Decided on March 23,1983

UNION OF INDIA Respondents

Cited Judgements :-



D.R.Khanna,J. - (1.)JUDGMENT -
(2.)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.
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. Thereunder according to the petitioner, the respondent Union of India was to supply raw-material in the form of M.S. biiicts 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.

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 violative 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.

However, inspite 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 con nection 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 thereunder 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 Organi- sation, whether in addition to other functions or otherwise."

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 favour of his employer government and is constantly in fear of audit vigilence 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 favour and as such the arbitration agreement vitiates the very funda- mental 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 arbi- tration 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 arbi- trator. The clause is also pleaded to bs mala-fide and discriminatory inas- much 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.

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.

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 wiit petition it is further pleaded, was different from the claim of the respondent in arbitration.

The following issues were framed :

1. Is the arbitration clauss 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

(3.)THE sunn 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 favour of his employer, and even otherwise cannot independently act without fear and favour, 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 incumbence 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.
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 clauss 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 favour. 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 therefore 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.

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 AIR. 1961 S.C. 1743, there were allegations of defalcations by 'hare holders of a cooperative bank against the members of the managing committee. Tne allegations were brought to the notice of the Registrar of the Cooperative Sociesies 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 menaging 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. Therefore, 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.

In Ives & Barker v. Willans (1894) II Chancery Division 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 Madhya Pradesh 40, Shivlal Prasrdv. Unioa 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 favouring the railway in the absence of anything to show that they were favourably inclined towards the department or prejudically 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.


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