UNION OF INDIA Vs. RAJU CONSTRUCTION COMPANY, BHOPAL

JUDGEMENT

(1.) This revision under section 115 of the Code of Civil Procedure is directed against the order dated 7 -2 -1996 passed by the Fifth Additional District Judge, Bhopal in M.J.C. No. 27/95. The disposal of this revision shall govern the disposal of Civil Revision No. 857/96 as similar questions of facts and law arise in that revision too. The non -applicant, a partnership firm, carries on the business of construction. It entered into an agreement dated 5 -8 -1991 with the applicant No. 1 whereby it was awarded the contract of constructing 112 'A', 8 'B' and 12 'C' type of quarters at Hoshangabad within a period of six months from the date of the receipt of the work order with an additional period of 10 days as grace period, for the amount of Rs. 27,74,467/ - after completion of the task under the contract the non -applicant was paid Rs. 22,00,178/ - towards the final bill on 25 -6 -1994 which was received by it under protest. Thereafter, the non -applicant raised a dispute regarding the item wise payment and claimed that it has been paid short to the time of Rs. 5,33,619/ -. The agreement dated 5 -8 -1991 had an arbitration clause numbered as 25. It provided, inter alia, that in case of difference or dispute between the parties to the agreement, the dispute shall be referred to an arbitrator appointed by the Chief Engineer in charge of the work at the time of dispute or in his absence by the administrative head of the department of the Control Public Work Department (C.P.W.D. for short). No arbitrator was appointed by the Chief Engineer, the Applicant No. 2, despite notices dated 25 -1 -1995, 9 -2 -1995, 22 -3 -995, 15 -5 -1995 and 16 -8 -1995. Thereupon the non -applicant filed an application dated 30 -6 -1995 under section 8 of the Arbitration Act 1940 (henceforth 'the Act') seeking order from the Court for appointment of an arbitrator. The applicants in their reply did not question the facts relating to difference between the parties regarding amount to be paid to the non -applicant, but claimed that section 8 of the Act was not attracted. It was further pointed out as per reply dated 6 -1 -1996 that as provided the arbitration clause No. 25 of the agreement Shri V. Nainani was appointed as the sole arbitrator on 1 -8 -1995 during the pendency of application under section 8 (ibid). However, on resignation of V. Nainani, the Applicant No. 2 in exercise of his powers under clause 25 of the agreement, appointed Shri P.K. Kohli as the sole arbitrator by order dated 4th January 1996 and asked him to continue the work of the arbitrator from the stage the previous arbitrator left it at the time resigning the office of the sole arbitrator. The Court below was of the view that dispute or difference in respect of claims Nos. 2, 8 and 11 was liable to be referred to arbitration. The claims Nos. 1, 9 and 10 were not covered by the arbitration clause. Since there is no challenge on the part of the non -applicant regarding this finding by the non -applicant, it appears that the non -applicant was satisfied by the order of the Court below that only dispute regarding claim Nos. 2, 8 and 11 was liable to be referred to arbitration. However, the applicant challenges the very power of the Court to refer any claim to an arbitrator under section 8 of the Act. If that be so, the finding of the Court below in respect of all claims is Coram non judice and as such of no consequence. The key to the application of section 8 of the Act has to be found in the interpretation of clause 25 of the agreement dated 5 -8 -1991 which is being reproduced below as follows: - Clause 25 of the agreement (Annexure A -1): - 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 or workmanship or materials used on the work or as to any other questions, 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 or the execution or failure to execute the same whether arising during the progress of the work or after the completion or abandonment thereof shall be referred to the sole arbitration of the person appointed by the Chief Engineer in charge of the work at the time of dispute or if there be no Chief Engineer the administrative head of the said Central Public Works Department at the time of such appointment. It will be no objection to any such appointment that the arbitrator so appointed is a Government servant, that he has to deal with the matters to which the contract relates and that in the course of his duties as Government servant he had expressed views on all or any of the matters in disputes or difference. The arbitration to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason, such Chief Engineer or administrative head aforesaid at the time of such transfer, vacation 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 stage 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 Chief Engineer or administrative head of the C.P.W.D. 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. In all cases where the amount of the claim in disputes is Rs. 75,000/ - (Rs. Seventy Five Thousand only) and above arbitrator shall give reasons for the award. 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. It is also a term of the contract that the party invoking arbitration shall specify the dispute, a dispute to be referred to arbitration under this clause together with the amount or amounts claimed in respect of each such disputes. It is also a term of the contract that of the contractor(s) do/does not make any demand for arbitration in respect of any claim(s) in writing within 90 days of receiving the intimation from the government that the bill is ready for payment the claim of the contractor(s) will be deemed to have been waived and absolutely barred and the government shall be discharged and released of all liabilities under the contract in respect of these claims. The arbitrator(s) may from time to time with consent of the parties enlarge the time for making and publishing the award. The decision of the Superintending Engineer regarding the quantum of reduction as well as justification thereof in respect of rates or sub -standard work which may be decided to be accepted will be final and would not be open to arbitration. It would be clear from the aforesaid arbitration clause that the power to appoint the sole arbitrator is controlled by that clause itself and rests in the Chief Engineer mentioned therein or in his absence by the administrative head of the C.P.W.D. It is also clear in case of the vacancy of the sole arbitrator, the competent authority mentioned above had full power to fill up the vacancy. The intention of the parties is made clear by providing that 'no person other than a person appointed' by the authorities mentioned in the arbitration clause shall act as an arbitrator. There is further clarification in the arbitration clause to the effect that in case was not possible "the matter is not referred to arbitration at all". The question is if the Court below is right in holding that the Court had power to appoint the arbitrator because the concerned authority under the arbitration clause did not appoint the arbitrator after receiving notice of fifteen days as per section 8(2) of 'the Act'. Looking to the language of clause 25 of the agreement, it can be safely concluded that it envisages appointment of the sole arbitrator by the named authority and authorises it alone to fill up vacancy and none other. It also specifically says that in case there be no possibility of appointment the arbitration clause shall not be deemed to have been invoked. The wide powers conferred by the agreement between the parties can be overridden by the statute or by declaring them null and void being prohibited by any statutory law. The learned counsel for the parties have argued this revision on the foundation that section 8 of the Act is key to the problem. The counsel for the applicants says that it does not apply at all. The counsel for non applicants argues with equal vehemence that it applies. Section 8 of the Act reads as under: - Section 8(1) of the Arbitration Act: - In any of the following cases: - (a) where 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 (b) if any appointed arbitrator or umpire neglects or refuses to act, or is incapable of acting, or dies, and the arbitration agreement does not show that it was intended that the vacancy should not be supplied, and the parties or the arbitrators, as the case may be, do not supply the vacancy; or (c) where the parties or the arbitrators are required to appoint an umpire and do not appoint him; 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. (2) If the appointments is not made within fifteen clear days after the service of the said notice, the Court may, on the application of the party who gave the notice and after giving the other parties an opportunity of being heard appoint an arbitrator or arbitrators or umpire as the case may be, who shall have like power to act in the reference and to make the award as if he or they had been appointed by consent of all parties. An analysis of section 8(1)(a) of the Act would reveal the following ingredients for our purpose: -

(2.) THE arbitration agreement should provide there shall be reference to one or more arbitrators to be appointed by the consent of all the parties. That there should be difference or dispute between the parties and there is no concurrence regarding the appointment of arbitrator.

(3.) A notice should have been sent by one of the parties to the other party to concur in the appointment. It is clear from the language the arbitration clause, the appointment of the sole arbitrator is by the named authority to which both the parties have conferred the power of appointment. Once the parties have abdicated their powers of appointment by consent and delegated the power of appointment to an authority named in the agreement, there is no question of consent of the parties. The appointment of the sole arbitrator is upon the discretion of that authority and for this reason section 8(1)(a) of the Act is out of the way. Section 4 of the Act, on the other hand, enables a party to provide in the agreement that reference thereunder shall be made to an arbitrator by a person named in the agreement by name or by office. The parties in this case have entered into agreement in consonance with section 4 of 'the Act'. For these reasons, section 8(1)(a) of the Act would not apply. Once section 8(1)(a) of the Act does not apply the question of applying section 8(1) (b) or (c) of the Act would also not arise because section 8(1) of the Act could not be applied piecemeal. It may also be noticed that section 8(2) of the Act refers to notice which is sought to be served as per section 8(1) of the Act. Once it is held that section 8(1) of the Act does not apply, it follows as night the day, that section 8(2) does not apply because it refers notice mentioned in section 8(1) of the Act. In the case of M/s Harbans Singh Tuli and Sons Builders (P) Ltd. vs. Union of India reported in : AIR 1992 SC 1124, the two Judge Bench of the Supreme Court made the following observation at page 1128, paragraph 18: Page 1128, paragraph 18: - 18. Sub -section (1)(a) would apply to a case of initial appointment of an arbitrator or arbitrators. The implication is in the arbitration agreement, the arbitrator or arbitrators must not have been named. Where, therefore, they are named, this section will have no application. Similarly, the arbitrator or arbitrators are required to be appointed by all parties to the reference with consent, on the contrary, if there is some other mode of appointment, for example, section 4, where the parties to the agreement agree that the arbitrator has to be appointed by a person designated in the agreement either by name or hold, for the time being in office, certainly, this section will not apply. It is true that Supreme Court stated further that in case one of the parties delegates its power of appointment to another party to the agreement absolutely, still the appointment shall be treated by consent within the meaning of section 8(1)(a) of the Act. However, such is not case here. It is true that Supreme Court in that case considered application of section 8(2) of the Act to facts of that case and ruled that section 8(2) of the Act would not apply. The same position would be obtaining here because the non -applicant had not come to Court for not filling up the vacancy but claiming that the power to appoint the sole arbitrator was exhausted after 15 days notice within meaning of section 8(2) of 'the Act.' It is true that in Nandyal Co -operative Spinning Mills Ltd. vs. K.V. Mohan Rao's case reported in : 1993(2) SCC 654 : 1993 (2) Arbitration Law Reporter 359, a two Judge Bench of Supreme Court has taken the view that if the named person does not appoint arbitrator within 15 clear days then it will deemed that the named person had abdicated the power of appointment of the arbitrator and the Court gets jurisdiction to appoint arbitrator under section 8(1)(a) of the Act. There appears to be direct conflict between the two Benches of Co -equal strength. Therefore, this Court has an unenviable task of choosing between the two views. With great respect, the view taken in the case of Nandyal Co -operative Spinning Mills Ltd. (supra,) was decided on 11 -5 -1993 without taking note of the earlier judgment in case of M/s H.S. Tuli and Sons Builders Pvt. Ltd. vs. Union of India (Supra) which was decided on 11 -2 -1992. It appears that this case was reported also prior to delivery of the subsequent Judgment. It appears to this Court that this subsequent decision is per incuriam in the sense that the earlier the judgment was not brought to the notice of their Lordships. It is per incuriam for another reason that it does not discuss the essential terms of section 8(1)(a) of the Act that there should be consent of both the parties which was not there after delegation of power to the named authority. After analysing section 8(1)(a) of the Act in paragraph (8) of judgment and mentioning the condition No. 4, regarding consent, their Lordships of the Supreme Court omitted to consider if condition No. 4 was applicable to the facts of the case. The judgment rendered is sub silentio. Nor does the authority Union of India vs. Prafulla Kumar Sanyal,, (1979) 1 SCC 631 was applicable to section 8. It is an authority on section 20(4) of the Act. The decision of the Bombay High Court in the case of Union of India vs. M/s Ajit Mehta and Associates reported in : AIR 1990 Bom 45, was distinguished but was not overruled. In the opinion of this Court, the decision of the Supreme Court in the case of Nandyal Co -op. Spinning Mills Ltd. (supra) is not binding on this Court as it is not law declared within the meaning of Article 141 of the Constitution. The view taken by this Court is supported by the decision of the Kerala High Court in the case of Food Corporation of India vs. Salam Traders reported in : AIR 1998 Ker 194 (F.B.). The Full Bench of the Kerala High Court after discussing the case of Nandyal Co -op. Spinning Mills Ltd. (supra) made the following observations regarding the aforesaid case at page 200: - In the facts of the case, the Supreme Court held that an application under section 8(1)(a) was maintainable. But we do not think, the observations in that case can be taken as conclusively deciding the question; especially because in the earlier decision of the Supreme Court in : (1992) 2 SCC 225 : AIR 1992 SC 1124 and : AIR 1961 SC 1285 were not considered. With great respect, this Court endorses the view of the Full Bench of the Kerala High Court. The view of this Court is supported by the decisions reported in the case of (1) Union of India vs. M/s Ajit Mehta and others reported in : AIR 1990 Bom 45, (D.B.), (2) Food Corporation of India vs. Ghanshyamdas Agarwal reported in : AIR 1985 Ori 298, (3) V.K. Construction Works (P) Ltd. Chandigarh vs. M/s Food Corporation of India, Chandigarh and another reported in : AIR 1987 P&H 97, (4) Ved Prakash Mithal vs. Union of India and others reported in, AIR 1985 Del 325. The contrary view taken by the Patna High Court in the case of Union of India vs. D.P. Singh reported in : AIR 1961 Pat 228 that by delegation of the power to appoint an arbitrator to a third person in the arbitration clause would itself deemed to be the appointment by consent within the meaning of section 8(1)(a) of the Act does not appear to be correct as section 8(1)(a) of the Act requires that it must be provided in the arbitration clause that appointment of arbitrator shall be done with the consent of the parties. Apart from the authorities, this Court is of the view that clause 25 of the agreement gives discretion to the named authority to refer the matter to the arbitrator when there is difference between the parties regarding the agreement. It was made clear that no person other than that appointed by the named authority was entitled to act as an arbitrator. This was made the term of a contract. The matter is further clarified by saying for any reason if it was not possible to name an arbitrator the matter is not referred to arbitration at all. That means the arbitration clause shall not be invoked. The clause 25 then applies provisions of the Act subject to the above conditions amongst others. In view of such agreement the power to appoint an arbitrator is taken away from the jurisdiction conferred upon the Court under section 8 of the Act. No authority was cited before me that such an arbitration agreement would be invalid. Section 4 of the Act does provide that the parties can agree between themselves to designate a person at whose behest the arbitrator shall be appointed. Therefore, when the agreement itself provides as the terms of contract that no person other than the person appointed by the named authority shall act as a sole arbitrator and that the same authority shall have power to fill up the vacancy then the question of application of section 8 of the Act does not arise. In case the arbitrator is not appointed at all by the named authority, the remedy of the aggrieved party may be under section 20 of the Act as was done in the case of Union of India vs. Prafulla Kumar Sanyal (supra) reported in : AIR 1979 SC 1457. Perhaps it would be much reasonable to hold that the non -appointment of an arbitrator had rendered the arbitration clause ineffective and the parties shall have remedy in accordance with the general law. It may be noticed that by inaction the named authority cannot allow the remedy of the parties to be extinguished by law of limitation. This Court does not agree with the decision of the learned Single Judge in the case of State of Haryana vs. Himat Singh reported in, 1991 (2) Arb. L.R. 231 and holds that the decisions of same Court reported in the case of V.K. Construction Works (P) Ltd., Chandigarh vs. M/s Food Corporation of India, Chandigarh and another (supra) : AIR 1987, P&H 97 lay down the Correct law. The case of State of West Bengal vs. Gourangalal, 1993 (2) Arb. L.R. 95 has no application to facts of the case. In the case of Food Corporation of India vs. M. Ramchandra Rao, 1993 (2) Arb. L.R. 225 relates to application under section 20 of the Act and cannot be invoked as an authority in this case. The case of State of West Bengal vs. National Builders,, 1994 (1) Arb. L.R. 5 is inapplicable as it related to the revocation of the authority of the arbitrator. The decision reported as the G. Rama Chandra Reddy and Co. vs. Chief Engineer,, 1994 (2) Arb. L.R. 61 also does not apply because it is on application under section 20 of the Act the order was made. The Court followed the decision of Union of India vs. Prafulla Kumar (supra). The facts of that case are distinguishable. The Court cannot treat the application under section 8 of the Act as an application under section 20 thereof because during the pendency of the application, the Chief Engineer had already appointed V. Nainani as the sole arbitrator and the vacancy on his resignation has been filled by the appointment of Shri S.K. Kohli. The appointment of V. Nainani would have deprived the Civil Court of its jurisdiction under section 20 of the Act. The subsequent appointment of Shri S.K. Kohli as the sole arbitrator on the vacancy created by the resignation of V. Nainani is in accordance with terms of clause 25. The result of the aforesaid discussion is that this revision succeeds and is allowed. The impugned order dated 7 -2 -1996 is hereby set aside. The consequence is that Shri S.K. Kohli appointed by the Chief Engineer shall resume his work as a sole arbitrator from the stage Shri V. Nainani left and shall give an award according to the agreement and the Act without any impediment. No costs. Revision allowed.