2003 (8) TMI 381 - SC - Companies Law

Supreme Court rules against biased arbitrator in Clause 60 agreement, emphasizing impartial tribunal

Bihar State Mineral Development Corpn. Versus Encon Builders (I) (P.) Ltd.

Bihar State Mineral Development Corpn. Versus Encon Builders (I) (P.) Ltd. - [2004] 49 SCL 3 (SC), 2003 (7) SCC 418, 2003 AIR 3688 Issues Involved:1. Whether Clause 60 of the agreement constitutes an arbitration agreement.2. Whether the Managing Director of the Corporation (Appellant No. 2) can act as an arbitrator.3. Whether the High Court erred in dismissing the appeal regarding the arbitration clause.4. Whether the principle of bias applies to the arbitrator in this case.5. Whether the appeal under section 39(1)(i) of the Arbitration Act, 1940, was maintainable.Issue-wise Detailed Analysis:1. Whether Clause 60 of the agreement constitutes an arbitration agreement:Clause 60 of the agreement states, 'In case of any dispute arising out of the agreement, the matter shall be referred to the Managing Director, Bihar State Mineral Development Corporation Limited, Ranchi, whose decision shall be final and binding.' The appellants contended that this clause satisfies the essential elements of an arbitration agreement as per section 2(a) of the Arbitration Act, 1940, which includes (a) a written agreement, (b) submission of present or future differences, (c) referral to a named arbitrator, and (d) the decision being final. The High Court, however, concluded that Clause 60 did not constitute an arbitration agreement. The Supreme Court acknowledged that for construing an arbitration agreement, the term 'arbitration' need not be specifically mentioned, but ultimately agreed with the High Court's finding that Clause 60 did not constitute an arbitration agreement.2. Whether the Managing Director of the Corporation (Appellant No. 2) can act as an arbitrator:The respondent challenged the validity of Clause 60, arguing that the Managing Director could not act as an impartial arbitrator due to his involvement in the dispute. The High Court found that since the Managing Director had the authority to terminate the agreement and impose fines, he could not assume the role of an arbitrator. The Supreme Court upheld this view, emphasizing that an arbitration agreement must involve an impartial tribunal and that a person cannot be a judge in his own cause.3. Whether the High Court erred in dismissing the appeal regarding the arbitration clause:The appellants argued that the High Court erred in its judgment by not recognizing Clause 60 as an arbitration agreement. The Supreme Court, however, found no merit in this argument, agreeing with the High Court's assessment that the clause did not meet the criteria for an arbitration agreement.4. Whether the principle of bias applies to the arbitrator in this case:The Supreme Court extensively discussed the principle of bias, noting that actual bias leads to automatic disqualification if the decision-maker has an interest in the outcome. The Court cited various legal texts and precedents to support the view that impartiality is crucial for arbitration. The Court concluded that the case satisfied the test of real bias and the suspicion of bias, thus disqualifying the Managing Director from acting as an arbitrator.5. Whether the appeal under section 39(1)(i) of the Arbitration Act, 1940, was maintainable:The Supreme Court noted that the learned Subordinate Judge held that Clause 60 did not constitute an arbitration agreement, and thus, the appeal under section 39(1)(i) of the Act was not maintainable since the arbitration agreement was not superseded. The Court dismissed the appeal on this ground as well.Conclusion:The appeal was dismissed, with the Supreme Court affirming the High Court's judgment that Clause 60 did not constitute an arbitration agreement and that the Managing Director could not act as an arbitrator due to bias. The Court emphasized the importance of impartiality in arbitration and upheld the principle that a person cannot be a judge in his own cause.