Union of India (UOI) vs V.M. Mathai

Kochu Thommen, J.—This appeal by the Union of India is against the order of the Subordinate Judge, Ottaopalam, dated 20th August 1983 in O.S. No. 22 of 1982 appointing Shri. M. Ramachandran, Retired District Judge, Ponnani, as arbitrator and making a reference to him of the dispute between the Plaintiff-Respondent and Defendants-Appellants. The Appellants contend that the learned Judge exceeded his power in making a reference to arbitration otherwise than as provided by the parties in their agreement, dated 18th June 1979.

The Plaintiff (whom we shall refer to as the contractor) entered into Ext. B-1 contract, dated 18th June 1979 with the President of India acting through the Deputy Chief Engineer (Construction), Egmore, Madras. (We shall refer to the Appellants-Defendants as the Railway). Differences arose between the contractor and the Railway on account of non-payment of the contractor''s claim dated 22nd February 1981 (Ext. B-2). Ext. B-3, dated 11th May 1981 was sent by the contractor to the Railway requesting for immediate settlement of the outstanding bills. By Ext. B-4 dated 10th November 1981 the contractor requested the Railway to furnish a panel of names to nominate arbitrators in terms of Clause 63 of the agreement. This clause prescribes the mode of appointing the arbitrators. Since the Railway did not comply with the request of the contractor, he filed an application before the Sub Court, Ottappalam u/s 20 of the Arbitration Act, 1940. Both sides were heard by the Court and it pronounced judgment on 14th June 1983 ordering the Railway to file the arbitration agreement between the parties and also directing the Railway to furnish a panel containing the names of persons for the contractor to make his nomination in accordance with the provisions of Clause 63 of the agreement. On 29th June 1983 the Railway filed a panel containing four names of its officers. On 30th June 1983 the contractor filed his objections stating that the persons included in the panel were unknown to the contractor and that they did not inspire confidence in his mind about their impartiality. The Court, accepting the objections, passed the impugned order appointing Shri. M. Ramachandran as the arbitrator.

Counsel for the Railway Shri. M.C. Cherian submits that where the parties had agreed to the mode of appointment of the arbitrators, the Court had no power to act otherwise than in accordance with such agreement, particularly when the designating authority specified under the agreement promptly complied with the direction of the Court to furnish a panel in accordance with the agreement. Counsel submits that to appoint an arbitrator otherwise than in accordance with the agreement is to refuse to file an arbitration agreement thereby making the impugned order an order within the scope of Section 39(1)(iv) Counsel relies on the decisions in Union of India (UOI) Vs. M.S. Grewal and Co., and The Controller of Stores and Another Vs. Kapoor Textile Agencies, . Counsel further submits that Section 20(4) postulates that where there was an agreement between the parties designating an arbitrator or a person entitled to nominate an arbitrator, the only function of the Court after ordering the agreement to be filed is to make a ministerial order of reference to the arbitrator so designated or nominated. The Court in ignoring such contractual provisions acted in excess of and without jurisdiction.

Shri. M.A. George, appearing for the contractor, submits that the contractor was at all material times ready and willing to act in accordance with the provisions of the arbitration agreement contained in Clause 63 of the agreement, but despite repeated requests the Railway did not comply with those provisions. In such circumstances, the contractor was compelled to approach the Court u/s 20 for appointing a sole arbitrator. The panel furnished by the Railway containing names of their own officers, who are totally unknown to the contractor, is not acceptable to the contractor and in view of the proceedings in the Court initiated by him u/s 20 of the Act, the Court acted well within its jurisdiction in acknowledging and accepting the genuineness of the apprehensions expressed by the contractor in regard to the unilateral action of the Railway and the possibility of the persons included in the panel not being unbiased. Shri George further submits that in a contract of this nature with the "all powerful Railway", the parties are in an unequal bargaining position and injustice is likely to occur unless the terms of the contract receive strict construction to the advantage of the contractor.

Clause 63 of Ext. B-1 agreement, in so far as it is material, reads:

Demand for arbitration. (1) In the event of any dispute or difference between the parties hereto as to the construction or operation of this contract, or the respective rights and liabilities of the parties on any matter in question, dispute or difference on any account, or as to the withholding by the Railway of any certificate to which the Contractor may claim to be entitled to, or if the Railway fails to make a decision within a reasonable time, then and in any such case, but except in any of the ''Excepted Matters'' referred to in Clause 62 of these conditions, the Contractor, after 90 days of his presenting his final claim on disputed matters, may demand in writing that the dispute or difference be referred to arbitration. Such demand for arbitration shall specify the matters which are in question, dispute or difference, and only such dispute or difference, of which the demand has been made and no other, shall be referred to arbitration.

(2) * * * *

(3) (a) Matters in question, dispute or difference to be arbitrated upon shall be referred for decision to�

(i) * * * (ii) Two Arbitrators, who shall be Gazetted Railway Officers of equal status to be appointed in the manner laid down in Clause (3)(i) for all claims of Rs. 3,00,000 (Three lakhs) and above and for all claims irrespective of the amount or value of such claims if the issues involved are of a complicated nature. The General Manager shall be the sole Judge to decide whether the issues are of a complicated nature, or not. In the event of the two Arbitrators being divided in their opinion the matter under dispute will be referred to an umpire to be appointed in the manner laid down in Clause (3)(b) for his decision.

(iii) * * * *

(b) for the purpose of appointing two arbitrators as referred to in Sub-clause (a)(ii) above, the Railway will send a panel of more than three names of Gazetted Railway Officers of one or more departments of the Railway to the Contractor, who will be asked to suggest to the General Manager one name out of the list for appointment as the Contractor''s nominee, will also appoint a second arbitrator as the Railway''s nominee either from the panel or from outside the panel, ensuring that one of the two Arbitrators so nominated is invariably from the Accounts Department. Before entering upon the reference the two Arbitrators shall nominate an Umpire who shall be a Gazetted Railway Officer to whom the case will be referred to in the event of any differances between the two Arbitrators. Officers of the Junior Administrative grade of the Accounts Department of the Railway shall be cons den d as of equal status to the officers in the intermediate administrative grade of other departments of the Railway for the purposes of appointment as Arbitrators.

* * * This is admittedly a contract falling within Sub-clause (3)(b), for the disputed amount far exceeds Rs. 3 lakhs. When disputes arise attracting the provisions of Clause 63, the Railway has to send to the contractor a panel of more than three names of Gazetted Railway Officers of one or more departments of the Railway. The contractor is entitled to nominate one person out of the panel. It is then open to the Railway to nominate a person either from the panel or outside the panel ensuring that one of the nominees is an officer of the Accounts Department. The two persons thus nominated by the parties will act as the arbitrators, and they will then nominate Anr. Gazetted Railway Officer as an umpire to whom differences between the arbitrators will be referred. Technically this provision is satisfied if the penal sent by the Railway consists of only four persons, for the relevant clause only says "more than three names". However one must remember that the Railway has to afford the contractor an effective and meaningful choice as to his nominee.

In a standard form contract of this nature where the contractor is hardly in an effective bargaining position in comparison to the Railway, it would indeed be fair if the panel furnished by the Railway is large enough for an effective choice. We should have thought that a panel containing less than nine names would not satisfy the requirement of fairness in the matter of choice, particularly in view of the relatively unequal bargaining position of the contractor; but the relevant term of the contract is technically satisfied if the persons included in the panel are from anyone department of the Railway, although it would be most desirable, in view of the special nature of the Railway contract, and in the interests of both the parties, that Officers of different departments of the Railway are included in the panel so as to make it truly representative of diverse expertise.

Section 20 is the relevant provision of the Act under which the Court has the power to intervene for making a reference. The application of the contractor having been made u/s 20(1), the power of the Court is confined to what is embodied in Sub-section (4) in the matter of reference to an arbitrator. This Sub-section reads:

20(4) where no sufficient cause is shown, the Court shall order the agreement to be filed, and shall make an order of reference to the arbitrator appointed by the parties, whether in the agreement or otherwise, or, where the parties cannot agree upon an arbitrator, to an arbitrator appointed by the Court.

It contains two limbs postulating two separate orders. Under the first limb the Court must make a judicial order "filing or refusing to file an arbitration agreement" within the meaning of Section 39(1)(iv). Under the second limb the Court performs a ministerial act of reference to the arbitrator or arbitrators Dhanrajamal Gobindram Vs. Shamji Kalidas and Co., It the parties have agreed upon the arbitrator, the reference is automatically made to such arbitrator. Where the parties cannot agree upon an arbitrator, the reference has to be made to an arbitrator appointed by the Court, In a case such as the present, where the parties have by agreement placed the power of selecting on arbitrator in the hands of a particular person, all that the Court has to do is to perform the ministerial act of sending the agreement to that person. See Dhanrajamal Gobindram Vs. Shamji Kalidas and Co., , 1294. By the order, dated 14th June 1983 the Court made a judicial order that the agreement be filed. That was an order which fell within the first limb of Sub-section (4) of Section 20. Under the second limb, the Court had no power to make a reference to anybody outside the agreement.

Shri George however submits that this is a case where there is no agreement between the parties as regards the arbitrators to be appointed. Under the agreement a person was designated with the power to prepare a panel of names out of which the parties were entitled to nominate one person each as arbitrators. That was, therefore, Counsel says, not an agreement designating arbitrators, but at best a machinery for the selection of arbitrators. The Court in reform has the power to ignore the Agreement, and appoint someone outside the agreement. We do not agree.

In Dhanrajamal Gobindram Vs. Shamji Kalidas and Co., , 1294, the position was similar to what obtains in the present case. The power of appointment of arbitrators was left in the hands of the Chairman of the company. The parties had agreed that the Chairman alone would appoint the arbitrators. It is true that in the present case the parties themselves are entitled to nominate the arbitrators, but that nomination is confined to the list unilaterally prepared by the General Manager of the Railway. The parties thus agreed upon a well defined machinery for the appointment of the arbitrators. They had no choice to act outside that agreement. Once the agreement was ordered to be filed, all that the Court had to do was to mase a reference to the designated authority empowered under the agreement to appoint the arbitrators or to set in motion the machinery for such appointment. See Union of India (UOI) Vs. S.V. Krishna Rao, , Union of India v. Prafulla Kumar, (1983) 1 LLJ 304 , M/s Ama Corporation, Madras v. Food Corporation of India AIR 1981 S.C. 121 and Ved Prakash Mittal v. Union of India and Ors. 1985 Arb. L.R. 443 (Delhi).

Accordingly we hold that by the impugned order the Court ignored the agreement between the parties in regard to the appointment of arbitrators and acted outside the terms of that agreement, thereby exceeding its jurisdiction.

We must now deal with a preliminary objection which Mr. George raised at the outset of his arguments. According to him the impugned order is not an appealable order, for Section 39 does not postulate an appeal from an order making a reference. The relevant provision of Section 39(1) is what is contained in Clause (iv), namely, "filing or refusing to file an arbitration agreement". That, Counsel points out, shows that only the order under the first Limb of Section 20(4) is an appealable order. The order, dated 14th June 1983, which remains unchallenged, was an appealable order, for that was the order by which the Court ordered the filing of the agreement. The subsequent order, dated 20th August 1983. Counsel says, is an order which falls under the second limb. That is an order making a reference which finds no place among the appealable orders mentioned u/s 39. Counsel for the Railway Shri Cherian, however, submits that the impugned order is in law an order refusing to file on arbitration agreement in so far as a reference has been made by the Court otherwise than in terms of the agreement between the parties. He refers to the principle laid down on this question by the Calcutta High Court in Union of India (UOI) Vs. M.S. Grewal and Co., and the Punjab and Haryana High Court in The Controller of Stores and Another Vs. Kapoor Textile Agencies, . Counsel further points out that in any view the impugned order is an order made in excess of or without jurisdiction. We agree with the submissions of Mr. Cherian.

Whether the order is viewed as an order falling u/s 39(1)(iv), being an order made otherwise than in accordance with the agreement between the parties; or, as an order totally outside the powers conferred on the Court u/s 20, thereby rendering it liable to be impeached in revision, the parties are not helpless and this Court is not without power to correct the error. Whether we consider the impugned order as a revisable order by treating this appeal as a Revision Petition, or, as an appealable order within the meaning of Section 39(1)(iv), we hold that the impugned order has no merits. It is accordingly set aside.

Shri George submits that the names mentioned in the panel are no longer relevant, for the panel was submitted as early as 29th June 1983 and some or all of the officers may have already retired. The Railway''s Counsel is not in a position to assure us that these Officers are still working with the Railway. We are also, as stated above, of the view that the panel furnished by the Railway is far too limited to afford an effective opportunity to the contractor to make a proper and meaningful choice in terms of the arbitration agreement. Shri George submits that if a fresh panel of names of Gazetted Officers of the Railway were to be supplied to the contractor, the contractor would without raising any further complaint positively and promptly nominate on his side one from among them for appointment as arbitrator. Shri Cherian fairly submits that the Railway will within three weeks from today furnish a panel containing the names of nine Gazetted Officers having the requisite rank, as mentioned under Clauses 63, and belonging to different departments of the Southern Railway; and, the Railway on its part would nominate a person in terms of Clause 63 within one month after the contractor has made his choice. These submissions at the bar are recorded. In the circumstances we direct the parties to act in accordance with their submissions. The appeal is allowed in the above terms. The parties shall, however, bear their respective costs.

In the event of default on the part of either party to act strictly in accordance with their submissions as recorded above, it will be open to the aggrieved party to approach this Court for appropriate orders.