Madras High Court
M/S. Tribol Engineering Private ... vs Indian Oil Corporation Ltd., Rep. By Its ... on 12 October, 1998
Equivalent citations: 1998(3)CTC385
ORDER Judgement pronounced by Shivappa, J.
1. The C.M.P.No. 10631 of 1998 has been filed for removal of respondent No.2 Arbitrator on the ground of reasonable apprehension of bias and to appoint an independent Arbitrator in his place.
2. In order to determine whether or not to revoke the authority of respondent No.2, it is appropriate to set out certain facts and circumstances pertaining to his appointment, conduct during the arbitral proceedings and the pecuniary interest in the Respondent No.l organisation. They are stated as under:- Respondent. No.1 invited tenders on March 24, 1988 for the construction of L.S.H.S. (Low Sulphur Heavy Stock) Project for Neyveli Lignite Corporation. The petitioner's tender was accepted by respondent No.l who issued a letter of intent dated June 27,1988, for execution of the said project and the petitioner had completed the job which was awarded to it. One of the conditions stipulated therein was that disputes, if any, that would arise in relation to the contract, are to be settled through arbitration. The petitioner by his letter dated April 9, 1992, requested respondent No.l herein, to refer the disputes to arbitration, since some disputes had arisen between him and respondent No.l. But no positive action was taken to appoint the Arbitrator to resolve the disputes as per tender conditions. The inaction on the part of the respondent No.l, led the petitioner to file C.S.No. 1140 of 1994 on the file of this Court for reference to arbitration and to pray for the appointment of a third party arbitrator.
3. The list of disputes that had arisen between the petitioner and respondent No.l which are to be referred to arbitration, are furnished as an annexure to the affidavit filed in support of the said suit. The suit was contested on the ground that there was no contract or agreement existed between the parties which contained arbitration clause. Though counter was filed during October, 1994, no counter-claim was made at that time. Ultimately, the suit was dismissed in January 1995.
4. Aggrieved against the said judgment, O.S.A. 20 of 1995 was preferred and a Division Bench of this Court had directed the appointment of, respondent No.2 as the sole Arbitrator who was the then Chief Plant Manager, Lube Blending Plant of the respondent No.l herein. A review petition was filed against the order of the division Bench which was also ended in dismissal. This Court directed that the arbitrator should complete the arbitration proceedings within six months from October 31, 1996, i.e., on or before April 30,1997. The respondent No.2 in pursuance of the order of this Court in O.S. A.No.20 of 1995, directed the petitioner to file the claim statement and the respondent No.l to file a counter statement.
5. The claim statement was filed by the petitioner on June 30,1997 and the respondent No.l filed the counter statement on September 17,1997. Including the time extended, finally the written statement was filed on November 7, 1997. The respondent No.2 directed both the parties to file draft issues on November 27, 1997. The counter-claim was made on December 8, 1997. The petitioner contended that respondent No.l would not be entitled to file any counter-claim since the matters in dispute had come to the stage of framing the issues. The counter-claim was resisted on the ground that it is belated and barred by limitation and also stating that the counter-claim was not the subject matter of reference by this Court and requested for rejection of the counter-claim. The respondent No. 1 contended that the counter-claim was not barred by limitation and it was also not beyond the scope of reference. Since the respondent No.2 entertained the counter-claim without assigning any reasons, a request was made before respondent No.2 on March 26, 1998 to suspend the further proceedings and to take action against the reception of the counter claim.
6. In this petition several allegations have been made touching the conduct of respondent No.2, the manner as to how the counter-claim was entertained, the surrounding circumstances, such as, his arbitration fee not fixed, he himself is a shareholder of respondent No.l Corporation, the Arbitration Meetings are held in the Chambers of Law Officer of respondent No.l, the Law Officer dictated the minutes, the respondent No.2 aided and corrected the mistakes of respondent No.l, all these things when put together amount to indication of the proof of bias and misconduct.
7. The respondent No.l denied the allegations inter alia contending that mere entertaining of the counter claim would not mean that respondent No.2 is biased. It is further contended that the interaction between the attorneys of respondent No.l and respondent No.2, the venue of the Meeting; and the dictation of the minutes by the Law Officer, are in no way construed as interfering with the proceedings. The respondent No.l also imputed that the petitioner has deliberately failed to participate in the proceedings and that the respondent No.2 guided the officer of respondent No. 1 is an uncharitable statement.
8. The question for consideration is whether the conduct of respondent No.2 while conducting the arbitration proceedings, having regard to his pecuniary interest, amounts to misconduct and bias warranting removal?
9. The learned counsel for the petitioner Mr. V.S. Subramanian in order to show that the Arbitrator is biased, urged several contentions, such as, (1) rejection of counter claim without assigning any reasons; (2) not confining to the disputes referred in the suit; (3) respondent No.2 having a pecuniary interest being a shareholder of respondent No.l Corporation; (4) his fee not fixed and interest not disclosed; 5) Meetings held in the chambers of Law Officers of respondent No.l; (6) Law Officer dictating the minutes; (7) respondent No.2 aiding and correcting the mistakes of respondent No. 1 all these aspects put together amount to proof of bias and misconduct. In order to examine the tenability or otherwise of the rival contentions touching the alleged reasonable apprehension of bias and misconduct, the several shades of the contentions for the purpose of convenience can be classified under the headings (a) Counter-claim (b) jurisdiction (c) Interest of the Arbitrator (d) Conduct and (e) Venue.
10. Re. Counter-Claim: The learned counsel for the petitioner Mr.V.S. Subramanian contended that the reception of counter-claim is bad on two grounds, viz., (1) that it is not a matter referred to and (2) it is barred by limitation. The counter-claim was made on December 8, 1997, though the written statement was filed on November 7, 1997. It is the grievance of the petitioner that respondent No.l had not preferred any counter claim against the petitioner, even though counter statement had been filed beyond the period fixed for completion of the arbitration. To substantiate his contention, the learned counsel invited our attention to Order 8, Rule 6A of the Code of Civil Procedure, which reads as follows:-
"6A. Counter-Claim by defendant:- (1) A defendant in a suit may, in addition to his right of pleading a set-off under Rule 6, by way of counter-claim against the claim of the plaintiff, any right or claim in respect of a cause of action accruing to the defendant against the plaintiff, either before or after the filing of the suit but before the defendant has delivered his defence or before the time limited for delivering his defence has expired, whether such counter-claim is in the nature of a claim for damages or not".
A reading of this Rule makes it clear that any right or claim in respect of a cause of action accruing to the defendant either before or after the filing of the suit shall be made or set-off, before the defendant has delivered his defence of before the time limited for delivering his defence has expired.
11. In Impex Transport Aktieselskabet v. A.G. Thames Holdings Limited, 1981 (2) Lloyd's L.R. 566, it was held that where the defendants did not exercise the right of action by way of a counter-claim until after the expiry of limitation period, the claim becomes barred by lapse of time and cannot be exercised by way of a counter-claim or set-off.
12. In Board of Trustees for the Port of Calcutta v, Panchu Gopal Das and others, 1992 (1) Arb. L.R. 87, the Calcutta High Court has taken the view that if no steps are taken to lodge the claim within the time on which the cause of action arose, the claim is hopelessly barred by limitation.
13. In Mar Athanasius College v. State of Kerala, , the Supreme Court was of the view that the functions of the arbitrator carried with it the implication that the arbitrator should give effect to all legal defences such as that of limitation and he has entitled and bound to apply the law of limitation, because the proceedings before the Arbitrator are like civil proceedings before the Court within the meaning of Section 14 of the Limitation Act. By consent, the parties have substituted the arbitrator for a court of law to arbiter their disputes or differences. It is, therefore, open to the parties to plead in the proceedings before him of limitation as a defence. In Official Receiver v. Kersondas, AIR 1926 Sind 209, it was held that the right to enforce the alleged claim had been lost by lapse of time.
14. The learned counsel for the respondent No.l Mr. G. Subramaniam submitted that the arbitrator functioning under the Arbitration Act is entitled to evolve his own procedure and is not under an obligation to record the reasons for his decision. The questions of jurisdiction and limitation have to be decided after recording evidence on all issues and therefore, there is no illegality or irregularity in entertaining the counter claim. He also relied on a decision of the Karnataka High Court in Mckenzies v. State, . It was a case where the arbitral proceedings were conducted by more than one arbitrator and if there is nothing to indicate that the counter claim was filed after the defence and no objection was raised in that case at the initial stage on the question of limitation and jurisdiction. There, the arbitrators permitted both the parties to frame such issues as they desired. Both the parties submitted their issues and in consultation with them and with their acceptance, the arbitrators finalised the issues and furnished a copy of the same to both the parties. Neither party at that stage desired that any of the issues to be treated as preliminary issue. As such, the proceedings were processed thereafter. In such a situation, any order passed at the intermediary stage cannot be found fault with. In the' instant case, objections were raised in the preliminary stage. Counter-claim was resisted on the ground of limitation and even jurisdiction was questioned since there was enlargement of jurisdiction embracing questions not referred in the application.
15. The recent trend is that the arbitrator should indicate the reason what weighed with him while accepting the counter claim and that would be in consonance with the principles of natural justice as observed in the case of Food Corporation of India, v. Great Eastern Shipping Co. Limited, .
16. The Apex Court in the case of Siemens Engineering and Manufacturing Co. of India Limited v. Union of India, was concerned with the decision of the Collector of Customs. The Apex Court observed that where an authority makes an order in exercise of a 'quasi-judicial function, it must record its reasons in support of the order it makes. The Apex Court observed further that every quasi-judicial order must be supported by reasons.
17. In Rohtas Industries Limited v. Rohtas Industries Staff Union, where the Apex Court was concerned with an award under S. 10-A of the Industrial Disputes Act, 1947, it was observed that there was a need for a speaking order where considerable numbers are affected in their substantial rights. It was further reiterated that in such a situation a speaking order may well be a facet of natural justice or fair procedure. In Dewan Singh v. ' ckampat Singh, , the Apex Court reiterated that the proceedings before the arbitrators were quasi-judicial proceedings and they must be conducted in accordance with the principles of natural justice. It was, therefore, obligatory to give reasons.
18.In a catena of decisions, the Apex Court and various High Courts have indicated that Arbitrators should give some indications what weiged with them tc take a particular course of action or view. It was not necessary for the arbitrator to record a long reasoned order on the preliminary objections and indeed the law does not demand writing such a long order. If that be such a course, it will consume considerable length of time and the proceedings then never come to an end. It would always be open to the aggrieved party to challenge the award on the ground of jurisdiction. But it is essential that short, intelligible indications of the grounds should be made available to find out the mind of the arbitrator for his action. That is sufficient to meet the requirements. It is one thing to say that reasons should be stated, but another thing to state that a detailed judgment be given in support of each of the objections.
19. In the instant case the respondent No.2 without deciding the question whether it is referred or the counter-claim is barred by limitation, observed that "after going through the statement and reply statement filed by the respondent and the claimant and also the oral submissions made by both the parties, I consider taking into file the counter-claim made by the respondent. The conduct in not assigning any reason is an error of law.
20. Re. Jurisdiction: It is well settled that parties by agreement cannot confer jurisdiction on any court which it did not otherwise possess. But, where the parties may agree that the disputes between them shall be tried conferring power on a particular person by filing an application for appointment of an Arbitrator, the application must contain the items of disputes to be referred, otherwise, reference to the arbitrator cannot be made. The Madras High Court Rules to Arbitration Act, Form No.11, confine only to disputes referred in the suit. In the instant case, the list containing several disputes that had arisen between the parties , is annexed to the application. There were only 22 items. But the issues framed by respondent No.2 enlarging the original list of 22 items to 34 items, clubbing the disputes furnished by - respondent No. 1, inspite of the protest against expanding the list of draft issues beyond the original scope of reference. There is no specific averment in the counter as to how the 34 items could be clubbed when the reference was in respect of 22 items only.
21. Basakha Singh and Sons v. Indian Drugs and Pharmaceutical , Limited, in substance, is that the scope of the arbitral proceedings is a condition to the matter pleaded and referred in the petition under section 20 of the Arbitration Act and the Arbitrator has to determine only those differences arising between the parties that are referred and not the matters which arose but not pleaded in the application.
22. Even in Bodachari v. Muniyachari, AIR 1921 Mad. 709, this Court took the view that the Court's jurisdiction to refer to arbitration is confined to matters in difference in the suit itself and not extended to all matters in dispute between the parties.
23. A division Bench of the Kerala High Court in State of Kerala v.
Joseph Anchilose, , held thus:"
"We are of the opinion that the Arbitrator, and the Court below were wrong in assuming that the Arbitrator had jurisdiction notwithstanding the preliminary objections which the appellants validly raised. We are also of the opinion that these preliminary points involved propositions of law. The Arbitrator arrogated jurisdiction to proceed further with the disputes only on the basis of a wrong delermination. We hold further that those propositions of law were incidental to the assumption of jurisdiction and the determination by the Arbitrator. We should necessarily hold that the wrong determination on , incidental propositions of law which was the basis of assumption of jurisdiction and the decision of the Arbitrator were illegalities apparent on the face of the Award."
24. In Sherbanubai v. Hooseinbhoy, AIR 35 1948 Bom. 292, it was that the Court does not give up its supervision over conduct of reference and the Arbitrator must act judicially and determine such disputes given by order of reference. The Arbitrator assuming wide powers and flouting the provisions of reference amounts to legal misconduct. When a Court of Law refers a matter to an arbitrator, it substitutes a domestic forum in place of itself. But that domestic forum has got to act judicially. Arbitrators must perform judicial functions observing the fundamental rules which govern judicial proceedings within the framework of reference.
25. In Orissa Mining Corporation v. P.V. Rawlley, , the Apex Court held that "when an agreement is filed in Court and order of reference is made under Section 20(4) of the Arbitration Act,-1940, then the claim as a result of the order of reference is limited to a particular relief and the arbitrator cannot enlarge the scope of the reference and entertain fresh claims without a further order of reference from the Court."
26. In Associated Engineering Co. v. Government of Andhra Pradesh, , the Apex Court held thus:-
"The Arbitrator cannot act arbitrarily, irrationally, capriciously or independently of the contract. His sole function is to arbitrate in terms of the contract. He has no power apart from what the parties have given him under the contract. If he has travelled outside the bounds of the contract, he has acted without jurisdiction. But if he has remained inside the parameters of the contract and has construed the provisions of the contract, his award cannot be interfered with unless he has given reasons for the award disclosing an error apparent on the face of it. A conscious disregard of the law or the provisions of the contract from which he has derived his authority vitiates the award. In other words, if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error..."
27. The learned counsel for the respondent No. 1 relying on a decision in Nagar Palika, Mirzapur v Mirzapur Elect. Supply Co. Ltd., contended that when the award passed by the arbitrator is fully conscious of the dispute, no fault can be found with that a ward. That, was a case where the award did mention of arbitrator being conscious of the disputes raised before him and has passed the award fully conscious of the dispute and it was a case by consent of parties all the five heads between the parties were taken cognizance by the arbitrator. It was a case of ignoring certain disputes under certain head. There, the appellant's grievance was that the arbitrator had ignored to decide the heads of disputes raised by it which is not the same factual situation in this case. The contention does not merit consideration.
28. The Arbitrator cannot widen his jurisdiction by deciding the question not referred to him by the parties or by deciding the question otherwise than in accordance with the contract. He cannot say that he does not care what the contract says. He is bound by it. It must bear his jurisdiction. He cannot travel outside the bounds. If he exceeds his jurisdiction by so doing, his award will be liable to be set aside.
29. Having regard to the principles laid down in all these cases, including or extending the jurisdiction to matters not referred and drafting issues so as to include 34 items, where only 22 items were referred, in the absence of any reason or enlargement of the scope of reference by the Court, suo motu taking matters beyond the difference in disputes, amounts to legal misconduct.
30. Re. Interest; The learned counsel for the petitioner Mr. V.S. Subramaniam submitted that respondent No.2 applied for excusing the delay, got shares in me Company and paid Rs. 60,000 after commencement of the arbitral proceedings. Thus, he has personal financial interest having shares in the respondent No. 1 Corporation and the same has not been disclosed to the petitioner so far. Inspite of the request to fix his remuneration and as to how the said remuneration shall be drawn by the contesting party, the remuneration not fixed so far and he is an employee of the respondent No.1 Corporation, drawing his regular salary utilising all facilities provided by respondent No.l. This fact of holding shares in the respondent No.l Corporation by the respondent No.2 is admitted and also non-fixing of the remuneration, since he is working in the Corporation are admitted at para 5 of the counter filed by respondent No.l. An arbitrator who acts as a Judge is bound to act Impartially. The arbitrator having a pecuniary interest shall not be a judge, as it amounts to judging his own cause. Such an interest may make the arbitrator to function partially but not with detachment and is every possibility, there will be a likelihood of bias. Even the correspondence dated 16.12.1995 produced at page 95 of the paper book shows that the undersigned is the respondent No.2 herein Mr.AL. Annamalai, as Sole Arbitrator for Indian Oil Corporation Limited. This is indicative of the fact that the respondent No.2 is identifying himself with the respondent No.l Corporation as an employee. Even in all the communications, he is styling himself as the Deputy General Manager (Plants) and Sole Arbitrator. The respondent No.l Corporation was also addressing the respondent No.2 in all its correspondences, as the Deputy General Manager (Plants) and Sole Arbitrator. All these correspondence demonstrate the likelihood of bias in the mind of the petitioner, or atleast, a reasonable inference that the Arbitrator is not free from the shadow of respondent No.l and there may.be possibility of identifying himself with the interest of respondent No. 1 adversely to the interest of the petitioner.
31. In Amarchahd v. Ambica Jute Mills, , the Apex Court held that "it is enough to show that there is a reasonable ground for apprehension that the arbitrator will be biased. But the reasonable ground must be established to the satisfaction of the Court to which an application for leave to revoke the authority of an appointed arbitrator is made.
32. The learned counsel for the respondents Mr. G. Subramaniam contended that a Company incorporated is a distinct and independent person in law, endowed with special rights and privileges, being a separate legal entity distinct from its members. Relying on a decision of this Court in R.T. Perumal v. Join Deavin, , he contended that shareholders are not in the eye of law part-owners of the undertaking, and thus the respondent No.2 has no pecuniary interest.
33. The learned counsel invited our attention to Borland's Trustee v. Steel Brothers and Co., 1901(1) Ch 279 C, wherein Farwell, J. held thus:-
"A share in Company cannot properly be likened to a sum of money settled upon and subject to executory limitations to arise in the future; it is rather to be regarded as the interest of the shareholder in the company, measured, for the purposes of liability and dividend, by a sum of money...."
The Apex Court in Bacha F. Guzdar v. Commissioner of Income-Tax, Bombay, held thus:-
A shareholder has got no interest in the property of the Company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the Company was explained in the Sholapur Mills Case-Charanjit Lal v. Union of India, ".
34. In substance, the contention of the learned counsel for the respondents Mr. G. Subramaniam, is that the Company and the shareholders being distinct legal entitles, as aforesaid, in that view of the matter, the respondent No.2 Arbitrator has no pecuniary interest.
35. The contention of the learned counsel for the respondents is unsustainable, because the grievance of the petitioner is that a person interested, his interest may be identified with the party, be it a beneficial interest or a community interest or security interest or possessory interest, equitable interest or a future interest and it has many shades, he being an employee, will have several interests with the employer and ultimately when his name finds a place in the register as a share holder and is also entitled for the dividend or the profit, it also comes within the future interest or a beneficial interest or identify of interest apart from his security termination etc.
36. The Apex Court in R.C. Cooper v. Union of India, held that "a shareholder has merely an interest in the Company arising under its Articles of Association, measured by a sum of money for the purpose of liability and by a share in the profit..." "The share holder of a Company, it is true, is not the owner of its assets; he has merely a right to participate in the profits of the company subject to the contract contained in the Articles of Association." In such an event, it cannot be said that he has no interest of any kind in the affairs of respondent No.l Corporation.
37. To support the conduct of the arbitrator, the learned counsel relied on a decision in Srustidhar v. Steel Authority of India Limited, and contended that the apprehension of bias on the ground that the arbitrator is an employee of respondent No.l need not result in drawing a presumption that he would be unfair. Ofcourse, just because he is an employee, the apprehension that he would be biased ipso facto may not prove that he would be biased. But it was a case where, no data or materials were placed from which the bias of an arbitrator can be inferred. But, in the very decision it is stated, "It is of course true that a reasonable apprehension in the mind of a party would be sufficient for removal of an arbitrator but the apprehension must be that of a reasonable man and must be well founded." Because there was no material in the case to come to such a conclusion that the apprehension is either reasonable or well founded, the Court came to the conclusion that it would be unfair need not be drawn. But, where he has a speculative interest which was not disclosed, actively by conduct aided through his knowledge to assist the other party makes the distinction between this case and that case, and, therefore, the ratio of this case has no application.
38. The powers and duties of arbitrators are defined. As held in Gajanand v. Phul Chand, AIR 1930 All. 675, that once the Arbitrator is appointed, he becomes a judge in the case and is bound to act impartially and with scrupulous regard to the ends of justice. He should in no sense consider himself to be the advocate of the cause of the party appointing him nor is such party to be deemed as his client. He should refrain from identifying himself with the interest of such party. The doing of an act in utter disregard of proprierty and sense of proportion, to try to further the interests of the party nominating him, amounts not merely to a misconduct in the legal or technical sense, but is grossly improper and inconsistent with 'their plain duty as arbitrators seriously disposed to settle a dispute referred to them for arbitration. The conduct of the arbitrators as "legal misconduct"... is with in the meaning "Sufficient to set aside the award." (Italics Supplied)
39. In the text "Russel on Arbitration" Twenty First Edition, at page 164, under the caption "Duty to act judicially, fairly and impartially", although the Arbitrator has been appointed by one of the parties or by the Court, it is observed thus:-
"The Arbitrators so selected i.e., one by each side are not to consider themselves the agents or advocates of the party who appoints them. When once nominated, they are to perform the duty of deciding impartially between the parties, and they will be looked on as acting corruptly if they act as agents or take instructions from either side"
40. The Code of Conduct is a simple working rule which should guide the importance of keeping the administration of justice clear from all suspicion of unfairness. By observing the code of conduct strictly, it would not only serve to maintain the standards of the quasi-judicial function as a whole, but would also preserve the reputation for impartiality as an Arbitrator in deciding the dispute.
41. There is no better known rule of natural justice than the one that a man shall not be a judge in his own cause. It means that a man shall not judge an issue in which he has a direct pecuniary interest. The object being such an interest in the parties or the matters in dispute may make it difficult for him to approach the problem with impartiality and detachment which the judicial function requires. An association with one of the parties may erode the judicial officer's impartiality and detachment that the bias which this rule is intended to prevent really comes to the fore. The two tests to be observed in such a situation are: (1) Whether there is a real likelihood of bias.;and (2) whether there is reasonable suspicion of bias. These two tests are often over lapping. It may be that one is appropriate in one situation. If there is something which involves respondent No.2, in which he has an interest, it is a case of likelihood of bias. Where the conduct is not nominal but active, which is sufficient to erode detachment and impartiality, it amounts to reasonable suspicion of bias, borders on real probability, stamps the actions with unfairness indicating special interest, both result in disqualifying him to arbitrate. Both these tests when approached, namely, in the context of the passage in "The Discipline of Law' by Lord Denning, it leads to an inevitable conclusion that 'A man may be disqualified from sitting in a judjcial capacity on one of two grounds. First a "direct pecuniary interest" in the subject-matter. Second, "bias" in favour of one side or against the other'. In R. v Barnsley Licensing Justices, Ex Parte Barnsley and District Licensed Victuallers' Association, Delvin, J appears to have limited that principle considerably, but I would stand by it. It brings home this point: in considering whether there was a real likelihood of bias, the Court does not look at the mind of the justice himself or at the mind of the Chairman of the tribunal, or whoever it may be, who sits in a judicial capacity. It does not look to see if there was a real likelihood that he would, or did, in fact favour one side at the expense of the other. The Court looks at the impression which would be given to other people. Even if he was as impartial as could be, nevertheless if right-minded persons would think that, in the circumstances, there was a real likelihood of bias on his part, then he should not sit. And if he does sit, his decision cannot stand; Nevertheless there must appear to be real likelihood of bias. Surmise or conjecture is not enough. The basis being that "Justice must be deep rooted in confidence: and confidence is destroyed when right-minded people go away thinking: "Judge was biased". These tests are also referred in R. v. Altrincham Justices 1975 (2) All E.R. 78. In William Dimes v. The Properties of the Grand" Junction Canal and others, 1852 Cases in The House of Lords, 759 at 788 in an appeal against a judgment of the late Lord Chancellor, Cottenham it was held "the interest of the Lord Chancellor in the subject matter of the suit disqualified him from deciding upon it."
42. To answer this question, what constitutes "misconduct" is a matter to be looked into. The word "misconduct" is nowhere defined in the Arbitration Act, but it covered a wide range of errors on the part of an Arbitrator. That expression does not necessarily involve personal turpitude on the part of an Arbitrator, but amounts to mishandling of the arbitration as is likely to amount to some substantial miscarriage of justice. It ranged from a fundamental abuse of his position to what was often referred to as "technical misconduct", i.e. where the arbitrator made errors but not in a culpable way or so as to impugn his integrity. Where the misconduct was more serious in the sense that the arbitrator's integrity was impugned or the parties lost confidence in him, his removal is considered more appropriate. Misconduct could arise in various circumstances, such as, failure on the part of the Arbitrator to deal with all the issues, making errors, failing to observe the principles of natural justice, acting in excess of his jurisdiction by purporting to decide issues which were not within his terms of reference, although in such a latter case challenge could be made to the award in an appeal, still all these aspects constitute misconduct.
43. "Bias" is a condition of mind and it may not always be possible to furnish actual proof of bias. But, the court, for this reason, cannot be said to be in a crippled state. There are many ways to discover bias, for example, by evaluating the facts and circumstances of the case or applying the tests of "real likelihood of bias" or "reasonable suspicion of bias". De Smith in Judicial Review, of Administrative Action, 1980 Edn., 262, 264, has explained that "reasonable suspicion" test looks mainly to outward appearances, while "real likelihood" test focuses on the Court's own evaluation of the probabilities". See The Apex Court has already in innumerable cases, beginning with a classic decision in A.K. Kraipak v. Union of India, , laid down the need of "fair play" or "fair hearing" in quasi-judicial and administrative matters. The hearing has to be by a person sitting with an unbiased mind. To the same effect is the decision in S.P. Kapoor v. State of Himachal Pradesh, AIR 1981 SC 2181. The hearing has to be by a person sitting with an unbiased mind, on the principle based on the most frequently quoted dictum of Lord Hewart C.J. in R. v. Sussex JJ., ex.p. Mc Carthy, 1924 (1) KB 256, 259, that: "it is of fundamental importance that justice should not only be done but should manifestly and undoubtedly be seen to be done". In Metropolitan Properties Co. v. Lannon, 1968 (1) WLR 815, it was observed "whether there was a real likelihood of bias or not has to be ascertained with reference to right minded persons; whether they would consider that there was a real likelihood of bias."
44. The Arbitrator has a number of duties arising from the manner in which proceedings are conducted, breach of which can lead to his removal on the ground of serious irregularity. The irregularity committed by the Arbitrator will provide a complete defence which gets strengthened when there is a pecuniary interest in one of the parties to the arbitration proceedings.
45. Re. Conduct: It is the allegation of the petitioner at part 41 of the affidavit that respondent No.2 on his own, advised the respondent No.l to correct a mistake in its rejoinder dated November 17, 1997 and in page 5, para 8, line 3, in its reply dated November 17, 1997, the respondent No.l promptly corrected its mistake. And on January 8, 1998, when the Law Officer Mr. Dhandapani was not present due to his pre-occupation with some other legal work, some of his juniors only attended the hearing. At that time, they were in a fix as to how to answer the contentions of the petitioner stated in his letter dated January 8, 1998. At that stage, the respondent No.2 went to the rescue of the officers of the respondent No.l and guided the officers to make its written submissions on the points taken by the petitioner and directed them to take time for filing a reply. After such suggestions were made, the officers requested for time and time was granted upto January 19, 1998 for filing reply to the preliminary objections of the petitioner in relation to the maintainability of the counter claim. The allegation that the respondent No.2 guided the officer of respondent No. 1 Corporation, is termed as uncharitable statement, in the counter filed by the respondent No. 1.
46. In Fox v Wett/air Limited, 1981 (2) Lloyd's L.R 514 at page 522, it was held thus:-
"I am afraid that the arbitrator fell into error here. He felt that it was his duly to protect the interests of the unrepresented parly in much the same way as a judge protects a litigant in person. But in a case like this, I do not think it is the duly of the arbitrator to protect the interests of the unrepresented party. If the defendants do not choose to turn up to protect themselves, it is no part of the arbitrator's duty to do it for them. In particular, he must not throw his own evidence into the scale on behalf of the unrepresented party - or use his own special knowledge for the benefit of the unrepresented parly - at any rate he must not do so without giving the plaintiff's experts a chance of dealing with it - for they may be able to persuade him that his own view is erroneous."
47. In Satyendra Kumar v. Hind Constructions Limited, , the High Court of Bombay took the view that an arbitrator must show uberrimafides to the parties whose disputes he is going to arbitrate and who have constituted him their domestic forum. At para 4 it was held that "the position of an arbitrator is different from that of a Judge. If a party goes to a court, he has got to submit to a decision of the judge. He has no choice in the appointment of the judge. But when parties go to a domestic forum and want their matters to be determined by arbitration, they have every choice as to the person whom they should select as their arbitrator, and therefore it is clear that highest faith should be shown by the arbitrator. It also follows that the arbitrator must disclose to the parties all facts which are likely or calculated to bias him in any way in favour of one or the other party. A circumstance or a fact may in fact not bias the decision of the arbitrator. The arbitrator may have too strong a character, too deep a sense of justice to be influenced by any consideration extraneous to or foreign to the evidence which he has got to consider. But the question is not what is likely in fact to happen, but what is likely to tend or is calculated to tend to a particular result. Therefore, if the Court comes to the conclusion that there are any facts or any circumstances which are likely to affect the decision of the arbitrator which are likely to bias him, it would be incumbent upon the arbitrator to disclose those facts to the parties. If he fails to disclose those facts, then his award would be liable to be successfully challenged". It is in this sense that respondent No.2 having knowledge that he has financial interest with respondent No.l Corporation not disclosing the same amounts to misconduct. At page 131 of the paper book in the minutes of the personal hearing held on 28.4.1997 at the Conference Hall, Indian Oil Bhavan, Madras, the respondent No.2 has resolved that "The Court should be approached for extension of time in due course." All these things put together go to show that his interest is more than in one way and the argument of the learned counsel that he has no interest, does not stand to reason or merit any consideration. The learned counsel for the respondent No.1 relied on a decision in Hari Krishna v. Vaikunth Nath, which was a case of extension of time while making the award by consent of parties and it has no application to the case on hand.
48. It is not the duty of the arbitrator to go to the aid of the parties and state what they could and should have done for themselves. His function is not to supply his special knowledge, but to -play the role of an impartial arbitrator without assuming the role of an advocate for the defaulting side. At any rate, he should not use his own knowledge to give them a chance of answering it and showing the way as to how the matter should be dealt with This conduct cannot be termed as 'fair' and what had happened as alleged, when not controverted, can be taken as deemed to have been admitted. The inevitable conclusion is that the proceedings have been misconducted; and the arbitrator has to take responsibility for it".
49. Re. Venue:- The learned counsel for the petitioner Mr. V.S. Subramanyan lastly contended that the meetings of the arbitration are held only in the cabin of the Law Officer of the respondent No.l Corporation and not in any common or mutually acceptable venue, despite several requests for the same, particularly when the said Law Officer is the person who represents respondent No.l in the arbitration proceedings. It is submitted that respondent No.2 does not take down any notes as to what is being debated during the course of hearing and even the proceedings of the Arbitrator, the respondent No.2 herein, is being dictated by the officers of the respondent No.l and not by the arbitrator. In the counter, the respondent No.l denied the allegation and contended that there is no mishandling of any proceeding as alleged.
50. It is not open to the arbitrator to fix the venue of arbitration of his choice regardless of the convenience of the parties. When there is no condition in the arbitration agreement empowering the arbitrator to fix the venue of arbitration as he thought fit, the arbitrator in fixing the venue of the meeting must take into account all material circumstances including the residence of the parties and their witnesses, the subject matter of the reference and the balance of convenience. He
- cannot violate the principles of natural justice and has to give a fair hearing to the parties. In substance, the venue must be conducive for fair hearing of the matter and to the convenience of the parties. In the instant case, when the respondent No.2 sitting in the cabin of Law Officer interacting with the law officer, and despite the objections continuing in the same venue are indicative of not providing a conducive atmosphere inspiring confidence in the mind of the petitioner. The venue plays an important role, especially, when the arbitrator is an employee of respondent No.l Corporation since both are working in the respondent No.l Corporation. The Arbitrator must all the more be careful, atleast he must have conducted in such a place to create a proper atmosphere. Having not taken such a step, it amounts to not providing a fair hearing to the parties. In other words, it must be in consonance with the principles of natural justice.
51. The learned counsel Mr. G. Subramanian appearing for respondent No.l, contended that subsequent participation by the petitioner, disentitles it to contend bias. The question is whether participation is by its own volition or by compulsion. Non-participation would have resulted in an ex parte award. Therefore, when it is on account of compulsion not to-suffer an award, that does not mean that the petitioner subjected to the jurisdiction without any grievance.
52. The learned counsel for the respondent No.l lastly urged that the third party arbitrator would not be feasible, because, (l) he may not be conversant with the working method of respondent No.l Corporation; (2) it may be onerous and (3) having agreed in the agreement to have the company arbitrator, it is not proper to resist on the ground that the mode of remedy has to be worked out in the manner agreed. At page 79 of the paper book, the Arbitration Clause touching the settlement of disputes contemplates that the matter shall be referred to the sole arbitration of Contracting Company and 'persons designated' does not mean an employee of a Company. He may even be a third party arbitrator. When it is a question of dispensing justice impartially and justly, the onerousness or whether one is conversant with the method of working assumes" lesser importance. Because justice is deep-rooted in confidence; justice should not only be done but also should seem to have been done.
53. On a settled principle that a man cannot be a judge in his own cause, even by an act of contract against natural equality as to make a man, judge in his own cause, is void in itself. Therefore, in order to ensure a sense of justice and freedom of opinion to rule out any irregularity and to defeat nullity of the award, in which event, not only inconvenience but also there may be an occasion of great delay, if not, denial of justice ultimately. Therefore, though there may be some delay in acquainting with the working method, and incur more cost but there will be less chance of denial of justice. In this view of the matter, we are of the view that neither a person nominated by the respondent No.l Corporation nor his deputy can determine the cause fairly and impartially, rather, a third party arbitrator is more preferable. In Sellar v High Land Rail Way ,1919 56 Sc.L.R. 216 H.L. wherein a railway company, party to an arbitration, nominated a shareholder as its arbitrator, it was held that he was disqualified and on that ground the award was set aside.
54. The other argument of the learned senior counsel Mr. G. Subramanian that the resistance to the appointment of the respondent No.2 by the petitioner during the course of the appeal and in the review petition, prevents the same question being raised again and it has to be heard only to reject, because, Sections 5 and 11 of the Arbitration Act, empowers the Court to remove an Arbitrator who has misconducted himself or the proceedings. When the grievance was rejected by this Court while deciding the appeal and the review petition, there were no material to show the misconduct. When he misconducted during the proceedings, it is altogether a different aspect which goes to the conduct in conducting the arbitral proceedings. Therefore, there is no substance in that argument also.
55. In substance, where the arbitrator has misconducted himself, when an application is made for revoking the authority, the Court has to keep in view the actual bias, whether reasonable or proved, relationship between the arbitrator and the parties, conduct of the arbitrator and how he exceeded the terms of the reference or by failing to deal with the matter in the manner prescribed infusing confidence in the parties, amounts to misconduct. Misconduct should cover the error in procedure, error in judgment, error in not disclosing, lack of independence, partiality etc. If the things are in such a state, if the reference to go on, the only result will be that more expense will be incurred and the award must inevitably be set aside. When the award is made which is treated as nullity, it is better to have the proceedings stopped in limine and revoke the authority by removing the arbitrator for his misconduct and the irregularities during the proceedings.
56. The provision of law contained in S. 12 of the Act has not been subjected to an agreement to the contrary between the parties, as a result of which it is clear that even if the arbitration agreement provides for the filling up of the vacancy by a named person even in the case of a vacancy caused by the removal of the arbitrator under the orders of the court, the same would be invalid being in contravention of S. 12 which gives power to the court alone to fill up the vacancy on the removal of an arbitrator by court. Thus, the removal of the arbitrator and appointing a new arbitrator in his place, rests with the court under Section 12 of the Act. In other words, it is the court alone which is competent to appoint a new arbitrator and not the authority referred to in the arbitration agreement. M.S. Kkanna Associates (P) Ltd. v. New Delhi Municipal Committee, .
57. In Banamali Charan v. Kamaladebi Saha, , it was held thus-"
:Where the arbitrator appointed by a party is removed, the court is not legally bound to ask the concerned party to nominate another person to replace the Arbitrator removed and is not bound to appoint the said nominee of the party. The court is not entitled to leave the appointment of Arbitrator to the party whose nominee has been removed, Not that the Court is not entitled to ask the parties to suggest names to enable him to make a suitable choice to fill up the vacancy caused by the order of removal of the Arbitrator. But it is the Court who is to apply its mind and make the final choice for appointment of arbitrator".
58. The learned counsel for respondent No.l contended that respondent No.2 was appointed by the Division Bench of this Court and the Review Petition filed against that order, questioning on the ground of bias since dismissed, this court again need not revoke the authority of respondent No.2 to arbitrate. The Division Bench while rejecting the apprehension of the petitioner observed that unless there is allegation of incapacity or malafides or interestedness against a named and agreed arbitrator he cannot and should not be removed in exercise of the discretion vested with the court, under Section 5 of the Act. It was this order that was not interfered with in the Review Petition. A reading of the order of the Division Bench makes it clear that at that relevant point of time, the interest of respondent No.2 in respondent No.l Corporation, his incapacity or malafides for reasonable apprehension of bias was not available. But that is not the situation in this case. During the course of the arbitral proceedings, the misconduct and the pecuniary interest of respondent No.2 has come to light and that becomes a substantial change in circumstances, which does not prevent this court to exercise its discretion to revoke the authority of respondent No.2. Therefore, the contention of the learned counsel for respondent No.l that respondent No.2 appointed by this court does not call for removal, is unsustainable both on facts and in law.
59. The learned counsel contended that just because he is an employee it does not mean that he lacks independence and it is also one of the grounds for removal of the arbitrator. It is ofcourse true that mere employment does not make the employee solely depend on the employer, mortgaging his independence to the employer. But, where there are justifiable doubts about his impartiality, then such reasonable doubts suggestive of partiality unless the arbitrator is disqualified, may result in miscarriage of justice. Therefore, the test is whether by conduct the arbitrator infact frustrated the object of the Act, which is intended to establish substantial justice between the parties where the court comes to the conclusion that the arbitrator's conduct in the proceedings can fairly be said is improper. Then it boils itself to misconduct. Therefore, keeping the pecuniary interest of respondent No.2 and his subsequent conduct in not disclosing the same to the party, coupled with his interaction with the law officer Mr. Dhandapani in the Law Officer's cabin, being the venue, aiding with his knowledge the officers of respondent No.l Corporation during arbitral proceedings, if put together, plea of reasonable apprehension of bias is justified and the arbitrator did drop the mantle of impartiality adversely to the interest of the petitioner.
60. In view of our reasons at para 53 of this judgment, we are of the opinion that a third-party arbitrator is preferable so far as the facts and circumstances of this case is concerned.
61. For reasons aforestated, the C.M.P.No. 10631 of 1998 is allowed. The authority of respondent No.2 as arbitrator is revoked. The C.M.P.No. 10632 of 1998 for stay is dismissed. Parties to bear their own costs.
62. Re. Appointment of Arbitrator:
ORDER Though court is not bound to ask the concerned party to suggest any person to replace the arbitrator removed, but still we thought that an option should be given to both parties to suggest a common name. Since there is no unanimity in suggesting the name, we appoint Mr. Justice A. Abdul Hadi, a former Judge of this Court as arbitrator and we direct that he shall consider all objections that may be put forth by either of the parties with reference to the dispute referred and then to decide the matter in accordance with law, within six months, from today.
Note: Communicate the order pertaining to the appointment of the arbitrator, to Mr. Justice A. Abdul Hadi, former Judge of this Court, to his residential address. Respondent No.2 herein to handover all the papers to the arbitrator appointed by us today to facilitate him to continue the proceedings.