ORDER Vikarmajit Sen, J.
permitated
1. By this judgment I propose to decide three petitions filed under Section 11 of the Arbitration and Conciliation Act, 1996. Arbitration Application No. 45/1998 is directed against the Mahanagar Telephone Nigam Ltd.; and Arbitration Application Nos. 46/1998 and 47/1998 are against the U.O.I., Ministry of Telecommunication. The facts of the case need not engage the attention of the Court at this stage, since the prayers contained in the Applications are for the appointment of an Arbitrator and referral to him of all the claims/disputes that have arisen between the parties. On 11.10.1999 I had indicated to Learned Counsel for the Respondents that it was open to the Respondents to expeditiously appoint an Arbitrator in accordance with the Arbitration Clause and that if this was not done, and the Petition was allowed to run its full course, this opportunity may not subsequently remain available to them. No appointment has been made and arguments have been addressed by both sides at great length.
It is not disputed that the Contract contains the following Arbitration Clause:-
14. General conditions of Contract of the aforesaid tender contains clause 16.
"Clause 16: Arbitration:
16.1 In the event of any dispute or difference arising as to the construction or execution of the contract or the respective rights and liabilities of the parties or the interpretation by any clause hereof or any special conditions of Purchase Order (except as to any matters the decision of which is specially provided for by these or the special conditions) the same shall be referred to the sole arbitration of MD, MTNL or his nominee. The award of the arbitrator shall be final and binding on the parties to this Purchase.
16.2 It is further a term of this Purchase Order that no person other than the person appointed by the MD, MTNL as aforesaid should act as arbitrator and that, if for any reason that is not possible, the matter is not to be referred to arbitration at all.
16.3 The arbitrator may from time to time with the consent of all the parties to the Purchase Order enlarge the time for making the award.
16.4 Upon every any such reference, the assessment of the cost incidental to the reference and award respectively shall be in the discretion of the arbitrator.
16.5 Subject as aforesaid, the Arbitration Act, 1940 and the rules thereunder any statutory modifications thereof for the time being in force shall be deemed to apply to the arbitration proceedings under this clause.
16.6 The venue of arbitration shall be the place from which the acceptance note is issued or such other places as the MD, MTNL as his Discretion may determine.
16.7 In this clause the expression "MD, MTNL" includes any other Officer who is for the time being the Administrative head of the Organisation, whether in addition to other functions or otherwise."
2. In the estimation of the Petition it was entitled to claim substantial sums from the Respondents. As a result a legal notice was issued lodging a claim for these sums. When they were not paid another letter was issued invoking the Arbitration Clause. In all the cases the Respondents neither filed any reply to these legal notices nor made any appointment in terms of the Arbitration Clause as demanded by the Petitioner. It is for this reason that the Petitioners had no alternative but to file the present Petition under Section 11 of the Arbitration and Conciliation Act 1996. Replies and rejoinders have been duly filed by the parties and arguments have been heard.
3. Mr. Ashok Bhasin, Learned Counsel who had argued the case in A.A. No. 46 and A.A. No. 47/1998, and whose arguments had adopted by Learned Counsel appearing for the Respondents in A.A. 45/1998, has opposed the Petition on various grounds. Firstly, he had submitted that the Respondents were fully entitled to recover liquidated damages since a clause to this effect is contained in the Agreement between the parties. It was his submission that liquidated damages had been recovered by the Respondents and on a plain reading of the relevant clause, this question was not arbitrable, being specifically excluded from the scrutiny and adjudication of the Arbitrator. In answer, Mr. Parag Tripathi, Learned Senior Counsel for the Petitioner, had relied on the decision of the Supreme Court in Fateh Chand Vs. Balki shan Dass rendered in the context of Section 74 of the Indian Contract Act. He had further submitted that even questions touching upon whether a dispute was referable to Arbitration or not is also capable of adjudication by the Arbitrator as was held in Jhabbu Mal Jang Bahadur Vs. Nanak Chand Aggarwal and Another A.I.R. 1982 Delhi 55. This decision was given in terms of the Arbitration Act, 1940. He relied on Section 16 of the Arbitration and Conciliation Act, 1996 which has now given statutory recognition to this proposition of law. Having been given a thoughtful consideration to the contentions raised before me, I am of the view that the Petition deserves to be allowed.
4. Clause 15 which undoubtedly admittedly is germane to the disposal of the present Petition is reproduced below :-
Clause 15: Delays in the supplier's performance:
15.1 Delivery of the Goods and performance of services shall be made by the supplier in accordance with the time schedule specified by the purchaser in its purchase order, in case the supply is not completed in the stipulated delivery period, as indicated in the purchase order, purchaser reserves the right either to short close/cancel this purchase order and/or recover liquidated damage charges. The cancellation/short closing of the order shall be at the risk and responsibility of the supplier and purchaser reserves the right to purchase balance unsupplied item at the risk and cost of the defaulting vendors.
15.2 Delay by the supplier in the performance of its delivery obligations shall render the Supplier liable to any or all of the following sanctions, forfeiture of its performance security, imposition of liquidated damages and/or termination of the contract for default.
15.3 If at any time during performance of the contract, the Supplier or subcontractor (s) encounters conditions impeding timely delivery of the goods and performance of service, the Supplier shall promptly notify the Purchaser in writing of the fact of the delay, its likely duration and its causes(s). As soon as practicable after receipt of the Supplier's notice, the Purchaser shall evaluate the situation and may at its discretion extend the period for performance of the contract after mutual discussion with the supplier.
5. I am unable to appreciate the contentions of Learned Counsel for the Respondents that the provisions of this clause empower the Respondents to automatically recover/deduct liquidated damages and/or that this clause operates in a manner such as would necessarily exclude the disputes from arbitrability. I had, earlier, an occasion to interpret Section 74 of the Contract Act in a totally different situation. A suit had been filed under the summary procedure laid down in Order xxxvII of the Code of Civil Procedure. The plaint disclosed that a contract had been entered into between the parties for the purchase of immovable property for a total consideration of Rs. 30,00,000/. The agreement contained a clause that if the purchaser failed to perform his obligation, he would be liable to pay double the amount of earnest money. It was this amount together with interest which was claimed in the Plaint. I was convinced that leave to defend the suit ought to be granted, primarily by the application of Section 74 of the Contract Act. I had merely applied the decision of the Apex Court in Fateh Chand's case as well as another decision of the Supreme Court Viz. U.O.I. Vs. Raman Iron Foundry, . I had also followed the decision rendered by Chhagla, J. in Iron and Hardware (India) Co. Vs. Firm Shamlal and Bros., . If I was correct in holding that it was incumbent that 'leave to defend' be granted in the circumstances of that case, I must also held the view that arbitrable disputes have also arisen in the facts of the present case requiring, in the exercise of the powers contained in Section 11, the appointment of an Arbitrator. In the Iron and Hardware Company's case the following observations were made:
"In my opinion it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party.
As already stated, the only right, which he has is the right to go to a Court of law and recover damages. Now, damages are the compensation which the Court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the Court. Therefore, no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the Court is doing is ascertaining a pecuniary liability which already existed. The Court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till determination there is no liability at all upon the defendant. "
6. The following paragraphs of the judgment rendered in Fateh Chand's case (supra) are topical and need to be set out in extensio.
"7. The AttorneyGeneral appearing on behalf of the defendant has not challenged the plaintiff's right to forfeit Rs. 1,000/- which were expressly named and paid as earnest money. He has, however, contended that the covenant which gave to the plaintiff the right to forfeit Rs. 24,000/- out of the amount paid by the defendant was a stipulation in the nature of penalty, and the plaintiff can retain that amount or part thereof only if he establishes that in consequence of the breach by the defendant, he suffered loss, and in the view of the Court the amount or part thereof is reasonable compensation for that loss. We agree with the Attorney General that the amount of Rs. 24,000/- was not of the nature of earnest money. The agreement expressly provided for payment of Rs.1000/- as earnest money, and that amount was paid by the defendant. The amount of Rs. 24,000/- was to be paid when vacant possession of the land and building was delivered, and it was expressly referred to as "out of the sale price." If this amount was also to be regarded as earnest money, there was no reason why the parties would not have so named it in the agreement of sale. We are unable to agree with the High Court that this amount was paid as security for due performance of the contract. No such case appears to have been made out in the plaint and the finding of the High Court on that point is based on no evidence. It cannot be assumed that because there is a stipulation for forfeiture the amount paid must bear the character of a deposit for due performance of the contract.
8. The claim made by the plaintiff to forfeit the amount of Rs. 24,000/- may be adjudged in the light of Sec. 74 of the Indian Contract Act, which in its material part provides:
"When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or as the case may be, the penalty stipulated for."
The section is clearly an attempt to eliminate the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine preestimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties; a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty.
9. The second clause of the contract provides that if for any reason the vendee fails to get the sale deed registered by the date stipulated, the amount of Rs. 25,000/- (Rs. 1,000 paid as earnest money and Rs. 24,000/- paid out of the price on delivery of possession) shall stand forfeited and the agreement shall be deemed cancelled. The covenant for forfeiture of Rs. 24,000/- is manifestly a stipulation by way of penalty.
10. Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a contract containing a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by Section 74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable; and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damage", it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.
11. Before turning to the question about the compensation which may be awarded to the plaintiff, it is necessary to consider whether Sec. 74 applies to the stipulations for forfeiture of amounts deposited or paid under the contract. It was urged that the section deals in terms with the right to receive from the party who has broken the contract reasonably compensation and not the right to forfeit what has already been received by the party aggrieved. There is however no warrant for the assumption made by some of the High Courts in India, that Sec. 74 applies only to cases where the aggrieved party is seeking to receive some amount on breach of contract and not to cases where upon breach of contract an amount received under the contract is sought to be forfeited. In our judgment the expression "the contract contains any other stipulation by of penalty" comprehensively applies to every covenant involving a penalty whether it is for payment on breach of contract of money or delivery of property in future, or for forfeiture of right to money or other property already deliv ered. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by Sec. 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the Court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture. We may briefly refer to certain illustrative cases decided by the High Courts in India which have expressed a different view".
7. Learned Counsel for the Petitioner correctly emphasised the last sentence of Para 10 above to buttress his argument that it was necessary for the Respondents to have appointed an Arbitrator in the present case. He had contended that the Respondent was responsible for the delays that had occurred in the performance of the contract. He had further contended that, in fact, no damages had suffered by the Respondents, and that for this reason alone there was no justification for their taking recourse to the liquidated; damages clause. These arguments are of substance and lead me to the conclusion that the disputes which have arisen definitely require adjudication. Since there is an Arbitration Clause between the parties this adjudication has to be carried out not by the Court, but by the Arbitrator. Secondly Fateh Chand's case was not cited before the Apex Court when, over a decade later it was called upon to pronounce on a similar question of law in U.O.I. Vs. Raman Iron Foundry, A.I.R. 1994 SC 1265. In a manner similar to that which attends the present case, by resorting to a clause in the subsisting contract, the U.O.I. had sought to recover liquidated damages merely by the stock of a pen. The Learned Judges written observations similar to those in Fateh Chand's case.
Having discussed the proper interpretation of clause 18, we may now turn to consider what is the real nature of the claim for recovery of which the appellant is seeking to appropriate the sums due to the respondent under other contracts. The claim is admittedly one for damages for breach of the contract between the parties. Now, it is true that the damages which are claimed are liquidated damages under clause 14, but so far as the law in India is concerned, there is no qualitative difference in the nature of the claim whether it be for damages. Section 74 of the Indian Contract refinements made under the English stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine preestimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties: a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty, and according to this principle, even if there is a stipulation by way of liquidated damages, a party complaining of breach of contract can recover only reasonable compensation for the injury sustained by him, the stipulated amount being merely the outside limit. It, therefore makes no difference in the present case that the claim of the appellant is for liquidated damages. It stands on the same footing as a claim for unliquidated damages. Now the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority. When there is a breach of contract, the party who commits the breach does not eo instanti incur any pecuniary obligation, nor does the party complaining of the breach becomes entitled to a debt due from the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages. That is not an actionable claim and this position is made amply clear by the amendment in Section 6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred. This has always been the law in England and as far back as 1858 we find it stated by Wightman, J., in Jones Vs. Thompson, (1858) 27 LJQB 234. "Ex parte Charles and several other cases decide that the amount of a verdict in an action for unliquidated damages is not a debt till judgment has been signed." It was held in this case that a claim for damages does not become a debt even after the jury has returned a verdict in favour of the plaintiff till the judgment is actually delivered. So also in O'Driscoll Vs. Manchester Insurance Committee, (1915) 3 KB 499. Swinfen Eady, L.J., said in reference to cases where the claim was for unliquidated damages: ".....in such cases there is no debt at all until the verdict of the jury is pronounced assessing the damages and judgment is given." The same view has also been taken consistently by different High Courts in India. We may mention only a few of the decisions, namely, Jabed Sheikh Vs. Taher Mallik ; S. Milkha Singh Vs. M/s. N.K. Gopala Krishna Mudaliar, and Iron and Hardware (India) Co. Vs. Firm Shamlal and Bros., . Chagla, C.J. in the last mentioned case, stated the law in these terms:
In my opinion it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party.
As already stated, the only right which he has is the right to go to a Court of law and recover damages. Now damages are the compensation which a Court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the Court. Therefore, no pecuniary liability arises till the Court has determined that then party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the Court is doing is ascertaining a pecuniary liability which already existed. The Court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant."
This statement in our view represents the correct legal position and has our full concurrence. A claim for damages for breach of contract is, therefore, not a claim for a sum presently due and payable and the purchaser is not entitled, in exercise of the right conferred upon it under clause 18, to recover the amount of such claim by appropriating other sums due to the contractor. On this view, it is not necessary for us to consider the other contention raised on behalf of the respondent, namely that on a proper construction of clause 18, the purchaser is entitled to exercise the right conferred under that clause only where the claim for payment of a sum of money is either admitted by the contractor, or in case of dispute, adjudicated upon by a Court or other adjudicatory authority. We must, therefore, hold that the appellant had no right or authority under Clause 18 to appropriate the amounts of other pending bills of the respondent in or towards satisfaction of its claim for damages against the respondent and the learned Judge was justified in issuing an interim injunction restraining the appellant from doing so.
8. In order that Clauses 15 can be resorted to by the Respondents to justify retention of any sums of money as liquidated damages. They would have to first prove, in terms of the opening words of Clause 15.2 itself, that there was a delay by the supplier in the performance of its obligations. None of clauses of the agreement clothe the Respondents with the power to arrogate to this unilaterally arrive at the finding that delay had been caused by the Petitioner. Therefore, even independent of Section 74 of the Contract Act and without reference to the decisions of the Apex Court interpreting this Section, it is necessary that an adjudication should take place on the question who was responsible and liable for the delay. I am of the unqualified view that the Respondents were not entitled in law to deduct or claim liquidated damages without these damages being adjudicated upon. It was, therefore, not reasonable for them to resist and frustrate the Petitioner's plea for the appointment of an Arbitrator in terms of the Arbitration Clause.
The apparent dilemma that now arises is whether the Court should exercise its power of appointment of an Arbitrator or should direct the Respondents to do the needful. Learned Counsel for the Respondents laid great stress on an unreported judgment of the Hon'ble Supreme Court passed in the case of D.G.S. & D. and Another Vs. U.P. Edbestos Ltd. which reads as under:
"Special Leave granted.
Heard counsel on both sides.
The short grievance of the appellant is that while the Court should have appointed an Arbitrator on the failure of the Department to appoint one, the Court had to remain within the parameter of the Arbitration Clause 24 AC which clearly states that the reference shall be made to the sole Arbitration of an officer in the Ministry of Law. The Arbitrator appointed in the instant case is a retired Judge. Whereas the Arbitration Clause envisages the appointment of a person who is an officer in the Ministry of Law, meaning thereby who is in the service at the relevant point of time. This is also the purport of this Court's decision in S. Rajan Vs. State of Kerala. (1992 4 SC 321). We, therefore, set aside the order of the High Court appointing a retired Judge as sole Arbitrator and quash the appointment and direct that the High Court shall appoint an Arbitrator in terms of clause 24 of the agreement. The appeal will stand disposed of accordingly with no order as to costs."
9. It is not diservable from this Order whether any efforts or attempts had been made by the Respondents towards appointment of an Arbitrator in that case. As has already been mentioned hereinabove I had put the Respondents to notice that if on a reconsideration they were of the opinion that an Arbitrator should be appointed by them they should do so forthwith and that this request would not be entertained by me if the proceedings were made to run through full course. Learned counsel for the Respondents would, however, have me read the above extracted orders of the Apex Court to mandate the Court, in all cases, to make an appointment only in terms of the Arbitration Clause. I am unable to accept this to be the correct interpretation to be given to this decision of the Apex Court. The position would be abundantly clear on reverting to the decision in S. Rajan's case itself. The ratio of the judgment is contained in para 12 which is, therefore, reproduced below:-
"We also think it appropriate to point out that the learned Subordinate Judge was not justified in directing the parties to submit their respective panels of arbitrator so as to enable him to appoint an arbitrator or arbitrators, as the case may be, out of such panels. Clause (3) of the agreement (extracted in the counterffidavit filed by the State of Kerala in this Court, the correctness whereof is not questioned by the learned counsel for the appellant) says that "the arbitrator for fulfillling the duties set forth in the arbitration clause of the Standard Prelimitary Specification shall be the Superintending Engineer, Buildings and Roads Circle, Trivandrum". Thus, this is a case where the agreement itself specifies and names the arbitrator. It is the Superintending Engineer, Building and Roads Circle, Trivandrum. In such a situation, it was obligatory upon the learned Subordinate Judge, in case he was satisfied that the dispute ought to be referred to the arbitrator, to refer the dispute to the arbitrator specified in the agreement. It was not open to him to ignore the said clause of the agreement and to appoint another person as an arbitrator. Only if the arbitrator specified and named in the agreement refuses or fails to act does the court get the jurisdiction to appoint another person or persons as the arbitrator. This is the clear purport of subsection (4). It says that the reference shall be to the arbitrator appointed by the parties. Such agreed appointment may be contained in the agreement itself or may be expressed separately. To repeat, 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 appoint an arbitrator. It must, accordingly, be 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, has become academic now in view of the fact that the very application under Section 20 has been held by us to be barred by limitation. Even so we thought it necessary to emphasise this aspect in view of the numerous instances noticed by us where courts ignore the arbitrator specified in the agreement and appoint a different person as the arbitrator."
10. The following passage from the decision of the Supreme Court in Nandlal Co-op. Spinning Mills Vs. K.V. Mohan Rao, is of relevance. It appears to set down a position different to that in Rajan's case (supra):
"It would thus be clear that if no arbitrator had been appointed in terms of the contract within 15 days from the date of receipt of the notice, the administrative head of the appellant had abdicated himself of the power to appoint arbitrator under the contract. The Court get jurisdiction to appoint an arbitrator in place of the contract by operation of Section 8. The contention of Shri Rao, therefore, that since the agreement postulated preference to arbitrator appointed by the administrative head of the appellant and if he neglects to appoint, the only remedy open to the contractor was to have recourse to civil suit is without force. It is open that under the contract the respondent contracted out from adjudication of his claim by a Civil Court. Had the contract provided for appointment of a named arbitrator and the named person was not appointed, certainly the only remedy left to the contracting party was the right to suit. That is not the case on hand. The contract did not expressly provide for the appointment of a named arbitrator. Instead power has been given to the administrative head of the appellant to appoint sole arbitrator. When he failed to do so within the stipulated period of 15 days enjoined under Section 8, then the respondent has been given right under Clause 65.2 to avail the remedy under Section (1)(a) and request the Court to appoint an arbitrator. If the contention of Shri Rao is given acceptance, it would amount to putting a premium on inaction depriving the contract of the remedy of arbitration, frustration the contract itself."
11. In the present case over a year has elapsed since the demand for Arbitration was raised. The Respondents have failed to make the appointment of the Arbitrator on the grounds that it had the unfettered rights to unilaterally decide to recover liquidated damages and that this right would not have to await the decision or imprimatur of the Arbitrator. Section 11 of the Arbitration and Conciliation Act clearly stipulates that if a party fails to appoint an Arbitrator within thirty days from the receipt of a request to do so from the other party, the appointment shall be made by the Court. I had specifically sought a clarification from Learned Counsel for the Respondents as to whether a demand for liquidated damages had been addressed by them to the Petitioner. All that was shown to me was a letter in which, for allowing an extension of time to the Petitioner, the Respondents had stated that liquidated damages were claimable. It could have been appreciated if the Respondents, had arrived at a decision in regard to the justification of imposition/recovery of liquidated damages intradepartmentally. Even if this issue is to be considered as a nonarbitral dispute, it does not lead to the conclusion that it can be automatically taken by the Respondents, in flagrant violation of the audi alteram parted rule. I cannot convinced that there is any justification for the interpretation of the clause relied upon by the Respondents to warrant a unilateral decision, without even affording the party so affected with an opportunity of being heard. Clause of this nature, variously referred to as exclusion or exemption or exceptional clauses, merely substitute the decision making power on such issues to a person (usually an officer or nominee of the Drafter of the exclusion clause) other than the Arbitrator. It does not dispense with the rules of natural justice, of enjoining this officer/nominee from hearing the other side. It certainly cannot be interpreted in so draconian a manner as to empower a deduction without even a semblance of exercise of mind.
12. It has now become common place for persons who have retained this power of appointment of an Arbitrator, not to act at all or to act with such obduracy as to render an Arbitration clause totally meaningless. The vehemence with which the present petition was opposed, often caused me to forget that it was only the appointment of an Arbitrator to adjudicate upon the claims raised by both parties and not the disposal of objections, that was in debate. After hearing lengthy arguments it would be an abdication of judicial duty if the Respondents were still permitted to make an appointment of the Arbitrator. The State is expected to act without arbitrariness and with fairness and in furtherance of the well-being of its citizens. It is also expected to know the law, especially as laid down by the Supreme Court. It cannot be excused if its action tantamount to emasculating the laws i.e. of expeditious disposal of disputes through arbitration. Apart from the logistic considerations, i.e., encouraging vexatious and obdurate failure to act in accordance with and in conformity with the contact between parties, there is one further consideration which has persuaded me to make an appointment of an independent person as an Arbitrator. The decision to oppose the present petition has been taken by the very officer who is to act as the Arbitrator. He has already taken a view in the case and has issued instructions and then action for their implementation. The prepon derance of likelihood is that he or his nominee would uphold his view. Having already decided held that the Department is justified in claiming liquidated damages, and having declined the petitioner's request for the appointment of an Arbitrator, there is a strong pervading risk that a fair decision would not be rendered. Since this Officer also have the power to nominate an Arbitrator, presumably also in service, it is quite possible that his bias would permitated to his nominee. Justice has not only to be done but must also appear to be done. As observed above had the Respondents agreed to appoint an Arbitrator, albeit after some delay, I would have not felt compelled to appoint an Arbitrator de hors the Arbitration clause. The decision of the Apex Court in Rajan's case would not have application to the present circumstances in view of the recalcitrant refusal of the Respondent to make an appointment of an Arbitrator.
13. The petition is accordingly allowed.
I appoint Hon'ble Mr. Justice S. Ranganathan, a retired Judge of the Supreme Court as the Arbitrator. He will issue notice to the parties on entering upon the Reference and shall fix his own remuneration.
14. The Respondents shall pay costs of each petition quantified at Rs. 5000/-