What is the central principle decided in this case?

A person cannot act as a judge in a dispute where they have an interest. The Managing Director could not adjudicate because of a real likelihood of bias.

Was Clause 60 an arbitration agreement?

No. The Court held Clause 60 did not create a neutral arbitral tribunal and thus failed as an arbitration clause.

What test did the Court apply for bias?

The real likelihood test—whether a reasonable person would think bias was likely in the decision-maker’s position.

Why is the decision important for drafting contracts?

It warns against naming an interested company officer as the final decision-maker. Arbitration must be independent and impartial.

What is the citation of the case?

Bihar State Mineral Development Corp. v. Encon Builders (I) (P) Ltd., (2003) 7 SCC 418.

Bihar State Mineral Development Corp. v. Encon Builders Ltd

Supreme Court of India 2003 Natural Justice Arbitration (2003) 7 SCC 418 6 min read

Author: Gulzar Hashmi

Location: India

Slug: bihar-state-mineral-development-corp-v-encon-builders-ltd

Published: 2025-11-02

PRIMARY_KEYWORDS: real likelihood of bias; natural justice; arbitration clause; nemo judex SECONDARY_KEYWORDS: Clause 60; Managing Director; Patna High Court; SCC 2003; contract tenders

Quick Summary

This case is about fairness in decision-making. The company’s Managing Director was named in the contract to decide disputes. The work was later re-allotted to another agency, and both sides made claims. The key question was simple: can the Managing Director decide the dispute when the company is itself a party?

Held: No. The Supreme Court said there was a real likelihood of bias. A person cannot be a judge in their own cause. Clause 60 did not create a neutral arbitration process, so the Managing Director could not act as the final decision-maker.

Issues

Can the Appellant’s Managing Director decide disputes under Clause 60 without violating natural justice (nemo judex in causa sua)?
Does Clause 60 amount to a valid arbitration agreement creating an impartial tribunal?

Rules

Natural Justice – Real Likelihood Test of Bias: Disqualification applies where a reasonable person would think bias is likely.
Arbitration Agreement Essentials: There must be a clear agreement to refer disputes to a neutral and independent tribunal whose decision is binding.
Nemo Judex Principle: No one should be a judge in their own cause.

Facts (Timeline)

Tender & Agreement

The Appellant invited tenders for removal of soil and minerals including coal. The Respondent’s tender was accepted. Clause 60 said disputes would be decided by the Managing Director.

Performance Dispute

The Appellant claimed monthly coal output was below the agreed figure and re-allotted the work to another agency, alleging loss due to the Respondent.

Cross-Claims

Both parties raised claims. The agreement itself was not formally terminated by the Managing Director, yet the work was reassigned.

Before the Courts

The High Court said Clause 60 is not an arbitration clause and the Appellant cannot act as arbitrator. The Appellant appealed to the Supreme Court.

Timeline graphic depicting tender, dispute, and court stages

Arguments

Appellant

Clause 60 satisfied all essentials of an arbitration agreement.
Managing Director’s decision should be final and binding.
Loss occurred due to Respondent’s low output; re-allotment was justified.

Respondent

Work was illegally re-allotted though the agreement was not terminated.
Clause 60 is not arbitration; it allows a party’s own officer to decide.
Natural justice bars a person from judging their own cause.

Judgment

The Supreme Court upheld the principle that an arbitrator must be neutral. Clause 60 failed because it placed adjudicatory power in the hands of the Appellant’s Managing Director, who was interested in the outcome.

Result: The action of the Managing Director acting as the decision-maker was a nullity. The real likelihood of bias test was satisfied.

Ratio Decidendi

An arbitration agreement requires a consensual reference to an impartial tribunal.
Where a company officer connected with one party decides disputes, there is a real likelihood of bias.
Such a clause cannot be treated as a valid arbitration clause.

Why It Matters

For contracts, especially public tenders, this case is a caution. If the dispute clause names a party’s own executive as the final decision-maker, it risks invalidation. Use independent arbitral institutions or neutral arbitrators.

Key Takeaways

Neutrality first: Arbitration must be independent and impartial.
Draft carefully: Avoid clauses making a party’s officer the final judge.
Bias test: Ask if a reasonable person would suspect likely bias.
Natural justice: Nemo judex applies to private dispute mechanisms too.

Mnemonic + 3-Step Hook

Mnemonic: “ NO MD JUDGE”

NO – No neutrality? No arbitration.
MD – Managing Director cannot decide.
JUDGE – Nemo judex: don’t judge your own cause.

Spot the clause naming a party’s officer.
Test the real likelihood of bias.
Fix by appointing an independent arbitrator.

IRAC Outline

Issue

Is Clause 60 valid as arbitration, and can the Managing Director decide the dispute?

Rule

Neutral, independent tribunal; real likelihood of bias test; nemo judex principle.

Application

MD is part of the Appellant; a reasonable observer would suspect bias.

Conclusion

Clause 60 is not valid arbitration; MD’s decision is a nullity.

Glossary

Real Likelihood of Bias: A reasonable chance of bias, seen from an objective standpoint.
Nemo Judex in Causa Sua: No one should be a judge in their own cause.
Arbitration Agreement: A consensual promise to refer disputes to a neutral tribunal whose award binds the parties.

FAQs

It rejects a clause where an interested officer acts as final judge. Parties should use an independent arbitrator or an institution to preserve neutrality.

By asking whether a fair-minded person would think bias is likely, given the decision-maker’s role and interests.

Name a neutral arbitrator or adopt institutional rules (like SIAC/ICA/DIAC). Avoid naming a party’s own officer as adjudicator.