CASE ANALYSIS

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

Vs.

PUNJAB POLICE HOUSING CORPN. LTD. & ORS.

PREPARED BY- Group 12

Sandeep Kumar B PGP28399

Kumar Mayur PGP28019

Prashasti Singh PGP28023

Saurav Prasad PGP28008

Salonee Gupta PGP28021

INTRODUCTION

The law is a set of rules used to control the behaviour of people in society. The law:

tells you what you are entitled to

tells you what you must do

tells you what you must not do

tells you what others may not do to you

tells you what your rights are against the state and others

tells you what your responsibilities are as a member of society

To implement and enforce the law and provide services to the public, a government's

bureaucracy, the military and police are vital. While all these organs of the state are

creatures created and bound by law, an independent legal profession and a

vibrant civil society inform and support their progress

Kinds of law

There are various ways of categorising law; the major categorisation is CRIMIINAL

LAW and CIVIL LAW.

CRIMINAL LAW: Criminal Law, also known as penal law, pertains to crimes and

punishment and is an aspect of public law that relates to conduct which the State

seeks to control and/or eradicate. Criminal law involves the enforcement of particular

forms of behaviour, and the State acts positively to ensure compliance and

physically prevents people from committing a crime in the first place. In a criminal

case the state prosecutes the accused person for committing a crime or breaking the

law. 'Prosecutes' means the state makes a charge against someone.

CIVIL LAW: Civil law is a form of private law and set of rules for your private

relationships with other people. It is the legal system through which individuals can

claim against others and have those rights settled or enforced. The purpose of civil

law is to settle disputes between individuals and to provide remedies; it is not

concerned with punishment as such.  Modern civil law systems essentially derive

from the legal practice of the 6th-century Eastern Roman Empire whose texts were

rediscovered by late medieval Western Europe. Much of contemporary Indian law

shows substantial European and American influence.

Introduction to the Case

The current case we are dealing with belongs to the Contract Law, which is a part of

Law of Obligations. The law of obligations is one of the component private law

elements of the civil system of law. The contract has be made between two parties

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 appellant filed a case saying that the executive engineer who was made

as the arbitrator (in case of any disputes between the parties) was biased and hence

should be removed from the position of arbitrator. The Chief Engineer is chosen

despite knowing his role in the affairs relating to the contract but nevertheless both

the parties agreed for him to be arbitrator and name him in the agreement to

adjudicate the dispute/s between the parties.

The contract says that “time was essence of the contract and the contractor

should follow time given for carrying out work as entered in the tender”. As the

Contractor could not maintain the time schedule and the progress of the work

was not observed, the Contractor was pushed to make progress in the work but that

also the Contractor 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.

Even after notification from the said Corporation, there was no required progress in

execution of the work by the Contractor. On May 8, 1991, the Corporation decided

to take action under Clause 3 of the contract, cancelled the contract and assigned

further course of work to another contractor. Thus the disputes have arisen between

the parties, the Contractor appealed to the court of Sub Judge, First Class,

Chandigarh, for appointment of the arbitrator in terms of Clause 25A of the

contract, pertaining to the bias of the arbitrator, the executive engineer.

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”.

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.

The Contractor is legally competent when he agreed for the disputes between

the parties will 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 agreed for resolution of disputes between the parties by the

Chief Engineer as an arbitrator.

The fact provided is that the Chief Engineer has inspected the progress of the work

given to the Contractor along with other engineers of the Corporation on October 26,

1990 as part of the contract. During inspection, the slow progress of the work was

noticed and was made aware to the Contractor on that date. It was the Contractor

who made an application for appointment of arbitrator in terms of Clause 25A of the

agreement, as a matter of fact, on the contract being terminated on May 8, 1991. As

that the inspection by the arbitrator did not disqualify him to be arbitrator, the case

has been filed by the contractor.

There was no allegation by the arbitrator against the appeal of the contractor.

Instead the Chief Engineer of the Corporation said that the appointment was made

as the Contractor himself prayed for appointing an arbitrator. Also the advocate

appearing for the Contractor submitted the appointment for arbitrator as mentioned

in the agreement. No allegation was made before the court as the contract was

terminated at the instance or behest of the Chief Engineer.

The Corporation also filed its counter-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. But 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.

As there was neither stay order from the court nor appearance of the Contractor,

the arbitrator proceeded from his side and concluded the arbitral proceedings.

Because of this the arbitrator cannot be accused of being biased as the arbitrator

went ex parte and made his decisions, which will be done by any person in his

position.

Also the two main aspects highlighted by the 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. Because the photocopy of the agreement was produced

before the court on May 13, 1992 and the order was passed by the Sub judge. Just

because the copy of agreement was found missing by the District Judge, it cannot be

assumed that the copy of agreement is not placed at all. The total amount of

unutilised secured advance came out to Rs. 9,63,635.25/- including the interest on

the amount that is given to the Contractor as a secured advance, which the arbitrator

has claimed as there was no work progress noticed.

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.

STATUS OF THE PROBLEM

The Supreme Court rejected the challenge of the M/s Ladli construction firm

to the award of arbitration stating that when the parties enter into a contract making

the Chief Engineer the arbitrator, knowing his role, authority or power, they are

bound by the choice. “The Chief Engineer is chosen by both the parties in spite of

knowing his role in the affairs relating to the contract, agree for him to be arbitrator

and name him in the agreement to settle the disputes between the parties, they

stand bound by it unless there is a good or valid legal point for elimination” the court

stated in this case, M/s Ladli Constructions Ltd vs Punjab Police Housing

Corporation. This case first appealed in the Punjab and Haryana high court but

resulted in failure and hence moved to the Supreme Court for the final judgement.

Before the Supreme Court, it argued that the arbitrator, who was the Chief Engineer,

was biased. The executive engineer cancelled the contract at his instance and

therefore the firm had reasonable apprehension of bias. The court did not accept

this, remarking that except some vague statements, there was nothing to show bias

on the part of the arbitrator

 The Supreme Court adjudicated that the appellant M/s Ladli Construction

raised vague and general objections that the arbitrator was biased and had

inclination to decide against the Contractor; no materialistic evidence has been

placed by the Contractor to show bias of the arbitrator. Also no satisfactory reason

was provided as to why the arbitrator should not have continued with the arbitral

proceedings. Regarding the appeal by the learned counsel for the Contractor saying

the arbitrator is biased as he filed a case against the Contractor taking the side of the

Corporation, the Supreme Court stated that “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 court implied that the arbitrator has

done what any other person in his place would have done in such circumstances.

Existing laws

Arbitration has a long history in India. In ancient times, people often voluntarily

submitted their disputes to a group of wise men of a community—called the

panchayat—for a binding resolution. Modern arbitration law in India was created by

the Bengal Regulations in 1772, during the British rule. The Bengal Regulations

provided for reference by a court to arbitration, with the consent of the parties, in

lawsuits for accounts, partnership deeds, and breach of contract, amongst others.

The government enacted the Arbitration and Conciliation Act, 1996 (the 1996 Act) in

an effort to modernize the outdated 1940 Act. The 1996 Act is a comprehensive

piece of legislation modeled on the lines of the UNCITRAL Model Law. This Act

repealed all the three previous statutes (the 1937 Act, the 1961 Act and the 1940

Act).Its primary purpose was to encourage arbitration as a cost-effective and quick

mechanism for the settlement of commercial disputes. The 1996 Act covers both

domestic arbitration and international commercial arbitration.

International Conventions on Arbitration

India is a party to the following conventions:

the Geneva Protocol on Arbitration Clauses of 1923

the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927;

and

the New York Convention of 1958 on the Recognition and Enforcement of

Foreign Arbitral Awards. It became a party to the 1958 Convention on 10th

June, 1958 and ratified it on 13th July, 1961. 

There are no bilateral Conventions between India and any other country concerning

arbitration.

The Types of Arbitrations

The Indian Arbitration and Conciliation Act, 1996 applies to both domestic arbitration

in India and to international arbitration. Section 2(1)(f) of the Act defines

"International Commercial Arbitration" as arbitration relating to disputes arising out of

legal relationships, whether contractual or not, considered as commercial under the

law in force in India where at least one of the parties is: 

an individual who is a national of, or habitually resident in any country other than

India; or a body corporate which is incorporated in any country other than India; or a

company or an association or a body of individuals whose central management and

control is exercised in any country other than India; or the Government of a foreign

country.

Requirements of an Arbitration Agreement

Section 7(3) of the Act requires that the arbitration agreement must be in writing.

Section 7(2) provides that it may be in the form of an arbitration clause in a contract

or it may be in the form of a separate agreement.

Under Section 7(4), an arbitration agreement is in writing, if it is contained in : (a) a

document signed by the parties, (b) an exchange of letters, telex, telegrams or other

means of telecommunication, providing a record of agreement, (c) or an exchange of

claims and defense in which the existence of the agreement is alleged by one party

and not denied by the other.

 In section 7(5), it is provided that a document containing an arbitration clause may

be adopted by "reference", by a contract in writing. 

Validity of an Arbitration Agreement

Section 16 of the Act empowers the arbitral tribunal to rule on its jurisdiction:

Under the Act, the arbitration tribunal can rule on its own jurisdiction, including ruling

on any objections with respect to the existence or validity of the arbitration

agreement, and for this purpose:

an arbitration clause which forms part of a contract will be treated as an agreement

independent of the other terms of the contract; and a decision by the arbitral tribunal

that the contract is null and void will not entail, ipso jure, the invalidity of the

arbitration clause.

A plea that the arbitral tribunal does not have jurisdiction will, however, have to be

raised not later than the submission of the statement of defense. However, a party

shall not be precluded from raising such a plea merely because he has appointed, or

participated in the appointment of an arbitrator.

A plea that the arbitral tribunal is exceeding the scope of its authority has to be

raised as soon as the matter alleged to be beyond the scope of its authority is raised

during the arbitral proceedings.

The arbitral tribunal may, in either of the cases referred to above, admit later a plea if

it considers the delay justified.

The arbitral tribunal has to decide on a plea about lack of jurisdiction or about the

tribunal exceeding the scope of its authority and where the arbitral tribunal takes a

decision rejecting the plea; it shall continue with the arbitral proceedings and make

the arbitral award.

A party aggrieved by such an arbitral award is free to make an application for setting

aside the award under section 34 of the Act. Section 34(2)(a) inter alia permits a

challenge to an award on the above grounds.

In Summary-

Arbitration is an alternate means of settlement of a dispute in place of approaching a

court. However, this does not amount to a working out of compromise between the

parties. Arbitration law is based on the substantive law.

Arbitration and Conciliation Act, 1996, provides the details for all matters related to

arbitration.

An arbitration clause in a contract does not completely oust the access to the courts.

Awaiting arbitration, a party can approach a court for interim relief and measures.

This can be for protection of goods, restoring money or protection and preservation

of evidence.

A party can approach the Chief Justice of the High Court for appointing the arbitrator

if the other party does not respond to his duties towards moving for arbitration.

The parties are free to set the procedure to be followed by the arbitration tribunal.

However, each party has to be treated with equality and must be given full

opportunity to present his case.

The arbitration has to be done in accordance with the substantive law. However, if

the parties provide otherwise, the arbitration tribunal can also do an amicable

settlement.

A party can’t be an arbitrator in its own cause. This is a violation of the principles of

natural justice.

Implementation Issues

Arbitrations conducted in India are mostly ad hoc. The concept of institutional

arbitration, though gradually creeping in the arbitration system in India, has yet to

make an impact. The advantages of institutional arbitration over ad hoc arbitration in

India need no emphasis and the wide prevalence of ad hoc arbitration has its

ramifications in affecting speedy and cost-effectiveness of the arbitration process.

There are a number of advantages of institutional arbitration over ad hoc arbitration

in India, some of which are discussed below:

• In ad hoc arbitration, the procedures have to be agreed upon by the parties and the

arbitrator. This requires co-operation between the parties and involves a lot of time.

When a dispute is in existence, it is difficult to expect cooperation among the parties.

In institutional arbitration, on the other hand, the procedural rules are already

established by the institution. Formulating rules is therefore no cause for concern.

The fees are also fixed and regulated under rules of the institution.

• In ad hoc arbitration, infrastructure facilities for conducting arbitration pose a

problem and parties are often compelled to resort to hiring facilities of expensive

hotels, which increase the cost of arbitration. Other problems include getting trained

staff and library facilities for ready reference. In contrast, in institutional arbitration,

the institution will have ready facilities to conduct arbitration, trained

secretarial/administrative staff, as well as library facilities. There will be

professionalism in conducting arbitration.

• In institutional arbitration, the arbitral institutions maintain a panel of arbitrators

along with their profile. The parties can choose the arbitrators from the panel. Such

arbitral institutions also provide for specialized arbitrators. These advantages are not

available to the parties in ad hoc arbitration.

• In institutional arbitration, many arbitral institutions such as the International

Chamber of Commerce (ICC) have an experienced committee to scrutinize the

arbitral awards.

Before the award is finalized and given to the parties, the experienced panel

scrutinizes it. As a result, the possibilities of the court setting aside the award is

minimal, because the scrutiny removes possible legal/technical flaws and defects in

the award. This facility is not available in ad hoc arbitration, where the likelihood of

court interference is higher.

• In institutional arbitration, the arbitrators are governed by the rules of the institution,

and they may be removed from the panel for not conducting the arbitration properly.

In ad hoc arbitration, the arbitrators are not subject to such institutional removal

sanctions.

• In the event the arbitrator becomes incapable of continuing as arbitrator in an

institutional arbitration, substitutes can be easily located and the procedure for

arbitration remains the same. This advantage is not available in an ad hoc

arbitration, where one party (whose nominee arbitrator is incapacitated) has to re-

appoint the new arbitrator. This requires co-operation of the parties and can be time

consuming.

• In institutional arbitration, as the secretarial and administrative staffs are subject to

the discipline of the institution, it is easy to maintain confidentiality of the

proceedings. In ad hoc arbitration, it is difficult to expect professionalism from the

secretarial staff.

In spite of the numerous advantages of institutional arbitration over ad hoc

arbitration, there is currently an overwhelming tendency in India to resort to ad hoc

arbitration mechanisms. This tendency is counterproductive, since there is

considerable scope for parties to be aggrieved by the functioning of ad hoc tribunals.

An empirical survey will reveal that a considerable extent of litigation in the lower

courts deals with challenges to awards given by ad hoc arbitration tribunals.

Some of the arbitral institutions in India are the Chambers of Commerce (organized

by either region or trade), the Indian Council of Arbitration (ICA), the Federation of

Indian Chamber of Commerce and Industry (FICCI), and the International Centre for

Alternate Dispute Resolution (ICADR).

Hierarchy of courts in India

Supreme Court of India

High Court of the respective state

(Sessions Judge, Addl. Sessions

Judge, Asst. Sessions Judges )

Chief Judicial Magistrate in

districts

Judicial Magistrate of Second Class

Judicial Magistrate of First

Class

Chief Metropolitan Magistrate in

cities

Metropolitan Magistrate

Number of cases pending with courts:

Replying to a question in Rajya Sabha, law minister Salman Khurshid said around

3.2 crore cases were pending in high courts and subordinate courts across the

country while 56,383 cases were pending in the Supreme Court.The number of

pending cases for the month of june, 2012 in the Supreme Court of India is 63851.

The backlog has been increasing at an average rate of 3.4 percent annually. This

huge backlog of unresolved cases, experts claim, is directly proportional to a lack of

judges. First and foremost, poor pay for judges causes a huge talent crunch, which

leads to delays and also is a cause of rampant corruption and bribery in the Indian

judicial system.

The increase in the salary will not serve as a solution to reduce the vacancies of

judges or increase the quality of the people joining the legal services.

Comparison between no. of cases registered for trial and the actual no. of trial

completed

EXCERPTS FROM THE ADDRESS BY HON’BLE SHRI K.G.

BALAKRISHNAN,CHIEF JUSTICE OF INDIA,AT VIGYAN BHAWANON 8TH APRIL,

2007

There are serious concerns about the efficacy and ability of justice delivery system to

dispense a speedy and affordable justice. Questions on the credibility of judiciary are

being raised due to mounting arrears of cases, delays in disposal and high cost of

obtaining justice. The growing population, increasing awareness of rights and

abiding confidence of the people in the judiciary saw a litigation boom which our

judicial set up was not sufficiently equipped to handle. With the enactment of large

number of laws, the volume of work in courts has increased enormously without any

increase let alone corresponding increase in the strength of Judges at all levels.

People have become more and more aware of their rights and are no longer willing

to submit to arbitrariness anywhere.

The problem is much more acute in criminal cases, as compared to civil cases.

Speedy trial of a criminal case considered to be an essential feature of right of a fair

trial has remained a distant reality. A procedure which does not provide trial and

disposal within a reasonable period cannot be said to be just, fair and reasonable. If

the accused is acquitted after a long delay, one can imagine the unnecessary

suffering he was subjected to. Many times, inordinate delay contributes to acquittal

of guilty persons either because the evidence is lost or because of lapse of time, or

the witnesses do not remember all the details or do not come forward to give true

evidence due to threats, inducement or sympathy. Whatever may be the reason, it is

justice that becomes a casualty.

High Courts increased their annual disposal from 980474 cases in the year 1999 to

1450602 cases in the year 2006, the cumulative increase being 48% in seven years,

without there being commensurate increase in the strength of judges. However, the

institution increased from 1122430 cases in the year 1999 to 1589979 cases in the

year 2006 leading to increase in pendency from 2757806 cases as on 31st

December, 1999 to 3654853 cases as on 31st December, 2006.

Subordinate Courts disposed of 15842438 cases in the year 2006 as against

12394760 cases in the year 1999, thereby, increasing the disposal by 28% in seven

years without any substantial increase in the strength of Judges. However, the

institution increased from 12731275 cases in the year 1999 to 15642129 cases in

the year 2006, resulting in the pendency getting increased from 20498400 cases as

on 31st December,1999 to 24872198 cases as on 31st December, 2006.

Vacancy Positions

In India there are only 10 judges for every million people whereas the United

States and Great Britain have around 150 judges for a million of its population.

Statement showing the Approved strength, Working Strength and Vacancies of

Judges in the Supreme Court of India and the High Courts (As on 01.06.2012)

   

Sl.

No.Name of the Court

Approved

Strength

Working 

Strength

Vacancies as

per Approved

Strength

A.Supreme Court of

India31 27 4

B. High CourtPmt

.Addl. Total

Pmt

.Addl. Total Pmt. Addl. Total

1 Allahabad 76 84 160 58 28 86 18 56 74

2 Andhra Pradesh * #32 17 49 28 02 30 04 15 19

3 Bombay 48 27 75 42 15 57 06 12 18

4 Calcutta 45 13 58 43 02 45 02 11 13

5 Chhattisgarh #07 11 18 07 06 13 - 05 05

6 Delhi * 29 19 48 25 11 36 04 08 12

7 Gauhati 17 07 24 15 08 23 02 -1 01

8 Gujarat * 29 13 42 21 08 29 08 05 13

9 Himachal Pradesh #08 03 11 08 03 11 - - -

10 Jammu & Kashmir * 9 05 14 05 01 06 04 04 08

11 Jharkhand 10 10 20 07 05 12 03 05 08

12 Karnataka #34 16 50 33 06 39 1 10 11

13 Kerala * 27 11 38 24 07 31 03 04 07

14 Madhya Pradesh * 32 11 43 26 08 34 06 03 09

15 Madras #43 17 60 42 11 53 01 06 07

16 Orissa 17 05 22 13 01 14 04 04 08

17 Patna 29 14 43 26 11 37 03 03 06

18 Punjab& Haryana * 38 30 68 31 08 39 07 22 29

19 Rajasthan 32 08 40 18 06 24 14 02 15

20 Sikkim 03 0 03 02 0 02 01 - 01

21 Uttarakhand 09 0 09 08 0 08 01 - 01

Total 574 321 895 482 147 629 92 174 266

* Acting Chief Justice

# Temporary conversion of post

The average disposal per Judge comes to 2374 cases in High Courts and 1346

cases in Subordinate Courts if calculated on the basis of disposal in the year 2006

and working strength of Judges as on 31st December, 2006. Applying this average,

we require 1539 High Court Judges and 18479 Subordinate Judges to clear the

backlog in one year. The existing strength being inadequate, even to dispose of the

actual institution, the backlog cannot be wiped out without additional strength,

particularly, when the institution is likely to increase and not come down in the

coming years.

Law Enforcement Agencies

Central (federal) agencies

 Central Armed Police Forces

 Border Security Force

 Central Industrial Security Force

 Central Reserve Police Force

 Indo-Tibetan Border Police

 National Security Guards

 Railway Protection Force

 Special Protection Group

 Sashastra Seema Bal /SSB

 Central investigation and intelligence institutions

 Central Bureau of Investigations

 Indian Income-tax Department

 Directorate of Revenue Intelligence

 National Investigation Agency

 Narcotics Control Bureau

 Bureau of Police Research & Development (BPR&D)

 National Crime Records Bureau (NCRB)

 Central forensic institutions

 Central Forensic Science Laboratory

 National Institute of Criminology and Forensic Sciences (NICFSC)

State agencies

Police force

 Metropolitan police

Traffic Police

 State Armed Police Forces

Effectiveness of courts

Our population is growing at a rapid pace and so is our awareness towards law. Now

more and more people are registering complains against malpractices. But

shortages of judges in courts are thwarting justice to the people. In June 2009, there

were 3.8 lakh prisoners in Indian jails. Of these 2.6 lakh were under trails.

Of the under trials, several inmates have been in jail for many years, in large

measure because of delays in the justice delivery system. As per the information

collected by First National Judicial Pay Commission, every state except Delhi has

been providing less than 1% of the budget for subordinate judiciary whereas the

figure is 1.03% in case of Delhi. Govt. needs to allocate more resource to judiciary to

speed up the process. Various new initiatives have been taken like Gramnyayala, E-

courts etc. IT is being used in maintaining records and managing the process.

Role of judiciary in the case

In this case the judiciary has played an advisory role. From the time the first

application plea was filed by the contractor till the rejection of the same plea by the

Supreme Court, the judiciary at each step has looked to uphold the sanctity of the

contract law. The contract signed between the contractor and the corporation had a

specific clause to deal with disputes. Clause 25A of the contract specified that in

circumstances leading to disputes, the case will be referred for arbitration to the

Chief Engineer of the Punjab Police Housing Corporation, Chandigarh.

Holding the above clause of the agreement as the essence of the contract the Sub

Judge appoints the Chief Engineer of the Punjab Police Housing Corporation as the

arbitrator. The contractor, who had willing agreed upon the agreement and all the

clauses, was now not willing to comply with the rules of the contract. His concern

that the chief engineer being an active member of the opposing party should not be

nominated as the arbitrator was not in congruence with the contract. Though the

conflict of interest was a valid point, the court took the view that since the contractor

has agreed to the contract he cannot go back on the terms of the contract. The court

took the view that the Chief Engineer is a legal arbitrator as per the agreement and

his decision will be abiding to the parties involved. Only under certain circumstance

when the arbitrator failed to perform his duties the court can interject and appoint a

new arbitrator.

The sequence of events in the case are a testimony to the stand taken by the

judiciary right from the bottom level of the sub judicial magistrate to the senior most

level of the Hon. Supreme Court.

Once the contractor appealed to the Sub Judge for appointment of the arbitrator it

was the prerogative of the Sub Judge to appoint an arbitrator as per the clause of the

agreement.

“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.”

Once the arbitrator was appointed as per the pre existing agreement, the onus was

now on the contractor and the corporation to present their case in front of the

arbitrator and follow the guidelines given by the arbitrator. The appointed arbitrator

was presumed to act in the benefit of both parties. The contractor not appearing

before the arbitrator only weakened his cause in the case. Since the arbitrator was

appointed by the Sub Judge in accordance with the agreement the contractor should

have appeared before the arbitrator and presented his case. The contractor should

have appealed in the court only if it was found that the arbitrator was unfair in his

proceedings, which was not so.

“Hereafter, 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.”

Since the contractor did not appear before the arbitrator, the arbitrator proceeded

with the arbitration ex parte and passed the award. It was purely legal for the

arbitrator to look into the matter of the case as presented to by the corporation and

pass the award accordingly. Meanwhile the contractor moved ahead with his appeal

for removal of the arbitrator.

“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 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.”

Now the award passed by the arbitrator was made the rule of the court and passed

as a decree. It was now the official ruling of the Sub Judicial Magistrate. Not

receiving any relief from the Sub Judge the contractor challenged the ruling in the

district court. The District court judge dismissed the petition.

“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.”

The contractor now filed and appeal with the High Court. Sighting the clause 25A of

the agreement the High Court did not see any merit in the appeal of the contractor. It

was therefore dismissed and the ruling of the Sub Judge was upheld.

“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.”

With no relief from any of the judgments the contractor now filed a petition in the

Supreme Court. The Supreme Court sighted judgments made in the past where in

the Arbitrator had performed his duty with honesty and without bias. The court

sighted that mere apprehension of bias is not a basis for removal of the arbitrator.

“Constitution Bench judgment of this Court in GullapalliNageswaraRao 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”

“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.”

The court did not find any bias in the order passed by the arbitrator. As the arbitrator

was appointed by the clause of the agreement the court had no reason to quash the

appointment of the arbitrator unless the arbitrator was proved to be biased.

Henceforth the Supreme Court rejected the plea filed by the contractor and upheld

the order passed by the Sub Judge.

Role of Industry / Business Associates in the case

Generally speaking, unlike in Europe, where the manner of settling disputes has

substantially evolved separately across various industry sectors, there is no marked

difference in arbitration practice from one industry to another in India. The exceptions

to this rule, however, are the construction industry and the IT industry. Due to the

technical complexities and long term nature of relationships between parties in these

industries, arbitration in construction and IT industry disputes are characterized by

certain peculiarities quite distinct from other industries.

The growth in the infrastructure and the IT industry in India is a recent development,

and a result of the globalization of the Indian economy. An important secondary

effect of this development is that arbitration has also streamlined a sector-specific

approach to cater to the technicalities and specific requirements of such specific

sectors.

Arbitration in the construction industry

Construction/infrastructure is one of the fastest growing sectors of the Indian

economy, and millions of dollars are spent in construction related disputes.

According to a survey conducted in 2001 by the Construction Industry Development

Council, the amount of capital blocked in construction sector disputes was over INR

540,000 million.

Ad hoc arbitration is still very popular in the construction industry. Arbitration in the

construction industry has a unique feature, which is quite distinct from the general

arbitration practice seen in other industries.

Standard Contracts of Central and State Governments and Industry Giants

Over the last four decades in India, there has been a great deal of construction

activity both in the public and private sectors. Central and state governments; state

instrumentalities; and public and private companies have all been entering into

contracts with builders as part of their commercial activities. The rights and

obligations, privies and privileges of the respective parties are formally written. The

central and state governments and instrumentalities of the states, as well as private

corporations, have their own standard terms of contract, catering to their individual

needs. Often, these contracts provide for remedial measures to meet various

contingencies.

Despite these extensive and time-tested contracts, disputes and differences often

arise between the parties. To meet these situations, arbitration clauses are provided

in the contract themselves, generally covering either all disputes arising from the

contract or all disputes save a few ‘excepted matters.’

Unique Features of Arbitration in the Construction Industry

In the standard forms adopted by the government departments like the Central

Public Works Department (CPWD), Military Engineer Services (MES), railways and

public enterprises, although an arbitration clause may include within its purview all

the possible disputes relating to the transaction, there are exemption clauses or

exclusion clauses that make the decision of an authority named in the agreement,

final and binding on the parties.

These clauses are included, because in construction contracts, situations arise for

which immediate decisions on a point of difference or dispute is required to avoid

costly delays. In these situations, the ‘excepted matters’ or ‘exclusion clauses,’ make

the decision of a particular authority final and binding on both the parties, and not

subject to arbitration.

There has been a series of judicial decisions, which have held that if a particular

matter has been excluded from the purview of arbitration incorporating excepted

matter clause/exclusion clause, the same shall not be re-agitated in arbitration.

There may be certain clauses in the contract which empower either the engineer-in-

charge or the consultant to take an on-the-spot decision regarding points of

difference between the builder and the employer. Such clauses also provide a right

of appeal to a superior officer within a particular time, and impose a liability on the

officer to give a decision within a stipulated time. The clause further provides

reference of the matter to arbitration, in case one of the parties is not satisfied with

such decision, or if the officer does not render a decision. However, the provision

expressly provides that if none of the parties opt for the choice to refer the matter to

arbitration within the time limit thus prescribed, the decision last rendered shall be

treated as final and binding upon both the parties.

Dispute Review Board in the Construction Industry

The concept of a Dispute Review Board (DRB) is quite common in the construction

industry. The DRB is a panel of three experienced, respected and impartial

reviewers. The DRB is organized before construction begins and meets periodically

at the job site. The DRB members are kept abreast of the developments and

progress in the job, and made familiar with the project procedures and the

participants, and are provided with the contract plans and specifications.

The DRB meets with the employer and the contractor representatives during regular

site visits, and encourages the resolution of disputes at the job level. The DRB

process helps the parties to solve problems before they escalate into major disputes.

The proceedings of the DRB can be brought as evidence before an arbitral tribunal

or other judicial forum. The board members could also be presented as witnesses.

Recommendations made by the three experts known for their reputation, accepted

by both the parties at the start of the work as neutral persons and having thorough

knowledge of the project will not normally be changed by any such tribunal. It would

therefore become difficult to go against the tribunal. On this consideration, due

acceptance is given to the system worldwide, and almost no case goes up to

arbitration.

The statistics up to the year 2001 indicate that there were 818 projects with DRBs

valued at US $ 41 billion; and that during that year, 1221 disputes were settled by

the DRBs, and out of 1038 recommendations made, only 31 were taken by the

parties to the arbitral tribunal.

Specialized Arbitral Institutions in the Construction Industry

In India, substantial sums amounting to several crores of Indian rupees (INR) are

locked up in contractual disputes in the construction sector alone. Therefore, the

construction industry felt the need to introduce new measures to resolve disputes in

a fair, speedy and cost-efficient manner. Due to such requirements, the Construction

Industry Development Council, India (CIDC), in cooperation with the Singapore

International Arbitration Centre (SIAC), set up an arbitration centre in India called the

Construction Industry Arbitration Council (CIAC).

This type of institution-administered arbitration has clear advantages over ad hoc

arbitrations for construction companies, public sector undertakings and government

departments that have construction contracts.

To illustrate the role of industry / Business Associates in the present case, the

following 2 examples of previous cases are applicable:

Case of N Radhakrishnan and M/s Maestro Engineers

One of the questions to be asked in context of the case is that if an arbitration clause

is valid, and it covers the dispute in question, should a court proceedings brought by

one of the parties be stayed to arbitration? The answer, one would expect, should be

‘yes’. But ‘no’ was the answer of the Supreme Court of India in last October’s

decision in the case of N Radhakrishnan and M/s Maestro Engineers. The

implications of this Supreme Court decision on the construction industry and on

arbitration practice in general are as follows:

The growth of India’s economy, with a construction market worth US$50 billion per

annum alone, is a major draw for foreign investment and domestic up-skilling alike.

The facts

NR, an Indian engineer, entered into a partnership agreement with others to form

Maestro. The partnership agreement contained an arbitration agreement.

A dispute arose between the parties when NR alleged that Maestro had

misappropriated funds from the partnership accounts and had forged the books. NR

offered to resign from the partnership, subject to payment of outstanding salary and

profit share from Maestro. Maestro’s response was to begin a civil suit against NR

requesting a declaration that NR had effectively resigned from the partnership and

for an injunction to stop NR from interfering with the partnership.

NR’s response was to seek an application under Section 8 of the Arbitration Act for

the civil proceedings to be stayed because there was an arbitration clause in the

partnership agreement. Two sets of lower courts rejected NR’s application, and NR

moved the Supreme Court on appeal. The Supreme Court was of the same view as

the lower courts, and it is to the ‘why’ that I now turn.

The issues

The starting position is that any action brought in the courts, in breach of an

arbitration agreement that covers the dispute in question, should be stayed. Despite

argument between the parties as to whether there was a valid arbitration agreement

in this case, and whether that agreement covered the present dispute, the Supreme

Court held that the arbitration agreement was valid and the dispute between the

parties fell within its scope.

However, the Supreme Court held that, given the allegations of forgery and

misappropriation of funds, the level of enquiry into material evidence that would be

needed made it inappropriate for an arbitrator to carry out that enquiry; only the court

was in a position to do so. Accordingly, there would be no stay of the civil

proceedings and Maestro could continue in the courts.

The Supreme Court said this: “The facts of the present case do not warrant the

matter to be tried and decided by the Arbitrator, rather for the furtherance of justice, it

should be tried in a court of law which would be more competent and have the

means to decide such a complicated matter.”

The consequences

Several troubling consequences arise from this decision. First, it undermines the

certainty that parties can have in their choice of forum for resolution of their disputes

arising from a particular transaction or contract. Leaving aside the relative speed and

possibly increased technical expertise that an arbitral tribunal can bring to the

resolution of specialist disputes when compared to the courts, (For instance, it took

some three years for the procedural challenge to be resolved through three layers of

court, and this is before any of the substantive matters in dispute have been heard)

the desire to keep disputes out of the public eye can now be thwarted by a party

seeking to raise a certain type of dispute.

Secondly, the Supreme Court did not decide that the matters in dispute in Maestro

were outside the jurisdiction of an arbitrator, merely that it would not be appropriate

for an arbitrator to deal with the issues pleaded. This risks muddying the

jurisprudence on the circumstances in which an arbitration tribunal can proceed.

S. Rajan v State of Kerala

The agreement was entered into in 1966. It was terminated on 19.12.1968. The work

was re- tendered and it was completed through another contractor. The State then

worked out the loss suffered by it on account of the appellant's failure to carry out

the work in accordance with the agreement and called upon the appellant to pay the

same through the demand notice dated 30.5.1974. It is relevant to notice that this

demand notice was questioned by the appellant by way of writ petition in the High

Court of Kerala which was dismissed on 25.11.1978.

Thus, the dispute had arisen in 1974 with the service of the demand notice. Only in

the year 1983, did the appellant choose to request the Government to refer the

dispute to the arbitrator in terms of the agreement which was rejected in the

following year. Neither the arbitration clause nor a copy of the agreement was

placed before them. Therefore, it could not be said whether the arbitration clause

contemplated that a reference to arbitration can be made only by the Government

and not by the appellant. Assuming that such was the requirement of the arbitration

clause, even so it was held that the very request in 1983 was very much belated and

cannot, in any event, be treated as the date on which the right to apply accrued. The

differences had already arisen between the parties following the service of the

demand notice. The challenge to the said demand notice made by the appellant by

filing a writ petition in the Kerala High Court is the demonstrable proof of the dispute.

Accordingly, it was agreed with the High Court that 30.5.1974 is the date on which

the right to apply accrued in terms of article 137 read with Section 20(1) and that

therefore the application filed in the year 1985 was clearly 657 barred by limitation.

Only in cases where the agreement does not specify the arbitrator and the parties

cannot also agree upon an arbitrator, does the court get the jurisdiction to

appointment an arbitrator.

It was, accordingly, said that in the present case, there was no occasion or warrant

for the learned Subordinate Judge to call upon the parties to submit panels of

arbitrators. He was bound to refer the dispute only to the arbitrator named and

specified in the agreement. This aspect, however, was dismissed with costs. The

appeal was, thus, dismissed.

APPENDIX I

The Indian Arbitration and Conciliation Act, 1996 (No.26 of 1996): Preamble

[16th August, 1996]

An Act to consolidate and amend the law relating to domestic arbitration,

international commercial arbitration and enforcement of foreign arbitral awards as

also to define the law relating to conciliation and for matters connected therewith or

incidental thereto.

PREAMBLE

WHEREAS the United Nations Commission on International Trade Law (UNCITRAL)

has adopted the UNCITRAL Model Law on International Commercial Arbitration in

1985;

AND WHEREAS the General Assembly of the United Nations has recommended

that all countries give due consideration to the said Model Law, in view of the

desirability of uniformity of the law of arbitral procedures and the specific needs of

international commercial arbitration practice;

AND WHEREAS the UNCITRAL has adopted the UNCITRAL Conciliation Rules in

1980;

AND WHEREAS the General Assembly of the United Nations has recommended the

use of the said Rules in cases where a dispute arises in the context of international

commercial relations and the parties seek an amicable settlement of that dispute by

recourse to conciliation;

AND WHEREAS the said Model Law and Rules make significant contribution to the

establishment of a unified legal framework for the fair and efficient settlement of

disputes arising in international commercial relations;

AND WHEREAS it is expedient to make law respecting arbitration and conciliation,

taking into account the aforesaid Model Law and Rules;

Be it enacted by Parliament in the forty seventh year of the Republic as follows:—

PRELIMINARY

Short title, extent and commencement.—(1) This Act may be called the Arbitration

and Conciliation Act, 1996.

It extends to the whole of India:

Provided that Parts I, III and IV shall extend to the State of Jammu and Kashmir only

in so far as they relate to international commercial arbitration or, as the case may be,

international commercial conciliation.

Explanation— In this sub-section, the expression “international commercial

conciliation” shall have the same meaning as the expression “international

commercial arbitration” in clause (f) of sub-section (1) of section 2, subject to the

modification that for the word “arbitration” occurring therein, the word “conciliation”

shall be substituted.

It shall be deemed to have come into force on the 25th day of January, 1996.

Chapter 1 : General Provisions

Definitions-

In this Part, unless the context otherwise requires,—

“arbitration” means any arbitration whether or not administered by permanent arbitral

institution;

“arbitration agreement” means an agreement referred to in section 7;

“arbitral award” includes an interim award;

“arbitral tribunal” means a sole arbitrator or a panel of arbitrators;

“Court” means the principal Civil Court of original jurisdiction in a district, and

includes the High Court in exercise of its ordinary original civil jurisdiction, having

jurisdiction to decide the questions forming the subject-matter of the arbitration if the

same had been the subject-matter of a suit, but does not include any civil court of a

grade inferior to such principal Civil Court, or any Court of Small Causes;

“international commercial arbitration” means an arbitration relating to disputes arising

out of legal relationships, whether contractual or not, considered as commercial

under the law in force in India and where at least one of the parties is—

an individual who is a national of, or habitually resident in, any country other than

India; or

a body corporate which is incorporated in any country other than India; or

a company or an association or a body of individuals whose central management

and control is exercised in any country other than India; or

the Government of a foreign country;

“legal representative” means a person who in law represents the estate of a

deceased person, and includes any person who intermeddles with the estate of the

deceased, and, where a party acts in a representative character, the person on

whom the estate devolves on the death of the party so acting;

“party” means a party to an arbitration agreement.

Scope

This Part shall apply where the place of arbitration is in India.

This Part shall not affect any other law for the time being in force by virtue of which

certain disputes may not be submitted to arbitration.

This Part except sub-section (1) of section 40, sections 41 and 43 shall apply to

every arbitration under any other enactment for the time being in force, as if the

arbitration were pursuant to an arbitration agreement and as if that other enactment

were an arbitration agreement, except in so far as the provisions of this Part are

inconsistent with that other enactment or with any rules made thereunder.

Subject to the provisions of sub-section (4), and save in so far as is otherwise

provided by any law for the time being in force or in any agreement in force between

India and any other country or countries, this Part shall apply to all arbitrations and to

all proceedings relating thereto.

Construction and References

Where this Part, except section 28, leaves the parties free to determine a certain

issue, that freedom shall include the right of the parties to authorise any person

including an institution, to determine that issue.

An arbitral award made under this Part shall be considered as a domestic award.

Where this Part—

refers to the fact that the parties have agreed or that they may agree, or

in any other way refers to an agreement of the parties,

that agreement shall include any arbitration rules referred to in that agreement.

Where this Part, other than clause (a) of section 25 or clause (a) of sub-section (2) of

section 32, refers to a claim, it shall also apply to a counter-claim, and where it refers

to a defence, it shall also apply to a defence to that counter-claim.

Receipt of written communications—

Unless otherwise agreed by the parties,—

any written communication is deemed to have been received if it is delivered to the

addressee personally or at his place of business, habitual residence or mailing

address, and

if none of the places referred to in clause (a) can be found after making a reasonable

inquiry, a written communication is deemed to have been received if it is sent to the

addressee’s last known place of business, habitual residence or mailing address by

registered letter or by any other means which provides a record of the attempt to

deliver it.

The communication is deemed to have been received on the day it is so delivered.

This section does not apply to written communications in respect of proceedings of

any judicial authority.

Waiver of right to object—A party who knows that—

any provision of this Part from which the parties may derogate, or

any requirement under the arbitration agreement,

has not been complied with and yet proceeds with the arbitration without stating his

objection to such non-compliance without undue delay or, if a time limit is provided

for stating that objection, within that period of time, shall be deemed to have waived

his right to so object. Extent of judicial intervention—

Notwithstanding anything contained in any other law for the time being in force, in

matters governed by this Part, no judicial authority shall intervene except where so

provided in this Part.

Administrative assistance—

In order to facilitate the conduct of the arbitral proceedings, the parties, or the arbitral

tribunal with the consent of the parties, may arrange for administrative assistance by

a suitable institution or person.

References:

http://articles.timesofindia.indiatimes.com/2011-12-20/india/

30537308_1_subordinate-courts-pendency-crore-cases

http://supremecourtofindia.nic.in/pendingstat.htm

http://en.wikipedia.org/wiki/Law_enforcement_in_India

http://www.prsindia.org/administrator/uploads/general/1310014291~~Vital%20Stats

%20-%20Pendency%20of%20Cases%20in%20Indian%20Courts

%2004Jul11%20v5%20-%20Revised.pdf

http://doj.gov.in/?q=node/90