Holding

The Supreme Court held that the court’s appointment of an arbitrator under Section 8(1)(a) was lawful and that the contractual clause did not waive the respondent’s right to challenge a biased arbitrator.

Summary

The respondent, K.V. Mohan Rao, entered into a building contract with Nandyal Co‑Op Spinning Mills Ltd. that contained a clause mandating that all disputes be referred to a sole arbitrator appointed by the owner’s Administrative Head, with no objection to the arbitrator being the owner’s representative. After the Administrative Head failed to appoint an arbitrator within the stipulated 15‑day period, the respondent served two notices requesting nomination, received no action, and filed a petition under Section 8 of the Arbitration Act, 1940 for court appointment of an arbitrator. The appellant later named a Superintending Engineer of BHEL as arbitrator, which the respondent challenged on the ground of bias, arguing that the contractual clause did not waive his right to object to a biased arbitrator. The trial court appointed a retired High Court judge as arbitrator, a decision upheld by the High Court. On appeal, the Supreme Court examined whether the contract waived the bias objection and whether the court had jurisdiction under Section 8(1)(a) after the Administrative Head’s inaction. The Court held that the contract only waived objection to the specific arbitrator appointed by the Administrative Head, not to any biased arbitrator, and that the court rightly exercised jurisdiction to appoint an arbitrator under Section 8(1)(a). Consequently, the appointment was deemed legal and the appeal was dismissed.

Issues considered

Whether the arbitration clause in the contract waives the respondent's right to object to bias of an arbitrator appointed by the Administrative Head.
Whether the civil court has jurisdiction under Section 8(1)(a) of the Arbitration Act, 1940 to appoint an arbitrator when the Administrative Head fails to do so within 15 days.
Whether bias can be waived by agreement in an arbitration covenant.
Whether the appointment of an arbitrator by the court is valid despite alleged bias.

Legislation cited

Arbitration Act, 1940s. 8(1)(a)
Code of Civil Procedure, 1908s. 9

Subjects

ArbitrationBiasSection 8Arbitrator appointmentContractual waiverCivil court jurisdictionBuilding contract

Judgment

A NANDYAL CO-OP. SPINNING MILLS LTD .
v.
K.V. MOHAN RAO

MARCH 5, 1993

B · [K. RAMASWAMY AND R.M. SAHAI, JJ.]

. ArbitratiiJnAct, 1940 : ·

Section 8' Contract-Arbitration covenant~Agreement authorising a
C · party to nominlue,Arbitratoi-Nomination of Arbitrator-Right of other paity
. to. ·challenge. nomination on the ground of bias-Held by the convenant of
.arbitration in the agreement bias is not waived.

Power of Cowt to appoint Arbitrator-Agreement providing appoint- ~
men/ of Arbitrator by a party-Notice by other party to appoint Arbitrator-
D Authorised party not appointing ·Arbitrator within 15 days-Appointment of
Arbitrator by Court held valirJ-Conditions for applicability of Section 8--Dis-
cussed.

The respondent entered into a building-contract with the appellant-
mill, Clause 65.1 of the. contract provided "except where otherwise
E provided in the contract all disputes or questions relating to ...... shall be
referred to the s.ole Arbitration of the person appointed by the Ad-
ministrative Head of owner. There will be no objection to any such ap-
pointment that.the Arbitrator so appointed is the owner'.s representative,
thai he had to deal with the matters to which the contract relates and that
· · .·F in the ·course.of.his duties as owner's representative he had had expressed
vie.ws on ~II or. any of.the' matters in dispute or differences".

Differen.ces having arisen during the execution of the contract the
respondeni gave notice twice requesting the appellant to nominate an
~bitraior wi!hin ·15 days iime but no action thereunder was taken except
.C .replying 'that the matter was under consideration. Thereafter the respon-
dent filed a petition under Section 8 of the Arbitration Act, 1940 in the
Court to appoint an Arbftrator. In tlie'meantime, the appellant informed
·the i:,;sp9~dent that a. Superintending Engineer of B.H.E.L. Hyderabad
· ··was appointed.as sole ·Arbitrator to which the respondent objected on the
H ground of bias. The Civil Court appointed a retired Judge of th!o High
280
\
NANDYAL SPINNING MILLS v. K. V. MOHAN 281
'·
Court as Arbitrator. The appellant's revision petition was dismissed by A
the High Court.

In appeal to this Court it was contended on behalf of the appellant
that (1) by the covenant or arbitration in the agreement the respondent
had waived bias; (2) under the terms of the contract the respondent was
to abide by the appointment of Arbitrator by the Administrative Head of B
the appellant and, therefore, the Civil Court lacked jurisdiction to appoint
Arbitrator under Section S(a) of the Act.

Dismissing the appeal, this Court,

HELD: 1. The appointment of the Arbitrator by the trial court as c
upheld by the High Court is perfectly legal and valid. [290A]

·" ; 2. Under the contract all questions and disputes relating to the
contract were to be referred to the sole arbitration of the person appointed
by the Administrative Head of the appellant. The right to suit available D
under Section 9 of the Code of Civil Procedure has been contracted out.
The waiver expressly engratled 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 difference on which he had had earlier dealt with to which the contract
related to. But there was no contract to ~rbiter by a named Arbitrator the E
dispute or differences that had arisen under the contract. [28411, 285A-B] ·

3. Justice must not only be done but seemingly appears to have beeil
done. The Arbitrator must not only be impartial but also be objective,
circumspect and honest in rende.ring his decision. l\'lany a time the 3'\\'ard
is not a speaking award which would inspire confidence for acceptance F
only when the above perspectives are present. Its invalidity would be iested
on grounds available in law. Admittedly the Arbitrator nominated by the
appellant acted on earlier occasions as appellant's Arbitrator. Therefore,
the respondent rightly objected to the nomination of Arbitrator. Such
nomination, therefore, does not bind him. [286D-E] G
Manak Lal v. Dr. Prem Ownd, (1957] S.C.R. 575; G. Sama v. Univer-
.,-. sity of Lucknow & Ors., (1977] 1 S.C.R. 64 and V. Rafizgunadha Rao v. State
of A.P., 1988 (I} A.L.T. 461, held inapplicable:
•
Judicial Review of Administrative Action by S.A. ~esmith, 3rd Edn. H
I
282 SUPREME COURT REPORTS [1993] 2 S.C.R. i
A p.223, referred to. l
I
3.1. 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 owu tribunal may, provided they act with full knowledge,
B choose dishonest, partial or interested Arbitrators (though this exception is
in its tum subject to a statutory exception which gives parties who have '••
so choosen 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. [285C-D] '
c Russell's Arbitration, 19th Edn. p.116, referred to.
I
4. The application for appointment of an Arbitrator is not main-
tainable when an Arbitrator has already been appointed and the applicant --1
has been informed of the said facts before the expiry of 15 days as
D envisaged under Section 8(1)(a). [287E] '
•
4.1. Admittedly the respondent did gave notice twice requesting the
appellant to nominate an Arbitrator within 15 day's time bot no action
thereunder bad been taken. If no Arbitrator had been appointed in terms
of the contract within 15 days from the date of the receipt of the notice,
E ~
the Administrative Head of the appellant had abdicated himself of the
power to appoint Arbitrator nuder the contract. Therefore, the Court bad •'
jurisdiction to appoint an Arbitrator in place of the contract by operation '
I'
of Section 8(1)(a). The contention, therefore, that since the agreement
postulated preference to Arbitrator appointed by the Administrative Head
F 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. 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 snit. But that is not the case on hand. Therefore, the,
G order of the High Court needs no interference. [287G, 288E-G, 283D]

Union of India v. Prafu/la Kumar Sanya4 [1979] 1 S.C.C. 631, relied
on.

Chander Bhan Harbhajan Lal v. State of Punjab, [1977] 3 S.C.R. 38;
H Mis Boriah Basavish & Sons v. Indian Telephone Industries Ltd., A.I.R. 1973
I-
NANDYAL SPINNING MILL v. K.V. MOHAN [RAMASWAMY, J.] 283

Mysore 309; V.K. Construction Works (P) Ltd. v. Food Corporation of India, A
A.l.R. 1987 l'b. & Haryana 97 and Union of India v. Ajit Mehta & As-
sociates, A.l.R. 1990 Bombay 45, held inapplicable.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 938 of
1993.
B
·+ From the Judgment and Order dated 12.10.92 of the Andhra Pradesh
High Court in C.R.P. No.1381 of 1991.

P .P. Rao and Mrs. Sarla Chandra for the Appellant.

K. Madhava Reddy and G. Prabhak<rr for the Respondent.
c
The Judgment of the Court was delivered by

K. RAMASWAMY, J. Leave granted.
D
Having heard the learned _Senior counsel Mis. P.P. Rao and K.
Madhava Reddy on ei\her side and having given our anxious consideration
to their contentions, we find in final analysis that the order of the High
Court needs no inkll~rence. The facts lie in a short compass, are as stated
under:
E
The respondent concluded a contract with the appellant on February
11, 1986 to construct a building at a cost of Rs.LOO 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 F
August 8 and 18, 1987 the respondent was informed that the matter was
under consideration. His renewed request in Jette< on August 17, 1987
evoked no action. Finding it futile to await, on July 27, 1988, the respondent
filed O.P. No.167of1988 in the Court of the Subordinate Judge, at Nandyal
to appoint an Arbitrator. The notice was issued to the appellant therein. G
By letter dated July 27, 1988 the respondent was informed of the appoint-
ment of Sri 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 Sri 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. H

I
284 SUPREME COURT REPORTS [1993) 2 S.C.R.

A Sri P.P. Rao, learned Senior counsel conteded that the concurrent
finding that Sri Yethiraj had bias against the respondent as he had acted
on ear~et 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 respodnent had waived bias, Secondly, it is confended that
Sri Yethiraj had no personal bias agianst the respondent and the contract
B postulated of appointment of an Arbitrator, the contract cannot be nul-
lified 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. Clause 65.1 of
the Contract reads thus:

c "Except where otherwise provided in the contract ail dis- -
putes or questions relating to ............ shall be referred to
the sole Arbitration of the person appointed by the ad-
ministrative Head of onwer. There will be no objecion to
any such appointment that the Arbitrator so appointed is
the owner's representative, that he had to deal with the
D matters to which the contract relates and that in the course
of his duties as owner's representative he had bad ex-
pressed views on all or any of the matters in dispute or
differences ..........

E 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.......

F Clause 65.2. Subject to as aforesaid the provisions of the
Arbitration Act, 1940 (for short 'the Act' added) or any
statutory modication or re-enactment thereof and the
rules made thereunder and for the time being in force
shall apply to the arbitration proceedings itnder this
cluase.".
G
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 Set:.9 of the Code of Civil Procedure has been contracted out. The
H waiver expressly engrafted was only of the Arbitrator appointed by the
NANDYAL SPINNING MILL v. K. V. MOHAN [RAMASWAMY, J.] 285

Administrative Head of the appellant one who was its representative who A
had had occasion to express views on all or any of the matters in dispute
or differences on which he had had earlier dealt with to which the contract
related to.

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 B
done but seemingly appears 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 c
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
dishones~ partial or interested arbitrators (emphasis supplied) (though this
exception is in its turn subject to a statutory exception which gives parties
who have so choosen a locus poenitentiae in certian circumstances). Apart D
from this exception, arbitrators who are in all other respects suitably
qualified are disqualified by c.'ishonesty, partiality or interest.

When the arbitration tribunal was chosen by the contracting parties,
undoubtedly they had chosen to avail of the adjudiction by the Tribunal
and to abide by the decision. Having so chosen and taken a decision it E
would no lager 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 at 589 thus:

"It seems clear that the appellant wanted to take a chance F
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. Sama v. University of Lucknow & Ors., (1977] G
1 SCR 64 at pp. 69-70. The above ratio bears no relevance since the
contract was not to appoint Sri 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 occassion to deal with the matter or ex-
pressed an opinion on the matter in dispute or difference, if appointed H
286 SUPREME COURT REPORTS [1993] 2 S.C.R.

A 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.

The decision relied on by the High Court in V. Raghgunadha Rao v.
State of A.P., (1988) 1 ALT 461 was in relation to the appointment of an
B 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 facts stituation. It bears no relevance
to the facts of the case. In Judicial Review of Administrative Action by S.A.
DeSmith (3rd Edition) at p.223 it is stated that "In a private law an
C independent commercial arbitrator must observe strictly judicial stand-
ards". 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 oc-
D casions as appellant's arbitrator. Justice must not only be done but seem-
ingly appears 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
E respondent rightly objected to the nomination of Yethiraj. Such nomina-
tion, therefore, does not bind him. We find force in the stand taken by the
respondent supported by Sri K. Madhava. Reddy.

It is next contended by Sri Rao that s.8(1)(a) of the Arbitration Act
F does not apply to the facts of this case as the contract abstracted herein-
before makes the respondent to abide by the appointment of an arbitrator
by the Administrative Head of the appellant. It he had an objection to the
nomination of Yethiraj, he would have had requested for another ar-
bitrator. The Civil Court lacked jurisdiction. The exercise of the jurisdic-
tion by Civil Court under s.8(1)(a), is hedged with existence of the contract.
G Section 8(1)(a) of the Arbitratio.n Act reads thus:

"where an arbitration agreement provides that the refer-
ence shall be to one or more arbitrators to be appointed
by consent of the parties and all the parties do not, after
H diferences have arisen, concur in the appointment or
NANDYAL SPINNING MILLS v. KV. MOHAN (RAMASWAMY, J.] 2537

appointments; or ........ A
~·
Any party may serve the other parties or the arbitrators,
as the case may be, with a written notice to concur in the
appointments or in supplyiltg the vacancy."

For its applicability, the following canditions must be fulfilled. B

( 1) There must be an arbitration agreement.

(2) The agreement must provide that in case of difference one or
more arbitrators to be appointed by consent of parties and did not concur
in the appointment of the arbitrator/arbitrators. c
(3) Disputes have arisen to which the agreement applies.
)o-..
( 4) The parties had been consented in the appointment or appoint-
ments.
D
(5) The appointment is not made within 15 clear days of the srevice
of the written notice to do so; and

(6) The application is made to the court by any party to the agree-
ment.
E
'r· 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
s.8(1)(a).
F
We have seen the arbitral agreement in Clause 65.1, and of ap-
plicability of the Act in Clause 65.2 thereof. The agreement provided that
after thqlisputes 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 gave notice twice requesting the appellant to
nominate an arbitrator and within 15 day's time no action thereunder had G
been taken. The replies thereto were only that the matter was under con-
sideration. 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 day's time the respondent had invoked
the jurisdiction of the trial court which is competent to deal with the matter. H
•
288 SUPREME COURT REPORTS [1993] 2 S.C.R.
,_
A 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 ofIndia v. Prafu/la Kumar Sanyal, [1979] 1SCC631 constru-
ing s.20(4) of the Act this court held in paragraph 4 thus :

"ffilo such arbitrator had been appointed and when the
B parties cannot agree upon an arbitrator itself, 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
rC to. act to the person appointed by the arbitrator. An
arbitrator, in fact, has not been appointed by the President
of India though provisions has been made for such ap-
pointment... ...........

If an arbitrator had not been appointed, the court is to
D
find whether the parties conld 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."

E It would thus be clear that if no arbitrator had been appointed in
terms of the contract within 15 days from the date of the receipt of the ~
notice, the Administrative Head of the appointment had abdicated himself '
of the power to appoint arbitrator under the contract. The court gets
jurisdictio~ to appoint an arbitrator in place of the contract by operation
F of s.8(1)(a). The contention of Sri 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
G named arbitrator and the named person was not appointed, certainly the
only remedy left to the contracting party was the rights to suit. That is not
the case on hand. The contract did not expressly provide for the appoint-
ment of a named arbitrator. Instead power has been given .to the Ad- -·~
ministrative Head of the appellant to appoint sole arbitrator. When he
H failed to do so within the stipulated period of 15 days enjoined under
Jll.\NDYAL SPINNING MILLS v. K.V. MOHAN [RAMASWAMY, J.) 289

s.8(1)(a), then the respondent has been given right under clause 65.2 to A
avail the remedy. under s.8(1)(a) and request the court to appoint an
arbitrator. If the contention of Sri Rao is given acceptance, it e.mounts to
put a premium on inaction depriving the contractor of the remedy of
arbitration frustrating the contract itself.

The ratio in Chander Bhan Harbhajan Lal v. State of Punjab, [1977] B
3 SCR 38 at 41E & D relied on by Sri 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 who had applied to the Govt. to nominate a Settlement Commit-
,- tee the Govt. moved the court for appointment of the Committee. Thus the C
Govt. itself was entitled to have the committee appointed under the
agreement and instead had taken recourse to s.8(1)(a).

The ratio in Mis. Boriah Basavish .& Sons v. Indian Telephone In-
dustries Ltd., AIR 1973 Mysore 309 is also inapplicable to the facts in this D
case. Therein the contract expressly provided for appointment of an ar-
bitrator by consent of parties. Since the parties did not agree, it was held
that s.20(4) and not s.8 that would be applicable.

The case of V.K Co11stmctio11 Works (P) Ltd. v. Food Corporation of E
India, AIR 1987 Pb. & Haryana 97 is equally inapplicable. Therein the
terms of the contract was 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 the arbitration at all. In terms of that contract the
invocation power of the court under s.8 was taken. F

The case of Union of India v. Ajit Mehta & Associates, AIR 1990
Bombay 45 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 G
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 s.8 of the Act and the arbitration award H
290 SUPREME COURT REPORTS [1993] 2 S.C.R.

-
\
A made pursuant thereto was held to be a nullity.

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.

T.N.A. Appeal dismissed.

. ,.·