Holding

Clause 60 is an arbitration agreement, but the Managing Director is disqualified as arbitrator due to actual bias, making the arbitration proceedings void.

Summary

Bihar State Mineral Development Corporation (appellant) awarded a contract to ENCON Builders (respondent) for excavation work. The respondent failed to perform, leading the corporation to re‑allocate the work and incur losses. Clause 60 of the contract stipulated that any dispute would be decided by the Managing Director of the corporation, whose decision would be final and binding, and the Managing Director also possessed powers to terminate the contract and impose fines. The respondent challenged the validity of this clause as an arbitration agreement, arguing that the Managing Director was biased because of his supervisory powers over the contract. The Supreme Court held that while clause 60 satisfied the essential elements of an arbitration agreement, the Managing Director was disqualified from acting as arbitrator due to actual bias, rendering the arbitration proceedings a nullity. Consequently, the appellant's appeal was dismissed.

Issues considered

Whether clause 60 of the contract constitutes a valid arbitration agreement under the Arbitration Act, 1940.
Whether the Managing Director, who has powers to terminate the contract and impose fines, can act as an arbitrator without violating the principle of impartiality.
Whether actual bias of an arbitrator renders the arbitration proceedings a nullity.

Legislation cited

Arbitration Act, 1940s. 2(a), s. 33, s. 39(1)(i)
Arbitration Act, 1996s. 24(1)(a), s. 5

Subjects

arbitration agreementactual biasarbitrator disqualificationconflict of interestArbitration Act 1940contract terminationnullity of proceedingsimpartial tribunal

Judgment

A BIHAR STATEMINERAL DEVELOPMENT CORPN. AND ANR.
v.
ENCON BUILDERS (I) PVT. LTD.

AUGUST 21, 2003

B [V.N. KHARE, CJ AND S.B. SINHA, J.]

Arbitration Act, I 940:

Arbitration agreement-Bias-Effect of-Held: Actual bias influences
C the decision, depriving the litigant a fair trial-It would lead to
. disqualification of the arbitrator-In the facts and circumstances ofthe case
bias on the part of the authority goes to the root of his jurisdiction to act
as an arbitrator rendering his entire action a nullity-High Court rightly
held that a Managing Director possessing power to impose fine/terminate the
D contract; could not assume the role of an arbitrator.
Words and Phrases:

'Actual bias '-Meaning of-Jn the context of Arbitration Act, 1940.

E Appellant Corporation had given a contract, as per agreement, to
respondent firm for removal of soil, sandstone etc. to stack the same in a
dump yard. The respondent failed to fulfil its obligation as a result whereof
the remaining work was got done by the appellant Corporation from another
agency; thereby it incurred a huge loss. Therefor it invoked the purported
arbitration agreement; respondent also made claim against the appellant
F Corporation. The matter was pending before the arbitrator, Appellant No.2.
In the meanwhile, respondent questioned the validity of the arbitration clause
viz. Clause 60 of the agreement. Trial Court allowed the petition restraining
appellant No.2 from acting as an Arbitrator. Aggrieved, appellant filed appeal,
which was dismissed by the High Court Hence the present appeal.

G It was contended for the appellant that clause 60 of the agreement
satisfied the essential ingredients of an arbitration agreement; that an
employee of the Principal could be named as an arbitrator and bias on his
part should not be presumed.

On behalf of the respondent, it was submitted that the appellant
H 812
BIHAR STATE MINERAL DEV. CORPN. v. ENCON BUILDERS 813

Corporation had re-allotted work to another agency illegally. A
Dismissing the appeal, the Court

HELD: 1.1. There cannot be any doubt whatsoever that an arbitration
agreement must contain the broad consensus between the parties that the
disputes and differences should be referred to a domestic tribunal. But the B
domestic tribunal must be an impartial one. It is a well-settled principle of
law that a person cannot be a judge of his own cause. It is further well-settled
that justice should not only be done but manifestly seem to be done.
(817-F,G)

1.2. Actual bias would lead to an automatic disqualification where the C
decision maker is shown to have an interest in the outcome of the case. Actual
bias denotes an arbitrator who allows a decision to be influenced by partiality
or prejudice and thereby deprives the litigant of the fundamental right to a
fair trial by an impartial tribunal. As bias on the part of the second appellant,
being the Managing Director goes to the root of his jurisdiction to act as an D
arbitrator, the entire action is a nullity. An order which lacks inherent
jurisdiction would be a nullity and, thus, the procedura! law of waiver or
estoppel would have no application in such a situation.
(817-H; 818-A; 821-D, EJ

Kumaon Manda/ Vikas Nigam ltd v. Girja Shankar Pant and Ors., E
1200111 sec 182, relied on.

The Secretary to the Government, Transport Deptt., Madras v.
Munuswamy Mudaliar and Ors., AIR (1988) SC 2232; Michael Golodetz and
Ors. v. Serajuddin & Co. AIR (1963) SC 1044; State of Orissa and Ors. v.
Narain Prasad and Ors., (19961 5 SCC 740 and State of UP. v. Tipper Chand, F
[19801 2 sec 341, distinguished.

Judicial Review ofAdministrative Action by De Smith, Woolf and Jowell
(Fifth Edition at page 527); The Law and Practice ofCommercial Arbitration
in England by Sir Michael J. Mustill and Stewart C. Boyd; and 'Russell on
Arbitration', 22nd Edition, referred to. G
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2025of1997.

From the Judgment and Order dated 10.9.96 of the Patna High Court in
M.A.No. 176 of 1995 (R).
H
814 SUPREME COURT REPORTS (2003) SUPP. 2 S.C.R.

A. Dinesh Dwivedi, Kumar Rajesh Singh and B.B. Singh for the Appellants.

E.C. Vidya Sagar (NP) for the Respondent.

The Judgment of the Court was delivered by

B S.B. SINHA, J. The appellants before the High Court are in appeal
before us against the judgment and order dated I 0.9.1996 passed by the High
Court of Patna, Ranchi Bench, Ranchi, in Misc. Appeal No.176 of 1995 (R)
dismissing an appeal preferred by the appellants herein purported to be in
terms of Section 39(1 )(i) of the Arbitration Act, 1940 ('the Act' for short),
against an order dated 11.9.1995 passed by the Subordinate Judge-VI, Ranchi,
c allowing Arbitration (Misc.) Case No.39 of 1995 filed by the respondent t=
herein.

The basic fact of the matter is not in dispute. Appellant No. I herein
invited tender for removal of soil, sandstone, shale, conglomerates/coal et<:.
D and stacking it up to a distance of I. k.m. Pursuant to or in furtherance of
the notice inviting tender issued by Appellant No. I, the respondent herein
submitted his tender which was accepted. According to the appellants, the
respondent failed and neglected to produce 10,000 M.T. of coal per month and
stack the same in the dump yard which was the subject-matter of the agreement
dated 17.3 .1992, as a result whereof the balance job was got done by another
E agency.

According to the appellants. by reason of the aforementioned acts of
omission and commission on the· part of the respondent, i.t suffered a huge
loss. The agreement of the respondent, however, was not expressly cancelled
by Appellant No.2 herein. The respondent herein allegedly invoked the
F purported arbitration agreement contained in the said agreement dated
17.3.1992.

Clauses 37, 59 and 60 which, according to the appellants, are relevant
for the purpose of this case read thus :

G "37. It will be at the absolute discretion of the Managing Director of
the Corporation to terminate the agreement in the following events

a. If the excavation work is found to be unsatisfactory.
b. If the agency be involved in any action involving moral turpitude.
H
BIHAR STATE MINERAL DEV. CORPN. v. ENCON BUILDERS [ S.B. SINHA, J.] 815
c. If the agency be involved in any action causing breach of peace A
indiscipline at the Mines or stops the work before the expiry of
the agreement period.
d. If the agency fails to comply with any of the terms and conditions
contained herein or that would be mutually agreed upon for the
execution of the work. B
e. If the agency fails to pay full wages to workmen as per prevailing
act/awards from the management premises and in presence of
Corporation authorised representative.

Before terminating the agreement, one month's notice under
registered post on the address given in this agreement will be C
given to the agency without prejudice to the right and claim
under the agreement and the corporation; will have the right to
adjust such amount towards the financial loss that corporation
might incur due to such acts or commissions of the agency from
bills or security deposit or earnest deposit or through other legal ])
proceedings."

59. If during course of inspection or on reports of officers of the
Corporation the Managing Director finds that the working operation
·' are not carried out in.a workman like manner or payments to workmen
are not made timely and according to provisos of the rules and E
regulations he may impose fine on the agency up to a maximum of
rupees five thousand at a time depending on the gravity of the
violations.

.( 60. In case of any dispute arising out of the agreement, the matter
' shall be referred to the Managing Director, Bihar State Mineral F
Development Corporation Limited, Ranchi, whose decision shall be
final and binding."

The respondent also allegedly made claim against the appellants. The
disputes were said to have been referred to Appellant No.2 herein purported
to be in terms of clause 60 of the said agreement. But who referred the said G
dispute and how it was done is not borne out from the records.

Allegedly, 22.6.1995 was the date fixed for hearing of the matter before
Appellant No.2 which was subsequently adjourned to 6.7.1995. The respondent
herein questioned the validity of clause 60 of the agreement by a letter dated
H
816 SUPREME COURT REPORTS [2003] SUPP. 2 S.C.R.

A 15.7.1995.
It thereafter filed an application under Section 33 of the Act in the Court
of the Subordinate Judge-VI, Ranchi. The said application was allowed by the
learned Subordinate Judge, by reason of an order dated 11.9.1995, whereby
and whereunder, Appellant No.2 was restrained from acting as an Arbitrator.
B The learned Judge further held that clause 60 of the agreement cannot be
construed to be an arbitration agreement.

Aggrieved thereby and dissatisfied therewith, the appellants preferred
an appeal before the High Court. By reason of the impugned judgment, the
C said appeal was dismissed. The appellants are in appeal before us against the
said judgment.

Mr. Dinesh Dwivedi, learned senior counsel appearing on behalf of the
appellants, would submit that the courts below committed manifest illegality
in passing the impugned judgment insofar as they held that clause 60 of the
D agreement does not constitute an arbitration agreement as the same satisfies
the definition thereof as contained in Section 2(a) of the Act, insofar as it
contains the following essential elements of an arbitration agreement, namely,
(a) the agreement is in writing; (b) the agreement is to submit a present or
a future difference; (c) dispute is to be referred to a named arbitrator; and (d)
the decision of the arbitrator is final.
E
The learned counsel would contend that as the essential elements of
arbitration are satisfied from clause 60 of the agreement, it was not necessary
to specifically use the terminology 'arbitration' therefor and no particular form
is required therefor. Reliance in this connection has been placed on Smt.
Rukmanibai Gupta v. The Collector, Jabalpur and Ors., AIR (1981) SC 479.
F
The learned counsel would further submit that the High Court further
erred insofar as it failed to take into consideration the fact that an employee
of the Principal can be named as an arbitrator wherefor bias on his part cannot
be presumed. Strong reliance in this behalf has been placed on The Secretary
G to the Government, Transport Deptt., Madras v. Munuswamy Mudaliar and
Ors., AIR (1988) SC 2232, State of UP. v. Tipper Chand, [I 980] 2 SCC 341, K.K.
Modi v. MN. Modi and Ors., JT (1998) 1 SC 407, Michael Golodetz and Ors.
v. Serajuddin and Co., AIR (1963) SC 1044 and State of Orissa and Ors. v.
Narain Prasad and Ors., [ 1996] 5 SCC 740.

H The short question which arises for consideration in this appeal is as
BIHAR STATE MINERAL DEV. CORPN. v. ENCON BUILDERS [ S.B. SINHA, J.] 817

to whether the learned court below committed an illegality in refusing to refer A
the matter to arbitration.

The essential elements of an arbitration agreement are as follows :

(I) There must be a present or a future difference in connection with
some contemplated affair. B
(2) There must be the intention of the parties to settle such difference
by a private tribunal.
(3) The parties must agree in writing to be bound by the decision
of such tribunal.
c
(4) The parties must be ad idem.

There is no dispute with regard to the proposition that for the purpose
of construing an arbitration agreement, the term 'arbitration' is not required
to be specifically mentioned therein. The High Court, however, p~oceeded on
the basis that having regard to the facts and circumstances of this case, the D
arbitration agreement could have been given effect to. We may,, therefore,
proceed on the basis that Clause 60 of the Contract constitutes an arbitration
agreement.

A finding has been arrived at by the High Court that the Second
Appellant was the only competent authority to arrive at his satisfaction that E
the agreement was liable to be terminated. By reason of the power conferred
upon the Managing Director of Appellant No. I, he is also entitled to impose
fine on the contractor depending upon the gravity of violation of the agreement.

The respondent would contend that although the agreement 'was not
expressly terminated, the work had illegaHy been re-allotted to another agency F
by the second appellant. The correctness or otherwise of the said decision
on the part of the second appellant was in question. The High Court, therefore,
arrived at a finding that as for all intent and purport the agreement was
terminated by Appellant No.2, he could not assume the role of an arbitrator.

There cannot be any doubt whatsoever that an arbitration agreement G
must contain the broad consensus between the parties that the disputes and
differences should be referred to a domestic tribunal. The said domestic
tribunal must be an impartial one. It is a well-settled principle of law that a
person cannot be a judge of his own cause. It is further well-settled that
justice should not only be done but manifestly seen to be done.
818 SUPREME COURT REPORTS (2003] SUPP. 2 S.C.R.

A Actual bias would lead to an automatic disqualification where the decision
maker is shown to have an interest in the outcome of the case. Actual bias
denotes an arbitrator who allows a decision to be influenced by partiality or
prejudice and thereby deprives the litigant of the fundamental right to a fair
trial by an impartial tribunal.

B The case at hand not only satisfies the test of real bias but also satisfies
the real danger as well as suspicion of bias. See Kumaon Manda/ Vikas
Nigam Ltd v. Girja Shankar Pant and Ors., [200 I J 1 SCC I 82.

In Judicial Review of Administrative Action; by De Smith, Woolf and
C Jowell (Fifth Edition at page 527), the law is stated in the following terms :

"The various tests of bias thus range along a spectrum. At the one
end a court will require that, before a decision is invalidated, bias must
be shown to have been present. At th·e other end of the spectrum, the
court will strike at the decision where a reilsonable person would have
a reasonable suspicion from the circumstances of the case that bias
D
might have infected the decision. In between these extremes is the
"probability of bias" (this being closer to the "actual bias" test), and
the "possibility of bias" (this being closer to that of reasonable t:
suspicion)".

E In "The Law and Practice of Commercial Arbitration in England by Sir
Michael J. Mustill and Stewart C. Boyd, it is stated :

"Since the general principles of law relating to bias apply in the
same 'way to arbitrations as to other tribunals, and since instances
which are sufficiently serious to bring about the intervention of the
F Court are very rare indeed, _there is no need to deal with the subject
in detail."

In 'Russell on Arbitration', 22nd Edition, the law is stated thus :
"4-030 Actual and apparent bias. A d!stinction is made between actual
bias and apparent bias. Actual bias is rarely established, but clearly
G provides grounds for removal. More often there is a suspicion of bias
which has been variously described as apparent or unconscious or
imputed bias. In such majority of cases, it is often emphasized that the
challenger does not go so far as to suggest the arbitrator is actually
biased, rather that some form of objective apprehension of bias exists.
H 4-032 Pecuniary interest. There is an automatic disqualification for an
BIHAR STATE MINERAL DEV. CORPN. v. ENCON BUILDERS [ S.B. SINHA, J.) 819

arbitrator who has a direct pecuniary interest in one of the parties or A
is otherwise so closely connected with the party that can truly be said
to be a judge in his own cause.

5-052 Impartial. Section 33( 1) of the Arbitration Act 1996 states that
the tribunal must act "impartially". An arbitrator must also appear
impartial and if there are justifiable doubts as to his impartiality this B
will provide a ground for his removal by the court under section
24(1)(a) of the Arbitration Act 1996 or may mean that the award can
be challenged."

Mr. Dwivedi placed strong reliance in Munuswamy Mudaliar 's, case
(supra). In that case an application under Section 5 of the Act was filed. C
Furthermore, the fact of the said case is not applicable in the present case
inasmuch as therein actual work by the contract did not start. In that situation,
the risk and cost clause was invoked. The only contention raised therein was
that as the said clause was invoked by the Chief Engineer; the Superintending
Engineer being an inferior authority to him would not be in a position to D
dispense with the justice effectively. It was, in that situation, held by this
Court as under :

"This is a case of removal of a named arbitrator under S.5 of the Act
which gives jurisdiction to the Court to revoke the authority of the
arbitrator. When the parties entered into the contract, the parties knew E
the terms of the contract including arbitration clause. The parties
knew the scheme and the fact that the Chief Engineer is superior and
the Superintending Engineer is subordinate to the Chief Engineer of
the particular Circle. In spite of that the parties agreed and entered
into arbitration and indeed submitted to the jurisdiction o~ the
Superintending Engineer at that time to begin with, who, however, F
could not complete the arbitration because he was transferred and
succeeded by a successor.

In those circumstances on the facts stated no bias can reasonably be
apprehended and made a ground for removal of a named arbitrator. In
our opinion this cannot be, at all, a good or valid legal ground. Unless G
there is allegation against the named arbitrator either against his
honesty or capacity or ma/a fide or interest in the subject-matter or
reasonable apprehension of the bias, a named and agreed arbitrator
cannot and should not be removed in exercise of a discretion vested
in the Court under S.5 of the Act." H
820 SUPREME COURT REPORTS [2003] SUPP. 2 S.C.R.

A Such is not the position here.

In Serajuddin 's, case (supra), this court was concerned with an
application under Section 34 of the Arbitration Act. It was held :

" ... The Court insists, unless sufficient reason to the contrary is made
B out upon compelling the parties to abide by the entire bargain, for not
to do so would be to allow a party to the contract to approbate and
reprobate, and this consideration may be stronger in cases where
there is an agreement to submit the dispute arising under the contract
to a foreign arbitral tribunal..."

c It was further observed :

" ... The Court ordinarily requires the parties to resort for resolving
disputes arising under a contract to the tribunal contemplated by them
at the time of the contract. That is not because the Court regards itself
bound to abdicate its jurisdiction in respect of disputes within its
D cognizance : it merely seeks to promote the sanctity of contracts, and
for that purpose stays the suit..."

In the said case, the question of bias on the part of the arbitrator did
not fall for consideration.

E In Narain Prasad's, case (supra), this Court was not dealing with an
arbitration matter but with the conduct of the parties in relation to enforcement
of a contract in a liquor vend. Therein the respondent filed a writ petition for
coming out his contractual obligation and in the said fact situation obtaining
therein this Court observed :
F " ... A person who enters into certain contractual obligations with his
eyes open and works the entire contract, cannot be allowed to tum
round, according to this decision, and question the validity of those
obligations or the validity of the Rules which constitute the terms of
the contract. The extraordinary jurisdiction of the High Court under
G Article 226, which is of a discretionary nature and is exercised only
to advance the interests of justice, cannot certainly be employed in
aid of such persons. Neither justice nor equity is in their favour".
In K.K. Modi's, case (supra), clause 9 of a memorandum of agreement
came up for consideration, which was in the following terms :

H "Implementation will be done in consultation with the financial
BI HAR STATE MINERAL DEV. CORPN. v. ENCON BUILDERS [ S.B. SINHA, J.] 82}

institutions. For all disputes, clarifications etc. in respect of A
implementation of this agreement, the same shall be referred to the
Chairman, IFCI or his nominees whose decisions will be final and
binding on both the groups."

It was held that the same did not constitute an arbitration clause.
B
Yet again in Tipper Chand's, case (supra) whereupon reliance has been
placed by Mr. Dwivedi, the following clause was not held to be an arbitration
clause :

"For any dispute between the contractor and the Department the
decision of the Chief Engineer PWD Jammu and Kashmir, will be final C
and binding upon the contract."

As in the instant case, the test of bias on the part of Appellant No.2
is fully satisfied, the impugned order is unassailable. As bias on the part of
the second Appellant goes to the root of his jurisdiction to act as an arbitrator,
the entire action is a nullity. D
As the acts of. bias on the part of the s.econd appellant arose during
execution of the agreement, the question as to whether the respondent herein
entered into the agreement with his eyes wide open or not takes a back-seat.
An order which lacks inherent jurisdiction would be a nullity and, thus, the
procedural law of waiver or estoppel would have no application in such a E
situation.

It will bear repetition to state that the action of the second appellant
itself was in question and, thus, indisputably he could not have adjudk tted
thereupon in terms of the principle that nobody can be a judge of his own
cause. F

F~rthermore, asthe learned Subordinate Judge, inter alia, held that
clause 60 did not constitute an arbitration agreement, the same could not have
been the subject-matter of an appeal under Section 39(1Xi) of the Act inasmuch
as thereby the arbitration agreement was not superseded.
G
For the reasons aforementioned, there is no merit in this appeal which
is dismissed. As the respondent did not appear, there shall be no order as
to costs.
S.K.S. Appeal dismissed.
H