2014 (4) TMI 512 - SC - Companies Law

Arbitration agreement - a contract was entered into between the appellant-company and the respondent for establishing 2x8 MVA, 66/11 Sub-stations which included the supply materials, erection and civil works on partial turnkey basis - During the performance of the contract, the respondent raised a claim before the engineer as per clause 48 of the general conditions of the contract and called upon the engineer to settle certain disputes arising in connection with the contract - Since no action was taken by aribitrator, Respondent filed claim in High court under Arbitration Act - Appellant took objection that there was no arbitration agreement. Held that - On a careful reading of the clause 48 of the agreement, it is demonstrable that it provides for the parties to amicably settle any disputes or differences arising in connection with the contract. This is the first part. The second part, as is perceptible, is that when disputes or differences of any kind arise between the parties to the contract relating to the performance of the works during progress of the works or after its completion or before or after the termination, abandonment or breach of the contract, it is to be referred to and settled by the engineer, who, on being requested by either party, shall give notice of his decision within thirty days to the owner and the contractor. There is also a stipulation that his decision in respect of every matter so referred to shall be final and binding upon the parties until the completion of works and is required to be given effect to by the contractor who shall proceed with the works with due diligence. To understand the intention of the parties, this part of the clause is important. On a studied scrutiny of this postulate, it is graphically clear that it does not provide any procedure which would remotely indicate that the concerned engineer is required to act judicially as an adjudicator by following the principles of natural justice or to consider the submissions of both the parties. That apart, the decision of the engineer is only binding until the completion of the works. It only casts a burden on the contractor who is required to proceed with the works with due diligence. Besides the aforesaid, during the settlement of disputes and the court proceedings, both the parties are obliged to carry out the necessary obligation under the contract. The said clause, as we understand, has been engrafted to avoid delay and stoppage of work and for the purpose of smooth carrying on of the works. It is interesting to note that the burden is on the contractor to carry out the works with due diligence after getting the decision from the engineer until the completion of the works. Thus, the emphasis is on the performance of the contract. The language employed in the clause does not spell out the intention of the parties to get the disputes adjudicated through arbitration. It does not really provide for resolution of disputes - Thus clause 48, as we have analysed, read in conjunction with clause 4.1, clearly establishes that there is no arbitration clause in the agreement - In fact, clause 48, even if it is stretched, cannot be regarded as an arbitration clause. The elements and attributes to constitute an arbitration clause, as has been stated in Jagdish Chander (2007 (4) TMI 624 - SUPREME COURT), are absent. Therefore, the irresistible conclusion is that the High Court has fallen into grave error by considering the said clause as providing for arbitration - Decided in favour of appellant.

Issues Involved:
1. Whether Clause 48 of the agreement constitutes an arbitration clause.
2. Interpretation of Clause 4.1 of the agreement.
3. Applicability of Section 11(5) and (6) of the Arbitration and Conciliation Act, 1996.

Issue-wise Detailed Analysis:

1. Whether Clause 48 of the agreement constitutes an arbitration clause:
The primary issue was whether Clause 48 of the agreement between the parties could be considered an arbitration clause. The appellants contended that Clause 48 does not provide for arbitration and cannot be construed as an arbitration clause. They relied on Clause 4.1 of the agreement, which specifies that disputes should be decided by a competent court at Bangalore. The respondents, on the other hand, argued that Clause 48, when read in its entirety, indicates the intention of the parties to refer disputes to arbitration.

The court referred to Section 7 of the Arbitration and Conciliation Act, 1996, which defines an arbitration agreement. The court emphasized that an arbitration agreement must express the intention of the parties to submit disputes to arbitration. The court examined various precedents, including Smt. Rukmanibai Gupta v. Collector, Jabalpur, and others, and State of U.P. v. Tipper Chand, to understand what constitutes an arbitration clause.

Clause 48 was analyzed in detail. It provides for the amicable settlement of disputes and refers disputes to the engineer for a decision within thirty days. However, the court noted that the clause does not require the engineer to act judicially or follow principles of natural justice. The decision of the engineer is only binding until the completion of the works and primarily aims to avoid delays and ensure smooth progress. The court concluded that Clause 48 does not spell out the intention of the parties to get disputes adjudicated through arbitration and does not provide for the resolution of disputes in a manner consistent with arbitration.

2. Interpretation of Clause 4.1 of the agreement:
Clause 4.1 of the agreement was also scrutinized. It states that all disputes arising out of the agreement shall be decided by a competent court at Bangalore. The appellants argued that this clause indicates that disputes should be resolved by a civil court, not through arbitration. The respondents contended that Clause 4.1 only determines territorial jurisdiction and does not preclude arbitration.

The court interpreted Clause 4.1 to mean that disputes and differences are to be adjudicated by the competent civil court. This interpretation was consistent with the analysis of Clause 48, reinforcing the conclusion that the agreement does not contain an arbitration clause.

3. Applicability of Section 11(5) and (6) of the Arbitration and Conciliation Act, 1996:
The court examined whether the designated Judge of the Chief Justice could invoke the power under Section 11(5) and (6) of the Act to appoint an arbitrator based on Clause 48. Given the conclusion that Clause 48 does not constitute an arbitration clause, the court held that the designated Judge erred in appointing an arbitrator under these provisions.

Conclusion:
The appeals were allowed, and the judgments and orders passed by the High Court were set aside. The court found that Clause 48, read in conjunction with Clause 4.1, does not constitute an arbitration clause. Consequently, the appointment of an arbitrator under Section 11(5) and (6) of the Arbitration and Conciliation Act, 1996, was not justified. There was no order as to costs.

← Previous Next →