1995 (12) TMI 374 - SC - Companies Law

Whether the clause in the contract gives rise to an arbitration? Held that - 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. Thus Clause 25 of the agreement does not contain an arbitration agreement nor it envisages any difference or dispute that may arise or had arisen between the parties in execution of the works for reference to an arbitrator. The decision of the High Court, therefore, is clearly unsustainable in law. The appeals are accordingly allowed. Appointment of the arbitrator in furtherance of the orders of the Subordinate Judge stands set aside

Issues Involved:
1. Existence of an arbitration agreement.
2. Applicability of limitation to the arbitration claims.
3. Validity of the appointment of an arbitrator by the Subordinate Judge.

Detailed Analysis:

1. Existence of an Arbitration Agreement:
The primary contention revolved around whether the clause in the contract constituted an arbitration agreement. The relevant clause stated: "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."

The Court held that this clause did not constitute an arbitration agreement as defined under Section 2(a) of the Arbitration Act, 1940. The clause did not explicitly or implicitly refer to the submission of disputes to arbitration. It was determined that the clause merely provided the Public Health Engineer with the authority to make final decisions on specified matters during the execution of the contract, but did not extend to resolving disputes through arbitration. The Court cited the precedent in State of U.P. v. Tipper Chand [1980] 2 SCC 341, affirming that an arbitration agreement must explicitly or implicitly provide for the reference of disputes to arbitration.

2. Applicability of Limitation to the Arbitration Claims:
The Court examined whether the claims were barred by limitation under Section 37(1) of the Arbitration Act, 1940, which incorporates the provisions of the Limitation Act, 1963. The Court noted that the cause of arbitration is deemed to have commenced when one party serves notice on the other party requiring the appointment of an arbitrator.

The Court found that the first contract, executed in 1967, was clearly barred by limitation since the notice was issued on September 15, 1980, well beyond the permissible period. For the other two contracts, the Court acknowledged the respondent's argument that the time for execution was extended until 1979. However, the Court left the determination of whether these claims were barred by limitation to the arbitrator, given the disputes over the extension of time.

3. Validity of the Appointment of an Arbitrator by the Subordinate Judge:
The Subordinate Judge had allowed the application under Sections 8 and 20 of the Arbitration Act and directed the parties to file the agreement in court and nominate a panel of names for appointment as an arbitrator. This decision was upheld by the High Court.

However, the Supreme Court found that since there was no arbitration agreement, the appointment of an arbitrator was invalid. The Court emphasized that without an arbitration agreement, the jurisdiction of the court under Sections 8 and 20 of the Arbitration Act could not be invoked. The Court cited Panchu Gopal Base v. Board of Trustees for Port of Calcutta [1993] 4 SCC 338, which held that the provisions of the Limitation Act apply to arbitrations and that the cause of arbitration accrues when the claimant first acquires the right to require arbitration.

Conclusion:
The Supreme Court concluded that Clause 25 of the agreement did not constitute an arbitration agreement. Consequently, the appointment of the arbitrator by the Subordinate Judge was set aside, and the petitions filed by the respondent under Sections 8 and 20 of the Arbitration Act were dismissed. The Court directed that each party bear its own costs throughout the proceedings.

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