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Nandyal Coop. Spinning Mills Ltd. v. K.V Mohan Rao .
Factual and Procedural Background
The respondent entered into a contract dated 11 February 1986 with the appellant for construction of a building valued at ₹1 crore. Clause 65 of the agreement contained an arbitration clause authorising the appellant’s administrative head to appoint a sole arbitrator.
Disputes arose during execution. By letter dated 27 July 1987 the respondent asked the administrative head to appoint an arbitrator within 15 days. Reminders on 8, 17 and 18 August 1987 produced only assurances that the request was “under consideration.” Receiving no appointment within the statutory 15-day period, the respondent filed O.P. No. 167 of 1988 before the Subordinate Judge, Nandyal, on 7 July 1988 seeking court appointment of an arbitrator under Section 8(1)(a) of the Arbitration Act, 1940.
On 27 July 1988—after the expiry of 15 days and after the O.P. had been filed—the appellant nominated Shri Yethiraj, Superintending Engineer, BHEL, Hyderabad, as sole arbitrator. The civil court, after hearing both sides, appointed Justice C. Sriramulu (retired) as arbitrator on 12 March 1991. The High Court dismissed the appellant’s revision (C.R.P. No. 1381 of 1991) on 25 October 1992. The present appeal challenges those concurrent orders.
Legal Issues Presented
- Whether the belated appointment of Shri Yethiraj by the appellant was vitiated by reasonable apprehension of bias notwithstanding a contractual waiver clause.
- Whether, upon the appellant’s failure to appoint an arbitrator within 15 days of notice, the civil court had jurisdiction under Section 8(1)(a) of the Arbitration Act, 1940 to appoint an arbitrator.
Arguments of the Parties
Appellant's Arguments (represented by Shri P.P. Rao, Senior Advocate)
- The contract contained an express waiver of bias; therefore the respondent could not object to Shri Yethiraj’s appointment.
- No personal bias of Shri Yethiraj was demonstrated; he merely happened to have acted as arbitrator for the appellant on earlier occasions.
- The agreement mandated that disputes be resolved only by an arbitrator appointed by the appellant’s administrative head; hence the civil court lacked jurisdiction and Section 8(1)(a) was inapplicable.
- If the respondent objected to Shri Yethiraj, his remedy was to ask the administrative head for a different arbitrator, not to approach the court.
Respondent's Arguments (supported by Shri K. Madhava Reddy, Senior Advocate)
- Justice must be seen to be done; Shri Yethiraj’s repeated service as the appellant’s arbitrator created a legitimate apprehension of bias.
- The waiver clause covered only an arbitrator validly appointed within time; once the 15-day period lapsed the power to appoint ceased, and any appointment thereafter was void.
- Under Section 8(1)(a), the civil court acquired jurisdiction because the appellant failed to act within 15 days despite repeated notices.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Manak Lal v. Dr Prem Chand, 1957 SCR 575; AIR 1957 SC 425 | A party who chooses a tribunal cannot later allege bias after an adverse outcome. | Court noted the ratio but distinguished it because no named arbitrator had been agreed upon in the present contract. |
| G. Sarana v. University of Lucknow, (1976) 3 SCC 585 | Follows Manak Lal on waiver of bias. | Held not applicable for the same reason as Manak Lal. |
| V. Raghunadha Rao v. State of A.P., (1988) 1 ALT 461 | Consensus ad idem and inherent bias when an employee-arbitrator is imposed. | Court stated the decision was irrelevant to the present facts. |
| Union of India v. Prafulla Kumar Sanyal, (1979) 3 SCC 631 | If no arbitrator is appointed as per agreement, the court may appoint one. | Relied upon to uphold the civil court’s power under Section 8(1)(a) once the contractual power lapsed. |
| Chander Bhan Harbhajan Lal v. State of Punjab, (1977) 2 SCC 715 | Distinction between Section 8 and Section 20 applications. | Held inapplicable; factual matrix differed. |
| Boriah Basavish & Sons v. Indian Telephone Industries Ltd., AIR 1973 Mys 309 | Section 20(4) applies where arbitrator must be appointed by mutual consent. | Distinguished; contract here did not require mutual consent. |
| V.K. Construction Works (P) Ltd. v. Food Corporation of India, AIR 1987 P&H 97 | Where contract says “if no appointment possible, no arbitration at all,” Section 8 is excluded. | Held not relevant because the present contract lacked such an exclusion. |
| Union of India v. Ajit Mehta & Associates, AIR 1990 Bom 45 | Exclusion of court’s jurisdiction where contract names authority to appoint arbitrator. | Considered but found distinguishable on contractual wording. |
Court's Reasoning and Analysis
1. Effect of Waiver Clause and Alleged Bias: Clause 65 waived objections only to an arbitrator validly appointed by the administrative head who might earlier have dealt with the matter; it did not amount to an open-ended waiver of bias or to acceptance of any specific individual. Justice must appear to be done; repeated prior service of Shri Yethiraj for the appellant created a reasonable apprehension of partiality. Therefore the respondent’s objection to his nomination was legitimate.
2. Lapse of Contractual Power to Appoint: Under Section 8(1)(a) the administrative head had 15 clear days after notice to appoint an arbitrator. The appellant’s failure to do so—merely stating the request was “under consideration”—extinguished that contractual power. A subsequent nomination, made after the respondent had already moved the court, was ineffectual.
3. Court’s Jurisdiction under Section 8(1)(a): Once the contractual mechanism failed, the respondent was entitled to approach the civil court. Precedent (Prafulla Kumar Sanyal) supports the proposition that the court may appoint an arbitrator where none has been effectively appointed under the agreement. The argument that the respondent’s only remedy was a civil suit was rejected because the contract itself ousted ordinary civil jurisdiction in favour of arbitration.
4. Distinction from Cited Authorities: Authorities relied upon by the appellant (e.g., Chander Bhan, Boriah Basavish, V.K. Construction, Ajit Mehta) were distinguished as involving contracts either naming a specific arbitrator, requiring mutual consent, or expressly excluding arbitration if appointment failed—none of which applied here.
Holding and Implications
Appeal Dismissed. The Supreme Court affirmed the orders of the trial court and High Court upholding the appointment of Justice C. Sriramulu as arbitrator. No costs were awarded.
Implications: The decision reinforces that (i) a contractual power to appoint an arbitrator must be exercised within the period prescribed by Section 8(1)(a) or it lapses, and (ii) waiver clauses do not preclude objections based on a reasonable perception of bias when the appointment itself is invalid. The ruling clarifies parties’ recourse to courts for appointment of an independent arbitrator and does not lay down new precedent beyond applying settled principles.
K. Ramaswamy, J.— Leave granted.
2. Having heard the learned senior counsel M/s P.P Rao and K. Madhava Reddy on either side and having given our anxious consideration to their contentions, we find in final analysis that the order of the High Court needs no interference. The facts lie in a short compass and are as stated under.
3. The respondent concluded a contract with the appellant on February 11, 1986 to construct a building at a cost of Rs 1.00 crore. During its execution since differences had arisen the respondent by his letter dated July 27, 1987 requested the administrative head of the appellant to appoint an arbitrator within 15 days from the date of its receipt. On August 8 and 18, 1987 the respondent was informed that the matter was under consideration. His renewed request in letter on August 17, 1987 evoked no action. Finding it futile to wait, on July 7, 1988, the respondent filed O.P No. 167 of 1988 in the Court of the Subordinate Judge, at Nandyal to appoint an arbitrator. The notice was issued to the appellant therein. By letter dated July 27, 1988 the respondent was informed of the appointment of Shri Yethiraj, Superintending Engineer of B.H.E.L, Hyderabad as sole arbitrator. After giving opportunity to both sides by Order dated March 12, 1991, the Civil Court appointed Shri Justice C. Sriramulu, a retired Judge of the High Court as arbitrator. The High Court dismissed C.R.P No. 1381 of 1991 on October 25, 1992.
4. Shri P.P Rao, learned senior counsel contended that the concurrent finding that Shri Yethiraj had bias against the respondent as he had acted on earlier occasions as an arbitrator of the appellant is vitiated by legal error since bias can always be waived. By the covenant of arbitration in the agreement, the respondent had waived bias. Secondly, it is contended that Shri Yethiraj had no personal bias against the respondent and the contract postulated of appointment of an arbitrator. The contract cannot be nullified on the plea of bias, as the endeavour of the court would be to give effect to the contract. We find no force in the contentions. Clauses 65.1 and 65.2, of the contract read thus:
“65.1 Except where otherwise provided in the contract all disputes or questions relating to … shall be referred to the sole arbitration of the person appointed by the administrative head of owner. There will be no objection to any such appointment that the arbitrator so appointed is the owner's representative, that he had to deal with the matters to which the contract relates and that in the course of his duties as owner's representative he had had expressed views on all or any of the matters in dispute or differences …. It is also a term of this contract that no person other than a person appointed by such administrative head as aforesaid should act as Arbitrator and if for any reason it is not possible the matter is not referred to the arbitration at all….
65.2 Subject to as aforesaid the provisions of the Arbitration Act, 1940 (for short ‘the Act’ added) 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 proceedings under this clause.”
5. It would thus be clear that all questions and disputes relating to the contract shall be referred to the sole arbitration of the person appointed by the administrative head of the appellant. The right to suit available under Section 9 of Code of Civil Procedure has been contracted out. The waiver expressly engrafted was only of the arbitrator appointed by the administrative head of the appellant, one who was its representative who had had occasion to express views on all or any of the matters in dispute or differences on which he had earlier dealt with to which the contract related to.
6. There is no contract to arbiter by a named arbitrator the dispute or differences that had arisen under the contract. Justice must not only be done but seemingly appear to have been done. Contracting parties agreed to abide by the arbitrator, i.e chosen forum. Russell's Arbitration, 19th Edition at p. 116 stated that there is universal agreement amongst jurists of all countries that it is of the first importance that judicial tribunals should be honest, impartial and disinterested. This rule applies in full force to arbital tribunals, subject only to this exception, that parties who are free to choose their own tribunal may, provided they act with full knowledge, choose dishonest, partial or interested arbitrators (emphasis supplied) (though this exception is in its turn subject to a statutory exception which gives parties who have so chosen a locus poenitentiae in certain circumstances). Apart from this exception, arbitrators who are in all other respects suitably qualified are disqualified by dishonesty, partiality or interest.
7. When the arbitration tribunal was chosen by the contracting parties, undoubtedly they had chosen to avail of the adjudication by the tribunal and to abide by the decision. Having so chosen and taken a decision it would no longer be open to turn around and contend that the tribunal was biased against the party. This was the view laid by this Court in Manak Lal v. Dr Prem Chand 1957 SCR 575, AIR 1957 SC 425 thus:
“It seems clear that the appellant wanted to take a chance to secure a favourable report from the tribunal which was constituted and when he found that he was confronted with an unfavourable report, he adopted the device of raising the present technical point.”
This ratio was followed in G. Sarana v. University of Lucknow (1976) 3 SCC 585, (1977) 1 SCR 64. The above ratio bears no relevance since the contract was not to appoint Shri Yethiraj as arbitrator nor the respondent stood by any award being made by him. Only an officer, representative of the appellant who had had an occasion to deal with the matter or expressed an opinion on the matter in dispute or difference, if appointed later, such an appointment (though open to debate but needs no occasion to decide) cannot be questioned as the respondent had contracted to waive that objection.
8. The decision relied on by the High Court in V. Raghunadha Rao v. State of A.P (1988) 1 ALT 461 was in relation to the appointment of an Engineer of the Department, the party to the contract. In the dotted lines contract it was held that the consensus ad idem was absent and the element of bias would be inherent from the fact situation. It bears no relevance to the facts of the case. In Judicial Review of Administrative Action by S.A de Smith (3rd Edn.) at p. 223 it is stated that “In a private law an independent commercial arbitrator must observe strictly judicial standards”. At p. 229 he further stated that “It is open to a party to lead evidence to prove that an independent arbitrator has shown altered bias in favour of the other party or that an arbitrator who is an employee of the other party has prejudged the issue”. Admittedly Yethiraj acted on earlier occasions as appellant's arbitrator. Justice must not only be done but seemingly appear to have been done. The arbitrator must not only be impartial but also be objective, circumspect and honest in rendering his decision. Many a time the award is not a speaking award which would inspire confidence for acceptance only when the above perspectives are present. Its invalidity would be tested on grounds available in law. Therefore, the respondent rightly objected to the nomination of Yethiraj. Such nomination, therefore, does not bind him. We find force in the stand taken by the respondent supported by Shri K. Madhava Reddy.
9. It is next contended by Shri Rao that Section 8(1)(a) of the Arbitration Act does not apply to the facts of this case as the contract abstracted hereinbefore makes the respondent abide by the appointment of an arbitrator by the administrative head of the appellant. If he had an objection to the nomination of Yethiraj, he would have requested for another arbitrator. The civil court lacked jurisdiction. The exercise of jurisdiction by civil court under Section 8(1)(a), is hedged with existence of the contract. Section 8(1)(a) of the Arbitration Act reads thus:
“[W]here an arbitration agreement provides that the reference shall be to one or more arbitrators to be appointed by consent of the parties and all the parties do not, after differences have arisen, concur in the appointment or appointments; or
Any party may serve the other parties or the arbitrators, as the case may be, with a written notice to concur in the appointment or appointments or in supplying the vacancy.”
For its applicability, the following conditions must be fulfilled:
(1) There must be an arbitration agreement.
(2) The agreement must provide that in case of differences one or more arbitrators to be appointed by consent of parties and (the parties) did not concur in the appointment of the arbitrator/arbitrators.
(3) Disputes have arisen to which the agreement applies.
(4) The parties had consented in the appointment or appointments.
(5) The appointment is not made within 15 clear days of the service of the written notice to do so; and
(6) the application is made to the court by any party to the agreement.
10. The application for appointment of an arbitrator is not maintainable when an arbitrator has already been appointed and the applicant has been informed of the said facts before the expiry of 15 days as envisaged under Section 8(1)(a). We have seen the arbitral agreement in Clause 65.1, and of applicability of the Act in Clause 65.2, thereof. The agreement provided that after the disputes had arisen and notice given by either party, power has been given to the administrative head of the appellant to appoint an arbitrator. Admittedly the respondent did give notice twice requesting the appellant to nominate an arbitrator and within 15 days' time no action thereunder had been taken. The replies thereto were only that the matter was under consideration. After the expiry of the period prescribed the administrative head denuded his power under Clause 65.1 of the contract to appoint the arbitrator. Long after the expiry of 15 days' time the respondent had invoked the jurisdiction of the trial court which is competent to deal with the matter. It had given an opportunity to the appellant to contest the claim. Appellant had intimated the appointment of Yethiraj only long after the expiry of the period. In Union of India v. Prafulla Kumar Sanyal (1979) 3 SCC 631 constructing Section 20(4) of the Act this Court held in paragraph 3 thus:
“… If no such arbitrator had been appointed and when the parties cannot agree upon an arbitrator, the court may proceed to appoint an arbitrator by itself. Thus if an arbitrator had been appointed whether in the agreement or otherwise, the court shall make an order of reference to him. In this case, clause 29 of the agreement provides that every dispute shall be referred to the sole arbitration of the person appointed by the President of India or if he is unwilling to act to the person appointed by the arbitrator. An arbitrator, in fact, has not been appointed by the President though provision has been made for such appointment …. If an arbitrator had not been appointed, as required in the sub-section, the court is to find whether the parties could agree upon an arbitrator. If the parties agree, the court has to appoint the person agreed as an arbitrator. If there is no such agreement, the court will have to appoint arbitrator of its choice.”
11. It would thus be clear that if no arbitrator had been appointed in terms of the contract within 15 days from the date of receipt of the notice, the administrative head of the appellant had abdicated himself of the power to appoint arbitrator under the contract. The court gets jurisdiction to appoint an arbitrator in place of the contract by operation of Section 8(1)(a). The contention of Shri Rao, therefore, that since the agreement postulated preference to arbitrator appointed by the administrative head of the appellant and if he neglects to appoint, the only remedy open to the contractor was to have recourse to civil suit is without force. It is seen that under the contract the respondent contracted out from adjudication of his claim by a civil court. Had the contract provided for appointment of a named arbitrator and the named person was not appointed, certainly the only remedy left to the contracting party was the right to suit. That is not the case on hand. The contract did not expressly provide for the appointment of a named arbitrator. Instead power has been given to the administrative head of the appellant to appoint sole arbitrator. When he failed to do so within the stipulated period of 15 days enjoined under Section 8(1)(a), then the respondent has been given right under Clause 65.2 to avail the remedy under Section 8(1)(a) and request the court to appoint an arbitrator. If the contention of Shri Rao is given acceptance, it would amount to putting a premium on inaction depriving the contractor of the remedy of arbitration frustrating the contract itself.
12. The ratio in Chander Bhan Harbhajan Lal v. State of Punjab (1977) 2 SCC 715, (1977) 3 SCR 38 relied on by Shri Rao is not applicable to the facts of this case. Therein no bar was created in the contract to appoint a fresh committee for going into the dispute as stipulated in the condition. The appellant having not replied to the Government seeking to nominate a settlement committee the Government moved the court for appointment of the committee. Thus the Government itself was entitled to have the committee appointed under the agreement and instead had taken recourse to Section 8(1)(a).
13. The ratio in Boriah Basavish & Sons v. Indian Telephone Industries Ltd. AIR 1973 Mys 309, (1973) 1 Mys LJ 360 is also inapplicable to the facts in this case. Therein the contract expressly provided for appointment of an arbitrator by consent of parties. Since the parties did not agree, it was held that it was Section 20(4) and not Section 8 that would be applicable.
14. The case of V.K Construction Works (P) Ltd. v. Food Corporation of India AIR 1987 P&H 97, (1986) 90 Punj LR 383, 1986 Rev LR 373 is equally inapplicable. Therein the terms of the contract were that no person other than a person appointed by the Managing Director or administrative head of the corporation should act as an arbitrator. If for any reason it is not possible, the matter is not to be referred to arbitration at all. In terms of that contract the invocation of power of the court under Section 8 was taken. The case of Union of India v. Ajit Mehta and Associates AIR 1990 Bom 45, (1989) 3 Bom CR 535 renders little assistance. Clause 70 of the contract therein provided an arbitration clause which postulated that all disputes between the parties to the contract shall, after written notice given by either parties to the contract to either of them, will be referred to the sole arbitration of an Engineering Officer to be appointed by the authority mentioned in the tender documents. Engineer-in-chief was the authority concerned. On those facts it was held that the contract excluded the invocation of the jurisdiction of the court under Section 8 of the Act and the arbitration award made pursuant thereto was held to be a nullity.
15. Thus we hold that the appointment of the arbitrator by the trial court as upheld by the High Court is perfectly legal and valid warranting no interference. The appeal is accordingly dismissed, but without costs.
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