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PETITIONER:

M.DAYANAND REDDY

Vs.

RESPONDENT:

A.P. INDUSTRIAL INFRASTRUCTURE CORPORATION LTD. AND ORS.

DATE OF JUDGMENT24/03/1993

BENCH:

RAY, G.N. (J)

BENCH:

RAY, G.N. (J)

VENKATACHALLIAH, M.N.(CJ)

CITATION:

1993 AIR 2268 1993 SCR (2) 629

1993 SCC (3) 137 JT 1993 (3) 566

1993 SCALE (2)270

ACT:

Indian Arbitration Act 1940. Sections 3, 5, 11 and 12 read

with Sections 8 and 9-Scope of-Removal and Appointment of

Arbitrator by Civil Court-Power thereto--Original agreement

vis-a- vis copy of agreement-Preferability.

Whether the existence of an arbitration agreement to refer

the dispute to arbitrator can be ascertained in the facts

and circumstances of the case. And whether in the absence of

an arbitration clause, it was necessary to find out the

terms agreed between the parties-Whether unwritten

arbitration agreement can be recognised under the Act.

Arbitration Agreement and other agreement-Distinct feature-

Mode Of enforcement Whether the Courts have discretionary

power of dispensation of a valid arbitration agreement

vis-a-vis other agreements-Obligations of the Parties.

HEADNOTE:

The appellant, entered into an agreement with the first

respondent on December 11, 1986 for construction of sewer

line. On June 27, 1988 he requested the Chairman to refer

the dispute to arbitration as per the preliminary

specification of the A.P. Standard specifications. As the

first respondent refused to settle the claims, the appellant

sent a claim petition dated October 3, 1988 to the named

arbitrator. He sent a reminder but the named arbitrator did

not enter the reference. The appellant gave further notice

dated January 5, 1989 calling upon the first respondent to

concur for the appointment of an arbitrator to adjudicate

the disputes and differences arising between the parties.

On January 18, 1989 the first respondent informed the

appellant that there was no arbitration clause in the

agreement between the parties, so the question of

entertaining the request to appoint an arbitrator did not

arise. The appellant then riled an application in the Civil

Court praying 629

630

for removal of the named arbitrator in the agreement and

appointment of the sole arbitrator in his place.

The respondent contested the application contending that the

appellant completed only a part of the work within the

stipulated time though the site was handed over to him. But

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the accounts were settled before the completion of work and

the final bill of the appellant was paid, while the balance

of work was got completed through other agencies. The

respondent also contended that the original agreement signed

between the parties did not provide for any arbitration

clause and such fact was known to the appellant.

The Civil Court found that the agreement did not contain any

arbitration clause. However, it held that the agreement was

silent about the mode of settlement of the disputes, if any,

while every agreement of civil contract contains an

arbitration clause. However, since there was clause 3 in

the copy of the agreement supplied to the appellant sub-

sequently under a covering letter with the seal and

signature of the second respondent, which provided for

reference to arbitration in accordance with standard

specification and since the copy of agreement was not

fabricated by the appellant, the respondents were bound by

the arbitration clause.

The respondents had neglected to refer the matter to

arbitration despite the agreement, so the civil court

appointed the sole arbitrator.

The respondents assailed the order of the civil court in

Civil Revision before the High Court. The High Court also

found that the original agreement did not contain any

arbitration agreement at all. Since there was no

arbitration clause in the original agreement, it was not

necessary to consider other material or circumstances. The

High Court rejected the contention that the existence of

such a clause should be assumed because the government

contractors were governed by the standard specification.

Therefore the High Court set aside the order appointing the

arbitrator.

This Court granted special leave to appeal to the appellant

and on consideration of respective contentions of the

parties, this Court dismissing the appeal.

HELD:Only an arbitration agreement in writing is-

recognised under

631

the Arbitration Act, 1940. [635-G]

Law is well settled that arbitration clause may be

incorporated by reference to a specific document which is in

existence and whose terms are easily ascertainable.

However, the question whether or not the arbitration clause

contained in another document has been incorporated in the

contract, is always a question of construction.[636 C-D]

The arbitration clause is quite distinct from the other

clauses of the contract. While other clauses of agreement

impose obligation which the parties undertake towards each

other, arbitration clause does not impose on any of the

parties any obligation in favour of the other party. Such

arbitration agreement embodies an agreement between the

parties that in case of dispute, such dispute shall be

settled by arbitrator or umpire of their own constitution or

by an arbitrator to be appointed by the court in appropriate

cases. [636-E]

There is a material difference in an arbitration agreement

inasmuch as in an ordinary contract the obligations of the

parties to each other cannot be specifically enforced and

breach of such terms of contract results only in damages,

but the arbitration clause can be specifically enforced by

the machinery of the Arbitration. Act. While the courts

have discretionary power of dispensation of a valid

arbitration agreement, there is no such power of

dispensation of other terms of contract. An arbitration

agreement in no way classifies the right of the parties

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under the contract but it relates wholly to the mode of

determining the rights. [636 F-H, 637 A]

In the instant case, it is the specific finding of the High

Court and civil court that there is no arbitration clause In

the original agreement signed by both the parties.

Therefore it Is not necessary to make any effort for the

purpose of finding out as to what were the terms agreed

between the parties. In the absence of clear intention of

both the parties, agreement for arbitration cannot and

should not be inferred, more so when the specific case of

the respondent is that by mistake the clause relating to

arbitration crept in the copy of agreement. [637 C-D, 638 D]

The High Court was justified in holding on facts that only

the original agreement and not the copy, was binding between

the parties and no reference to arbitration could thus be

made. In the aforesaid circumstances, no interference in

called for. [638 H, 639 A]

632

JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1427 of

1993.

From the Judgment and Order dated 13.2.1992 of the Andhra

Pradesh High Court in Civil Revision Petition No .2269 of

1.991.

S.K. Mehta for the Appellant.

K. Ram Kumar for the Respondents.

The Judgment of the Court was delivered by

G.N. RAY, J. Leave granted.

Pursuant to the notice issued on the Special Leave Petition

No.7575 of 1992, the respondents have appeared and have

filed counter affidavits and the appellant has also filed

affidavit of rejoinder. The special leave petition out of

which this appeal arises is directed against Order dated

February 13, 1992 passed by the Andhra Pradesh High Court in

Civil Revision No.2269 of 1991. The said Civil Revision was

filed by the respondents against Order dated May 10, 1991 by

which the learned Vth Additional Judge, City Civil Court of

Hyderabad allowed the application filed under Sections 3, 5,

11 and 12 read with Sections 8 and 9 of the Indian

Arbitration Act for removal of the named Arbitrator in the

agreement dated December 11, 1986 and to appoint the sole

arbitrator in his place.

The learned Judge, City Civil Court, inter alia came to the

finding that it was a fit case where the sole arbitrator

should be appointed for adjudicating the disputes and

differences between the parties arising out of the agreement

in question and the learned judge appointed a retired

District Judge as the sole arbitrator for adjudicating the

disputes and differences arising out of the arbitration

agreement for entering upon the reference and sign and pass

the award according to law.

The case of the appellant in short is that the appellant is

a Class I Contractor. He entered into an agreement with the

respondent No.1, A.P. Industrial Infrastructure Corporation

Ltd., for the construction of main sewer line from Point (H)

near C.C. Building IDA Nacharam to the disposal units of

Nallacheru (near Uppal) on December 11, 1986. Pursuant to

such agreement, the appellant completed the work in

question. Since

633

certain disputes and differences had arisen between the

appellant and the said Corporation during the execution and

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completion of the contract, the appellant by notice dated

June 27, 1988 requested the. Chairman of the Corporation to

refer the dispute for arbitration as per Clause 73 of the

preliminary specifications of A.P. Standard specifications,

hereinafter referred to as the standard specifications. As

the first respondent refused to settle the claims, the

appellant sent a claim petition dated October 3, 1988 to the

named arbitrator which was received by the said named

arbitrator on October 5, 1988. As the appellant did not

receive any communication from the named arbitrator, he sent

a reminder under registered post on November 28, 1988 to the

named arbitrator. The named arbitrator, however, did not

enter upon the reference within a period of one month and

also did not pass any award within a period of four months

as contemplated in the Indian Arbitration Act. The

appellant also contended in the said application for

appointment of arbitrator in place of the named arbitrator

that the Chairman of the Corporation, namely, the first

respondent had sent an undated letter signed on November 8,

1988 informing the appellant that para 3 of the article of

the agreement since referred to by the appellant was

erroneous and while making copies of the arbitration

agreement entered into between the parties, wrong sheets

were enclosed but in the original agreement, since signed

between the parties, there was no arbitration clause for the

work in question. The appellant, however, gave a further

notice dated January 5, 1989 through his learned Advocate

calling upon the said respondent to concur for the

appointment of any one of the three persons named in the

said notice to act as an arbitrator to adjudicate the

disputes and differences arising between the parties. On

receiving such notice, the first respondent by his letter

dated January 18, 1989 informed the learned Advocate of the

appellant that as there was no arbitration clause in the

agreement entered into between the parties, the question of

entertaining the request to appoint arbitrator did not

arise. In view of such failure on the part of the

respondent to refer the dispute to the arbitration in terms

of the said agreement between the parties, the appellant

made a prayer for removing the named arbitrator in respect

of the works in question and to appoint any one of the three

persons named in the application as sole arbitrator to

adjudicate the disputes and differences.

On such application made by the applicant in the Court of

the Vth Additional Judge, City Civil Court, Hyderabad, the

proceeding being O.P.

634

No.132 of 1989 arose.

The respondent No.1 opposed the said application and filed

counter to the said application inter alia contending

therein that the appellant entered into the agreement dated

December 11, 1986 with the A.P. Industrial Infrastructure

Corporation for the said work and the time stipulated for

the construction of the work was six months from the date of

handing over of the site. The appellant, however, completed

only a part of the work although the, site was handed over

to him. But before the completion to the entire work, the

accounts were settled between the parties and the final bill

was also paid to the appellant and the balance of work was

got completed through other agencies. It was further

contended that the original agreement signed between the

parties did not provide for any arbitration clause and such

fact was made known to the appellant. In view of the

aforesaid position,, the question of referring the matter to

the arbitration or to the named arbitrator or to any other

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arbitrator did not arise.

The learned Judge inter alia came to the finding that the

original agreement dated December 11, 1986 executed between

the parties in relation to the contract work did not contain

any arbitration clause and the articles of the agreement

only provided for various terms and conditions of the work

and such agreement containing the aforesaid terms was also

signed by both the parties. The learned Judge, however,

held that conspicuously the agreement was silent about the

mode of settlement of the disputes, if any, arising between

the parties in respect of the work. Generally, every

agreement of civil contract between the government and the

contractors or between the local bodies and the contractors

contains an arbitration clause for settling the disputes

between the parties. In the copy of the agreement which was

supplied to the appellant since marked as Ex. A-3, the

clauses appearing in the agreement were similarly entered

without variation. In the copy of agreement since furnished

to the applicant, there was a clause being clause 3 which

provided for reference to arbitration in accordance with the

standard specifications. It was further held by the learned

Judge that the copy since supplied to the applicant had the

stamp of the respondent No.2 and the covering letter under

which the copy of the agreement was forwarded to the

applicant also bore the seal and signature of the second

respondent. Since the said copy of the agreement had not

been fabricated by the applicant, the respondents were bound

by the said

635

Clause (3) as referred to in the copy of the agreement' As,

despite such agreement, the respondents failed and neglected

to refer the matter for arbitration, the learned Judge was

of the view that the application should be allowed. The

learned Judge, therefore, appointed Sri J. VenuGopal Rao, a

retired District Judge, as the sole arbitrator for

adjudicating all the disputes and differences between the

parties and for entering upon the reference and thereafter

sip and pass the award in accordance with law.

The respondents being aggrieved by the aforesaid order of

the learned Civil Additional Judge, moved the Andhra Pradesh

High Court for revision. The learned Judge inter alia came

to the finding that the original agreement Ex.B-1 since

signed by the parties did not contain any arbitration clause

at all. A copy of the agreement (Ex.A-3) was, however, for-

warded to the applicant eleven days after the original

agreement and the clause relating to arbitration as

contained in Ex.A-3 was absent in the original agreement.

The learned Judge was of the view that only the terms

contained in original agreement since signed by the parties

and not the terms contained in the copy forwarded to the

applicant were binding between the parties. The learned

Judge was also of the view. that as in the original

agreement, (Ex.B-1) signed by both the parties, there was no

arbitration clause at all, it was not necessary to look into

the other material or to consider other circumstances for

the purpose of finding that the parties had also agreed for

arbitration. The contention on behalf of the applicant that

in the absence of any specific clause for reference of

disputes to arbitration in the original agreement (Ex.B-1)

the existence of such a clause should be assumed because the

government contractors arc governed by the standard

specifications, was not accepted by the High Court. In that

view of the matter, the revision application was allowed by

the High Court inter alia holding that the impugned order

appointing an arbitrator was erroneous and not sustainable

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in law. As aforesaid, such order of the Andhra Pradesh High

Court is impugned in the instant appeal.

Under the Arbitration Act, 1940, only an arbitration

agreement in writing is recognised by the Act. In has been

held by this Court in Jugal Kishore Rameshwardas v. Mrs.

Goolbai Hormusji, [1955] 2 SCR 857 that it is not necessary

that the contract between the parties should be signed by

both the parties. But it is necessary that the terms should

be reduced in writing and the agreement between the parties

on such written terms is

636

established. It has also been held by this Court in Rallia

Ram v. Union of India, [1964] 3 SCR 164 that it is not

necessary that all the terms of the agreement should be

contained in one document. Such terms may be ascertained

from the correspondence consisting of number of letters. In

Smt. Rukmanibai Gupta v. The Collector, Jabalpur & Ors.,

AIR 1981 SC 479 this Court has laid down that an arbitration

clause is not required to be stated in any particular form.

If the intention of the parties to refer the dispute to

arbitration can be clearly ascertained from the terms of the

agreement, it is immaterial whether or not the expression

arbitration or 'arbitrator' or 'arbitrators' has been used

in the agreement. It is also not necessary that agreement

to arbitration should appear in the document containing the

other terms of agreement between the parties. Law is well

settled that arbitration clause may be incorporated by

reference to a specific document which is in existence and

whose terms are easily ascertainable. It is to be noted,

however, that the question whether or not the arbitration

clause contained in another document is incorporated in the

contract, is always a question of construction. It should

also be noted that the arbitration clause is quite distinct

from the other clauses of the contract. Other clauses of

agreement impose obligation which the parties undertake

towards each other. But arbitration clause does not impose

on any of the parties any obligation in favour of the other

party. Such arbitration agreement embodies an agreement

between the parties that in case of a dispute, such dispute

shall be settled by arbitrator, or umpire of their own

constitution or by an arbitrator to be appointed by the

Court in an appropriate case. It is pertinent to mention

that there is a material difference in an arbitration

agreement inasmuch as in an ordinary contract the obligation

of the parties to each other cannot, in general, be

specifically enforced and breach of such terms of contract

results only in damages. The arbitration clause however can

be specifically enforced by the machinery of the Arbitration

Act. The appropriate remedy for breach of an agreement to

arbitrate is enforcement of the agreement to arbitrate and

not to damage arising out of such breach. Moreover, there

is a further significant difference between an ordinary

agreement and an arbitration agreement. In An arbitration

agreement, the Courts have discretionary power of dispen-

sation of a valid arbitration agreement but the Courts have

no such power of dispensation of other terms of contract

entered between the parties. This very distinctive feature

of an agreement for arbitration has been highlighted

637

in the decision in Heyman v. Damins Ltd., 1942 AC 356. It

has been held in North Westen Rubber Company, 1908 2 KB 907

(over-ruled in (1961 (1) AC 1314) on other points), that an

arbitration agreement in no way classifies the right of the

parties under the Contract but it relates wholly to the mode

of determining the rights. In the backdrop of such position

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in law relating to an agreement for arbitration, it is to be

decided whether the existence of an agreement to refer the

dispute to arbitration can be clearly ascertained in the

facts and circumstances of the case. This, in turn, depends

on the interaction of the parties to be gathered from the

relevant documents and surrounding circumstances. In the

instant case, it is the specific finding of the learned

Judge of the City Civil Court, Hyderabad and also the Andhra

Pradesh High Court that in the original agreement signed by

the parties, there is no clause for referring the disputes

to arbitration. The agreement between the parties in this

case has been reduced in writing and has been signed by both

the parties. It is therefore not necessary to make any

effort for the purpose of finding out as to what were the

terms agreed between the parties. The learned Judge, City

Civil Court, allowed the application for appointment of

arbitrator simply on the ground that a copy of the agreement

was forwarded to the appellant with the seal and signature

of a competent officer of the Corporation, namely, the

respondent No.2 and in such copy, which was not fabricated

by the applicant there was a reference for arbitration as

contained in the standard specifications. The learned

Judge, City Civil Court, also proceeded on the footing that

usually in the agreements relating to the nature of the

contract, a provision for arbitration is made. As in the

original agreement signed between the parties there was no

such provision and the agreement was silent on the question

as to what would happen if the disputes would arise between

the parties, it should be presumed that the parties had

really intended to refer the dispute to arbitration in

accordance with the standard specifications and in the copy

of the agreement which was forwarded to the applicant the

provision for arbitration was included. The High Court

however, was not inclined to accept this view of the learned

Judge of the City Civil Court. The High Court was of the

view that it was the signed agreement between the parties

which was binding on the parties and only such written terms

in the original agreement signed by the parties should be

taken into consideration and not the terms contained in the

copy of the agreement which was forwarded to the applicant

after some time.

638

It has been indicated herein before that the case of the

respondent is that through mistake the clause containing the

arbitration agreement was not scored out in the copy of the

agreement since forwarded to the applicant. The attention

of the appellant was drawn to such mistake by the

respondents before initiation of the proceedings before the

City Civil Court. It also appears that on April 9, 1984,

which is long before the agreement dated December 11, 1986,

the respondent No.1, Corporation, came to the decision that

arbitration was not really necessary as the aggrieved party

to the agreement could always seek redress in a court of

law. It was, therefore, decided that the arbitration clause

in the standard specifications should be deleted altogether

and the agreement was to be finalised in respect of

engineering work without any provision for arbitration. It

was also indicated that the instruction for deleting the

arbitration clause should be followed with immediate effect.

If inspite of such policy decision, the original agreement

entered between the parties had contained the arbitration

clause there is no manner of doubt that the parties to the

agreement would have been bound by such arbitration

agreement. Admittedly, in the instant case, in the original

agreement signed between the parties, there is no clause for

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arbitration and the reason for absence of arbitration clause

can be well explained by the aforesaid policy decision of

the Corporation. An arbitration clause may be incorporated

by reference to a specific document but the intention to

refer to arbitration by such incorporation must be clear and

specific. In the instant case, the original agreement

signed between the parties does not contain any clause for

arbitration. It is not the case of the applicant that the

applicant had no occasion to know the terms of the agreement

since singed by the parties and there was any clear

representation that the copy of agreement was to be followed

by the parties and terms contained in the copy were to be

treated as the terms of agreement between the parties.

Hence, it cannot be held that after the signed agreement the

parties had clearly intended to include arbitration clause

in the standard specifications. In the absence of clear

intention of both the parties, agreement for arbitration

cannot and should not be inferred more so when the specific

case of the respondents is that by mistake the clause

relating to arbitration crept. in the copy of agreement. In

our view, the High Court was justified in holding that in

the facts of the case, only the original agreement, and not

the copy, was binding between the parties. Hence, no

reference to arbitration could be made. In

639

the aforesaid circumstances, no interference is called for

in the instant appeal and the appeal therefore, fails and is

dismissed without, however, my order as to costs.

S.P.S.

Appeal dismissed.

640