-1- IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION (1) Writ Petition No.8573 of 2007 1. The Cantonment Board Deolali and another ..Petitioners vs. Pooja Fancy Embroidery Pvt Ltd. ..Respondent Smt.Neeta V.Masurkar for petitioners. Shri S.P.Dharmadhikari with Shri Devendra Chauhan i/b Smt.Neha Palshikar Bhide for respondent. (2) Writ Petition No. 8580 of 2007 1. The Cantonment Board Deolali and another ..Petitioners vs. Shree Sai Enterprises ..Respondent Smt.Neeta V.Masurkar for petitioners. Shri S.P.Dharmadhikari with Shri Shri Devendra Chauhan i/b Smt.Neha Palshikar Bhide for respondent. CORAM: S.C.DHARMADHIKARI J. CORAM: S.C.DHARMADHIKARI J. CORAM: S.C.DHARMADHIKARI J. 28th and 31st March 2008 28th and 31st March 2008 28th and 31st March 2008 ORAL JUDGMENT: ORAL JUDGMENT: ORAL JUDGMENT: 1. Rule was issued on these petitions on 11th January, 2008. Considering the urgency and controversy raised, the matters were placed for hearing at the request of parties on 10th March, 2008. They were heard together and upon conclusion of the arguments, they are placed for judgment. -2- 2. These writ petitions are filed by the Cantonment Board, Deolali and the Principal Director, Defence Estates, Ministry of Defence, Southern Command, Pune, challenging the order dated 17th September, 2007 in Civil Misc.Application Nos.57 and 58 of 2007. By the common order under challenge the learned Principal District Judge, Nashik has allowed these applications. He has directed that the mandate of the Arbitrator has come to an end. Consequently, his Authority stands terminated and he is prohibited from functioning as Arbitrator in the dispute raised by the respondents/claimants who are original applicants in these Applications. 3. The factual backdrop in which the order is challenged is thus: 4. The respondents to these writ petitions are a partnership firm and a private limited company. The respondents have been awarded octroi collection contract by the Cantonment Board. The Cantonment Board is empowered to appoint an agent for collection of octroi and that is how the tender was floated on 26th -3- October, 2006 by the said Cantonment Board. The respondents submitted their bids and were found to be eligible for award of the said contract. Accordingly, the contract was awarded on 21st December, 2006 for a period of one year. The contract period was to expire on 25th December, 2007. In the application itself, the respondents contend that they were supplied with the schedule of rates on the basis of which the octroi is to be imposed on the goods imported within the limits of Cantonment Board. The contract work commenced after the respondents Contractors paid the fixed amount. Rs.32,00,000/- in the form of F.D.R. were paid as security deposit which was to stand forfeited. In addition, under the contract, the contractors were liable to pay Rs.2.11 crores to the Cantonment Board in weekly instalments. It was stated that the contractors paid Rs.63,00,000/- After referring to the clauses in the agreement, it was urged by the respondents that several defence units of the Indian Air Force and Army are located within the limits of the Cantonment Board. They are bulk importers of various materials from the companies including public sector Corporation. According to the respondents, a major issue regarding -4- grant of exemption to the units of the air force and army cropped up during the period of their appointment as agents. The army and Air Force claimed that their goods are exempted from payment of octroi in view of clause 13 of the Schedule of Rates. According to the contractors, the Cantonment Board accepted this position and granted exemption certificates in their favour. It is in such circumstances that they had filed the writ petition in this Court praying for a declaration that the goods imported by the Air Force within the limits of Cantonment Board are liable to payment of octroi and no exemption can be granted. The Cantonment Board contested this writ petition and filed its affidavit. The argument was that the contractor has an alternate remedy of approaching the Arbitral Tribunal by resorting to clause 8 of the agreement/contract. It was urged that such arbitration would become unworkable because the named arbitrator would be biased against the contractor. However, that writ petition was disposed of by this Court and the contract was relegated to the remedy of Arbitration available under the contract. 5. It is now necessary to refer to paras 11 and -5- 12 of the application filed by the contractors. In paras 11 and 12, this is what the contractors have urged: "11. The applicant submits that sunder an ordinary circumstance, there would have been no difficulty in referring the disputes to the named arbitrator. It is, however, submitted that the arbitrator named in the arbitration clause reproduced herein above cannot act as an arbitrator to resolve the disputes between the applicant and non applicant no.1. The authority named to act as an arbitrator has incurred a disqualification under section 14 of the Arbitration and Conciliation Act. This Hon’ble Court is empowered by section 14 to terminate the mandate of the arbitrator, should it become de-facto or de-jure incompetent to act as an arbitrator. The applicant submits even in the present matter, the named arbitrator has become de-jure and de-facto incompetent to act as an arbitrator. It is in view this disqualification incurred by the named arbitrator. It is in view this disqualification incurred by the named arbitrator, that the applicant was compelled to file proceedings seeking the termination of the mandate of the named arbitrator under section 14 of the Act. Those proceedings were registered as Misc.Application No.25 of 2007. Upon being noticed, the non applicants entered appearance and chose to file a common reply. The matter was then heard at length by this Hon’ble Court. It is further submitted that this Hon’ble Court when expressed that applicant’s application was premature, requirement of section 14(2) being not complied with by the applicant, the applicant sought liberty from this Hon’ble Court to withdraw the application, in order to comply with the procedure set out in sub-section (2) of section 14 of the Act. Applicant also sought liberty to file fresh application under section 14 -6- of the Act if the controversy as regards the arbitrator becoming de-jure or de-facto unable to perform his functions remains. This Hon’ble Court accepted the request made by the applicant and granted liberty to comply with requirements of sub-section 2 of section 14 of the Act and then attend to the matter as would be advised. With the aforesaid liberties, the application bearing no.25/2007 stood withdrawn by the applicant on 30.7.2007. 12. Having withdrawn the aforesaid application to comply with the requirement of section 14 sub-section 2 of the Act, the applicant addressed a communication on 31st July, 2007 to non applicant no.1 and also forwarded a copy of the said communication to non applicant no.2. By the said communication, the applicant called upon the non applicant board to concur within 7 days with applicant’s contention of non applicant no.2 having become de-jure incompetent to adjudicate the dispute between the applicant and the non applicant board. In order not to be verbose, the applicant in its communication chose to refer to its contentions raised in its application no.25/2007. 6. In paragraphs 15 and 16 the contractors urge thus: "15. The applicant submits that during the pendency of the writ petition filed by it before the Hon’ble Bombay High Court, the applicant could lay its hands on a communication addressed by the Director General of Defence Estates, to the Principal Director Defense Estates, Southern Command, Pune dated 21.3.2003. By this communication the Director General informs the principal Director, a decision taken by the Ministry of -7- Defense regarding charging of octroi for the material supplied to the Air Force within the octroi limit of Cantonment Board, Deolali. It was informed to the Principal Director that the Ministry of Defense has not acceded to the request of the Cantonment Board, Deolali for charging of Octroi on the material supplied to the Air Force within the limits of the Board. As per the decision of the Ministry of Defense, Principal Director was asked to direct the CEO of the Cantonment Board, Deolali not to charge octroi on the material supplied to the Air Force within its limits. With this communication the applicant’s chance of succeeding before the arbitral tribunal named sin the lease agreement is not just negligible, but is rather impossible. It would thus appear to this Hon’ble Court that the decision has been taken by the highest authority i.e. the Ministry of defense who is the appointing authority of both the Principal Director, Defense Estates and Direct General, Defense Estate. 16. The applicant submits that Indian Defence Estate Services are the Civil Services under the Ministry of Defence. The highest officer in these services is the Director General of Defence Estates, who is stationed at New Delhi and reports directly to the Ministry of Defence. For the purposes of smooth functioning of the cantonments under the Cantonments Act, the Central Government appoints a Director General. Senior Additional Director General and Director General are also the authorities which the Central Government is empowered to appoint. The applicant submits that non applicant no.2 is an officer from Indian Defence Estates Services. He is appointed by the Central Government under the Cantonment Boards Act to perform the duties of the Principal Director, Defence Estate. Therefore, it would appear to this Hon’ble Court that the Principle Director, Defence Estates is the lowest authority so far as the Indian Defence Estates Services are concerned and for the purposes of the -8- controversy involved in the present matter. The Ministry of Defence headed by the Defence Minister is the highest authority and the ultimate decision making authority." 7. Thus, it was the case of the contractors that whatever decision the Ministry of Defence takes that binds not only the Director General of Defence Estate but is also binding upon the Principal Director, Defence Estates, who is the Arbitrator in this case. Therefore, any high ranking officer cannot act independently nor can he ignore the decision of the Ministry. The Communication dated 21st March, 2003 perused as a whole reveals that the Ministry of Defence has already taken a decision of not charging octroi on materials received by Air Force. This decision still holds the field. In such circumstances, the Arbitrator becomes de-jure incompetent to act as such. One of the issue is whether the goods and articles imported or materials received by Air Force and Indian Army are capable of being exempted from payment of octroi and that will have to be decided by the Arbitrator. If the Arbitrator has before him such communication from the Ministry of Defence, then, there is every likelihood of his being influenced by the same. He would not act -9- independently. There is a reasonable prospect that the Arbitrator will be bias and that he will not be able to decide the matter fairly. It is in such circumstances that the contractors pray that the Court below must exercise its powers under the Arbitration and Conciliation Act, 1996 and more particularly section 14 thereof and grant relief as prayed. The relief that was prayed was that the Court below must declare that the Arbitrator cannot act as an independent person being dejure, incompetent to perform his functions. Upon such declaration being issued further relief that is sought was to terminate the mandate of this named Arbitrator. 8. The application was supported by the affidavit of authorised signatory. Thereafter, the application was served on the present petitioners and the Arbitrator was made a party thereto. A reply was filed to the said application and the petitioners denied the contents thereof. With reference to the specific averments reproduced above, the response of the petitioners was that the Air -10- Force and authorities of Indian Army are well within their right to claim exemption from payment of octroi for the goods imported by them. However, it is not correct to say that the claim is supported by granting any exemption certificate in their favour. It was stated that the named Arbitrator is capable of acting independently and fairly and there is no substance in the contents of the application filed by the contractors. There is no need to terminate his authority in as much as he has not become incompetent defacto or de jure. The contractors are unnecessarily drawing this interference. The application is filed despite the contractors being aware that their remedy is to go for arbitration. The contractors had approached the High Court and have thereafter taken steps in arbitral proceedings. There are Miscellaneous applications filed under section 9 of the Arbitration and Conciliation Act. That apart, it was contended that the provisions in the Arbitration and Conciliation Act regarding termination of the mandate of the Arbitrator are not at all applicable to the facts of the present case. The petitioners specifically denied that the Arbitral Tribunal would be influenced by the communication dated 21st -11- March, 2003. Thus, all the statements in the above paragraphs were denied. It was stated in para 13 of the reply that reference to the letter dated 21st March, 2003 is not only out of context but has no relevance to the present proceedings. The parties were fully aware of the contract. They were aware of the communication and situation prevailing with regard to the import of materials by the Air Force and the Army. It is not correct and proper to urge that because of the decision of a higher authority and the claim is to be adjudicated by the subordinate Authority, that, the said Arbitrator would not decide the matter in accordance with the prevailing Rules and stipulations in the contract. Thus, it was urged that there was no necessity of terminating the mandate of the Arbitrator. The reply dated 3rd September, 2007 was filed on behalf of the Executive Officer of the Cantonment Board, Deolali and the learned Arbitrator. 9. After the pleadings were complete the application was placed before the learned Principal Judge. The learned Principal Judge, has by the impugned order allowed the same. While allowing the same the learned Principal -12- Judge has observed that the letter dated 21st March, 2003 may have been sent much prior to the agreement/contract being executed but it will certainly weigh in the mind of the Arbitrator while deciding the arbitral proceedings. The apprehension prevailing in the mind of the litigant will have to be tested taking over all view of the matter and if the Court comes to the conclusion that the litigant was right in mentioning the doubt he has developed apprehending that the Arbitrator is biased, naturally, the Court should accept such stand of the litigant and pass appropriate order. The Court below concluded that if it accepts that a particular party was right in apprehending and manifesting bias against the Arbitrator, then, interest of justice requires that such Arbitrator should not function. The reasoning is in paras 39 and 40 of the impugned order which reads thus: "39. The applicants contend that the exemptions, which are sought to be pressed in service, are not to be applied and that the goods, which are brought in for the benefit of military establishments, also should be covered under the scheme of octroi. According to the applicants, the respondent no.2 would be required to decide in line with the text of the letter dated 21.03.2003. The applicants have come to the Court to -13- contend that even if it is said that respondent no.2 is an independent authority and would act on the basis of the record, still the text of the letter dated 21.03.2003 would be used by the respondent no.2 for the purposes of deciding the dispute. I find substance in the arguments advanced by learned Advocate Mr.Dharmadhikari in that behalf. The arguments advanced by learned Advocate Mr.Nagarkar that respondent no.2 will not show any concern with the letter dated 21.03.2003 cannot be accepted. It is true that the said letter was sent, much prior to entering into the agreements between the applicants and the respondent no.1. However, the said letter will certainly weigh in the mind of the respondent no.2, while deciding the said arbitration proceedings. The argument advanced by learned Advocate Mr.Dharmadhikari that on the question of bias, what is prevailing in the mind of the person who alleges bias, is required to be seen, is required to be accepted. The observations which are set out in the judgments in the case of Rattan Lal Sharma (supra) and Kumaon Mandal Vikas Nigam Limited (supra) would clearly go to show that an apprehension prevailing in the mind of the litigant will have to be tested by the Court and taking an over all view of the matter, if the Court comes to the conclusion that the litigant was right in mentioning to the Court about he having developed an apprehension that the arbitrator is bias, naturally the Court should accept such stand of the litigant and pass an appropriate order. In my view, if the Court accepts that a particular party was right in apprehending and manifesting bias against a particular person, who is to act as an arbitrator, then, the interest of justice do require that such an arbitrator should not function who in the eyes of the party appears to be bias to that party, though in the ultimate end if the proceedings are permitted to be proceeded before shim, he may hold against such a party, who expresses such a bias against him. -14- In my view, considering the spirit of section 14 of the said Act, it would be necessary for this Court before whom an application is made to judge the things from the angle in which it is perceived by a party, who alleges that the arbitrator may be bias against it and once that is accepted, then the proper course would be to pass an order under Section 14 of the said Act in favour of the party, who alleges that the arbitrator has become defacto or dejure incapable of functioning. In my view, the provisions of Section 14 are enacted in the said Act to protect the interest of a party. 40. Applying the aforesaid principles to the facts of the present case, in my views, the letter dated 21.03.2003 was sent by the Director General of Ministry of Defence to respondent no.2 and respondent no.2 in discharge of his duties would be duty bound to request the Chief Executive Officer, Deolali Camp not to charge octroi duty to the material supplied to the Air Force. The letter would weigh in his mind at the time of deciding the matter, which would be referred to him for arbitration qua the applicants on one hand and the respondent no.1 on the other. In my view, it would be appropriate in the above circumstances to hold that the respondent no.1 has become defacto unable to perform his functions as an arbitrator." 10. Mrs.Masurkar appearing for the petitioners while impugning this order has urged that this is a fit case for this Court to exercise its jurisdiction under Article 227 of the Constitution of India. Inviting my attention to the compilation of documents which contains relevant Notification and Rules she submits that -15- even the terms and conditions of the tender are clear. The contract envisages an arbitrator being appointed in the event of the dispute between the contractor and the Board. She submits that respondent is not interested in the arbitration in as much as the same grounds were urged in the pleadings in the earlier proceedings, including the writ petition. She submits that the arbitration clause is clear. She submits that inso far as the issue of exemption is concerned, the letter at page 65 of the petition compilation which is communication of 21st March, 2003 would demonstrate that this aspect will be decided by the Arbitrator in accordance with the material produced before him including the prevailing rules and regulations. She submits that the conclusion that the letter of 21st March, 2003 will have an impact on the case and the Arbitrator may not decide the issue independently has no basis. She submits that the letter was of 2003. The contract between the petitioner and the respondent was for one year. The letter is much prior to the same. She submits that the entire case is based on conjectures and surmises. There is absolutely no material other than the letter dated 21st March, 2003. She submits that this aspect -16- cannot be made a basis to urge that there is likelihood of bias and apprehension in the mind of the contractors is bonafide. She submits that application under sections 14 and 15 was clearly not maintainable. She has invited my attention to the impugned order and has urged that the learned Judge has completely misdirected himself in allowing the application. She has invited my attention to sections 5, 12 and 13 of the Arbitration and Conciliation Act. Apart from contending that the application before the Trial Court itself was not maintainable, she urged that the entire attempt is to delay the proceedings. She submits that the findings rendered by the learned Principal Judge are perverse. He has not satisfied himself as to whether the application makes out any case for terminating the mandate of the named Arbitrator. She submits that once the letter was not part of the agreement, then, recording of the finding that the letter will govern the proceedings is wholly erroneous. In such circumstances, the principles on which judicial and quasi decisions are vitiated on account of bias, personal or official or otherwise, are not attracted in this case. In such circumstances, the impugned order be -17- quashed and set aside. 11. On the other hand Shri Dharmadhikari appearing for the contractors submits that the impugned order does not suffer from any error apparent or perversity so as to call for interference in writ jurisdiction. He submits that this is a writ petition under Article 227 of the Constitution of India. The District Court has gone through the entire material and has rendered a finding consistent with the documents and contents thereof that the contractors have made out a case for exercising jurisdiction under section 14 of the Arbitration and Conciliation Act. He submits that it is not as if the contractors have not produced any material to show that there is a reasonable apprehension of bias. He submits that the letter is of 21st March, 2003. However, the contractors got knowledge of the same on 21st February, 2007. Shri Dharmadhikari submits that a reading of the communication/letter would indicate that the Arbitrator is bound to be influenced by the same. The arbitrator is subordinate officer. He cannot afford to bypass the said letter. Further, the Arbitrator was a party to the proceedings before the District -18- Court. The reply filed by the present petitioners would indicate that the Arbitrator also has affirmed and reiterated the contents thereof. In such circumstances, and when the Arbitrator has taken part in the proceedings so also he is a party petitioner before this Court means that he has prejudged the issue. Now, a statement is made that the claim is frivolous and baseless. This shows what the ultimate conclusion would be in this reference. Therefore, it needs fair adjudication. In such circumstances, test of reasonable likelihood of bias enunciated in the Supreme Court decision is clearly satisfied. In such circumstances, there is no merit in this writ petition and it deserves to be dismissed. 12. Shri Dharmadhikari has invited my attention to the reply filed by the petitioners before the Trial Court. He has invited my attention to paras 7 thereof and has urged that the issue of exemption is more or less decided.He has invited my attention to clauses 12 and 13 which have been reproduced at page 4 of the writ petition memo. Shri Dharmadhikari submits that this is the only issue in the arbitration proceedings. In