# INDIAN OIL CORPORATION LTD. & ORS v. ~. M/S. RAJA TRANSPORT (P) LTD

- **Citation:** [2009] 13 S.C.R. 510
- **Court:** Supreme Court of India
- **Decided:** 2009-08-24
- **Case number:** Civil Appeal No. 5760 of 2009
- **Bench:** R.V. Raveendran, D.K. Jain
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/indian-oil-corporation-ltd-ors-v-m-s-raja-transport-p-ltd-25132
- **Pages:** 30

## Headnote

Arbitration and Conciliation Act, 1996:
~
c
ss. 11 (6) and (8), 12 (1) and (3) and 18 -Agreement of
dealership - Between State instrumentality (Corporation) and
private company - Arbitration clause stating reference of
dispute for sole arbitration who would be Director of the
Corporation or any officer of Corporation nominated by the
D
Director - On dispute, dealer resorting to civil remedy - Civil
Courts on application of Corporation, directing reference for
arbitration as per agreement - Dealer thereafter intimating the
~
Corporation that it was not agreeable for the arbitrator as
specified in the agreement and sought for appointment of
E
independent arbitrator - Not agreed by Corporation - Petition
for appointment of arbitrator - Chief Justice of High Court
appointing retired High Court Judge as sole arbitrator - On
appeal, Held: Order of Chief Justice was not correct -
Arbitration agreements in Government contracts providing
._
that a high official of the Department unconnected with the
.,,
F work or the contract will be the Arbitrator, are neither void nor
unenforceable -
The rule is to refer the dispute to named
arbitrator in arbitration agreement - Rule could be ignored
only for valid reasons - On facts, dealer failed to act in terms
of agreed procedure - Government Contract.
G
s. 11 - Appointment of arbitrator- Scope of~ Discussed.
Appellant-Corporation entered into agreement with
r- .
respondent, appointing it as its dealer. As per the
arbitration clause of the agreement, the dispute was to
H
510
INDIAN OIL CORPORATION LTD. & ORS. v. RAJA
511
TRANSPORT (P) LTD.
be referred to the sole Arbitration of the Director of the A
~· -..(
appellant-Corporation or some other officer of the
Corporation, nominated by him. On termination of
dealership, respondent filed a suit for declaration of the
order of termination as illegal and void. Appellant filed an
application seeking rejection of the suit and reference of B
the dispute for arbitration in terms of the arbitration
clause. The application was allowed, but the appellant
was also directed not to stop supply of petroleum to the
y
respondent for two months. The order was challenged by
both the parties. Appellate court directed.reference of the c
dispute for arbitration in terms of the agreement.
Thereafter, respondent issued a notice stating that it was
not willing for appointment in terms of the agreement and
called upon the appellant to agree for appointment of an
independent arbitrator. As appellant did not agree,
D
respondent filed an. application u/s. 11 (6) of Arbitration
$.
and Conciliation Act, 1996 praying for appointment of
independent arbitrator. Chief Justice of High Court
appointed a retired Judge of High Court as sole arbitrator.
The questions for consideration in the present appeal
E
were: (i) whether the Chief Justice· was justified in
assuming that whenever an employee of one of the
parties to the dispute is appointed as an arbitrator, he will
••
not act independently or impartially; (ii) In what
'¥
circumstances, the Chief Justice or his designate can
F
ignore the appointment procedure or the named
arbitrator in the arbitration agreement, to appoint an
arbitrator of his choice; (iii) whether respondent had
taken necessary steps for appointment of arbitrator in
terms of the agreement, and whether the appellant had
G
faile~ to act in terms of the agreed procedure, by_ not
referring the dispute to its _Director for arbitration.
- --,--
Allowing the appeal, the Court
HELD: 1.1. If a party, with Open eyes and full
H
'
512 SUPREME COURT REPORTS [2009) 13· (ADDL.) S.C.R.
A knowledge and comprehension enters into a contract
with a Government/statutory Corporation/Public Sector
).- .......
Undertaking containing an arbitration agreement
providing that one of its Secretaries/Directors shall be the
arbitrator, he can not subsequently turn around and
B contend that he is agreeable for settlement of disputes
by arbitration, but not by the named arbitrator who is an
employ

## Text

_Characters 0–39,851 of 61,340. This is a partial read: ask again with offset=39851 for what follows._

[2009] 13 (ADDL.) S.C.R. 510
A
INDIAN OIL CORPORATION LTD. & ORS.
v.
~.
M/S. RAJA TRANSPORT (P) LTD.
(Civil Appeal No. 5760 of 2009)
B
AUGUST 24, 2009
[R.V. RAVEENDRAN AND D.K. JAIN, JJ.]
Arbitration and Conciliation Act, 1996:
~
c
ss. 11 (6) and (8), 12 (1) and (3) and 18 -Agreement of
dealership - Between State instrumentality (Corporation) and
private company - Arbitration clause stating reference of
dispute for sole arbitration who would be Director of the
Corporation or any officer of Corporation nominated by the
D
Director - On dispute, dealer resorting to civil remedy - Civil
Courts on application of Corporation, directing reference for
arbitration as per agreement - Dealer thereafter intimating the
~
Corporation that it was not agreeable for the arbitrator as
specified in the agreement and sought for appointment of
E
independent arbitrator - Not agreed by Corporation - Petition
for appointment of arbitrator - Chief Justice of High Court
appointing retired High Court Judge as sole arbitrator - On
appeal, Held: Order of Chief Justice was not correct -
Arbitration agreements in Government contracts providing
._
that a high official of the Department unconnected with the
.,,
F work or the contract will be the Arbitrator, are neither void nor
unenforceable -
The rule is to refer the dispute to named
arbitrator in arbitration agreement - Rule could be ignored
only for valid reasons - On facts, dealer failed to act in terms
of agreed procedure - Government Contract.
G
s. 11 - Appointment of arbitrator- Scope of~ Discussed.
Appellant-Corporation entered into agreement with
r- .
respondent, appointing it as its dealer. As per the
arbitration clause of the agreement, the dispute was to
H
510
INDIAN OIL CORPORATION LTD. & ORS. v. RAJA
511
TRANSPORT (P) LTD.
be referred to the sole Arbitration of the Director of the A
~· -..(
appellant-Corporation or some other officer of the
Corporation, nominated by him. On termination of
dealership, respondent filed a suit for declaration of the
order of termination as illegal and void. Appellant filed an
application seeking rejection of the suit and reference of B
the dispute for arbitration in terms of the arbitration
clause. The application was allowed, but the appellant
was also directed not to stop supply of petroleum to the
y
respondent for two months. The order was challenged by
both the parties. Appellate court directed.reference of the c
dispute for arbitration in terms of the agreement.
Thereafter, respondent issued a notice stating that it was
not willing for appointment in terms of the agreement and
called upon the appellant to agree for appointment of an
independent arbitrator. As appellant did not agree,
D
respondent filed an. application u/s. 11 (6) of Arbitration
$.
and Conciliation Act, 1996 praying for appointment of
independent arbitrator. Chief Justice of High Court
appointed a retired Judge of High Court as sole arbitrator.
The questions for consideration in the present appeal
E
were: (i) whether the Chief Justice· was justified in
assuming that whenever an employee of one of the
parties to the dispute is appointed as an arbitrator, he will
••
not act independently or impartially; (ii) In what
'¥
circumstances, the Chief Justice or his designate can
F
ignore the appointment procedure or the named
arbitrator in the arbitration agreement, to appoint an
arbitrator of his choice; (iii) whether respondent had
taken necessary steps for appointment of arbitrator in
terms of the agreement, and whether the appellant had
G
faile~ to act in terms of the agreed procedure, by_ not
referring the dispute to its _Director for arbitration.
- --,--
Allowing the appeal, the Court
HELD: 1.1. If a party, with Open eyes and full
H
'
512 SUPREME COURT REPORTS [2009) 13· (ADDL.) S.C.R.
A knowledge and comprehension enters into a contract
with a Government/statutory Corporation/Public Sector
).- .......
Undertaking containing an arbitration agreement
providing that one of its Secretaries/Directors shall be the
arbitrator, he can not subsequently turn around and
B contend that he is agreeable for settlement of disputes
by arbitration, but not by the named arbitrator who is an
employee of the other party. No party can say he will be
bound by only one part of the agreement and not the
--y
other part, unless such other part is impossible of
c performance or is void being contrary to the provisions
of the Act, and is severable from the remaining part of the
.agreement [Para 9] [523-D-F]
1.2-. Arbitration agreements in Government contracts
providing that an employee of the Department (usually a
D high official unconnected with the work or the contract)
will be the Arbitrator, are neither void nor unenforceable.
~
[Para 10] [524-B]
1.3. There is no bar under Arbitration and Conciliation
E Act, 1996, for an arbitration agreement providing for an
employ~e of a Government/ statutory Corporation/Publi~
Sector Undertaking (which is a party to the contract),
acting as arbitrator. Nothing in Sections 11, 12, 18 or
other provisions of the Act suggests that any provision
'
~
in an arbitration agreement, naming the arbitrator will be
)I
F invalid if such named arbitrator is an employee of one of
the parties to the arbitration agreement. [Para 13] [530-AG]
'
1.4. The power u/s. 11(8) is intended to be used
G keeping in view the terms of the arbitration agreement.
The fact that the named arbitrator is an employee of one
of the parties is not ipso facto a ground to raise a
r
presumption of bias or partiality of lack of independence
on his part. [Para 13] [530-G-H]
H
' (
INDIAN OIL CORPORATION LTD. & ORS. v. RAJA
513
TRANSPORT (P) LTD.
1.5. There can, however, be a justifiable A
apprehension about the independence or impartiality of
an Employee-Arbitrator, if such person was the
controlling or dealing authority in regard to the subject
contract or if he is a direct subordinate (as contrasted
from an officer of an inferior rank in some other B
department) to the officer whose decision is the subject
matter of the dispute. If any circumstance exists to create
a reasonable apprehension about the impartiality or
independence of the agreed or named Arbitrator, then
the court has the discretion not to appoint such a person. c
[Paras 14 and 15] [531-A-B; 531-F]
1.6. Where, however, the named arbitrator is a senior
officer of the Government/statutory body/Government
company, who had nothing to do with execution of the
subject contract, there can be no justification for anyone
D
doubting his independence or impartiality, in the absence
of any specific evidence. [Para 14] [531-B-C]
Executive Engineer, Irrigation Division, Puri vs.
Gangaram Chhapolia 1984 (3) SCC 627; Secretary to
Government, Transport Departmef?t, Madras v. Munuswamy
E
Mudaliar 1988 (Supp) SCC 651; S.Rajan v. State of Kera/a
1992 (3) SCC 608; Mis. Indian Drugs and Pharmaceuticals
v. Mis. lndo-Swiss Synthetics Germ Manufacturing Co. Ltd.
1996 (1) SCC 54; Union of India v.
M.P.Gupta (2004) 10
SCC 504; Ace Pipeline Contract Pvt. Ltd. v.
Bharat
F
Petroleum Corporation Ltd. 2007 (5) SCC 304, relied on.
Eckersley vs. Mersey Dock and Harbour Board 1894 (2)
QB 667, referred to.
2.1. T:ie legislative intent is that the parties should G
abide by the terms of the arbitration agreement. If the
arbitration agreement provides for arbitration by a named
Arbitrator, the courts should normally give effect to the
provisions of the arbitration agreement. But where there
is material to create a reasonable apprehension that the
H
514 SUPREME COURT REPORTS [2009) 13 (ADDL.) S.C.R.
A person mentioned in the arbitration agreement as the
arbitrator is not likely to act independently or impartially,
).- ......
or if the named person is not available, then the Chief
Justice or his designate may, after recording reasons for
not followin:;1 the agreed procedure of referring the
·a dispute to the named arbitrator, appoint an independent
arbitrator in accordance with Section 11 (8). Referring the
disputes to the named arbitrator shall be the rule. Ignoring
the named Arbitrator/Arbitral Tribunal and nominating an
independent arbitrator shall be the exception to the rule,
y
c to be resorted for valid reasons. [Para 19] [534-E-H; 535A]
2.2. While considering the question whether the
al'.bitral procedure prescribed in the agreement for
reference to a named arbitrator, can be ignored, it is also
D necessary to keep in view clause (v) of sub-section (2)
of section 34 of the Act which provides that an arbitral
award may be set aside by the court if the composition
of the arbitral tribunal or the arbitral procedure was not
in accordance with the agreement of the· parties (unless
E such agreement was in conflict with any provision of
Part-I of the Act from which parties cannot derogate, or,
failing such agreement, was not in accordance with the
provisions of Part-I of the Act). [Para 19] [534-C-E]
F
2.3. In the instant case, the condition in the
)'
arbitration agreement that "it is also a term of this contract
that no person other than the Director, Marketing or a
person nominating by such Director, Marketing of the
Corporation as aforesaid shall act as Arbitrator",
interferes with the power of the Chief Justice and his
G designate under Section 11(8) of the Act to appoint a
suitable pers·on as arbitrator is appropriate cases.
Therefore, the said portion of the arbitration clause is
,,,_...
liable to be ignored as being contrary to the Act. But the
~
position will be different where the arbitration agreement
H names an ind,vidual (as contrasted from someone
INDIAN OIL CORPORATION LTD. & ORS. v. RAJA
515
TRANSPORT (P) LTD.
referred to by designation) as the Arbitrator. [Para 20]
A
._, ~
[535-8-D]
',
2.4. The scope of Section 11 of the Act containing the
scheme of appointment of arbitrators may be summarised
thus: (I) Where the agreement provides for arbitration with B
three arbitrators (each party to appoint one arbitrator and
the two appointed arbitrators to appoint a third arbitrator),
in the event of a party failing to appoint an Arbitrator
'f
within 30 days from the receipt of a request from the other
party (or the tWo· nominated arbitrators failing to agree on c
the third arbitrator within 30 days from the date of the
appointment), the Chief Justice or his designate will
·exercise power under sub-section (4) of Section 11 of the
Act (ii) Where the agreement provides for arbitration by
a sole arbitrator and the parties have not agreed upon
any appointment procedure, the Chief Justice or his D
jdesignate will exercise power under sub-section (5) of
Section 11, if the parties fail to agree on the arbitration
within thirty days from the receipt of a request by a party
from the other party. (iii) Where the arbitration agreement
specifies the appointment procedure, then irrespective of E
whether the arbitration is by a sole arbitrator or by a
three-member Tribunal, the Chief Justice or his designate
...
will exercise power under sub-section (6) of Section 11,
"'
if a party fails to act as required under the agreed
procedure (or the parties or the two appointed arbitrators
F
fail to reach an agreement expected of them under the
agreed procedure or any person/institution fails to
perform any function entrusted to him/it under that
procedure). (iv) While failure of the other party to act
within 30 days will furnish a cause of action to the party G
seeking arbitration to approach the Chief Justice or his
~
designate in cases falling under sub-sections (4) and (5),
""
such a time bound requirement is not found in subsection (6) of Section 11. The faHure to act as per the
agreed procedure within the time limit prescribed by the
H
I-·
516 SUPREME COURT REPORTS (2009] 13 (ADDL.) S.C.R.
A arbitration agreement, or in the absence of any
~~
...
prescribed time limit, within a reasonable time, will enable
the aggrieved party to file a petition under Section 11 (6)
of the Act. (V) Where the appointment procedure has
-
been agreed between the parties, but the cause of action
B for invoking the jurisdiction of the Chief Justice or his
designate under clauses (a), (b) or (c) of sub-section (6)
has not arisen, then the question of Chief Justice or his
designate exercising power under sub-section (6) does
y
not arise. The condition precedent for approaching the
c Chief Justice or his designate for taking necessary
measures under sub-section (6) is that (i) a party failing
to act as required under the agreed appointment
procedure; or (ii) the parties (or the two appointed
arbitrators), failing to reach an agreement expected of
D them under the agreed appointment procedure; or (iii) a
person/institution whQ has been entrusted with any
--i
function under the agreed appointment procedure, failing
to perform such function. (vi) The Chief Justice or his
designate while exercising power under sub-section (6)
E of Section 11 shall endeavour -to give effect to the
appointment procedure prescribed in the arbitration
clause. (vii) If circumstances exist, giving rise to justifiable
doubts as to the independence and impartiality of the _
"'
person nominated, or if other circumstances warrant
,__
appointment of an independent arbitrator by ignoring the
¥
F procedure prescribed, the Chief Justice or his designate
may, for reasons to be recorded, ignore the designated
arbitrator and appoint someone else. [Para 21] (535-F-H;
536-A-H; 537-A-D]
G
Ace Pipeline Contract Pvt. Ltd. v. Bharat Petroleum
Corporation Ltd. 2007 (5) SCC 304; Northern Railway
Administration v. Patel Engineering Co. Ltd. 2008 (11)
)>-·-
SCALE 500, relied on.
,,......, """
Union of India v. Bharat Battery Manufacturing Company
H Pvt. Ltd. 2007 (7) SCC 684, referred to.
-~
INDIAN OIL CORPORATION LTD. & ORS. v. RAJA
517
TRANSPORT (P) LTD.
;-""' ~
3.1. When the dispute arose, the respondent did not A
--
--
seek arbitration, but went to civil court. It was the
appellant who sought reference to arbitraUon in terms of
the arbitration agreement. Civil courts directed reference
of the dispute to arbitration as per the agreement, within
two months. But there was no direction by the court to
B
appoint an independent arbitrator contrary to the terms
of the arbitration agreement. In view of the order, the
"f
respondent ought to have referred the dispute to the
Director (Marketing) of the appellant within two months
from the date of the order. It failed to do so. Therefore, it c
was the respondent who failed to act in terms of the
agreed procedure and not the appellant. [Para 23] [537H; 538-A-D]
3.2. The notice by which the respondent notified the
appeliant that it was not willing for appointment of D
arbitrator in terms of the agreement and that both should
therefore hold discussions to decide upon an
independent arbitrator, cannot be construed as a step
taken by the respondent for invoking arbitration in terms
of the arbitration agreement, as it is a demand in violation
E
of the terms of arbitration agreement. It required the
appellant to agree upon an arbitrator, contrary to the
provisions of the arbitration agreement. If the respondent
had called upon the appellant to act in a manner contrary
to the appointment procedure mentioned in the arbitration
F
agreement, it cannot be said that the appellant failed to
respond and act as required under the agreed procedure.
[Para 24] [538-E-H; 539-A-B]
3.3. Even subsequent to the order passed by the
District Court, the respondent did not refer the disputes G
to the Director (Marketing) of the appellant-Corporation
nor called upon the appellant to refer the disputes in
terms of the arbitration agreement, nor did it withdraw its
earlier letter demanding appointment of an independent
arbitrator contrary to the agreed procedure under the
H
518 SUPREME COURT REPORTS [2009) 13 (ADDL.) S.C.R.
A arbitration agreement. [Para 24] [539-C-E]
~ -... ~
3.4. The Chief Justice erred in having proceeded on
the basjs that the respondent had performed its duty in
terms of the arbitration agreement in seeking reference
B to arbitration and that the appellant had failed to act in
the matter and therefore, there was justification for
appointing an independent arbitrator. (Para ·25] [539-E-F]
Case Law Reference:
y
(1984) 3 sec 627
Relied on.
Para 10.1
c
1894 (2) QB 667
Referred to.
Para 10.2
1988 (Supp) sec 651 Relied on.
Para 10.3
(1992) 3 sec 608
Relied on.
Para 10.4
D
(1996) (1) sec 54
Relied on.
Para 10.5
~
(2004) 10 sec 504
Relied on.
Para 10.6
(2001) 5 sec 304
Relied on.
Para 10.7
and 18.1
E
(2007) 1 sec 684
Referred .to.
Para 18.2
2008 (11) SCALE 500 Relied on.
Para 18.3
-
¥
F
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
5760 of 2009.
From the Judgment & Order dated 26.9,2008 of the High
Court of Uttarakhand at Nainital in Arbitration Application No.
2 of 2006.
G
H.K. Puri, S.K. Puri, V.M. Chauhan, Priya Puri for the
r-·
Appellants.
......
Sunil Kumar, Atul Kumar, Sweety Singh, Himanshu
Shekhar for the Respondent.
H
INDIAN OIL CORPORATION LTD. & ORS. v. RAJA
519
TRANSPORT (P) LTD.
' t ... ~
The Judgment of the Court was delivered by
A
R. V. RAVEENDRAN, J. 1. Leave gran£ed. This appeal
by special leave is filed against the order dated 26.9.2008 of
the learned Chief Justice of the Uttaranchal High Court, in a
petition filed by the respondent herein, under section 11 (6) of
B
the Arbitration & Conciliation Act, 1996 ('Act' for short),
whereby he appointed a retired Judge as the sole arbitrator to
adjudicate upon the disputes between the parties.
2. Under an agreement dated 28.2.2005, the appellant
appointed the respondent as its dealer for retail sale of c
petroleum products. Clause 69 of the said agreement provided
for settlement of disputes by arbitration. The said clause reads
thus:
"69. Any dispute or a difference of any nature whatsoever
~
}-
or regarding any right, liability, act, omission or account of D
any of the parties hereto arising out of or in relation to this
Agreement shall be referred to the sole arbitration of the
Director, Marketing of the Corporation or of some officer
of the Corporation who may be nominated by the Director
Marketing. The dealer will not be entitled to raise any
E
objection to any such arbitrator on the g·round that the
arbitrator is an officer of the contract relates or that in the
"
.....
course of his duties or differences. In the event of the
.
'i.
arbitrator to whom the matter is originally referred being
transferred or vacating his office or being unable to act for
F
any reason the Director Marketing· as aforesaid at the time
of such transfer, vacation of office or inability to act, shall
designate another person to act as arbitrator in
accordance with the terms of the agreement. Such person
shall b~ entitled to proceed with the reference from the
G
-"'<(
point at which it was left .by his predecessor. It is also a
..
term of this contract that no person other than the
Director, Marketing or a person nominated by such
Director, Marketing of the Corporation as aforesaid shall
act as arbitrator hereunder. The award of the arbitrator so
H
520 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.
A
appointed shall be final, conclusive and binding on all
~ -~.
parties to the Agreement, subject to the provisions of the
' )<
Arbitration Act, 1940 or any statutory modification of reenactment thereof and the rules made thereunder and for
the time being in force shall apply to the arbitration
..
B
proceedings under this clause."
(emphasis supplied)
3. By letter dated 6.8.2005, the appellant terminated the
dealership of the respondent on the recommendation of its
c Vigilance Department. The respondent filed Suit No.43/2005
in the Court of Civil Judge, Junior Division, Rishikesh,
Dehradun for a declaration that the order of termination of
dealership dated 6.8.2005 was illegal and void and for a
permanent injunction restraining the appellant from stopping
D supply of petroleum products to its retail outlet.
~
4. In the- said suit, the appellant filed an application UJlder
'
section 8 of the Act read with Order VII Rule 11 of Civil
'
Procedure Code, praying that the suit be rejected and the
matter be referred to arbitration in terms of Clause 69 of the
E agreement. The learned Civil Judge, by order dated 16.11.2005
allowed the said application filed by the appellant directing the
parties to refer the matter to arbitration within two months, with
I
a further direction that appellant shall not stop supplies to the
.....
)c'
\
respondent for a period of two months.
F
5. Both appellant and respondent challenged the order
dated 16.11.2005. Respondent filed Civil Appeal No.96/2005
being aggrieved by the restriction of supply for only two months
from 16.11.2005. The appellant filed Civil Appeal No.214/2005,
being aggrieved by the direction to continue the supply for a
G period of two months from 16.11.2005. The respondent also
filed an application under Section 9 of the Act seeking an
,.. .•
interim injunction against the appellant. The two appeals and
>-
...
the application under section 9 of the Act were disposed of by
a common order dated 20.1.2006 by the learned District Judge,
H
,.,
INDIAN OIL CORPORATION LTD. & ORS. v. RAJA
521
TRANS.PORT (P) LTD. [R.V. RAVEENDRAN, J.]
, ti ~
Dehradun. He dismissed both the appeals but allowed the
A
application under section 9 of the Act and restrained the
appellant herein from interrupting the supply of petroleum
products to respondent for a· period of two months, and directed
the parties to refer the matter to arbitration as per the
agreement within the said period of two months.
B
6. When the said appeals were pending, the respondent
issued a notice dated 4.1.2006 through its counsel to the
appellant, referring to the appellant's insistence that only its
Director (Marketing) or an officer nominated by him could act c
as the arbitrator, in pursuance of the order of the Civil Judge
dated 16.11.2005. The respondent alleged that it did not
expect fair treatment or justice, if the Director (Marketing) or
any other employee of the appeliant was appointed as
arbitrator, and that therefore any such appointment would be
prejudicial to its interest. It contended that any provision enabling
D
one of the parties or his employee to act as an arbitrator was
contrary to the fundamental principle of natural justice that no
person can be a judge in his own cause. The respondent
therefore called upon the appellant by the said notice dated
4.1.2006, to fix a meeting at Dehradun between the officers of E
the appellant and respondent within seven days so as -to
-~
mutually agree upon an independent arbitrator. The appellant
"
submits that the said request, apart from being contrary to the
arbitration agreement, was also contrary to the subsequent
order dated 20.1.2006 which directed that the disputes should
F
be referred to the arbitrator as per the agreement and
therefore, it did not agree to the said request for an outside
arbitrator.
7. In this background, the respondent filed an application
(Arbitration Application No.2/2006) under section 11 (6) of the
G
~ "f
Act in March 2006 before the Chief Justice of Uttaranchal High
").
Court praying for appointment of an independent arbitrator to
decide the dispute relating to the validity of the termination of
the dealership, contending as follows :-
H
522
SUPREME COURT REPORTS [2009] 13 (AOOL.) S.C.R.
A
"That a dispute between the parties has arisen and by
~ ..... \
notice dated 4.1.2006, the applicant served the
respondent a notice calling upon them to appoint an
findependent arbitrator, but in spite of expiry of reasonable
time, no independent arbitrator has been appointed."
B The said petition was resisted by the appellant by contending
that an arbitrator can be appointed only in terms or clause 69
of the agreement. The learned Chief Justice, after hearing the
parties allowed the application by the impugned order dated
c
26.9.2008, and appointed a retired High Court Judge as sole
arbitrator to decide the dispute. The learned Chief Justice
assigned the following two reasons to appoint a retired Judge
as Arbitrator, instead of the person named in the Arbitration
Agreement :-
D
(i) The Director (Marketing) of the appellant, being its
empl_oyee, should be presumed not to act independenUy or
~
impartially.
(ii) The respondent had taken steps in accordance with the
agreed appointment procedure contained in the arbitration
E agreement and the directions of the civil court, by issuing a
I
notice dated 4.1.2006 calling upon the appellant to appoint an
...
i
arbitrator. After the receipt of the notice dated 4.1.2006, the
appellant had to refer matter for arbitration to its Director
~
Marketing, but it did not do so. Nor did it take any step for
....
F appointment of the Arbitrator. By not referring the matter to
arbitration to its own Director, despite receipt of the notice
dated 4.1.2006, the appellant had failed to act as required
under the agreed procedure.
8. The said order of the Chief Justice is challenged by the
G appellant. On the rival contentions urged by the parties, the
following questions arise for our consideration :
y·
(i) Whether the learned Chief Justice was justified in
("
assuming that when an employee of one of the parties to the
H dispute is appointed as an arbitrator, he will not act
INDIAN OIL CORPORATION LTD. & ORS. v. RAJA
523
TRANSPORT (P) LTD. [R.V. RAVEENDRAN, J.]
,.....
~
independently or impartially?
A
(ii) In what circumstances, the Chief Justice or his
designate can ignore the appointment procedure or the named
arbitrator in the arbitration agreement, to appoint an arbitrator
of his choice?
B
(iii) Whether respondent herein had taken necessary steps
for appointment of arbitrator in terms of the agreement, and the
....
appellant had failed to act in terms of the agreed procedure,
by not referring the dispute to its Director (Marketing) for
arbitration?
c
Re : Questions No.(i)
9. Arbitration is a binding voluntary alternative dispute
resolution process by a private forum chosen by the parties. It
is quite common for governments, statutory corporations and
D
~
public sector undertakings while entering into contracts, to
provide for settlement of disputes by arbitration, and further
provide that the Arbitrator will be one of its senior officers. If a
party, with open eyes and full knowledge and comprehension
of the said provision enters into a contract with a government/
E
~tatutory corporation/public sector undertaking cont~ining an
arbitration agreement providing that one of its Secretaries/
, ..
Directors shall be the arbitrator, he can not subsequently turn
'J,
around and contend that he is agreeable for settlement of
disputes by arbitration, but not by the named arbitrator who is
F
an employee of the other party. No party can say he will be
bound by only one part of the agreement and not the other part,
unless such other part is impossible of performance or is void
being contrary to the provisions of the Act, and such part is
severable from the remaining part of the agreement. The
arbitration clause is a package which may provide for what
G
--1
disputes are arbitrable, at what stage the disputes are
arbitrable, who should be the arbitrator, what should be the
venue, what law would govern the parties etc. A party to the
contract cannot claim the benefit of arbitration under the
H
524 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.
A arbitration clause, but ignore the appointment procedure
~ "'"'4
relating to the named Arbitrator contained in the arbitration
clause.
10. It is now well settled by a series of decisions of this
B
Court that arbitration agreements in government contracts
providing that an employee of the Department (usually a high
official unconnected with the work or the contract) will be the
Arbitrator, are neither void nor unenforceable. We may refer to
ta few decisions on this aspect.
c
(10.1.) In Executive Engineer, Irrigation Division, Puri vs.
Gangaram Chhapolia - 1984 (3) SCC 627, this Court was
considering the validity of appointment of the Arbitrator where
the arbitration required that the disputes shall be referred to the
sole arbitration of a Superintending Engineer of the Public
D Works Department unconnected with the work at any stage
nominated by the concerned Chief Engineer. This .Court held :
...
"The use of the expression "Superintending Engineer,
State Public Works Department" in Clause 23 qualified by
the restrictive words "unconnected with the work" clearly
E
manifests·an intention of the parties that all questions and
disputes arising out of a works contract shall be referred
to the sole arbitration of a Superintending Enginee~ of the
concerned department. From the very nature of things, a
...
dispute arising out of a works contract relating to the
)('
F
Department of Irrigation has to be referred to a
Superintending Engineer, Irrigation as he is an expert on
the subject and it cannot obviously be referred to a
Superintending Engineer, Building & Roads. The only
limitation on the power of the Chief Engineer under Clause
G
23 was that he had to appoint a "Superintending Engineer
unconnected with the work" i.e. unconnected with the works
contract in relation to which the dispute has arisen. The
r--
learned Subordinate Judge was obviously wrong in
assuming that since D. Sahu, Superintending Engineer,
H
Irrigation was subordinate to the Chief Engineer, he was
f
INDIAN OIL CORPORATION LTD. & ORS. v. RAJA
525
TRANSPORT (P) LTD. [R.V. RAVEENDRAN, J.]
not competent to act as an Arbitrator or since he was a A
Superintending Engineer, Irrigation, he could not
adjudicate upon the dispute between the parties. The
impugned ·order passed by the learned Subordinate Judge
is accordingly set aside."
(10.2.) In Eckersley vs. Mersey Dock and Harbour Board
8
- 1894 (2) QB 667, it was held :
"The rule which applies to a Judge or other person holding
judicial office, namely, that he ought not to hear cases in
which he might be suspected of a bias in favour of one of c
the parties, does not apply to an arbitrator, named in a
contract, to whom both the parties. have agreed to refer
disputes which may arise between them under it. In order
to justify the court in saying that such an arbitrator is
disqualified from acting, circumstances must be shown to
D
exist which establish,_at least, a probability that he will, in
fact, be biased in favour of one of the parties in giving his
decision ..... Where, in a contract for the execution of works,
the arbitrator selected by the parties is the servant of one
of them, he is not disqualified by the mere fact that under
E
the terms of the submission he may h?lve to decide
disputes involving the question whether he has himself
acted with due skill and competence in advising his
employer in respect of the carrying out of the contract."
(10.3.) In Secretary to Government, Transport
F
Department, Madras v. Munuswamy Mudaliar- 1988 (Supp)
SCC 651, the contract between the. respondent and State
Government contained an arbitration clause providing that the
Superintending Engineer will be the arbitrator. Disputes arising
in respect of cancellation of the contract by the department were
G
referred to the said Arbitrator. An application under section 5
-r of Arbitration Act, 1940 was filed by the contractor for removal
of the arbitrator on the ground of apprehended bias on the part
of the arbitrator as he was an employee of the State
Government and was subordinate of the chief Engineer who
H
526
SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.
A took the decision to cancel the contract. This Court negatived
~ ,...,.
the said contention and held :-
"When the parties entered into the contract, the parties
knew the terms of the contract including arbitration clause.
B
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
·t
arbitration ..... Unless there is allegation against the named
c
arbitrator either against his honesty or mala 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 Section 5 of the Act.
D
This Court in International Authority of India v. K.D.Bali
and Anr. [1988 (2) SCC 360) held th~t there must be
_..
reasonable evidence to satisfy that there was a real
likelihood of bias'.·'Vague suspicions of whimsical,
capricious and unreasonable people should not be made
E
the standard to regulate normal human conduct. In this
country. in numerous contracts with the Government,
clauses requiring the Superintending Engineer or some
official of the Govt. to be the arbitrator are there. It cannQt
•
be said that the Superintending Engineer, as such, cannot
..
F
be entrusted with the work of arbitration and that an
apprehension simpliciter in the mind of the contractor
without any tangible ground, would be a justification for
removal."
(10.4.) In S.Rajan v. State of Kera/a - 1992 (3) SCC 608,
G this Court held :-
"Clause (3) of the agreement says that "the arbitrator for
fulfilling the duties set forth in the arbitration clause of the
Standard Preliminary Specification shall be the
Superintending Engineer, Building and Roads Circle,
H
Travandrum". Thus, this is a case where the agreement
INDIAN OIL CORPORATION LTD. & ORS. v. RAJA
527
TRANSPORT (P) LTD. [R.V. RAVEENDRAN, J.]
itself specifies and names the arbitrator. Jn such a
A
',-
-4
situation, it was obligatory upon the learned Subordinate
Judge, in case he was satisfied that the dispute ought to
be referred to the arbitrator, to refer the dispute to the
arbitrator specified in the agreement. It was not open to
him to ignore the said clause of the agreement and to
B
appoint another person as an arbitrator. Only if the
arbitrator specified and named in the agreement refuses
or fails to act, does the court get the jurisdiction to appoint
another person or persons as the arbitrator. This is the
clear purport of Sub-section (4). It says that the reference c
shall be to the arbitrator appointed by the parties. Such
agreed appointment may be contained in the agreement
itself or may be expressed separately. To repeat, only in
cases where the agreement does not specify the arbitrator
and the parties cannot also agree upon an arbitrator, does
D
the court get th$ jurisdiction to appoint an arbitrator."
[emphasis supplied]
(10.5.) In Mis. Indian Drugs & Pharmaceuticals v. Mis.
lndo-Swiss Synthetics Germ Manufacturing Co.Ltd. - 1996 (1)
E
SCC 54, this Court held:
"Shri Desai submits that respondent No.3 may not be
..
required to arbitrate inasmuch as he being an appointee
.,
of the Chairman and Managing Director of the appellant
himself, respondents' case may not be fairly examined. He
F
prays that any retired High Court Judge may be appointed
as an arbitrator by us. We have not felt inclined to accept
this submission, because arbitration clause states
categorically that the difference/dispute shall be referred
"to an arbitrator appointed by the Chairman and Managing
G
. Director of IPDL" (Indian Drugs & Pharmaceutical Limited)
who is the appellant. This provision in the arbitration clause
cannot be givei:i a go-bye merely at the askance of the
respondent unless he challenged its binding nature in an
appropriate proceeding which he did not do."
H
528 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.
A
(10.6.) In Union of India v. M.P.Gupta (2004) 10 SCC
504, this Court was considering an arbitration agreement which
~~
provided for appointment of two Gazetted railway officers as
arbitrators. But a learned Single Judge of the High Court while
allowing an application under section 20 of the Arbitration Act,
B 1940, appointed ~retired Judge as the sole arbitrator and a
Division Bench affirmed the same. Reversing the said decision,
this Court held that having regard to the express provision in
the arbitration agreement that two Gazetted railways officers
t
shall be the Arbitrators, a retired Judge could not be appointed
c as sole Arbitrator.
(10.7.) In Ace Pipeline Contract Pvt. Ltd. v. Bharat
Petroleum Corporation Ltd. [2007 (5) SCC 304), this Court
considered a somewhat similar clause of another petroleum
corporation which also provided that the arbitration will be by
D its Director (Marketing) or some other officer nominated by the
Director (Marketing). The contractor expressed an
apprehension about the independence and impartiality of the
named arbitrator and prayed for appointment of a retired Judge
as Arbitrator in his application under section 11 (6) of the Act.
E This Court held :
.
.
"In the present case, in fact the appellant's demand was
to get some retired Judge of the Supreme Court to be
appointed as arbitrator on the ground that if any person
~
nominated in the arbitration clause is appointed, then it
~
F
may suffer from bias or the arbitrator may not be impartial
or independent in taking decision. Once a party has
entered into an agreement with eyes wide open it cannot
wriggle out of the situation (by contending) that if any
person of the respondent BPCL is appointed as arbitrator
G
he will not be impartial or objective. However, if the
appellant feels· that the arbitrator has not acted
independently or impartially, or he has suffered from any
bias, it will always be open. to the. party to make an
application under section 34 of the Act to set aside the
H
award on the ground that arbitrator acted with bias or
INDIAN OIL CORPORATION LTD. & ORS. v. RAJA
529
TRANSPORT (P) LTD. [R.V. RAVEENDRAN, J.]
malice in law or fact."
A
l'4 --f
11. The learned counsel for the respondent attempted to
distinguish the said decisions. He submitted that except the last
two decisions, all others were rendered with reference to the
provisions of the Arbitration Act, 1940, whose provisions were
B
different from the provisions of the Arbitration and Conciliation
Act, 1996. It was also submitted that the last two decisions
merely followed the legal position enunciated with reference to
•
the old Act, without considering the provisions under the new
Act. It is contended that the provisions of the Arbitration and c
Conciliation Act, 1996, in regard to appointment of arbitrators,
are materially different from the provisions of the old Act. It was
submitted that several provisions of the new.Act lay stress upon
the independence and impartiality of the Arbitrator. Reference
was invited to sub-section (8) of section 11, sub-sections (1)
and (3) of section 12 and Section 18 of the Act. 'It is contended
D
,._
by the respondent that in view of the emphasis on the
independence and impartiality of an arbitrator, in the new Act,
and having regard to the basic principle of natural justice that
no man should be judged in his own cause, any arbitration
agreement to the extent it nominates an officer of one of the
E
parties as the arbitrator, would be invalid and unenforceable.
'
12. While the provisions relating to independence and
,
impartiality are more explicit in the new Act, it does not mean
J.
that the old Act (Arbitration Act, 1940) enabled persons with
bias to act as Arbitrators. What was implicit under the old Act
F
is made explicit in the new Act in regard to impartiality,
independence and freedom from bias. The decisions under the
old Act on this issue are therefore not irrelevant when
considering the provisions of the new Act. At all events, M. P.
Gupta and Ace Pipeline are cases under the new Act. All the G
decisions proceed on the basis that when senior officers of
·~
government/statutory corporations/public sector undertakings
are appointed as Arbitrators, they will function independently
and impartially, even though they are employees of such
<
Institutions/organisations.
H
-
530
SUPREME COURT REPORTS [2009] 13 (ADDL.} S.C.R.
A
13.