State Bank Of Indore vs Shri N.C. Jain And Ors.
2004 Latest Caselaw 405 Del

JUDGMENT

Manmohan Sarin, J.

1.The petitioner by this writ petition seeks quashing of the order dated 3.3.2003, Annexure P-12, by which respondent No.1 Shri N.C.Jain, the Arbitrator under the Permanent Machinery for Arbitration, declined the petitioner's prayer against impleadment in the absence of an arbitration agreement with either the claimant or the respondent. The petitioner further seeks writ of prohibition to restrain respondent No.1 from adjudicating upon the liability of the petitioner, without an express or implied arbitration agreement.

2.The facts to the extent relevant for decision of writ petition may be noted briefly. Respondent No.2, State Bank of India through its Branch Manager, Satna, (M.P.) moved for appointment of an Arbitrator under the Permanent Machinery for Arbitration for settlement of its claim against respondent No.3, Sharda Gramin Bank, Regional Rural Bank. State Bank of Indore, respondent No.2/Claimant, State Bank of India, through the Branch Manager, Satna (M.P.) and respondent No3 Sharda Gramin Bank, are all Public Sector/Government Undertakings, falling within the ambit of Permanent Machinery of Arbitration.

3.Respondent No.2 filed its claim against the Sharda Gramin Bank. Sharda Gramin Bank had presented nine drafts, purported to have been issued by State Bank of India at Indore (Jabalpur) and State Bank of Indore, Kampoo Gwalior Branch, drawn on the State Bank of India, Satna Branch (M.P.) for clearing. The respondent No.2 claimant bank on scrutiny found the drafts to be in order and released the payment representing the proceeds of nine bank drafts to the collecting Bank. The total amount of the nine drafts was approximately Rs.70.26 lacs. The respondent Sharda Gramin Bank's Vigilance Department became suspicious of the transactions as these were high amounts for the volume of business transacted by the account holders through its Branches. The drafts drawn on the State Bank of India were suspected to be forged. It transpired that the said drafts had been stolen. Respondent No.2, therefore, claims refund of the sum of Rs.70.26 lacs together with interest from the date of payment. FIR was also lodged. Respondent No.2 claimed that payments were collected for account holders, who did not have any valid title to the drafts. Respondent No.2 made its claim against respondent No.3 alone.

4.Respondent No.1 was appointed as the Arbitrator under the Permanent Machinery for Arbitration. Respondents 2 & 3 submitted to his jurisdiction. The Arbitrator, respondent No.1 on 16.7.2002, gave number of directions, seeking inter alia, information and documents. These related to the arrangements between the petitioner and State Bank of India respondent No.2 for payment of drafts etc. Queries were raised regarding when the intimation of fraud/ forgery was received. Copies of departmental reports were sought. Petitioner was directed to file an affidavit as to the loss of the draft leafs and action taken by it. It was enquired whether any draft other than the nine drafts out of the total 50 drafts in the Book, were used by the accused persons. The Branch Manager of the petitioner Bank furnished to respondent No.2 an affidavit on 10.9.2002 to be filed on its behalf. In the event, respondent No.3, Sharda Gramin Bank contended before the Arbitrator that the information sought from the petitioner did not provide any insight into alleged lapse on the part of petitioner. It sought impleadment of the petitioner as a necessary party. The arbitrator recorded that respondent No.2 had no objection to the petitioner bank, which is a subsidiary of State Bank of India, being made a party. Respondent No.1 passed the following order:-

"Hence it is directed that a separate notice should be issued to State Bank of Indore for explaining the facts of the case and the lapses they have committed."

5.The petitioner bank objected to it being imp leaded in the arbitration. Petitioner's case is that it cannot be imp leaded as a party to the proceedings under the Permanent Arbitration Machinery in the absence of any agreement for arbitration and claim against it. The arbitration agreement, it is urged, is the very foundation which was missing in the instant case. The petitioner declined to submit to the jurisdiction of the arbitrator. Petitioner assails the observations in the impugned order that for determination of the factual position and negligence of petitioner, it was essential for it to submit to the jurisdiction of arbitration.

6.Learned Senior Counsel for the petitioner urges that the permanent machinery of arbitration pre-supposes "commercial and other agreement" between the parties for reference of disputes to the permanent machinery of arbitration. Admittedly there is no commercial or other agreement between the petitioner and State Bank of Indore and State Bank of India containing any clause for reference of disputes to the permanent machinery of arbitration. Reliance is placed on D.O.No.15(9)/86-BBE (Fin.) dated 29th March, 1989 appearing at Annexure P-2 Colly at page 18. From a perusal of Annexures P1, P2 and P3 which lay down the procedure for permanent machinery for arbitration to be set up, it is urged that existence of an arbitration agreement is a sine qua non. Instructions have been issued to various departments and PSUs to incorporate the arbitration clause so that in future all contracts provide for reference of disputes to arbitration.

7.It is submitted that the petitioner did not agree or refer the disputes to the permanent machinery of arbitration. Elaborating this, it is urged that jurisdiction could either be conferred by the statute or by an agreement between the parties agreeing to refer the disputes to arbitration. In the instant case, there is neither any statute or arbitration agreement or commercial agreement between the petitioner and others.

8.Learned counsel submits that the assumption of jurisdiction by the arbitrator in the instant case was thus illegal and non-est. In case, any information was required from the petitioner-Bank, it could be summoned as a witness. There was no occasion to implead petitioner as a party especially when respondent no.2 has not preferred any claim against the petitioner. Learned counsel finally submitted that State Bank of India and Sharda Gramin Bank had written to the Secretary, Bureau of Enterprises for appointment of an arbitrator under the permanent machinery for arbitration to adjudicate upon their disputes and this constituted an arbitration agreement between the two. This was otherwise a dispute, emanating from normal banking transactions. No specific agreement exists for the same. Petitioner has neither joined in the request for appointment of permanent machinery of arbitration nor there is an existing arbitration agreement between petitioner and others. Learned counsel submits that without being imp leaded as a party, petitioner is willing to cooperate fully and provide all information and documents as required.

9.Learned senior counsel for the petitioner also placed reliance on Md. Hasnuddin versus State of Maharashtra reported at para 25 in particular, to urge that before a Tribunal assumes jurisdiction it has an obvious duty to satisfy itself that facts and circumstances exist to invest it with jurisdiction, which was missing in the instant case. Reliance is placed on Rajasthan State Mines and Minerals Limited versu Eastern Engineering Enterprises and another reported at , para 23, wherein it is held that the arbitrator was the creature of the contract between the parties and it could not go beyond the terms of the reference under the agreement. Assumption of jurisdiction being illegal, as there is no agreement between the parties in the instant case. Reliance is also placed on Harcharan Singh versus Union of India reported at ; Bharat Cooking Coal Limited versus Annapurna reported at , recognising the role of the arbitrator being to arbitrate within the terms of the contract. He has no power apart from what the parties have given him under the contract. If he has traversed beyond the contract, he would be acting beyond jurisdiction. Learned counsel lastly submits that order dated 19.9.2002, was erroneous in so far as it recorded that the State Bank of India had stated that it has no objection to the petitioner being made a party and this fact has been brought on record by the State Bank of India.

10.Learned counsel appearing for Sharda Gramin Bank-respondent no.3 urged that petitioner was a public sector bank being a subsidiary of the claimant-respondent no.2. The said Bank was inextricably involved in the said transactions. The forged bank drafts were stolen from its offices and the Tribunal had rightly issued notices to the petitioner for its impleadment. Petitioner-Bank is seeking to be absolved of its liability on account of its negligence in the transaction by taking the objection that it has not consented to become a party.

11.Let us consider the main plank of petitioner's submission, namely, petitioner is not a party to the agreement for submission of disputes to the arbitrator under the permanent machinery of arbitration. It is respondent nos. 2 and 3 who have consented and referred the disputes. Petitioner has not joined them. This is not a case of statutory arbitration. Besides there is no claim against the petitioner by respondent no.2. Hence, the petitioner cannot be imp leaded as a party. This, in short, is the case of petitioner.

12. It would be pertinent to consider the genesis of the permanent machinery for arbitration. The Supreme Court in its judgment Oil and Natural Gas Commission and others versus Collector of Central Excise reported at 1992 Supplementary 2 SCC 432 expressed its concern over public sector undertakings of the Central Government and the Union of India fighting their litigations in Court by spending money on fees of counsel, court fees and wasting public time. The Court noted that its time was not to be consumed by litigations which are carried on either side at public expenses. By the said order, the Cabinet Secretary was called upon to look into this matter and report to the Court why the litigation is conducted when the two sides are public sector undertakings or departments or ministries of Union of India. This was followed by the second Order passed in the case ONGC and another versus Collector, Central Excise reported at 1995 Supplementary 4 SCC 541. The Cabinet Secretary conveyed that Governments accept the views of the Court. Court was informed that instructions have been issued to all departments of the Government of India as well as public sector undertakings of the Central Government that all disputes regardless of the type, should be resolved amicably by mutual consultation or through the good offices of empowered agencies of the Government or through arbitration and recourse to litigation should be eliminated.

13.The Court thereupon directed Government of India to set up a Committee consisting of representatives from the Ministry of Industry, the Bureau of Public Enterprises and the Ministry of Law to monitor disputes between the Ministry of Government of India, public sector undertakings of the Government of India and in between themselves. The Committee was also to ensure that no litigation comes to Court or Tribunal without a matter having been first examined by the Committee and its clearance for litigation being given. Pursuant to the foregoing instructions issued by the Government of India and the directions by the Court to constitute the Committee, instructions were issued by the Department of Public Enterprises, Ministry of Industry by which the permanent machinery of arbitration was also constituted. Vide its D.O.No.15(19)/BBE (Fin.) dated 29th March, 1989, it was provided that disputes between public sector enterprises and Government departments are settled through arbitration by Government officials or through the good offices of empowered Government agencies like Bureau of Public Enterprises. The Committee of Secretaries had also suggested that there should be a contractual clause binding the parties to the contracts to refer all disputes to this body.

14.In the aforesaid background of facts, I am unable to accept the submission of learned senior counsel for the petitioner that the settlement of disputes through the permanent arbitration machinery is to be confined strictly to "commercial and other agreements" between the parties. Even though the heading of the "subject" so provides in the memorandum, it is apparent that the directions given by the Supreme Court in the above referred case as also the acceptance of the said views by the Cabinet Secretary on behalf of the Government of India, was to ensure disputes inter se between the public sector undertakings, banks, etc. are not taken to Courts and are to be resolved through negotiation, conciliation and arbitration. To ensure compliance, prior clearance of the Committee of Secretaries is required for litigation in Court.

15.Besides it would be seen that the disputes have arisen out of regular banking transactions with regard to presentation of drafts their encashment etc.

16.The instructions in D.O. Dated 29th March, 1989, providing for an arbitration agreement in commercial contracts cannot be read as negating or whittling down the requirement and obligation of the public sectors and government undertakings to resolve the disputes by negotiations and internal departmental machinery set therefore. While it is true that the petitioner-bank has not joined formally in the proceedings before the Arbitrator under the permanent arbitration machinery and has not consented for the same, it appears to me that the approach adopted is contrary to the statement made on behalf of Government of India before the Court. The petitioner cannot be permitted on the plea of corporate autonomy or absence of formal arbitration agreement to strike a discordant note and walk the solitary and forbidden path. It is for the Government and the concerned ministry to rein in the petitioner-Bank. The argument about the absence of a commercial contract and an arbitration agreement is not tenable. In these transactions relating to negotiable instruments, there would not normally be any commercial contract and there was none between respondents 2 and 3 either, who bound by the Government stand accepted by the Supreme Court of India in Oil and Natural Gas Commission and others Versus Collector of Central Excise (Supra) took recourse to the permanent machinery for arbitration.

17.The matter could be looked at in another perspective. The proceedings being conducted by the Arbitrator are to adjudicate upon the claim made by respondent no.2 against respondent no.3. Respondent no.2 has not chosen to make any claim against petitioner. Undoubtedly, petitioner, as noticed earlier, is inextricably involved with the banking transaction and its presence is necessary in the proceedings for there being proper adjudication. Petitioner is therefore a proper party to enable adjudication of the disputes and claims. Petitioner has offered to cooperate in the proceedings and furnish all documents. The concern of the petitioner is that the Arbitrator had observed that in case negligence of the petitioner is found, it could incur liability. As respondent no.2 has chosen not to prefer any claim against the petitioner, even if petitioner is found to have contributory negligence, no award would be made against the petitioner and respondent no.2's claim/entitlement against respondent No.3 would get reduced proportionately. This would be so in the absence of any claim by respondent no.2 against the petitioner. The writ petition is dismissed with aforesaid observations and directions.