Mr. Y.S.N Murty, the learned counsel for the petitioner, relied upon the decision reported in (1981) 52 Cut LT 146 : (AIR 1981 NOC 227) (supra) and another decision reported in (1984) 58 Cut LT 472 : (AIR 1985 Orissa 298) (Food Corporation Of India… v. Ghanashyamdas Agarwal….) in support of the submission that the Managing Director not having appointed the Arbitrator, the last portion of the agreement takes effect and the Court has no power to appoint an Arbitrator. In both these decisions, the notice for appointment of Arbitrator was not replied. When an application was filed for appointment of an Arbitrator in the Court, specific objection was taken that it was not possible for appointment of an Arbitrator. In (1981) 52 Cut LT 146 : (AIR 1981 NOC 227) (supra), it has been observed:

“In the objection by the petitioner inter alia reliance was placed on Clause 25 in para 5 of the objection.”

In (1984) 58 Cut LT 472 : (AIR 1985 Orissa 298) (supra), it has been observed:

“The petitioner filed objection to the said application stating inter alia that in view of the express term in the Arbitration Clause to the effect that no person other than the person nominated by the Secretary or administrative head of the Ministry should act as Arbitrator, and if for any reason that is not possible, the matter is not to be referred to arbitration at all, the Court had no jurisdiction to appoint an Arbitrator in the case…..”

In the present case, no such objection was raised. Rather in para 5, it was stated that it is not possible for appointment of an Arbitrator. The only trump-card of Mr. Y.S.N Murty, the learned counsel for the petitioner, is the expression:

“….no person other than a person appointed by such Managing Director or administrative head of the Corporation 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……”

From reading the clause, I am satisfied that the same lays emphasis on the words ‘possible’ and ‘reason’. The absence of possibility for the person appointed by the Managing Director to act as Arbitrator is required to be for some reason and not arbitrary. Where no appointment is made by the Managing Director only on account of inaction, the term does not come into operation. The parties never agreed that inaction of one of the parties to the contract will have the effect of the written agreement for arbitration being nullified. Therefore, where there is a written agreement for arbitration, the Court gets jurisdiction under S. 8(2) for appointment of an Arbitrator.

While considering the question of exercising that power Court is to be satisfied that the term in the agreement is complied. When objection is raised in Court that it is not possible for any reason for the Arbitrator to act, it may find as a fact that the agreement has become ineffective. Where, however, no objection is taken in the Court that it is not possible for any reason for the Arbitrator appointed by the Managing Director to act. Court can presume that such a term has been ignored by the party to the contract whose inaction is subject-matter of consideration of the Court and therefore, it is to exercise the power under S. 8(2) of the Act.

8. In conclusion, distinguishing the decisions reported in (1981) 52 Cut LT 146 : (AIR 1981 NOC 227) (supra) and (1984) 58 Cut LT 472 : (AIR 1985 Orissa 298) (supra), I hold that the trial Court was justified in appointing the Arbitrator under S. 8(2) of the Act and no question of jurisdiction is involved in this case. Accordingly, Civil Revision No. 200 of 1984 has no merit.

9. In the result, both the Civil Revisions are dismissed. There shall be no order as to costs.

Revisions dismissed.