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Arbitration Act – No Arbitration clause = Vishnu (dead) by L.Rs. …Appellant versus State of Maharashtra and others …Respondents published in judis.nic.in/supremecourt/filename=40853

Arbitration Act – No Arbitration  clause =

 

English: The supreme court of india. Taken abo...

English: The supreme court of india. Taken about 170 m from the main building outside the perimeter wall (Photo credit: Wikipedia)

 

Whether Clause 30  of  B-1  Agreements  entered  into  between  the

 

      Government of Maharashtra and the appellant is in  the  nature  of  an

 

      arbitration clause is the question which arises for  consideration  in

 

      this appeal filed against  judgment  dated  6.5.2004  of  the  learned

 

      Single Judge of the Bombay High Court, Aurangabad Bench. =

 

 In view of the above discussion,  we  hold  that  the  High

 

      Court had rightly held that Clause 30  of  B-I  Agreement  is  not  an

 

      Arbitration Agreement and the trial Court was not right in  appointing

 

      the Chief Engineer as an Arbitrator.

 

 

 

      32.        Before concluding, we may observe that circulars issued  by

 

      the State Government may provide useful guidance  to  the  authorities

 

      involved in the implementation of the project but  the  same  are  not

 

      conclusive of the correct interpretation of the  relevant  clauses  of

 

      the agreement and, in any case, the Government’s interpretation is not

 

      binding on the Courts.

 

 

 

      33.        In the result, the appeals are dismissed.

 

 

 

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3680 OF 2005

 
Vishnu (dead) by L.Rs.
…Appellant

 
versus

 
State of Maharashtra and others
…Respondents

 
WITH

 
CIVIL APPEAL NO. 3681 of 2005

 
J U D G M E N T

 

 

 
G.S. SINGHVI, J.

 

 

 

1. Whether Clause 30 of B-1 Agreements entered into between the
Government of Maharashtra and the appellant is in the nature of an
arbitration clause is the question which arises for consideration in
this appeal filed against judgment dated 6.5.2004 of the learned
Single Judge of the Bombay High Court, Aurangabad Bench.

 

2. The tenders submitted by the appellant, who is now represented by
his legal representatives, for Tondapur Medium Project, Jalgaon Medium
Project Division, Jalgaon and Hatnoor Canal Division No.3, Chopda,
District Jalgaon were accepted by the Competent Authority and five
agreements were executed between the parties on 19.5.1983 and
5.10.1983 (hereinafter referred to as ‘B-1 Agreements’).

 

3. In January 1985, the appellant abandoned the works and submitted
bills for the works already done. He also claimed damages in lieu of
the alleged loss suffered by him.

 

4. After four years, the appellant served notice under Section
80 CPC and then filed Civil Suit No.995/1989 before the trial Court
for declaring the recovery proceedings initiated by the defendants as
illegal, null and void.

 

5. During the pendency of the suit, the appellant filed an application
under Section 21 of the Arbitration Act, 1940 (for short, ‘the 1940
Act’) and prayed that the matter may be referred to an Arbitrator by
appointing the Superintending Engineer or any other Arbitrator as the
sole Arbitrator in terms of Clause 30 of B-1 Agreement. The same was
dismissed by the trial Court vide order dated 29.7.1994 on the ground
that both the parties had not given consent for making a reference to
an Arbitrator.

 

6. Soon thereafter, the appellant filed an application under Order VI
Rule 17 CPC for leave to amend the plaint and incorporate an
additional prayer for reference of the dispute to an Arbitrator. The
same was allowed by the trial Court vide order dated 27.9.1994.

 

7. The respondents challenged the aforesaid order in Civil Revision
Application No.153/1995, which was partly allowed by the learned
Single Judge of the High Court and the order of the trial Court
granting leave to the appellant to amend the prayer clause was set
aside.

 

8. In the meanwhile, the appellant filed application dated 3.2.1995
under Section 20 of the 1940 Act for settlement of accounts and prayed
that respondent Nos.3 and 4 may be directed to file Arbitration
Agreement in terms of Clause 30 of B-1 Agreement executed between the
parties and an Arbitrator may be appointed to decide all the disputes.
On 17.6.1995, the trial Court directed the parties to adduce evidence
on the nature of Clause 30 of B-1 Agreement.

 

9. After considering the evidence adduced by the parties and by
placing reliance on some judgments of the High Courts, the trial Court
allowed the application and declared that Clause 30 of B-1 Agreement
is an arbitration clause. The trial Court also appointed Shri D.G.
Marathe, Chief Engineer (PWD) as an Arbitrator and referred all the
disputes to him.

 

10. Civil Revision Application No.447 of 1997 filed by the
respondents against the order of the trial Court was allowed by the
learned Single Judge of the Bombay High Court and it was held that
Clause 30 of B-1 Agreement cannot be treated as an arbitration clause.
In support of this conclusion, the High Court relied upon the judgment
of this Court in Civil Appeal No. 4700/1985 – State of Maharashtra v.
M/s. Ranjeet Construction.

 

11. While issuing notice of the special leave petition on
4.1.2005, this Court passed the following order:

 

“The learned counsel for the petitioner places reliances on a
three Judge Bench decision of this Court in Mallikarjun Vs.
Gulbarga University 2004 (1) SCC, 372 wherein a similar clause,
as arises for consideration in the present case, was held to be
an arbitration clause.

 
The abovesaid decision seems to be at divergence from the view
taken by a two Judge Bench decision in Bharat Bhushan Bansal
Vs.U.P. Small Industries Corporation Ltd., Kanpur 1999 (2) SCC,
166 wherein reliance has been placed on two judgments, of this
Court, each by three Judges, namely, State of Orissa Vs. Damodar
Das 1996 (2) SCC, 216 and State of U.P. Vs. Tipper Chand 1980(2)
SCC, 341.

 
Issue notice to the respondents and place for hearing before a
three Judge Bench.

 
Issue notice also on the prayer for grant of interim relief.”

 

 

 

12. By an order dated 11.07.2005, the three-Judge Bench
referred the matter to the Constitution Bench for resolving the
conflicting opinions expressed by the co-ordinate Benches. However,
vide order dated 8.12.2010, the Constitution Bench declined to decide
the matter and directed that the case be listed before the three Judge
Bench.

 

13. Shri Rana Mukherjee, learned counsel for the appellant
argued that the impugned order is liable to be set aside because the
High Court’s interpretation of Clause 30 of B-1 Agreement is contrary
to the law laid down in Mallikarjun v. Gulbarga University (2004) 1
SCC 372 and Punjab State v. Dina Nath (2007) 5 SCC 28. Learned
counsel emphasized that Clause 30 of B-1 Agreement makes the decision
of the Superintending Engineer binding on all parties to the agreement
and, therefore, the trial Court was right in treating the same as an
arbitration clause. Shri Mukherjee further argued that in view of
circulars dated 9.5.1977, 12.8.1982 and 21.5.1983 issued by the State
Government, Clause 30 of B-1 Agreements has to be treated as an
arbitration clause and the respondents had no right to challenge the
reference made by the trial Court and thereby question the wisdom of
the State Government.

 

14. Shri Manish Pitale, learned counsel for the respondents
relied upon the judgments of this Court in State of U.P. v. Tipper
Chand (1980) 2 SCC 341, State of Orissa v. Damodar Das (1996) 2 SCC
216 and Bharat Bhushan Bansal v. U.P. Small Industries Corporation
Ltd., Kanpur (1999) 2 SCC 166 and argued that Clause 30 of B-1
Agreement cannot be construed as an arbitration clause simply because
the decision of the Superintending Engineer is made binding on all
parties to the contract. Learned counsel submitted that the judgment
in Mallikarjun v. Gulbarga University (supra) is clearly
distinguishable because Clause 30 of the Agreement, which was
interpreted in that case was substantially different from the one
under consideration. Shri Pitale pointed out that the Superintending
Engineer of Gulbarga Circle was not directly involved in the execution
of contract between the University and the appellant, whereas
Superintending Engineer, who has been named as the officer in Clause
30 of B-1 Agreement entered into between the appellant and the State
Government is overall incharge of the work.

 

15. We have considered the respective arguments. Clauses 29
and 30 of the B-1 Agreement entered into between the parties read as
under:

 

“Clause 29.—All works to be executed under the contract shall be
executed under the direction and subject to the approval in all
respects of the Superintending Engineer of the Circle for the
time being, who shall be entitled to direct at what point or
points and in what manner they are to be commenced, and from
time to time carried on.

 
Clause 30 —Except where otherwise specified in the contract and
subject to the powers delegated to him by Government under the
Code rules then in force the decision of the Superintending
Engineer of the Circle for the time being shall be final,
conclusive, and binding on all parties to the contract upon all
questions, relating to the meaning of the specifications,
designs, drawings, and instructions, hereinbefore mentioned and
as to the quality of workmanship, or materials used on the work,
or as to any other question, claim, right, matter, or thing
whatsoever, if any way arising, out of, or relating to or the
contracts designs, drawings, specifications, estimates,
instructions, orders, or these conditions or otherwise
concerning the works, or the execution, or failure to execute
the same, whether arising, during the progress of the work, or
after the completion or abandonment thereof.”

 

 

 

16. Para 224 of the Maharashtra Public Works Manual, as amended
by Government C.M. No. CAT-1070/460 – DSK.2, dt.9/5/1977, reads as
under:

 

“Para 224 – Clause 30 of B-1 and B-2 Agreement forms lays down
that the decision of the Superintending Engineer in certain
matters relating to the contract would be final. The
Superintending Engineer’s decision taken under this clause
should be considered as that taken as an Arbitrator and this
should be considered as the decision taken under the Arbitration
Act. The decisions taken by the Superintending Engineer under
the other clauses should be considered different from his
decision taken under clause 30 of B-1 and B-2 tender agreement
as an arbitrator.”

 

 

 

17. We shall first consider the question whether Clause 30 of B-
1 Agreement can be construed as an arbitration clause. A conjoint
reading of Clauses 29 and 30 of B-1 Agreements entered into between
the parties shows that the appellant had to execute all works subject
to the approval in all respects of Superintending Engineer of the
Circle, who could issue directions from time to time about the manner
in which work was to commence and execute. By virtue of Clause 30,
decision of the Superintending Engineer of the Circle was made final,
conclusive and binding on all the parties in respect of all questions
relating to the meaning of the specifications, designs, drawings,
quality of workmanship or materials used on the work or any other
question relating to claim, right, matter or things arising out of or
relating to the contract designs, drawings, specifications, estimates,
instructions, orders, etc. These two clauses by which the
Superintending Engineer was given over all supervisory control were
incorporated for smooth execution of the works in accordance with the
approved designs and specifications and also to ensure that quality of
work is not compromised. The power conferred upon the Superintending
Engineer of the Circle was in the nature of a departmental dispute
resolution mechanism and was meant for expeditious sorting out of
problems which could crop up during execution of the work. Since the
Superintending Engineer was made overall in-charge of all works to be
executed under the contract, he was considered by the parties to be
the best person who could provide immediate resolution of any
controversy relating to specifications, designs, drawings, quality of
workmanship or material used, etc. It was felt that if all this was
left to be decided by the regular civil Courts, the object of
expeditious execution of work of the project would be frustrated. This
is the primary reason why the Superintending Engineer of the Circle
was entrusted with the task of taking decision on various matters.
However, there is nothing in the language of Clause 30 from which it
can be inferred that the parties had agreed to confer the role of
arbitrator upon the Superintending Engineer of the Circle.

 

18. In Russell on Arbitration, 21st Edn., the distinction
between an expert determination and arbitration has been spelt out in
the following words:

 

“Many cases have been fought over whether a contract’s chosen
form of dispute resolution is expert determination or
arbitration. This is a matter of construction of the contract,
which involves an objective enquiry into the intentions of the
parties. First, there are the express words of the disputes
clause. If specific words such as ‘arbitrator’, ‘arbitral
tribunal’, ‘arbitration’ or the formula ‘as an expert and not as
an arbitrator’ are used to describe the manner in which the
dispute resolver is to act, they are likely to be persuasive
although not always conclusive…. Where there is no express
wording, the court will refer to certain guidelines. Of these,
the most important used to be, whether there was an ‘issue’
between the parties such as the value of an asset on which they
had not taken defined positions, in which case the procedure was
held to be expert determination; or a ‘formulated dispute’
between the parties where defined positions had been taken, in
which case the procedure was held to be an arbitration. This
imprecise concept is still being relied on. It is unsatisfactory
because some parties to contract deliberately choose expert
determination for dispute resolution. The next guideline is the
judicial function of an arbitral tribunal as opposed to the
expertise of the expert; …. An arbitral tribunal arrives at its
decision on the evidence and submissions of the parties and must
apply the law or if the parties agree, on other consideration;
an expert, unless it is agreed otherwise, makes his own
enquiries, applies his own expertise and decides on his own
expert opinion….”

 

 

 

19. A clause substantially similar to Clause 30 of B-1
Agreement was interpreted by a three Judge Bench in State of U.P v.
Tipper Chand (supra) and it was held that the same cannot be construed
as an arbitration clause. Paragraphs 2 and 3 of the judgment which
contain the reasons for the aforesaid conclusion are reproduced below:

 

“2. The suit out of which this appeal has arisen was filed by
the respondent before us for recovery of Rs. 2000 on account of
dues recoverable from the Irrigation Department of the
petitioner State for work done by the plaintiff in pursuance of
an agreement, clause 22 of which runs thus:

 
“Except where otherwise specified in the contract the
decision of the Superintending Engineer for the time being
shall be final, conclusive and binding on all parties to
the contract upon all questions relating to the meaning of
the specifications, design, drawing and instructions
hereinbefore mentioned. The decision of such Engineer as to
the quality of workmanship, or materials used on the work,
or as to any other question, claim, right, matter or things
whatsoever, in any way arising out of or relating to the
contract, designs, drawing specifications, estimates,
instructions, orders, or these conditions, or otherwise
concerning the works, or the execution or failure to
execute the same, whether arising during the progress of
the work, or after the completion or abandonment of the
contract by the contractor, shall also be final, conclusive
and binding on the contractor.”

 
3. After perusing the contents of the said clause and hearing
learned Counsel for the parties we find ourselves in complete
agreement with the view taken by the High Court. Admittedly the
clause does not contain any express arbitration agreement. Nor
can such an agreement be spelled out from its terms by
implication, there being no mention in it of any dispute, much
less of a reference thereof. On the other hand, the purpose of
the clause clearly appears to be to vest the Superintending
Engineer with supervision of the execution of the work and
administrative control over it from time to time.”

 

 

 

20. In State of Maharashtra v. M/s. Ranjeet Construction
(supra), the two Judge Bench of this Court interpreted Clause 30 of
the agreement entered into between the parties, which is almost
identical to the clause under consideration, relied upon the judgment
in State of U.P. v. Tipper Chand (supra) and held that Clause 30
cannot be relied upon for seeking a reference to an Arbitrator of any
dispute arising under the contract.

 

21. In State of Orissa v. Damodar Das (supra), the three Judge
Bench interpreted Clause 21 of the contract entered into between the
appellant and the respondent for construction of sump and pump chamber
etc. for pipes W/S to Village Kentile. The respondent abandoned the
work before completion of the project and accepted payment of the
fourth running bill. Subsequently, he raised dispute and sent
communication to the Chief Engineer, Public Health, Orissa for making
a reference to an Arbitrator. The Subordinate Judge, Bhubaneswar
allowed the application filed by the respondent under Section 8 of the
1940 Act and the order passed by him was upheld by the High Court.
This Court referred to Clause 25 of the agreement, relied upon the
judgment in State of U.P. v. Tipper Chand (supra) and held that the
said clause cannot be interpreted as providing resolution of dispute
by an Arbitrator. Paragraphs 9 and 10 of the judgment, which contain
discussion on the subject, are extracted below:

 

“9. The question, therefore, is whether there is any arbitration
agreement for the resolution of the disputes. The agreement
reads thus:

 
“25. Decision of Public Health Engineer to be final.— Except
where otherwise specified in this contract, the decision of
the Public Health Engineer for the time being shall be
final, conclusive and binding on all parties to the contract
upon all questions relating to the meaning of the
specifications; drawings and instructions hereinbefore
mentioned and as to the quality of workmanship or materials
used on the work, or as to any other question, claim, right,
matter or thing, whatsoever in any way arising out of, or
relating to, the contract, drawings, specifications,
estimates, instructions, orders or these conditions, or
otherwise concerning the works or the execution or failure
to execute the same, whether arising during the progress of
the work or after the completion or the sooner determination
thereof of the contract.”

 

10. Section 2(a) of the Act defines “arbitration agreement” to
mean “a written agreement to submit present or future
differences to arbitration, whether an arbitrator is named
therein or not”. Indisputably, there is no recital in the above
clause of the contract to refer any dispute or difference
present or future to arbitration. The learned counsel for the
respondent sought to contend from the marginal note, viz., “the
decision of Public Health Engineer to be final” and any other
the words “claim, right, matter or thing, whatsoever in any way
arising out of the contract, drawings, specifications,
estimates, instructions, orders or these conditions, or
otherwise concerning the works or the execution or failure to
execute the same, whether arising during the progress of the
work or after the completion or the sooner determination thereof
of the contract” and contended that this clause is wide enough
to encompass within its ambit, any disputes or differences
arising in the aforesaid execution of the contract or any
question or claim or right arising under the contract during the
progress of the work or after the completion or sooner
determination thereof for reference to an arbitration. The High
Court, therefore, was right in its conclusion that the aforesaid
clause gives right to arbitration to the respondent for
resolution of the dispute/claims raised by the respondent. In
support thereof he relied on Ram Lal Jagan Nath v. Punjab State
through Collector AIR 1966 Punj 436. It is further contended
that for the decision of the Public Health Engineer to be final,
the contractor must be given an opportunity to submit his case
to be heard either in person or through counsel and a decision
thereon should be given. It envisages by implication existence
of a dispute between the contractor and the Department. In other
words, the parties construed that the Public Health Engineer
should be the sole arbitrator. When the claim was made in
referring the dispute to him, it was not referred to the court.
The respondent is entitled to avail of the remedy under Sections
8 and 20 of the Act. We find it difficult to give acceptance to
the contention. A reading of the above clause in the contract as
a conjoint whole, would give us an indication that during the
progress of the work or after the completion or the sooner
determination thereof of the contract, the Public Health
Engineer has been empowered to decide all questions relating to
the meaning of the specifications, drawings, instructions
hereinbefore mentioned and as to the quality of workmanship or
material used on the work or as to any other question, claim,
right, matter or thing whatsoever in any way arising out of, or
relating to, the contract drawings, specifications, estimates,
instructions, orders or those conditions or otherwise concerning
the works or the execution or failure to execute the same has
been entrusted to the Public Health Engineer and his decision
shall be final. In other words, he is nominated only to decide
the questions arising in the quality of the work or any other
matters enumerated hereinbefore and his decision shall be final
and bind the contractor. A clause in the contract cannot be
split into two parts so as to consider one part to give rise to
difference or dispute and another part relating to execution of
work, its workmanship etc. It is settled now that a clause in
the contract must be read as a whole. If the construction
suggested by the respondent is given effect then the decision of
the Public Health Engineer would become final and it is not even
necessary to have it made rule of the court under the
Arbitration Act. It would be hazardous to the claim of a
contractor to give such instruction and give power to the Public
Health Engineer to make any dispute final and binding on the
contractor. A careful reading of the clause in the contract
would give us an indication that the Public Health Engineer is
empowered to decide all the questions enumerated therein other
than any disputes or differences that have arisen between the
contractor and the Government. But for clause 25, there is no
other contract to refer any dispute or difference to an
arbitrator named or otherwise.”

 

(emphasis supplied)

 

 

 

22. In K.K. Modi v. K.N. Modi (1998) 3 SCC 573, this Court
interpreted Clause 9 of the Memorandum of Understanding signed by two
groups of Modi family. Group ‘A’ consisted of Kedar Nath Modi (younger
brother of Seth Gujjar Mal Modi and his three sons) and Group ‘B’
consisted of five sons of Seth Gujjar Mal Modi. To resolve the
disputes and differences between two groups, the financial
institutions, which had lent money, got involved. Ultimately, a
Memorandum of Understanding was signed by the parties on 24.1.1989,
Clause 9 of which reads as under:

 

“Implementation will be done in consultation with the financial
institutions. For all disputes, clarifications etc. in respect
of implementation of this agreement, the same shall be referred
to the Chairman, IFCI or his nominees whose decisions will be
final and binding on both the groups.”

 

 

 

The Chairman, Industrial Finance Corporation of India (IFCI) formed a
committee of experts to assist him in deciding various questions. The
committee of experts and the Chairman held discussion with both the
groups. On 8.12.1995, the Chairman, IFCI gave his detailed report /
decision. In his covering letter, the Chairman indicated that the
Memorandum of Understanding had been substantially implemented during
1989 to 1995 and with his decisions on the disputes / clarifications
given by him, it will be possible to implement the remaining part. The
report of the Chairman was neither filed in the competent Court as an
award nor any application was submitted for making the report a rule
or decree of the Court. However, the Chairman issued series of
directions for implementing the report. On 18.5.1996, the appellants
filed a petition under Section 33 of the 1940 Act in the Delhi High
Court challenging report dated 8.12.1995 by asserting that it was an
award in arbitration proceedings. The opposite parties filed civil
suit in the High Court to challenge the report of the Chairman.

 

23. One of the questions formulated by this Court was whether
Clause 9 of the Memorandum of Understanding constituted an Arbitration
Agreement and whether the decision of the Chairman, IFCI constituted
an award. The two Judge Bench first culled out the following
attributes of an Arbitration Agreement:

 

“(1) The arbitration agreement must contemplate that the
decision of the tribunal will be binding on the parties to the
agreement,

 

(2) that the jurisdiction of the tribunal to decide the rights
of parties must derive either from the consent of the parties or
from an order of the court or from a statute, the terms of which
make it clear that the process is to be an arbitration,

 

(3) the agreement must contemplate that substantive rights of
parties will be determined by the agreed tribunal,

 

(4) that the tribunal will determine the rights of the parties
in an impartial and judicial manner with the tribunal owing an
equal obligation of fairness towards both sides,

 

(5) that the agreement of the parties to refer their disputes to
the decision of the tribunal must be intended to be enforceable
in law and lastly,

 

(6) the agreement must contemplate that the tribunal will make a
decision upon a dispute which is already formulated at the time
when a reference is made to the tribunal.

 

The other factors which are relevant include, whether the
agreement contemplates that the tribunal will receive evidence
from both sides and hear their contentions or at least give the
parties an opportunity to put them forward; whether the wording
of the agreement is consistent or inconsistent with the view
that the process was intended to be an arbitration, and whether
the agreement requires the tribunal to decide the dispute
according to law.”

 

 

 

The Court then referred to several precedents including English cases
and held:

 

“In the present case, the Memorandum of Understanding records
the settlement of various disputes as between Group A and Group
B in terms of the Memorandum of Understanding. It essentially
records a settlement arrived at regarding disputes and
differences between the two groups which belong to the same
family. In terms of the settlement, the shares and assets of
various companies are required to be valued in the manner
specified in the agreement. The valuation is to be done by M/s
S.B. Billimoria & Co. Three companies which have to be divided
between the two groups are to be divided in accordance with a
scheme to be prepared by Bansi S. Mehta & Co. In the
implementation of the Memorandum of Understanding which is to be
done in consultation with the financial institutions, any
disputes or clarifications relating to implementation are to be
referred to the Chairman, IFCI or his nominees whose decision
will be final and binding. The purport of clause 9 is to prevent
any further disputes between Groups A and B. Because the
agreement requires division of assets in agreed proportions
after their valuation by a named body and under a scheme of
division by another named body. Clause 9 is intended to clear
any other difficulties which may arise in the implementation of
the agreement by leaving it to the decision of the Chairman,
IFCI. This clause does not contemplate any judicial
determination by the Chairman of the IFCI. He is entitled to
nominate another person for deciding any question. His decision
has been made final and binding. Thus, clause 9 is not intended
to be for any different decision than what is already agreed
upon between the parties to the dispute. It is meant for a
proper implementation of the settlement already arrived at. A
judicial determination, recording of evidence etc. are not
contemplated. The decision of the Chairman, IFCI is to be
binding on the parties. Moreover, difficulties and disputes in
implementation may not be between the parties to the Memorandum
of Understanding. It is possible that the valuers nominated in
the Memorandum of Understanding or the firm entrusted with the
responsibility of splitting some of the companies may require
some clarifications or may find difficulties in doing the work.
They can also resort to clause 9. Looking to the scheme of the
Memorandum of Understanding and the purpose behind clause 9, the
learned Single Judge, in our view, has rightly come to the
conclusion that this was not an agreement to refer disputes to
arbitration. It was meant to be an expert’s decision. The
Chairman, IFCI has designated his decision as a decision. He has
consulted experts in connection with the valuation and division
of assets. He did not file his decision in court nor did any of
the parties request him to do so.”

 

(emphasis supplied)

 

 

 

24. In Bharat Bhushan Bansal v. U.P. Small Industries
Corporation Limited, Kanpur (1999) 2 SCC 166, the two Judge Bench
interpreted Clauses 23 and 24 of the agreement entered into between
the parties for execution of work of construction of a factory and
allied buildings of the respondent at India Complex, Rai Bareli. Those
clauses were as under:

 

“Decision of the Executive Engineer of the UPSIC to be final on
certain matters

 
23. Except where otherwise specified in the contract, the
decision of the Executive Engineer shall be final, conclusive
and binding on both the parties to the contract on all questions
relating to the meaning, the specification, design, drawings and
instructions hereinbefore mentioned, and as to the quality of
workmanship or materials used on the work or as to any other
question whatsoever in any way arising out of or relating to the
designs, drawings, specifications, estimates, instructions,
orders or otherwise concerning the works or the execution or
failure to execute the same whether arising during the progress
of the work, or after the completion thereof or abandonment of
the contract by the contractor shall be final and conclusive and
binding on the contractor.

 
Decision of the MD of the UPSIC on all other matters shall be
final

 
24. Except as provided in clause 23 hereof, the decision of the
Managing Director of the UPSIC shall be final, conclusive and
binding on both the parties to the contract upon all questions
relating to any claim, right, matter or thing in any way arising
out of or relating to the contract or these conditions or
concerning abandonment of the contract by the contractor and in
respect of all other matters arising out of this contract and
not specifically mentioned herein.”

 

 

 

It was argued on behalf of the appellant that Clause 24 should be
construed as an arbitration clause because the decision of the
Managing Director was binding on both the parties. The two Judge
Bench analysed Clauses 23 and 24 of the agreement, referred to the
judgment in K.K. Modi v. K.N. Modi (supra), State of U.P. v. Tipper
Chand (supra), State of Orissa v. Damodar Das (supra) and observed:

 

“In the present case, the Managing Director is more in the
category of an expert who will decide claims, rights, or matters
in any way pertaining to the contract. The intention appears to
be more to avoid disputes than to decide formulated disputes in
a quasi-judicial manner. In para 18.067 of Vol. 2 of Hudson on
Building and Engineering Contracts. Illustration (8) deals with
the case where, by the terms of a contract, it was provided that
the engineer

 

“shall be the exclusive judge upon all matters relating to
the construction, incidents, and the consequences of these
presents, and of the tender, specifications, schedule and
drawings of the contract, and in regard to the execution of
the works or otherwise arising out of or in connection with
the contract, and also as regards all matters of account,
including the final balance payable to the contractor, and
the certificate of the engineer for the time being, given
under his hand, shall be binding and conclusive on both
parties.”

 

It was held that this clause was not an arbitration clause and
that the duties of the Engineer were administrative and not
judicial.

 
Since clause 24 does not contemplate any arbitration, the
application of the appellant under Section 8 of the Arbitration
Act, 1940 was misconceived. The appeal is, therefore, dismissed
though for reasons somewhat different from the reasons given by
the High Court. there will, however, be no order as to costs.”

 

 

 

25. The aforesaid judgments fully support the view taken by us
that Clause 30 of B-1 Agreement is not an arbitration clause.

 

26. The issue deserves to be looked into from another angle. In
terms of Clause 29 of B-1 Agreement, the Superintending Engineer of
the Circle was invested with the authority to approve all works to be
executed under the contract. In other words, the Superintending
Engineer was to supervise execution of all works. The power conferred
upon him to take decision on the matters enumerated in Clause 30 did
not involve adjudication of any dispute or lis between the State
Government and the contractor. It would have been extremely anomalous
to appoint him as Arbitrator to decide any dispute or difference
between the parties and pass an award. How could he pass an award on
any of the issues already decided by him under Clause 30? Suppose, he
was to decline approval to the designs, drawings etc. or was to object
to the quality of materials etc. and the contractor had a grievance
against his decision, the task of deciding the dispute could not have
been assigned to the Superintending Engineer. He could not be
expected to make adjudication with an un-biased mind. Even if he may
not be actually biased, the contractor will always have a lurking
apprehension that his decision will not be free from bias. Therefore,
there is an inherent danger in treating the Superintending Engineer as
an Arbitrator. This facet of the problem was highlighted in the
judgment of the two Judge Bench in Bihar State Mineral Development
Corporation and another v. Encon Builders (I)(P) Limited (2003) 7 SCC
418. In that case, the agreement entered into between the parties
contained a clause that any dispute arising out of the agreement shall
be referred to the Managing Director of the Corporation and his
decision shall be final and binding on both the parties. After
noticing several precedents, the two Judge Bench observed:

 

“There cannot be any doubt whatsoever that an arbitration
agreement must contain the broad consensus between the parties
that the disputes and differences should be referred to a
domestic tribunal. The said domestic tribunal must be an
impartial one. It is a well-settled principle of law that a
person cannot be a judge of his own cause. It is further well
settled that justice should not only be done but manifestly seen
to be done.

 
Actual bias would lead to an automatic disqualification where
the decision-maker is shown to have an interest in the outcome
of the case. Actual bias denotes an arbitrator who allows a
decision to be influenced by partiality or prejudice and thereby
deprives the litigant of the fundamental right to a fair trial
by an impartial tribunal.

 
As the acts of bias on the part of the second appellant arose
during execution of the agreement, the question as to whether
the respondent herein entered into the agreement with his eyes
wide open or not takes a back seat. An order which lacks
inherent jurisdiction would be a nullity and, thus, the
procedural law of waiver or estoppel would have no application
in such a situation.

 
It will bear repetition to state that the action of the second
appellant itself was in question and, thus, indisputably, he
could not have adjudicated thereupon in terms of the principle
that nobody can be a judge of his own cause.”

 

 

 

27. We may now notice the judgments relied upon by the learned
counsel for the appellant and find out whether the proposition laid
down therein supports his argument that Clause 30 should be treated as
an arbitration clause.

 

28. The facts of Mallikarjun v. Gulbarga University case
(supra) were that the respondent-University had accepted the tender
submitted by the appellant for construction of an indoor stadium. In
pursuance of the work order issued by the competent authority, the
appellant completed the construction. Thereafter, he invoked the
arbitration clause for resolution of the disputes which arose from the
execution of the project. Superintending Engineer, PWD, Gulbarga
Circle was entrusted with the task of deciding the disputes. The
parties filed their respective claims before the Superintending
Engineer. He considered the same and passed an award. The appellant
filed execution petition in the Court of Principal Civil Judge (Senior
Division), Gulbarga. The respondent filed an objection petition under
Section 47 of the CPC. The Executing Court rejected the objection. The
University challenged the decision of the Executing Court and pleaded
that the agreement on the basis of which the dispute was referred to
the Superintending Engineer was not an arbitration agreement and, as
such, award made by him cannot be treated as one made under the 1940
Act. The High Court accepted the plea of the University and set aside
the order of the trial Court. Clause 30 of the agreement which came up
for interpretation by this Court was as under:

 

“The decision of the Superintending Engineer of Gulbarga Circle
for the time being shall be final, conclusive and binding on all
parties to the contract upon all questions relating to the
meaning of the specifications, designs, drawings and
instructions hereinbefore mentioned and as to the quality of
workmanship or material used on the work, or as to any other
question, claim, right, matter, or thing whatsoever, in any way
arising out of or relating to the contract designs, drawings,
specifications, estimates, instructions, orders or those
conditions, or otherwise concerning the works or the execution
or failure to execute the same, whether arising during the
progress of the work, or after the completion or abandonment
thereof in case of dispute arising between the contractor and
Gulbarga University.”

 

 

 

After analyzing the aforesaid clause and making a reference to
essential elements of arbitration agreement enumerated in Bihar State
Mineral Development Corporation v. Encon Builders (I)(P) Limited
(supra), the three Judge Bench held:

 

“Applying the aforesaid principle to the present case, clause 30
requires the Superintending Engineer, Gulbarga Circle, Gulbarga,
to give his decision on any dispute that may arise out of the
contract. Further, we also find that the agreement postulates
present or future differences in connection with some
contemplated affairs inasmuch as there also was an agreement
between the parties to settle such difference by a private
tribunal, namely, the Superintending Engineer, Gulbarga Circle,
Gulbarga. It was also agreed between the parties that they would
be bound by the decision of the Tribunal. The parties were also
ad idem.

 

In the aforesaid view of the matter, it must be held that the
agreement did contain an arbitration clause.”

 

 

 

The Bench distinguished the judgment in Bharat Bhushan Bansal’s case
by making the following observations:

 

“A bare comparison of clause 30 of the contract agreement
involved in the present matter and clauses 23 and 24 involved in
Bharat Bhushan Bansal case would show that they are not
identical. Whereas clause 30 of the agreement in question
provides for resolution of the dispute arising out of the
contract by persons named therein; in terms of clause 24, there
was no question of decision by a named person in the dispute
raised by the parties to the agreement. The matters which are
specified under clauses 23 and 24 in Bharat Bhushan Bansal case
were necessarily not required to arise out of the contract, but
merely claims arising during performance of the contract. Clause
30 of the agreement in the present case did provide for
resolution of the dispute arising out of the contract by the
Superintending Engineer, Gulbarga Circle, Gulbarga. For that
reason, the case relied upon by the learned counsel for the
respondent is distinguishable.

 

Once clause 30 is constituted to be a valid arbitration
agreement, it would necessarily follow that the decision of the
arbitrator named therein would be rendered only upon allowing
the parties to adduce evidence in support of their respective
claims and counter-claims as also upon hearing the parties to
the dispute. For the purpose of constituting the valid
arbitration agreement, it is not necessary that the conditions
as regards adduction of evidence by the parties or giving an
opportunity of hearing to them must specifically be mentioned
therein. Such conditions, it is trite, are implicit in the
decision-making process in the arbitration proceedings.
Compliance with the principles of natural justice inheres in an
arbitration process. They, irrespective of the fact as to
whether recorded specifically in the arbitration agreement or
not are required to be followed. Once the principles of natural
justice are not complied with, the award made by the arbitrator
would be rendered invalid. We, therefore, are of the opinion
that the arbitration clause does not necessitate spelling out of
a duty on the part of the arbitrator to hear both parties before
deciding the question before him. The expression “decision”
subsumes adjudication of the dispute. Here in the instant case,
it will bear repetition to state, that the disputes between the
parties arose out of a contract and in relation to matters
specified therein and, thus, were required to be decided and
such decisions are not only final and binding on the parties,
but they are conclusive which clearly spells out the finality of
such decisions as also their binding nature.

 

A clause which is inserted in a contract agreement for the
purpose of prevention of dispute will not be an arbitration
agreement. Such a provision has been made in the agreement
itself by conferring power upon the Engineer-in-Charge to take a
decision thereupon in relation to the matters envisaged under
clauses 31 and 32 of the said agreement. Clauses 31 and 32 of
the said agreement provide for a decision of the Engineer-in-
Charge in relation to the matters specified therein. The
jurisdiction of the Engineer-in-Charge in relation to such
matters are limited and they cannot be equated with an
arbitration agreement. Despite such clauses meant for prevention
of dispute arising out of a contract, significantly, clause 30
has been inserted in the contract agreement by the parties.

 

The Superintending Engineer, Gulbarga Circle, Gulbarga, is an
officer of the Public Works Department in the Government of
Karnataka. He is not an officer of the University. He did not
have any authority or jurisdiction under the agreement or
otherwise either to supervise the construction works or issue
any direction(s) upon the contractor in relation to the contract
job. He might be an ex officio member of the Building Committee,
but thereby or by reason thereof, he could not have been given
nor in fact had been given an authority to supervise the
contract job or for that matter issue any direction upon the
contractor as regards performance of the contract.”
(emphasis supplied)

 

 

 

29. In Punjab State v. Dina Nath (supra), the two Judge Bench
was called upon to consider whether clause 4 of work order No.114
dated 16.5.1985 constituted an arbitration agreement. The clause in
question was as under:

 

“Any dispute arising between the department and the
contractor/society shall be referred to the Superintending
Engineer, Anandpur Sahib, Hydel Circle No.1, Chandigarh for
orders and his decision will be final and acceptable/binding on
both the parties.”

 

 

 

After noticing the judgment in K.K. Modi v. K.N. Modi, the Court
observed:
“Keeping the ingredients as indicated by this Court in K.K.Modi
in mind for holding a particular agreement as an arbitration
agreement, we now proceed to examine the aforesaid ingredients
in the context of the present case:

 
a) Clause 4 of the Work Order categorically states that the
decision of the Superintending engineer shall be binding on
the parties.

 

b) The jurisdiction of the Superintending Engineer to decide
the rights of the parties has also been derived from the
consent of the parties to the Work Order.

 

c) The agreement contemplates that the Superintending Engineer
shall determine substantive rights of parties as the clause
encompasses all varieties of disputes that may arise
between the parties and does not restrict the jurisdiction
of the Superintending Engineer to specific issues only.

 

d) That the agreement of the parties to refer their disputes
to the decision of the Superintending Engineer is intended
to be enforceable in law as it is binding in nature.

 

The words “any dispute” appears in clause 4 of the Work Order.
Therefore, only on the basis of the materials produced by the
parties in support of their respective claims a decision can be
arrived at in resolving the dispute between the parties. The use
of the words “any dispute” in clause 4 of the Work order is wide
enough to include all disputes relating to the said Work Order.
Therefore, when a party raises a dispute for non-payment of
money after completion of the work, which is denied by the other
party, such a dispute would come within the meaning of
“arbitration agreement” between the parties. Clause 4 of the
Work Order also clearly provides that any dispute between the
department and the contractor shall be referred to the
Superintending Engineer, Hydel Circle No.1, Chandigarh for
orders. The word “orders” would indicate some expression of
opinion, which is to be carried our, or enforced and which is a
conclusion of a body (in this case Superintending engineer,
Hydel Circle No.1, Chandigarh). Then again the conclusion and
decision of the Superintending Engineer will be final and
binding on both the parties. This being the position in the
present case and in view of the fact that clause 4 of the Work
Order is not under challenge before us, the decision that would
be arrived at by Superintending Engineer, Hydel Circle No.1,
Chandigarh must also be binding on the parties as a result
whereof clause 4 must be held to be a binding arbitration
agreement.”

 

 

 

The Bench distinguished the judgment in State of Orissa v. Damodar Das
(supra) by making the following observations:

 

“From a plain reading of this clause in Damodar Das it is
evident that the powers of the Public Health Engineer were
essentially to supervise and inspect. His powers were limited
to the questions relating to the meaning of the specifications,
drawings and instructions, quality of workmanship or materials
used on the work or as to any other question, claim, right,
matter, drawings, specifications, estimates, instructions,
orders or these conditions or otherwise concerning the works or
the execution or failure to execute the same. However, in the
case before us, the Superintending Engineer was given full power
to resolve any dispute arising between the parties which power
in our view is wide enough to cover any nature of dispute raised
by the parties. The clause in the instant case categorically
mentions the word “dispute” which would be referred to him and
states “his decision would be final and acceptable/binding on
both the parties.”

 

 

 

30. In our opinion, neither of the judgments relied upon by
Shri Mukherjee help the cause of his client. In Mallikarjun’s case,
this Court noted that Superintending Engineer, Gulbarga Circle,
Gulbarga was not an officer of the University and he did not have any
authority or jurisdiction either to supervise the construction work or
issue any direction to the contractor in relation to the project. The
Court also emphasized that the parties had agreed that any dispute
arising from the contract would be referred to the decision of the
Superintending Engineer. These factors are missing in the instant
case. Likewise, Clause 4 of the work order which came up for
interpretation in Punjab State v. Dina Nath (supra) contemplated
resolution by the Superintending Engineer of any dispute arising
between the department and the contractor. Therefore, the relevant
clause of the work order was rightly treated as an Arbitration
Agreement.

 

31. In view of the above discussion, we hold that the High
Court had rightly held that Clause 30 of B-I Agreement is not an
Arbitration Agreement and the trial Court was not right in appointing
the Chief Engineer as an Arbitrator.

 

32. Before concluding, we may observe that circulars issued by
the State Government may provide useful guidance to the authorities
involved in the implementation of the project but the same are not
conclusive of the correct interpretation of the relevant clauses of
the agreement and, in any case, the Government’s interpretation is not
binding on the Courts.

 

33. In the result, the appeals are dismissed.

 
…………………………………..J.
(G.S. SINGHVI)

 
…………………………………..J.
(V. GOPALA GOWDA)

 
………………………
…………..J.
(C. NAGAPPAN)
New Delhi,
October 4, 2013.

 

 

 
———————–
26

 

 

 

 

 

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