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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO(s). 947 OF 2006

M/S. LADLI CONSTRUCTION CO. (P) LTD.        Appellant (s)

                VERSUS

PUNJAB POLICE HOUSING CORPN. LTD. & ORS.    Respondent(s)

J  U  D  M  E  N  T

R.M. LODHA, J.  :

This Appeal, by special leave, arises from  

the judgment and order dated November 25, 2002 passed by  

the Punjab & Haryana High Court.

2. The  controversy  arises  in  this  way.   A  

contract was entered into between the appellant – M/s Ladli  

Construction Co. (P) Ltd. (hereinafter referred to as 'the  

Contractor'),  and  the  respondent  Nos.  1  and  2,  namely,  

Punjab  Police  Housing  Corporation  Limited  and  Executive  

Engineer  (Civil),   Punjab  Police  Housing  Corporation  

Limited (hereinafter referred to as 'the Corporation') for  

construction  of  240  houses  Type  II-A  at  Urban  Estate,  

Ludhiana  at  an  estimated  cost  of  Rs.  273.84  Lakhs.  The  

contract provided in Clause 2 that time was essence of the  

contract  and  the  time  allowed  for  carrying  out  work  as  

entered  in  the  tender  shall  be  strictly  observed  by

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Contractor.  The  Contractor  could  not  maintain  the  time  

schedule and the progress of the work was not observed. The  

Contractor was directed to push up the progress of work but  

that also it failed to do.  The Contractor was notified  

that if it failed to take any action to show requisite  

progress by 30th of April, 1991, action against it under  

Clause 3 of the agreement would be taken. Still there was  

no  requisite  progress  in  execution  of  the  work  by  the  

Contractor.  On  May  8,  1991,  the  Corporation  resorted  to  

action  under  Clause  3  of  the  contract,  rescinded  the  

contract and adopted further course by giving unexecuted  

work  to  another  contractor.  The  disputes,  thus,  having  

arisen between the parties, the Contractor moved the court  

of Sub Judge, First Class, Chandigarh, for appointment of  

the arbitrator in terms of Clause 25A of the contract.

3. On the application made by the Contractor for  

appointment of the arbitrator, the Sub Judge, on May 13,  

1992, ordered that matter in dispute may be referred for  

arbitration  as  per   Clause  25A  of  the  agreement  and,  

accordingly,  as  per  the  agreement  and  the  statement  of  

parties, the Sub Judge ordered the Chief Engineer of the  

Corporation  to  act  as  an  arbitrator  as  provided  under  

Clause  25A  of  the  agreement.  Both  the  parties  were  

permitted  to  file  claim  and  counter  claim  before  the  

arbitrator.

4.  In pursuance of the order dated May 13, 1992,

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the Corporation lodged its claim against the Contractor on  

June 15, 1992.  The arbitrator – Chief Engineer of the  

Corporation - called upon the Contractor to appear before  

him on June 25, 1992. Thereafter also the arbitrator called  

upon the Contractor to appear before him. The Contractor,  

however, did not appear before the arbitrator and instead  

sent a letter on June 29, 1992 intimating him that his  

appointment as arbitrator was not acceptable to it; it did  

not expect any justice and fair play from him and he must  

refrain from acting as an arbitrator in the case.

5. Thereafter, on July 24, 1992, the Contractor  

made an application before the Sub Judge, Chandigarh under  

Sections 5, 11 and 12 of the Arbitration Act, 1940 (for  

short, 'the 1940 Act') for removal of the arbitrator. The  

Contractor  did  not  appear  before  the  arbitrator.  

Consequently, the arbitrator proceeded with the arbitration  

ex parte and passed the award on August 18, 1992.

6. After  filing  of  the  award,  the  Contractor  

submitted  objections  under  Section  30  of  the  1940  Act  

alleging misconduct on the part of the arbitrator and also  

objected to the award being made rule of the court.

7. The  Sub  Judge  heard  the  two  applications  

together  -  (i)  application  made  by  the  Contractor  for  

removal of the arbitrator and objections under Section 30,  

and (ii) application for making the award rule of the court  

- and by a common order dated May 8, 1995 dismissed the

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application  made  by  the  Contractor  for  removal  of  the  

arbitrator and made the award dated August 18, 1992 rule of  

the court and passed decree in terms thereof.

8. The Contractor challenged the common order dated May  

8,  1995  passed  by  the  Sub  Judge,  Chandigarh  in  appeal  

before the District Judge, Chandigarh.  The District Judge  

dismissed the appeal on September 19, 1998.

9. Against these two concurrent judgments, the  

Contractor filed civil revision before the High Court which  

too was dismissed on November 25, 2002. As noted above, it  

is  from  this  order  that  the  present  Appeal,  by  special  

leave, has arisen.

10. We have heard Mr. Rajeev Sharma, learned counsel for  

the  Contractor,  and  Dr.  Balram  Gupta,  learned  senior  

counsel for the respondent Nos. 1 and 2 – Corporation.

11. Mr.  Rajeev  Sharma,  learned  counsel  for  the  

Contractor,  strenuously  urged  that  the  Contractor  had  

reasonable  apprehension  of  bias  on  the  part  of  the  

arbitrator as the action of cancellation of contract was  

taken  by  the  Executive  Engineer  at  the  behest  of  the  

arbitrator as he was the Chief Engineer of the Corporation.  

He referred to the inspection made by the Chief Engineer  

along with other Engineers of the Corporation on October  

26, 1990 and the opinion formed by the Chief Engineer on  

the basis of the inspection that the work was not being  

carried  out  by  the  Contractor  in  accord  with  the  time

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schedule.  He  also  referred  to  conduct  of  the  arbitral  

proceedings by the arbitrator, particularly concluding the  

arbitration proceedings in a short span of about 49 days  

and  that  too  when  the  Contractor's  application  for  his  

removal was pending before the Court. In support of his  

submission  that  the  arbitrator  was  biased  against  the  

Contractor,  the  learned  counsel  also  referred  to  post  

arbitral conduct of the arbitrator in contesting the Appeal  

before  this  Court  and  filing  counter  affidavit  in  

opposition to the Appeal.

12. Mr.  Rajeev  Sharma  would  highlight  two  aspects,  

viz., (i) the arbitration agreement was not placed before  

the arbitrator, yet he commenced and concluded the arbitral  

proceedings,  and  (ii)  the  award  relating  to  unutilised  

amount  of  secured  advance  which  was  not  claimed  by  the  

Corporation was passed, to indicate that the arbitrator was  

biased. In support of his submissions, the learned counsel  

relied upon a Constitution Bench judgment of this Court in  

Gullapalli  Nageswara  Rao  and  Others  Vs.  Andhra  Pradesh  

State Road Transport Corporation and Another1 and a judgment  

of the House of Lords in  Bristol Corporation  Vs.  John  

Aird & Co.2

13. Dr.  Balram  Gupta,  learned  senior  counsel  for  the  

Corporation, supported the judgment of the High Court. He  

submitted that only two submissions were made before the  

1  [1959]  Supp. (1) SCR 319 2  [1911-13]  All E.R. 1076

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High  Court  which  have  been  noted  and  considered  and  no  

other point was urged.

14. The  arbitration  clause  in  the  agreement,  i.e.,  

Clause 25A, reads as follows :

“Clause  25A.  Arbitration  etc.  -  If  any  question,  difference  or  objection  whatsoever  shall  arise  in  any  way  connected  with  or  arising out of this instrument of the meaning  of operation of any part thereof or the rights  duties  or  liabilities  of  either  party,  then  save in so far as the decision of any such  matter  is  hereinbefore  provided  for  and  has  been so decided, every such matter including  whether  its  decision  has  been  otherwise  provided for and/or whether it has been finally  decided  accordingly,  or  whether  the  contract  should  be  terminated  or  has  been  rightly  terminated  and  as  regards  the  rights  and  obligations of the parties as the results of  such  termination  shall  be  referred  for  arbitration to the Chief Engineer of the Punjab  Police  Housing  Corporation,  Chandigarh  or  acting as such at the time of reference within  180 days or in six months from the payment of  the final bill to the contractor or from the  date  registered  notice  is  sent  to  the  contractor to the effect that his final bill is  ready for payment and his decision shall be  final and binding and where the matter involves  a  claim  for  or  the  payment  or  recovery  or  deduction of money, only the amount, if any,  awarded  in  such  arbitration  shall  be  recoverable  in  respect  of  the  matter  so  referred.”

15.  The Contractor consciously agreed for the disputes  

between the parties to be referred for arbitration to the  

Chief Engineer of the Corporation. The Contractor, at the  

time of agreement, was in full knowledge of the fact that  

the Chief Engineer is under full control and supervision of  

all civil engineering affairs of the Corporation, yet it

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agreed for resolution of disputes between the parties by  

him as an arbitrator.  It is a fact that the Chief Engineer  

inspected the progress of the work given to the Contractor  

along with other engineers of the Corporation on October  

26, 1990. In the course of inspection, the slow progress of  

the work was brought to the notice of the Contractor on  

that date.  There was nothing unusual about it and, as a  

matter of fact, on the contract being terminated on May 8,  

1991, it was the Contractor who made an application for  

appointment of arbitrator in terms of Clause 25A of the  

agreement as it was well aware that the inspection by the  

arbitrator did not disqualify him to be arbitrator. In the  

application for appointment of arbitrator, no allegation of  

any  bias  or  hostility  was  made  against  the  named  

arbitrator, i.e., Chief Engineer of the Corporation, rather  

the  Contractor  prayed  for  appointment  of  arbitrator  in  

terms of the arbitration Clause 25A. When the application  

came up for consideration before the Sub Judge on May 13,  

1992,  the  advocate  appearing  for  the  Contractor  also  

submitted for appointment of the arbitrator as named in the  

agreement. Before the Court, no allegation was made that  

the contract was terminated at the instance or behest of  

the Chief Engineer.  These facts clearly show that no case  

of bias on the part of the Chief Engineer was pleaded or  

pressed  by  the  Contractor  before  the  court  in  the  

proceedings for appointment of the arbitrator.  There is

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nothing to indicate that something happened after May 13,  

1992  which  prompted  the  Contractor  to  write  to  the  

arbitrator on June 29, 1992 that it had lost faith in him.  

16.  It is pertinent to notice that on May 13, 1992  

while  referring  the  disputes  between  the  parties  for  

arbitration  as  per  Clause  25A  of  the  agreement,  the  

Contractor  as  well  as  the  Corporation  were  permitted  to  

file  claim  and  counter  claim  before  the  arbitrator.  The  

Corporation filed its claim against the Contractor on June  

15, 1992. Upon receipt of the claim by the Corporation, the  

arbitrator called upon the Contractor to appear before him  

on June 25, 1992. The Contractor did not appear and instead  

sent a letter to the arbitrator on June 29, 1992 intimating  

him that his appointment as arbitrator was not acceptable.  

No steps were taken by the Contractor for removal of the  

arbitrator immediately.  The application for removal of the  

arbitrator was made almost after 26 days.  Although the  

Contractor  prayed  before  the  Sub  Judge  for  stay  of  the  

proceedings before the arbitrator but it was not successful  

in  getting  any  such  order  on  July  24,  1992,  or  on  the  

subsequent dates, namely, July 30, 1992, August 3, 1992 and  

August 6, 1992 from the court.  In the absence of any stay  

order from the court and non-appearance by the Contractor,  

the arbitrator was left with no choice but to proceed  ex  

parte and  conclude  the  arbitral  proceedings.   Merely  

because the award came to be passed on August 18, 1992,

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i.e.,  a  day  before  the  next  date  fixed  before  the  Sub  

Judge, it cannot be said that the arbitrator concluded the  

proceedings hastily or he was biased.

17. The two aspects highlighted by Mr. Rajeev Sharma,  

learned  counsel  for  the  Contractor,  regarding  (i)  non-

availability of the agreement before the arbitrator, and  

(ii) the award of return of unutilised amount of secured  

advance by him, as grounds of bias  have no merit at all.  

18. The order dated May 13, 1992 passed by the Sub Judge  

shows  that  photocopy  of  the  arbitration  agreement  was  

produced before the court.  AW-1, who was examined by the  

Corporation,  in his deposition before the arbitrator, has  

stated that photocopy of the agreement was tendered to the  

arbitrator. Merely because copy of the agreement was not  

found by the District Judge in the record of the arbitral  

proceedings,  it  cannot  be  assumed  that  copy  of  the  

agreement  between  the  parties  was  not  placed  for  

consideration before the arbitrator.  

19. The arbitrator in his award has awarded interest in  

the sum of Rs. 1,40,150/- upto December 31, 1991 on the  

amount of secured advance paid to the Contractor for the  

period  the  amount  remained  unutilised  although  the  

Corporation had claimed the interest on that count in the  

sum of Rs. 1,69,878/-. With regard to award of unutilised  

amount of secured advance, the arbitrator  observed in the  

award that the exact amount of award will depend upon the

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actual  unutilised  amount  of  secured  advance  till  

realisation.   On  ascertaining  the  total  amount  of  

unutilised  secured  advance,  it  was  found  to  be  Rs.  

9,63,635.25/-.

20. The District Judge in the appeal preferred by the  

Contractor in challenging the judgment and decree held in  

para 21 of the judgment thus :-

“....In  it  unutilised  advance  of  Public  Health  items  as  per  statement  at  page  243  of  the  arbitrator  file  is  Rs.  5,85,423.75ps.   The  statement  of  this  witness  dated  14.8.1992  with  statement  of  interest  and  principal  of  the  unutilised secured advance of building component  is at pages 283-289 of the arbitration file in  which  unutilised  secured  advance  of  building  component is mentioned as Rs. 3,73,211.50ps. So  the total unutilised secured advance on both the  counts  comes  to  Rs.  9,63,635.25ps.   The  maxim  is,”Certum  est  quod,  certum  reddi  potest”.  (certain  is  that  which  can  be  made  certain).  Now, from the perusal of the record of the total  unutilised secured advance can be ascertained as  Rs.  9,63,635.25ps.  Similarly,  from  the  record,  the principal amount of the secured advance can  also be calculated and on it, interest on the  amount  of  the  secured  advance  paid  to  the  appellant  for  the  period  the  amount  remain  unutilised  could  be  calculated.   The  appellant  has  not  been  able  to  point  out  that  the  calculation of this amount as Rs. 1,40,150/- upto  31.12.1991 was wrong or incorrect.  Therefore, it  would  be  naïve  to  contend  that  the  award  was  vague, evasive or non-committal.”

21. The above finding of the District Judge, Chandigarh,  

was not challenged by the Contractor before the High Court  

as is apparent from the impugned order.  Thus, there is no  

merit, at all, in the submission of the learned counsel for  

the  Contractor  that  the  arbitrator  awarded  unutilised

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secured advance for which there was no claim. In any case,  

this  hardly  leads  to  any  inference  of  bias  of  the  

arbitrator.

22. In Gullapalli Nageswara Rao and Others (supra) this  

Court restated the principle of natural justice that the  

authority  empowered  to  decide  the  dispute  must  be  one  

without bias towards one side or the other in the dispute.  

There  can  hardly  be  any  doubt  about  this  fundamental  

principle of natural justice. The question is – Whether on  

facts, the Contractor has been able to establish that the  

arbitrator  was  biased  against  it  ?  None  of  the  

circumstances pointed out by the Contractor leads to any  

inference  that  the  arbitrator  had  any  bias,  personal  or  

otherwise.  No  doubt,  bias  may  be  found  in  variety  of  

situations  and  each  case,  where  bias  of  adjudicator  is  

alleged, has to be seen in the context of its own facts but  

a fanciful apprehension of bias is not enough.

23. The  observations  of  the  Lord  Atkinson  in  Bristol  

Corporation (supra), relied upon by the learned counsel for  

the  Contractor,  instead  of  supporting  his  argument,  go  

fully  against  the  Contractor.   In  Bristol  Corporation  

(supra) Lord Atkinson stated thus :

“...If  a  contractor  chooses  to  enter  into  a  contract binding him to submit any disputes which  arise between him and the engineer of the persons  with  whom  he  contracts  to  that  engineer  to  arbitrate  on,  then  he  must  be  held  to  his

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contract; whether it be wise or unwise, prudent  or the contrary, he stipulated that a person who  is  the  servant  of  the  persons  with  whom  he  contracted  shall  be  the  judge  to  decide  upon  matters upon which, necessarily, that engineer or  arbitrator has himself formed an opinion.  But  though the contractor is bound by that contract,  still  he  has  a  right  to  demand  that,  notwithstanding  those  pre-formed  views  of  the  engineer,  that  gentleman  should  listen  to  argument,  and  should  determine  the  matters  submitted  to  him  as  fairly  as  he  can,  as  an  honest man; and if it be shown in fact that there  is  any  reasonable  prospect  that  he  will  be  so  biased  as  not  to  decide  fairly  upon  those  matters, then the contractor is allowed to escape  from  his  bargain,  and  to  have  the  matters  in  dispute tried by one of the ordinary tribunals of  the land.  But he has  more than that right.  If,  without any fault of his own, the engineer has  put himself in such a position that it is not  fitting, or decorous, or proper that he should  act as arbitrator in any one or more of those  disputes,  the  contractor  has  the  right  of  appealing  to  a  court  of  law  to  exercise  the  discretion  which  s.  4  of  the  Arbitration  Act  vests in them....”

24. The above  observations exposit  the legal  position  

that a contractor is bound by the contract if he has agreed  

to  submit  the  disputes  to  the  engineer  for  arbitration  

although  he  has  to  deal  with  such  engineer  under  the  

contract. It needs no emphasis that once the dispute is  

referred  to  such  arbitrator,  the  arbitrator  has  to  act  

fairly and objectively and the proceedings must meet the  

requirements of principles of natural justice.

25.  Insofar  as  the  facts  of  the  present  case  are  

concerned, the Contractor moved the court for appointment  

of the Chief Engineer as arbitrator and then chose not to  

appear before him.  What was the intervening event after

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the arbitrator was appointed at his instance that prompted  

him to ask the arbitrator to recuse is not stated by the  

Contractor. The Contractor was not successful in getting  

any final or interim order in the proceedings initiated by  

it for removal of the arbitrator.  The award passed by the  

arbitrator also does not show that he misconducted in any  

manner in the proceedings. He gave full opportunity to the  

Contractor  to  appear  and  put  forth  its  case  but  the  

Contractor failed to avail of that opportunity.  

26. There is no justifiable circumstance on record  that  

enables the Contractor to escape from the bargain that it  

made  under  the  contract  and  have  the  disputes  resolved  

through the process other than agreed.   

27. In  The  Secretary  to  the  Government,  Transport  

Deptt., Madras  Vs.  Munuswamy Mudaliar and Others3, this  

Court stated :-

“11...  When  the  parties  entered  into  the  contract,  the  parties  knew  the  terms  of  the  contract  including  arbitration  clause.  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 arbitration and  indeed  submitted  to  the  jurisdiction  of  the  Superintending  Engineer  at  that  time  to  begin  with,  who,  however,  could  not  complete  the  arbitration  because  he  was  transferred  and  succeeded by a successor.  In those circumstances  on  the  facts  stated  no  bias  can  reasonably  be  apprehended and made a ground for removal of a  named arbitrator.  In our opinion this cannot be,  at  all,  a  good  or  valid  legal  ground.  Unless  

3  AIR 1988 SC 2232

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there is allegation against the named arbitrator  either  against  his  honesty  or  capacity  or  malafide  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  Courts under S. 5 of the Act.

12. Reasonable apprehension of bias in the mind of  a reasonable man can be a ground for removal of  the arbitrator.  A predisposition to decide for or  against one party, without proper regard to the  true merits of the disputes is bias.  There must  be reasonable apprehension of that predisposition.  The  reasonable  apprehension  must  be  based  on  cogent materials. See the observations of Mustill  and Boyd,  Commercial Arbitration, 1982 Edition,  page  214.  Halsbury's  Laws  of  England,  Fourth  Edition, Volume 2, para 551, page 282 describe  that the test for bias is whether a reasonable  intelligent  man,  fully  apprised  of  all  the  circumstances, would feel a serious apprehension  of bias.

13. This   Court  in  International  Airport  Authority of India v. K.D.Bali,  (1988) 2 JT 1 :  (AIR  1988  SC  1099)  held  that  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  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  cannot  be   said   that   the  Superintending Engineer,  as  such,  cannot  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.  No other  ground for the  alleged apprehension was indicated  in the  pleadings before the learned  Judge or the  decision  of the learned Judge. There was, in our  opinion,  no  ground   for  removal  of   the  arbitrator. Mere imagination  of  a  ground cannot  be an excuse for apprehending bias in the mind of  the chosen arbitrator.”

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28. In S. Rajan  Vs.  State of Kerala and another4, this  

Court stated :-

“12....Thus, this is a case  where the agreement  itself specifies and names the arbitrator.  It is  the Superintending Engineer, Buildings and Roads  Circle, Trivandrum. In such a 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  appoint  another  person  as  an  arbitrator.  Only  if  the  arbitrator  specified and named in the agreement  refuses or fails to act the Court does 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  shall  be  to the  arbitrator  appointed  by the  parties...”

29. Where  parties  enter  into  a  contract  knowing  the  

role,  authority  or  power  of  the  Chief  Engineer  in  the  

affairs relating to the contract but nevertheless agree for  

him  to  be  arbitrator  and  name  him  in  the  agreement  to  

adjudicate  the  dispute/s  between  the  parties,  then  they  

stand bound by it unless a good or valid legal ground is  

made out for his exclusion.     

30. Except raising the vague and general objections that  

the arbitrator was biased and had predisposition to decide  

against  the  Contractor,  no  materials,  much  less  cogent  

materials, have been placed by the Contractor to show bias  

of the arbitrator. No sufficient reason appears on record  

as to why the arbitrator should not have proceeded with the  

4  AIR 1992 SC 1918

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arbitral proceedings.  The test of reasonable apprehension  

of bias in the mind of a reasonable man is not satisfied in  

the factual situation.

31. We may now deal with the submission of the learned  

counsel for the Contractor that bias on the part of the  

arbitrator  is  also  reflected  from  the  fact  that  he  has  

contested  the  present  Appeal  and  filed  the  affidavit  in  

opposition. What would have the arbitrator done when he has  

been personally impleaded as respondent in the Appeal and  

the allegations of bias have been made against him. He was  

left with no choice but to rebut the allegations by filing  

his affidavit.  The arbitrator did what any other person in  

his place would have done in the circumstances.

32. The view taken by the High Court does not suffer  

from  any  infirmity  justifying  interference  by  us  in  our  

jurisdiction  in  appeal  under  Article  136  of  the  

Constitution of  India.

33. Civil Appeal is dismissed with no order as to costs.

..........................J. (R.M. LODHA)

NEW DELHI ..........................J. FEBRUARY 23, 2012 (H.L. GOKHALE)