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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.534 OF 2007

M/s Harsha Constructions … Appellant

Versus

Union of India & Ors. … Respondents

J U D G M E N T

ANIL R. DAVE, J.

1.Aggrieved by the judgment dated 9

th

September, 2005 delivered by the High Court of

Judicature, Andhra Pradesh at Hyderabad, in CMA

No.476 of 2005, this appeal has been filed by M/s

Harsha Constructions, a contractor, against Union

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of India and its authorities. Hereinafter, the

appellant has been described as a 'Contractor'.

2.The Union of India had entered into a

contract for construction of a road bridge at a

level crossing and in the said contract there was

a clause with regard to arbitration. The issue

with which we are concerned in the instant case,

in a nutshell, is as under:-

“When in a contract of arbitration,

certain disputes are expressly

“excepted”, whether the Arbitrator can

arbitrate on such excepted issues and

what are the consequences if the

Arbitrator decides such issues?”

3.For the purpose of considering the issue, in

our opinion, certain clauses incorporated in the

contract are relevant and those clauses are

reproduced hereinbelow :-

“Clause 39. Any item of work carried out

by the Contractor on the instructions of

the Engineer which is not included in

the accepted schedule of rates shall be

executed at the rates set forth in the

“Schedule of Rates, South Central

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Railway” modified by the tender

percentage and where such items are not

contained in the latter at the rates

agreed upon between the Engineer and the

Contractor before the execution of such

items of work and the Contractor shall

be bound to notify the Engineer at least

seven days before the necessity arises

for the execution of such items of work

that the accepted schedule of rates does

not include a rate or rates for the

extra work involved.

The rates payable for such items

shall be decided at the meeting to be

held between the Engineer and the

contractor in as short a period as

possible after the need for the special

item has come to the notice. In case

the contractor fails to attend the

meeting after being notified to do so or

in the event of no settlement being

arrived at the Railway shall be entitled

to execute the extra works by other

means and the contractor shall have no

claim for loss or damage that may result

from such procedure. Provided that if

the Contractor commences work or incurs

any expenditure in regard thereto before

the rates are determined and agreed upon

as lastly mentioned, then and in such a

case the Contractor shall only be

entitled to be paid in respect of the

work carried out or expenditure incurred

by him prior to the date of the rates as

aforesaid according to the rates as

shall be fixed by the Engineer.

However, if the contractor is not

satisfied with the decision of the

Engineer in this respect he may appeal

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to the Chief Engineer within 30 days of

getting the decision of the Engineer

supported by the analysis of the rates

claimed. The Chief Engineer's decision

after hearing both the parties in the

matter would be final and binding on the

contractor and the Railway.”

“Clause-63. All disputes and

differences of any kind whatsoever

arising out of or in connection with the

contract whether during the progress of

the work or after its completion and

whether before or after the

determination of the contract shall be

referred by the Contractor to the

Railway and the Railway shall within a

reasonable time after receipt of the

contractor's presentation make and

notify decisions on all matters referred

to by the contractor in writing provided

that matters for which provision has

been made in Clause 18, 22(5), 39,

45(a), 55, 55-A(5), 61(2) and 62(1)

(xiii)(B)(e)(b) of the General

Conditions of contract or in any Clause

of the Special conditions of the

contract shall be deemed as 'Excepted

matters' and decisions thereon shall be

final and binding on the contractor;

provided further that excepted matters

shall stand specifically excluded from

the purview of the arbitration clause

and shall not be referred to

arbitration.”

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4. Upon perusal of Clause 63 of the aforestated

contract, it is quite clear that the matters for

which provision had been made in Clauses 18,

22(5), 39, 45(a), 55, 55-A(5), 61(2) and 62(1)

(xiii)(B)(e)(b) of the General Conditions of

Contract were “excepted matters” and they were

not to be referred to the arbitrator.

5. In the instant case, we are concerned with a

dispute which had arisen with regard to the

amount payable to the contractor in relation to

extra work done by the contractor.

6. Upon perusal of Clause 39, we find that in

the event of extra or additional work entrusted

to the contractor, if rates at which the said

work was to be done was not specified in the

contract, the amount payable for the additional

work done was to be discussed by the contractor

with the concerned Engineer and ultimately the

rate was to be decided by the Engineer. If the

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rate fixed by the Engineer was not acceptable to

the contractor, the contractor had to file an

appeal to the Chief Engineer within 30 days of

getting the decision of the Engineer and the

Chief Engineer’s decision about the amount

payable was to be final.

7. It is not in dispute that some work, which

was not covered under the contract had been

entrusted to the contractor and for determining

the amount payable for the said work, certain

meetings had been held by the contractor and the

concerned Engineer but they could not agree to

any rate. Ultimately, some amount was paid in

respect of the additional work done, which was

not acceptable to the contractor but the

contractor accepted the same under protest.

8. In addition to the aforestated dispute with

regard to determination of the rate at which the

contractor was to be paid for the extra work done

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by it, there were some other disputes also and in

order to resolve all those disputes, Respondent

No.5, a former Judge of the High Court of Andhra

Pradesh, had been appointed as an Arbitrator.

9. The learned Arbitrator decided all the

disputes under his Award dated 21.9.2002 though

the contractor had objected to arbitrability of

the disputes which were not referable to the

Arbitrator as per Clause 39 of the Contract.

Being aggrieved by the Award, Union of India had

preferred an appeal before the Chief Judge, City

Civil Court, Hyderabad under Section 34 of the

Arbitration and Conciliation Act, 1996

(hereinafter referred to as “the Act”) and the

said appeal was allowed, whereby the Award was

set aside.

10. Before the City Civil Court, in the appeal

filed under Section 34 of the Act, the following

two issues had been framed :-

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(a)Whether the dispute was in relation to

an “excepted matter” and was not

arbitrable?

(b) Whether the claimant was entitled to

the amounts awarded by the Arbitrator?

11. The Court decided the appeal in favour of

the respondent and against the contractor. Being

aggrieved by the order dated 8.4.2005 passed by

the XIVth Additional Chief Judge, City Civil

Court, Hyderabad, CMA No.476 of 2005 was filed by

the contractor before the High Court and the High

Court was pleased to dismiss the same by virtue

of the impugned judgment and therefore, the

contractor has filed this appeal.

12. The learned counsel appearing for the

appellant-contractor had mainly submitted that as

per Clause 39 of the contract, the Engineer of

the respondent authorities was duty bound to

decide the rate at which payment was to be made

for the extra work done by the contractor,

through negotiations between the parties. A

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final decision on the said subject was taken by

the respondent authorities without the

contractor's approval and therefore, there was a

dispute between the parties. He had further

submitted that no specific decision was taken by

the Engineer and therefore, there was no question

of filing any appeal before the Chief Engineer

and as the Chief Engineer did not take any

decision, the aforestated clauses, viz. Clauses

39 and 64 would not apply because clause 64 would

“except” a decision of the Chief Engineer, but as

the Chief Engineer had not taken any decision,

there was no question with regard to “referring

to” clause 39. He had, therefore, submitted that

the Award in toto was correct and the High Court

had wrongly upheld the dismissal of the Award by

the trial Court.

13. The learned counsel had, thereafter,

referred to the judgments delivered by this Court

in General Manager, Northern Railway and another

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v. Sarvesh Chopra [(2002) 4 SCC 45] and Madnani

Construction Corporation (P) Limited v. Union of

India & ors.[(2010) 1 SCC 549] to substantiate

his case.

14. The learned counsel had, thereafter,

submitted that the appeal deserved to be allowed

and the judgment delivered by the High Court

confirming the order passed by the City Civil

Court deserved to be quashed and set aside.

15. There was no representation on behalf of

the Union of India and therefore, we are

constrained to consider the submissions made by

learned counsel for the appellant only.

16. Upon perusal of both the clauses included

in the contract, which have been referred to

hereinabove, it is crystal clear that all the

disputes were not arbitrable. Some of the

disputes which had been referred to in Clause 39

were specifically not arbitrable and in relation

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to the said disputes the contractor had to

negotiate with the concerned Engineer of the

respondent and if the contractor was not

satisfied with the rate determined by the

Engineer, it was open to the contractor to file

an appeal against the decision of the Engineer

before the Chief Engineer within 30 days from the

date of communication of the decision to the

contractor.

17. In the instant case, there was no finality

so far as the amount payable to the contractor in

relation to the extra work done by it is

concerned, because the said dispute was never

decided by the Chief Engineer. In the aforestated

circumstances, when the disputes had been

referred to the Arbitrator, the disputes which

had been among “excepted matters” had also been

referred to the learned Arbitrator.

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18. Upon perusal of the case papers we find that

before the learned Arbitrator, the contractor

did object to the arbitrability of the disputes

covered under Clause 39, but the Arbitrator had

decided the said issues by holding that the same

were not “excepted matters” but arbitrable.

19. The question before this Court is whether

the Arbitrator could have decided the issues

which were not arbitrable.

20. Arbitration arises from a contract and

unless there is a specific written contract, a

contract with regard to arbitration cannot be

presumed. Section 7(3) of the Act clearly

specifies that the contract with regard to

arbitration must be in writing. Thus, so far as

the disputes which have been referred to in

Clause 39 of the contract are concerned, it was

not open to the Arbitrator to arbitrate upon the

said disputes as there was a specific clause

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whereby the said disputes had been “excepted”.

Moreover, when the law specifically makes a

provision with regard to formation of a contract

in a particular manner, there cannot be any

presumption with regard to a contract if the

contract is not entered into by the mode

prescribed under the Act.

21. If a non-arbitrable dispute is referred to

an Arbitrator and even if an issue is framed by

the Arbitrator in relation to such a dispute, in

our opinion, there cannot be a presumption or a

conclusion to the effect that the parties had

agreed to refer the issue to the Arbitrator. In

the instant case, the respondent authorities had

raised an objection relating to the arbitrability

of the aforestated issue before the Arbitrator

and yet the Arbitrator had rendered his decision

on the said “excepted” dispute. In our opinion,

the Arbitrator could not have decided the said

“excepted” dispute.

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22. We, therefore, hold that it was not open to

the Arbitrator to decide the issues which were

not arbitrable and the award, so far as it

relates to disputes regarding non-arbitrable

disputes is concerned, is bad in law and is

hereby quashed.

23. We also take note of the fact that the

contract had been entered into by the parties on

24.4.1995 and the contractual work had been

finalised on 31.3.1997. The Award was made on

21.9.2002 and therefore, we uphold the portion of

the award so far as it pertains to the disputes

which were arbitrable, but so far as the portion

of the arbitral award which determines the rate

for extra work done by the contractor is

concerned, we quash and set aside the same.

24. Needless to say that it would be open to

the contractor to take appropriate legal action

for recovery of payment for work done, which was

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not forming part of the contract because the said

issue decided by the Arbitrator is now set aside.

25. For the reasons recorded hereinabove, the

appeal is partly allowed with no order as to

costs.

…………...........................J.

(ANIL R. DAVE)

…..........................................J.

(VIKRAMAJIT SEN)

New Delhi

September 05, 2014.