2013 (5) TMI 375 - SC - Companies Law

Arbitration agreement - appellant calculated the actual extra cost incurred in completing the work and the total amount recoverable from the petitioner in terms of the contract - Whether the Chief Justice or his designate can examine the tenability of a claim, in particular whether a claim is barred by res judicata, while considering an application under section 11 of the Act? - Held that - As decided in SBP & Co. case (2005 (10) TMI 495 - SUPREME COURT) The Chief Justice or his designate is not expected to go into the merits of the claim or examine the tenability of the claim, in an application under section 11 of the Act. The Chief Justice or his Designate may however choose to decide whether the claim is a dead (long-barred) claim or whether the parties have, by recording satisfaction, exhausted all rights, obligations and remedies under the contract, so that neither the contract nor the arbitration agreement survived. When it is said that the Chief Justice or his Designate may choose to decide whether the claim is a dead claim, it is implied that he will do so only when the claim is evidently and patently a long time barred claim and there is no need for any detailed consideration of evidence. The question whether a claim is barred by res judicata, does not arise for consideration in a proceedings under section 11 of the Act. Such an issue will have to be examined by the arbitral tribunal. A decision on res judicata requires consideration of the pleadings as also the claims/issues/points and the award in the first round of arbitration, in juxtaposition with the pleadings and the issues/points/claims in the second arbitration. The limited scope of section 11 of the Act does not permit such examination of the maintainability or tenability of a claim either on facts or in law. Thus the Designate has clearly exceeded his limited jurisdiction under section 11 by deciding that the claim for extra cost, though covered by the arbitration agreement was barred by limitation and by the principle of res judiata. He was also not justified in terming the application under section 11 of the Act as misconceived and malafide . Nor could he attribute mala fides to the appellant, a public sector company, in filing an application under section 11 of the Act, without any material to substantiate it. The Designate should have avoided the risks and dangers involved in deciding an issue relating to the tenability of the claim without necessary pleadings and documents, in a proceeding relating to the limited issue of appointing an Arbitrator. It is clear that the Designate committed a jurisdictional error in dismissing the application filed by the appellant under section 11 of the Act, on the ground that the claim for extra cost was barred by res judicata and by limitation. Consideration of an application under section 11 of the Act, does not extend to consideration of the merits of the claim or the chances of success of the claim - appeal is allowed and the order of the Designate is set aside.

Issues Involved:
1. Whether the Chief Justice or his designate can examine the tenability of a claim, particularly if it is barred by res judicata, while considering an application under section 11 of the Arbitration and Conciliation Act, 1996.
2. Whether the Designate was justified in holding that the claim was barred by res judicata and that the application under section 11 of the Act was misconceived and mala fide.

Issue-wise Detailed Analysis:

Re: Issue (i): Examination of Tenability of Claim by Chief Justice or Designate under Section 11 of the Act

The Supreme Court emphasized that the Chief Justice or his designate, when considering an application under section 11 of the Arbitration and Conciliation Act, 1996, is primarily tasked with determining the existence of an arbitration agreement between the parties. The Court, referencing National Insurance Co. Ltd. vs. Boghara Polyfab Private Limited and SBP & Co. v. Patel Engineering Ltd., categorized the issues to be considered into three groups. The first category involves deciding whether the application has been made to the appropriate High Court and whether there is an arbitration agreement. The second category includes issues like whether the claim is a dead (long-barred) claim or a live claim, which the Chief Justice or his designate may choose to decide or leave to the Arbitral Tribunal. The third category, which should be left exclusively to the Arbitral Tribunal, includes whether a claim falls within the arbitration clause and the merits of any claim involved in the arbitration.

The Court clarified that determining whether a claim is barred by res judicata or is mala fide requires examining facts and relevant documents, which is beyond the scope of section 11 proceedings. The Chief Justice or his designate should not delve into the merits of the claim or its tenability. However, they may decide if a claim is evidently and patently a long time barred claim without needing detailed consideration of evidence. For example, if a claim is made a decade after the completion of work without any acknowledgment of liability, it may be considered a dead claim. Conversely, if a claim is made within a reasonable period with some justification, the matter should be left to the Arbitral Tribunal.

Re: Issue (ii): Justification of the Designate's Decision on Res Judicata and Mala Fides

The Designate dismissed the appellant's application under section 11, labeling it as misconceived, barred by res judicata, and mala fide. The Designate reasoned that the claim for extra cost had already been considered and rejected by the Arbitrator, was barred by limitation, and should have been crystallized and claimed in the first round of arbitration.

The Supreme Court found that the Designate exceeded his jurisdiction by deciding on the tenability of the claim, which is the domain of the Arbitral Tribunal. The Designate's findings were deemed unwarranted as they ventured into the merits of the claim and its chances of success, which are beyond the limited scope of section 11 proceedings. The Court noted that the Designate should not have attributed mala fides to the appellant, a public sector company, without substantial evidence.

The appellant argued that under clause 7.0.9.0 of the contract, damages for extra cost incurred by completing the work through an alternative agency could only be claimed after the actual expenditure was incurred. The claim for extra cost was not included in the first arbitration because the final bill was settled after the arbitration hearings concluded. The Supreme Court agreed that the appellant was not expected to provide details of the final bill settlement in the section 11 petition and found the Designate's assumption that the claim should have been made in the first arbitration to be baseless.

The Supreme Court set aside the Designate's order and allowed the application under section 11, appointing Justice P.K. Bahri (Retd.) as the sole arbitrator to decide the appellant's claim regarding the additional cost for completing the work. The Court clarified that all contentions, including those of limitation, maintainability, and res judicata, could be raised before the arbitrator. The decision emphasized that the Designate committed a jurisdictional error by dismissing the application based on the tenability of the claim.

Conclusion:

The Supreme Court allowed the appeal, set aside the Designate's order, and appointed an arbitrator to decide the appellant's claim for additional costs. The Court underscored that the Chief Justice or his designate should not adjudicate on the merits or tenability of claims in section 11 proceedings, which should be left to the Arbitral Tribunal.

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