LARSEN AND TOUBRO LTD. v. FERTILIZER AND CHEMICALS TRAVANCORE LTD

Citation: [2007] 11 S.C.R. 1085

Court: Supreme Court of India

Bench: ARIJIT PASAYAT, LOKESHWAR SINGH PANTA

Case summary

LARSEN AND TOUBRO LTD. v. FERTILIZER AND CHEMICALS TRAVANCORE LTD.pdf

Judgment text

LARSEN AND TOUBRO LTD. V. FERTILIZER AND CHEMICALS TRAVANCORE LTD. NOVEMBER 12, 2007 [DR. ARIJIT PASAYAT AND LOKESHWAR SINGHPANTA,JJ. ) Arbitration-Contract entered between Appellant and Respondent-Contained two different set ofconditions viz. 'Standard Conditions 'and 'Special Conditions '--Dispute between Appellant and Respondent-Arbitration proceedings sought to be initiated- Disagreement between parties over the governingprovisions-Held: Arbitration proceedings to be governed by the 'Standard Conditions' and not 'Special Conditions' as contended by Appellant- 'Special Conditions' themselves showed that the 'Standard Conditions' containedprovisionsfor arbitration. Appellant and Respondent had entered into a contract vide a purchase order. The purchase order contained two different set of terms and conditions viz. 'Standard Conditions' and 'Special Conditions'.

Disputes having arisen between the parties, Appellant invoked the 'Special Conditions' and suggested three names to Respondent for appointment of an independent sole arbitrator. Respondent took the stand that in view ofArticle 26 ofthe 'Standard Conditions', only the Managing Director of Respondent could be appointed as a named arbitrator and accordingly declined to appoint a sole independent arbitrator. In appeals to this Court it was contended by the Appellants that the Managing Director of Respondent cannot be treated as an independent arbitrator and arbitration proceedings between the parties was to be governed by the 'Special Conditions' and not the 'Standard Conditions'. Dismissing the appeals, the Court HELD: 1. 1. The stand of the Appellant that the special conditions of the work order superseded the standard terms and conditions, is not correct. The apprehension that named arbitrator may not act fairly is without any foundation. [Paras 8 and 11) (1090-E; 1092-CJ ';- 1. 2.

The special conditions themselves show that articles 25 and 26 of the Standard terms and conditions contained provisions for arbitration. [Para 12) [1092-F) 1. 3.. BY Article 16 of the special terms and conditions of purchase there. was an amendment to Article 25 of the Standard terms and conditions. Similar was the amendment to Article 26 of ·the Standard terms and Conditions for erection and commissioning in Article 16 ofthe Special Conditions ofwork attached to the work order. The amendments incorporated by the Special conditions only provide that the provisions ofthe relevant Arbitration Act and the rules made thereunder and any statutory modifications thereoffor the time being in force will be applicable and the venue ofarbitration and language ofthe proceedings. [Paras 11and12) (1092-C, D, E, F, G) · Secretary to Government, Transport Deptt. , Madras v. Munuswanty Mudliar andAnr. , [1988) Suppl. SCC 651, referred to. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5159 of 2007.

From the final Judgment and Order dated 18. 12. 1999 ofthe High Court ofKerala at Emakulam in A. R. No. 29of1999. WITH C. A. No. 5160 of 2007 V. A. Mohta, Nilkanta Nayak, Shweta Bharti, Aditi Mohan, Neelam and Niranjana Singh for the Appellant. C. N. Sree Kumar for the Respondent. The Judgment ofthe Court was delivered by DR. ARIJIT PASAYAT, J. 1. Leave granted. 2. Challenge in these appeals is to the order passed by the learned Single Judge ofthe Kerala High Court disposing of arbitration request filed before him. 3. Background facts in a nutshell are as follows:- Appellant and the respondent entered into a contract vide purchase orderno. 3020/02-2701/016/1018 dated 7. 1. 1995.

Alleging that in breach ofthe terms and conditions ofthe purchase order certain amounts were withheld, the appellant invoked the arbitration agreement purportedly in terms of new Article 26 ofthe Special Conditions and suggested thre~ names for appointment ofan independent sole arbitrator and called upon the respondent to name one out ofthe three names. The respondent took, the stand that it is only the Managing Director ofthe respondent who can be appointed as a named arbitrator as per Article 26 of the Standard Conditions and refused to appoint a sole independent arbitrator. The High Court of Kerala was moved seeking appointment of an arbitrator by Arbitration Request 29/99. Learned Single Judge declined the arbitration request on the ground that terms and conditions ofthe purchase order provides for arbitration by the Chairman and Managing Director ofthe respondent. A writ petition was filed under Article 226 ofthe Constitution oflndia, 1950 (in short the 'Constitution').

During pendency ofthe said writ petition this Court in CA Nos. 3777, 4168 and 4169 of2003 held that the order passed under Section 11 ofthe Arbitration and Conciliation Act, 1996 (in short the 'Act') is ajudicial order and writ petition challenging the said order under Article 226 ofthe Constitution is not maintainable. Therefore, this appeal has been filed. 4. In support of the appeals, learned counsel for the appellant submitted that the provision contained in Article 26 of the Standard Conditions is not the actual provision for arbitration. The same is contained in the special te1ms and conditions attached to the purchase order and the work order respectively. The purchase order and the work order contained special conditions, standard terms and conditions. By Article 16 of the Special terms and Conditions of the purchase, there is amendment to the article 25 ofthe standard conditions.

There is similar amendment to article 26 of the standard terms so far as it related to commissioning. The provisions contained in the standard conditions in both the cases, it was submitted by learned counsel for the appellant, is not actual provision for arbitration. The general condition stated that all disputes and differences are required to he referred to the Chairman and Managing Director ofthe respondent-:company for his decision and it will be binding on the parties. It was further contended that the provisions contained in the special conditions by themselves do not have any provision for arbitration. It does not have any clause that disputes and C difference shall be settled by arbitration. In both the cases, the special conditions specifically state that it is by way of amendment ofgeneral condition only and not in supersession ofthat provision.

The Chairman and the Managing Director ofthe respondent-company cannot be treated as independent person to be appointed as arbitrator. This was essentially the stand which did not find acceptance. It is submitted by learned counsel for the appellant that certain changes were suggested by the respondent. 5. Learned counsel for the respondent on the other hand submitted that the High Court view is unexceptionable. 6. At this juncture it would be necessary to take note of the few conditions : Clause 16 of the Work Order reads as follows:- "16. Work Order Conditions: The order shall be governed by the above conditions as well as by the conditions stipulated in Attachment I, II and III ofthis Work Order, except the following: The order shall be governed by the present special conditions of work (W. O. Attachment Ill) as well as by the conditions stipulated in Attachment I, and II ofthis Work Order, except the following: Spec. No.

3020/CS/04: Standard Terms and Conditions ofErection & Commissioning. Art. 4. 0. 0 Taxes, Duties and Levies (comment) LARSEN AND TOUBRO LTD. v. FERTILIZERAND ~ Taxes shall be as per Article 4. 0. 0. However, at present conditions; tax on this Work Order is not applicable. Art. 13. 0. 0 Termination (comment) FACT can terminate the Work Order without giving any reason provided that reasonable cost for termination and actual out-of- + pocket expenses will be reimbursed. Art. 15. 0. 0 Changes (Amendment) FACT shall issue amendment orders which provide for changes in the scope ofwork required by FACT under the Work Order, and for equitable adjustment in the price and delivery/completion time, ifany, hereunder. Art. 21. 0. 0 Tests on Completion & Taking Over (New Article Added). Art. 21. 5.

0 (New Article) The Primary Reformer Package under the scope of this Work Order shall be deemed to be taken over by FACT immediately after satisfactory pre-commissioning is over within 10 days of Contractor's notice to Owner for commencement ofcommissioning after pre-commissioning, whichever is earlier. In case taking over is delayed due to no fault ofContractor, after the notice given by Contractor in this regard about the Completion, the entire Primary Reformer Package is deemed to be taken over by FACT. Art. 24. 0. 0 Indemnification Secondary liability such as indemnification for loss caused by stoppage of plant of like will be excluded from Contractor's liabilities under the Work Order. Art. 26. 0. 0 Applicable Law and Settlement of Disputes -( (an1endment) The provisions ofthe Indian Arbitration Act, 1940 and the rules there under, any statutory, modifications there for the time being in force will be applied.

+- \ The venue for the arbitration shall be Cochin, and the language of the proceedings shall be the English language. During the arbitration proceedings, both parties shall continue to discharge their obligations under the Work Order. " 7. There was addition and not substitution ofcondition. Without amendment there was arbitration clause and ifthere was no amendment the only substitution, then that there was no arbitration clause. In the arbitration request in the statement offacts it has been clearly stated that article 26 ofthe standard terms and conditions ofpurchase form part of the work order. The same read as follows: "Article 26: Work Order shall be subject to and shall in all respects be governed by Indian law. Any dispute or difference connected with or arising out of WORK ORDER which cannot be settled by mutual agreement of the parties shall be referred to the Chairman & Managing Director offACT, and his decision will be binding on the parties.

Any legal proceeding relating to this WORK ORDER shall be limited to Courts oflaw under the jurisdiction of the Kerala High Court at Emakulam District, Kerala State, India. " 8. The stand ofthe learned counsel for the appellant that the special conditions of the work order superseded the standard terms and conditions, is not correct. The mere fact that the arbitrator was named does not render the arbitration proceedings invalid. 9. In Secretary to Government, Transport Deptt. , Madras v. Munuswamy Mudliar and Anr. , [1988] Suppl. SCC 651 it was noted as follow: "7. Pursuant to this the Superintending Engineer ofthat Circle, at the relevant time, was previously appointed as arbitrator.

There was succession to that office by another incumbent and the succeeding Superintending Engineer wanted to continue the arbitration proceedings but before that an application was made under Section 5 ofthe Arbitration Act, 1940 (hereinafter called 'the Act') for removal ofthe arbitrator, before the learned Judge ofthe City Civil Court, Madras. " j 10. Again in paras ll to 13 it was noted as follows: "11. This is a case ofremoval ofa named arbitrator under Section 5 of the Act which gives jurisdiction to the court to revoke the authority of the arbitrator. 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 ChiefEngineer is superior and the Superintending Engineer is subordinate to the ChiefEngineer ofthe particular Circle.

In spite ofthat the parties agreed and entered into arbitration and indeed submitted to thejurisdiction ofthe 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 ofa named arbitrator. In our opinion this cannot be, at all, a good or valid legal ground. Unless there is allegation against the named arbitrator either against his honesty or capacity or ma/afide 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 ofthe Act. 12. Reasonable apprehension ofbias in the mind ofa reasonable man can be a ground for removal ofthe arbitrator.

Apredisposition to decide for or against one party, without proper regard to the true merits of the dispute is bias. There must be reasonable apprehension ofthat predisposition. The reasonable apprehension must be based on cogent materials. See the observations ofMustill and Boyd, Commercial Arbitration, 1982 edn. , page 214. Halsbury's Laws ofEngland, 4th edn. , Volume 2, para 551, page 282 describe that the test for bias is whether a reasonable intelligent man, fully apprised ofall the circumstances, would feel a serious apprehension ofbias. ...... , 13. This Court in International Authority ofIndia v. K D. Bali, [1988] 2 sec 360 held that there must be reasonable evidence to satisfy that there was a real likelihood ofbias. Vague suspicions ofwhimsical, 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 Government to be the arbitrator are there. It cannot be said that the Superintending Engineer, as such cannot be entrusted with the work of arbitration arid that an apprehension, simpliciter in the mind ofthe 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 ofthe arbitrator. Mere imagination ofa ground cannot be an excuse for apprehending bias in the mind ofthe chosen arbitrator. " 11. The apprehension that named arbitrator may not act fairly is without any foundation.

The High Court has rightly held that by article 16 of the ·special terms and conditions of purchase there was an amendment to article 25 which reads as follows:- "The provisions ofthe Indian Arbitration Act, 1940, and the rules thereunder, any statutory modifications thereofofthe time being in force will be applied. The venue of the arbitration shall be Cochin, and the language ofthe proceedings shall be the English Language. During the arbitration proceedings, both parties shall continue to discharge their obligations under the Purchase Order. " 12. Similar was the amendment to Article 26 ofthe Standard terms and Conditions for erection and commissioning in Article 16 ofthe Special Conditions ofwork attached to the work order. The special conditions themselves show that articles 25 and 26 contained provisions for arbitration.

The amendments incorporated by the Special conditions only provide that the provisions ofthe relevant Arbitration Act and the rules made thereunder and any statutory modifications thereoffor the time being . in force will be applicable and the venue ofarbitration and language of the proceedings. )- 13. The appeals are sans me1it, deserve dismissal, which we direct. B. B. B. Appeals dismissed. .. ,