Page 1 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1586 OF 2004

M/s. P. Dasaratharama Reddy Complex … Appellant

versus

Government of Karnataka and another … Respondents

WITH

CIVIL APPEAL NO. 1587 OF 2004

CIVIL APPEAL NO. 1588 OF 2004

CIVIL APPEAL NO. 4187 OF 2004

CIVIL APPEAL NO. 5496 OF 2004

CIVIL APPEAL NO. 6323 OF 2004

CIVIL APPEAL NO. 6327 OF 2004

CIVIL APPEAL NO. 6328 OF 2004

CIVIL APPEAL NOS. 558-560 OF 2006

CIVIL APPEAL NO. 1374 OF 2013

CIVIL APPEAL NO. 9459 OF 2013

(arising out of SLP(C) No. 16117 OF 2004)

CIVIL APPEAL NO.9460 OF 2013

(arising out of SLP(C) No. 17147 OF 2004)

CIVIL APPEAL NO. 9461 OF 2013

(arising out of SLP(C) No. 24655 of 2004)

1

Page 2 CIVIL APPEAL NO. 9462 OF 2013

(arising out of SLP(C) No. 26073 of 2004)

CIVIL APPEAL NO. 9463 OF 2013

(arising out of SLP(C) No. 5951 of 2006)

CIVIL APPEAL NO.9464 OF 2013

(arising out of SLP(C) No. 12552 of 2006)

CIVIL APPEAL NO.9465 OF 2013

(arising out of SLP(C) No. 12553 of 2006)

CIVIL APPEAL NO.9466 OF 2013

(arising out of SLP(C) No. 8597 of 2009)

CIVIL APPEAL NOS.9467-68 OF 2013

(arising out of SLP(C) Nos. 28087-28088 of 2011)

CIVIL APPEAL NO. 9469 OF 2013

(arising out of SLP(C) No. 28089 of 2011)

CIVIL APPEAL NOS.9470-73 OF 2013

(arising out of SLP(C) Nos. 29227-29230 of 2011)

CIVIL APPEAL NO. 9474 OF 2013

(arising out of SLP(C) No. 31975 of 2011)

AND

CIVIL APPEAL NO.9475 OF 2013

(arising out of SLP(C) No. 13528 of 2012)

J U D G M E N T

G. S. Singhvi, J.

1.Leave granted in SLP (C) Nos. 16117 of 2004, 17147 of 2004, 24655 of

2004, 26073 of 2004, 5951 of 2006, 12552 of 2006, 12553 of 2006, 8597 of

2

Page 3 2009, 28087-28088 of 2011, 28089 of 2011, 29227-29330 of 2011, 31975 of

2011 and 13528 of 2012.

2.Of the above noted 23 appeals, 17 have been filed by those who had been

awarded contracts by the Government of Karnataka and/or its

agencies/instrumentalities for execution of the particular project/works. They

have challenged the orders passed by the Designated Judge/Division Benches of

the Karnataka High Court rejecting their prayer for appointment of Arbitrator in

terms of the clauses relating to settlement of disputes. One appeal has been filed

by the contractor who was awarded construction contract by Nagarika

Yogbakashema Mathu Gruha Nirmana Sahakara Sangha. The remaining 5

appeals have been filed by Karnataka Neeravari Nigam Limited and Kirshna

Bhagya Jala Nigam Limited for setting aside the orders passed by the learned

Designated Judge whereby he directed the concerned Chief Engineer to act as an

Arbitrator.

3.For the sake of convenience, we shall notice the facts from the record of

Civil Appeal No.1586 of 2004 - M/s. P. Dasaratharama Reddy Complex v. The

Government of Karnataka and another because arguments were advanced with

reference to that case.

4.The appellant is a contractor engaged in executing work contracts

awarded by the Government of Karnataka and its instrumentalities. In 1996, the

appellant was awarded contract for construction of bridge between Yethabadi-

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Page 4 Buyyanadoddi across Shimsha river in Malavalli. The appellant did not

complete the work by alleging lack of cooperation on the part of Chief Engineer,

Communication and Building (South), Bangalore (respondent No.2) and then

lodged claim for payment of the amount allegedly due to him. After some time,

the appellant filed an application under Section 11(6) and (8) of the Arbitration

and Conciliation Act, 1996 (for short, ‘the 1996 Act’) for appointment of an

Arbitrator for adjudication of all the disputes pertaining to Contract No.5/96-97

dated 8.5.1996. The Chief Justice of the High Court assigned the application to

the Designated Judge, who dismissed the same vide order dated 14.9.2001 by

relying upon the judgment in Mysore Construction Company v. Karnataka

Power Corporation Ltd. ILR 2000 KAR 4953. Paragraphs 5 and 6 of that order

read as under:

“5.The above clause requires the contractor specifically to

approach the civil court, if he is not satisfied with the decision of the Chief

Engineer. It does not provide for reference to arbitration. But contrary to the

specific term of clause 29, the petitioner has sought appointment of Arbitrator

instead of approaching the Civil Court.

6.I had occasion to consider the question whether such a clause is an

arbitration agreement in Mysore Construction Company Vs. Karnataka Power

Corporation Ltd. [ILR 2000 KAR 4953] and held that the said clause is not an

arbitration agreement. Following the said decision and for the reasons stated

therein, it has to be held that clause 29 relied on by petitioner is not an

arbitration agreement.”

5. The writ petition filed by the appellant questioning the order of the

Designated Judge was dismissed by the Division Bench of the High Court by

4

Page 5 observing that Clause 29 of the Contract cannot be construed as an Arbitration

Agreement or an Arbitration Clause for settlement of disputes.

6.In some of the other appeals, the appellants have challenged the orders

passed by the Designated Judge rejecting their applications for appointment of

Arbitrator under the relevant clause of their respective agreements.

7.In the 5 appeals, Karnataka Neeravari Nigam Limited and Krishna Bhagya

Jala Nigam Limited have challenged the orders passed by the Designated Judge

for appointment of the Chief Engineer as an Arbitrator and directed him to

adjudicate the matter in dispute.

THE ARGUMENTS

8.Mrs. Kiran Suri, Senior Advocate and other learned counsel appearing for

the contractors argued that the impugned orders are liable to be set aside because

the learned Designated Judge and the Division Bench of the High Court

misconstrued the relevant clauses of the agreements. She further argued that in

view of the judgment of the Division Bench of the High Court in Karnataka

State Road Transport Corporation and another v. M. Keshava Raju 2004 (1) Arb.

LR 507 and of this Court in Smt. Rukmanibai Gupta v. Collector, Jabalpur and

others (1980) 4 SCC 556, Krishna Bhagya Jala Nigam Limited v. G.

Harishchandra Reddy and another (2007) 2 SCC 720, Punjab State and others v.

Dina Nath (2007) 5 SCC 28, State of Orissa and others v. Bhagyadhar Dash

(2011) 7 SCC 406, Bharat Bhushan Bansal v. U. P. Small Industries

5

Page 6 Corporation Ltd., Kanpur (1999) 2 SCC 166 and K. K. Modi v. K. N. Modi and

others (1998) 3CC 573, the judgment in Mysore Construction Company v.

Karnataka Power Corporation Limited (supra) cannot be treated as laying down

correct law. Mrs. Suri also relied upon Section 20 of the Arbitration Act, 1940

(for short, ‘the 1940 Act’) and argued that Clause 29 of the agreement executed

between appellant P. Dasaratharama Reddy Complex and the Government of

Karnataka and similar clauses contained in other agreements provide for

resolution of disputes by arbitration and the High Court committed serious error

by refusing to appoint an Arbitrator.

9.Shri Naveen R. Nath, learned counsel, who appeared on behalf of Krishna

Bhagya Jala Nigam Limited and Karnataka Neeravari Nigam Limited, who are

the appellants in the five appeals and respondents in some of the other cases

argued that Clause 29 of the agreement executed between the appellant and the

Government of Karnataka in Civil Appeal No.1586 of 2004 and similar clauses

in other agreements are in the nature of departmental dispute resolution

mechanism and the same cannot be treated as an arbitration clause. He pointed

out that Clause 29 and similar clauses contained in other agreements neither

postulate hearing of the parties by the Chief Engineer nor he can adjudicate the

dispute. Shri Nath pointed out that the relevant clauses in the agreements

entered into between the parties provide for settlement of disputes through Court

6

Page 7 and, therefore, the decision, if any, taken by the Chief Engineer cannot be treated

as an award of the Arbitrator.

10.We have considered the respective submissions. Clause 29 of the

Agreement entered into between the parties (the appellant and the respondents in

Civil Appeal No.1586/2004) and majority of other cases read as under:

“Clause-29: (a) If any dispute or difference of any kind whatsoever were to arise

between the Executive Engineer/Superintending Engineer and the Contractor

regarding the following matters namely,

(i)The meaning of the specifications designs, drawings and instructions

herein before mentioned;

(ii) The quality of workmanship or material used on the work and

(iii)Any other questions, claim right, matter, thing, whatsoever, in any way

arising out of or relating to the contract designs, drawings, specifications

estimates, instructions, or orders, or those conditions or failure to execute the

same whether arising during the progress of' the work, or after the completion,

termination or abandonment thereof, the dispute shall, in the first place, be

referred to the Chief Engineer who has jurisdiction over the work specified in

the contract. The Chief Engineer shall within a period of ninety days from the

date of being requested by the Contractor to do so, given written notice of his

decision to the contractor.

Chief Engineer's decision final

(b)Subject to other form of settlement hereafter provided, the Chief

Engineer's decision in respect of every dispute or difference so referred shall be

final and binding upon the Contractor. The said decision shall forthwith be given

effect to and contractor shall proceed with the execution of the work with all due

diligence.

Remedy when Chief Engineer's decision is not acceptable to Contract

(c)In case the decision of the Chief Engineer is not acceptable to the

contractor, he may approach the Law Courts at for settlement of dispute after

giving due written notice in this regard to the Chief Engineer within a period of

7

Page 8 ninety days from the date of receipt of the written notice of the decision of the

Chief Engineer.

Time limit for notice to approach law Court by Contractor

(d)If the Chief Engineer has given written notice of his decision to the

Contractor and no written notice to approach the law court has been

communicated to him by the Contractor within a period of ninety days from

receipt of such notice, the said decision shall be final and binding upon the

Contractor.

Time limit for notice to approach law court by contractor when decision is not

given by CE as at (b)

(e)If the Chief Engineer fails to give notice of his decision within a period of

ninety days from the receipt of the Contractors request in writing for settlement

of any dispute or difference as aforesaid, the contractor may within ninety days

after the expiry of the first named period of ninety days approach the Law Courts

at giving due notice to the Chief Engineer.

Contractor to execute and complete work pending settlement of disputes;

(f)Whether the claim is referred to the Chief Engineer or to the Law Courts,

as the case may be, the contractor shall proceed to execute and complete the

works with all due diligence pending settlement of the said dispute or

differences.

Obligations of the Executive Engineer and Contractor shall remain unsettled

during consideration of dispute.

(g)The reference of any dispute or difference to the Chief Engineer or the

Law Court may proceed notwithstanding that the works shall then be or be

alleged to be complete, provided always that the obligations of the Executive

Engineer and the Contractor shall not be altered by reason of the said dispute or

difference being referred to the Chief Engineer or the Law Court during the

Progress of the works.”

(emphasis supplied)

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Page 9 11. Clause 7 of the Agreement, which was subject matter of

consideration in Civil Appeal No.4187/2004 – C.C. Kondaiah v. the Secretary,

Nagarika Yogbakashema Mathu Gruha Nirmana Sahakara Sangha, reads thus:

“7. In all matters of dispute arising out of this contract agreement regarding the

quality of materials, work, etc., the decision of the Board of Directors of the

Sangha, shall be final and binding on the part of the Contractor.”

12. Clause 66 of the contract, which is subject matter of

consideration in the appeals arising out of SLP(C)Nos. 31975/2011 and

13528/2012, reads thus:

“Clause 66 : SETTLMENT OF DISPUTES:

66. If any disputes or difference of any kind whatsoever and contractor in

connection with, or raising out of the contract or the execution of works, whether

during the progress of the works or after their completion and whether before or

after the termination abandonment or breach of the contract, it shall, in the first

place, be referred to and settled by the Engineer who shall, within a period of

forty five days from the date of being requested by the contractor to do so, give

written notice of his decision to the contractor.

Subject to other form of settlement hereafter provided, such decision in respect

of every dispute or difference so referred shall be final and binding upon the

contractor. The said decision shall forthwith be given effect to, and the

contractor shall proceed with the execution of the works with all due diligence.

In case the decision of the Engineer is not acceptable to the contractor, he may

approach the law courts for settlement of dispute after giving due written notice

in this regard to the Engineer within a period of forty five days form the date of

receipt of the written notice of the decision of the Engineer. If the Engineer has

given written notice of his decision to the contractor and no written notice to

approach the law courts has been communicated to him by the contractor within

a period of forty five days from receipt of such notice, the said decision shall be

final and binding upon the contractor. If the Engineer shall fail to give notice of

his decision within a period of forty five days form the receipt of the contractor's

request in writing for settlement of any dispute or difference as aforesaid, the

contractor may within forty five days after the expiration of the first named

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Page 10 period of forty five days approach the law courts, giving due notice to the

Engineer. Whether the claim is referred to the Engineer or the law courts, as the

case may be, the contractor shall proceed to execute and complete the works

with all due diligence pending settlement of the said dispute or differences. The

reference of any dispute or difference to the engineer or law courts may proceed

not withstanding that the works shall then be or be alleged to be complete,

provided always that the obligations of the Engineer and the contractor shall not

be altered by reason of the said dispute or difference being referred to the

engineer or law courts during the progress of the works.

Neither party is entitled to bring a claim to resolution of disputes if the dispute or

differences are not notified in writing within thirty (30) days after expiration of

the maintenance period.”

(emphasis supplied)

13. Clause 67 of the contract, which is subject matter of

consideration in the appeal arising out of SLP(C) No.12553/2006, reads thus:

“SETTLEMENT OF DISPUTES

67) If any dispute or difference of any kind whatsoever shall arise between the

Engineer and the Contractor in connection with, or arising out of the Contract, or

the execution of works, whether during the progress of the works or after their

completion and whether before or after the termination, abandonment or breach

of the Contract, it shall, in the first place, be referred to and settled by the

Engineer who shall, within a period of ninety days from the date of being

requested by the Contractor to do so, give written notice of his decision of the

Contractor.

Subject to other form of settlement hereafter provided, such decision in respect

of every dispute or difference so referred shall be final and binding upon the

Contractor. The said decision shall forthwith be given effect to, and the

Contractor shall proceed with the execution of the works with all due diligence.

In case the decision of the Engineer is not acceptable to the Contractor, he may

approach the law Courts at Bangalore for settlement of dispute after giving due

written notice in this regard to the Engineer within a period of ninety days from

the date of receipt of the written notice of the decision of the Engineer. If the

Engineer has given written notice of his decision to the Contractor and no

written notice to approach the law courts has been communicated to him by the

Contractor within a period of ninety days from receipt of such notice, the said

1

Page 11 decision shall be final and binding upon the contractor. If the Engineer shall fail

to give notice of his decision within a period of ninety days from the receipt of

the Contractor's request in writing for settlement of any dispute of difference as

aforesaid, the Contractor may within ninety days after the expiration of the first

named period of ninety days approach the law Courts at Bangalore, giving due

notice to the Engineer. However the claim is referred to the Engineer or to the

law Courts, as the case may be, the Contractor shall proceed to execute and

complete the works with all due diligence pending settlement of the said dispute

or differences. The reference of any dispute or difference to the Engineer or law

Courts may proceed not withstanding that the works shall then be or be alleged

to be complete, provided always that the obligations of the Engineer and the

Contractor shall not be altered by reason of the said dispute or difference being

referred to the Engineer or law Courts during the progress of the works.”

(emphasis supplied)

14. In Mysore Construction Company v. Karnataka Power

Corporation Limited and others (supra), the learned Designated Judge referred to

the passage from Russell on Arbitration (19

th

Edition, page 59), the judgments of

this Court in K. K. Modi v. K. N. Modi and others (supra), Chief Conservator of

Forests, Rewa v. Ratan Singh Hans AIR 1967 SC 166; Smt. Rukmanibai Gupta

v. the Collector, Jabalpur (supra); State of Uttar Pradesh v. Tipper Chand (1980)

2 SCC 341; State of Orissa v. Damodar Das (1996) 2 SCC 216; Bharat Bhushan

Bansal v. Uttar Pradesh Small Industries Corporation Limited, Kanpur (1999) 2

SCC 166 and observed:

“The above decisions make it clear that an agreement or a clause in an

agreement can be construed as an arbitration agreement, only if,

(i)it provides for or contemplates reference of disputes or difference by

either party to a private forum (other than a Court or Tribunal) or decision;

(ii)it provides either expressly or impliedly, for an enquiry by the private

forum giving due opportunity to both parties to put forth their cases; and

1

Page 12 (iii) it provides that the decision of the forum is final and binding upon the

parties, without recourse to any other remedy and both would abide by such

decision.

Where there is no provision either for reference of disputes to a private forum, or

for a fair and judicious enquiry, or for a decision which is final and binding on

parties to the dispute, there is no arbitration agreement.”

The learned Designated Judge then analysed Clause 29 (old Clause 67) and

recorded his observations in the following words:

“(a)The heading of the clause is 'settlement of disputes'. There is no reference

to either 'arbitration' or 'Arbitrator'.

(b)Clause (a) provides that if any dispute or difference of any kind

whatsoever to arise between the Executive Engineer/Superintending Engineer

and the Contractor, regarding the matters mentioned therein, the dispute shall in

the first place be referred to Chief Engineer, who has jurisdiction over the work

specified in the contract. Thus the reference to the Chief Engineer is only the

first phase of the process of settlement of disputes and not the final phase of the

settlement of disputes. This is evident from the provision that when a dispute

arises, it should in the first place, be referred to the Chief Engineer for decision.

(c)The reference is to a person, who has jurisdiction over the contract work

and not to an independent Authority nor to an officer of the Corporation, who

has no connection or control over the work. In other words, the decision of Chief

Engineer is a decision by a person who has overall supervision and charge of the

execution of the work. This gives an indication that the decision of the Chief

Engineer is not intended to be an adjudication of the rights of the parties to the

dispute, but intended to be a decision of one party in regard to the claim of the

other party, to enable the other party to seek relief in a Court of law, if he is not

satisfied with the decision.

(d)Sub-clause (b) provides that subject to other form of settlement provided

in the ensuing sub-clause, the Chief Engineer's decision in respect of every

dispute or difference so referred, shall be final and binding upon the Contractor.

This clause makes it clear that the final remedy of the Contractor is to approach

the law Court for decision on the dispute. It is also significant that the decision

given by the Chief Engineer is made final and binding upon the Contractor

(subject to other remedies specified) and not KPC. Any decision, which is made

binding only on one party and not on both the parties, cannot be an adjudicatory

1

Page 13 decision. The very principle of adjudication of a dispute is that it is binding on

both the parties.

(e)Clause (c) provides that if the Contractor is not satisfied with the decision

of the Chief Engineer, he can approach the law Court at Karwar for settlement of

the dispute The clause requires the Contractor to approach the law Court for

settlement of disputes. If as contended by the petitioner, the disputes are to be

settled by way of arbitration by the Chief Engineer, acting as Arbitrator, then the

question of one of the parties being permitted to approach the law Courts for

settlement of the disputes does not arise. If the Chief Engineer is the Arbitrator

and his decision is an award, then a party can approach the Civil Court only for

setting aside the award and not for settlement of the disputes. This provision

makes it clear that the decision of the Chief Engineer is not intended to be a

decision by way of adjudication of the disputes/differences between the parties

by way of arbitration but is intended to be merely a decision of the party

(employer) which, when intimated to the other side, gives rise to a cause of

action to the other party (Contractor) to approach the Civil Court for

adjudication of its dispute/claim.

(f)Similarly, sub-clause (d) which provides that if the Chief Engineer does

not give his decision within a particular period, the Contractor can approach the

Civil Court for settlement of the dispute, again demonstrates that no finality is

intended to be attached to the decision of the Chief Engineer and the final

adjudication should be by the Civil Court and not by the Chief Engineer.

The scheme of Clause 29 (or old Clause 67) therefore is, whenever the

Contractor has a claim which is not settled by the Executive Engineer or

Superintending Engineer, he has to make the claim before the Chief Engineer. If

the Chief Engineer examines the matter and gives his decision which is not

acceptable to the Contractor, or if the Chief Engineer does not give his decision

within the time specified, the Contractor has to approach the Civil Court, by

filing a civil suit and get his disputes/claims adjudicated, on merits. Use of

words 'to approach the Civil Court for settlement of disputes' makes it clear that

final adjudicating authority in the case of a dispute is the Civil Court and not the

Chief Engineer. Thus, the Intention of the parties is not to refer any dispute for

adjudication by way of arbitration but to get adjudicated the dispute only through

the normal procedure of approaching law Courts. The said clause does not also

contemplate or require the Chief Engineer to hold any enquiry or hear the parties

before deciding the matter. On the other hand, the clause merely requires the

Chief Engineer to consider the claim of the Contractor and give his decision

thereon. Such decision being on behalf of KPC, the Contractor can either accept

it or approach the Civil Court for adjudication. Thus the petitioner has failed to

make out two of the three ingredients -- requirement of enquiry by the named

Authority and requirement of finality by a binding decision.”

1

Page 14 15. The distinction between an expert determination and

arbitration has been spelt out in Russell on Arbitration, 21

st

Edn., in the

following words:

“Many cases have been fought over whether a contract’s chosen form of dispute

resolution is expert determination or arbitration. This is a matter of construction

of the contract, which involves an objective enquiry into the intentions of the

parties. First, there are the express words of the disputes clause. If specific words

such as ‘arbitrator’, ‘arbitral tribunal’, ‘arbitration’ or the formula ‘as an expert

and not as an arbitrator’ are used to describe the manner in which the dispute

resolver is to act, they are likely to be persuasive although not always

conclusive…. Where there is no express wording, the court will refer to certain

guidelines. Of these, the most important used to be, whether there was an ‘issue’

between the parties such as the value of an asset on which they had not taken

defined positions, in which case the procedure was held to be expert

determination; or a ‘formulated dispute’ between the parties where defined

positions had been taken, in which case the procedure was held to be an

arbitration. This imprecise concept is still being relied on. It is unsatisfactory

because some parties to contract deliberately choose expert determination for

dispute resolution. The next guideline is the judicial function of an arbitral

tribunal as opposed to the expertise of the expert; …. An arbitral tribunal arrives

at its decision on the evidence and submissions of the parties and must apply the

law or if the parties agree, on other consideration; an expert, unless it is agreed

otherwise, makes his own enquiries, applies his own expertise and decides on his

own expert opinion....”

A clause substantially similar to the clauses referred to

hereinabove was interpreted by a three Judge Bench in State of U.P v. Tipper

Chand (supra) and it was held that the same cannot be construed as an arbitration

clause. Paragraphs 2 and 3 of the judgment which contain the reasons for the

aforesaid conclusion are reproduced below:

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Page 15 “2. The suit out of which this appeal has arisen was filed by the respondent

before us for recovery of Rs. 2000 on account of dues recoverable from the

Irrigation Department of the petitioner State for work done by the plaintiff in

pursuance of an agreement, clause 22 of which runs thus:

“Except where otherwise specified in the contract the decision of the

Superintending 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, design, drawing and instructions hereinbefore mentioned.

The decision of such Engineer as to the quality of workmanship, or materials

used on the work, or as to any other question, claim, right, matter or things

whatsoever, in any way arising out of or relating to the contract, designs,

drawing 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

abandonment of the contract by the contractor, shall also be final, conclusive and

binding on the contractor.”

3. After perusing the contents of the said clause and hearing learned Counsel for

the parties we find ourselves in complete agreement with the view taken by the

High Court. Admittedly the clause does not contain any express arbitration

agreement. Nor can such an agreement be spelled out from its terms by

implication, there being no mention in it of any dispute, much less of a reference

thereof. On the other hand, the purpose of the clause clearly appears to be to vest

the Superintending Engineer with supervision of the execution of the work and

administrative control over it from time to time.”

16. In State of Maharashtra v. M/s. Ranjeet Construction (Civil

Appeal No.4700 of 1985), a two Judge Bench of this Court interpreted Clause 30

of the agreement entered into between the parties, which is almost identical to

the clauses under consideration, relied upon the judgment in State of U.P. v.

Tipper Chand (supra) and held that Clause 30 cannot be relied upon for seeking

a reference to an Arbitrator of any dispute arising under the contract.

1

Page 16 17. In State of Orissa v. Damodar Das (supra), a three Judge

Bench interpreted Clause 21 of the contract entered into between the appellant

and the respondent for construction of sump and pump chamber etc. for pipes

W/S to Village Kentile. The respondent abandoned the work before completion

of the project and accepted payment of the fourth running bill. Subsequently, he

raised dispute and sent communication to the Chief Engineer, Public Health,

Orissa for making a reference to an Arbitrator. The Subordinate Judge,

Bhubaneswar allowed the application filed by the respondent under Section 8 of

the 1940 Act and the order passed by him was upheld by the High Court. This

Court referred to Clause 25 of the agreement, relied upon the judgment in State

of U.P. v. Tipper Chand (supra) and held that the said clause cannot be

interpreted as providing resolution of dispute by an Arbitrator. Paragraphs 9 and

10 of the judgment, which contain discussion on the subject, are extracted

below:

“9. The question, therefore, is whether there is any arbitration agreement for the

resolution of the disputes. The agreement reads thus:

“25. 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.”

1

Page 17 10. Section 2(a) of the Act defines “arbitration agreement” to mean “a written

agreement to submit present or future differences to arbitration, whether an

arbitrator is named therein or not”. Indisputably, there is no recital in the above

clause of the contract to refer any dispute or difference present or future to

arbitration. The learned counsel for the respondent sought to contend from the

marginal note, viz., “the decision of Public Health Engineer to be final” and any

other the words “claim, right, matter or thing, whatsoever in any way arising out

of 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” and contended

that this clause is wide enough to encompass within its ambit, any disputes or

differences arising in the aforesaid execution of the contract or any question or

claim or right arising under the contract during the progress of the work or after

the completion or sooner determination thereof for reference to an arbitration.

The High Court, therefore, was right in its conclusion that the aforesaid clause

gives right to arbitration to the respondent for resolution of the dispute/claims

raised by the respondent. In support thereof he relied on Ram Lal Jagan Nath v.

Punjab State through Collector AIR 1966 Punj 436. It is further contended that

for the decision of the Public Health Engineer to be final, the contractor must be

given an opportunity to submit his case to be heard either in person or through

counsel and a decision thereon should be given. It envisages by implication

existence of a dispute between the contractor and the Department. In other

words, the parties construed that the Public Health Engineer should be the sole

arbitrator. When the claim was made in referring the dispute to him, it was not

referred to the court. The respondent is entitled to avail of the remedy under

Sections 8 and 20 of the Act. We find it difficult to give acceptance to the

contention. A reading of the above clause in the contract as a conjoint whole,

would give us an indication that during the progress of the work or after the

completion or the sooner determination thereof of the contract, the Public Health

Engineer has been empowered to decide all questions relating to the meaning of

the specifications, drawings, instructions hereinbefore mentioned and as to the

quality of workmanship or material 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 those

conditions or otherwise concerning the works or the execution or failure to

execute the same has been entrusted to the Public Health Engineer and his

decision shall be final. In other words, he is nominated only to decide the

questions arising in the quality of the work or any other matters enumerated

hereinbefore and his decision shall be final and bind the contractor. A clause in

the contract cannot be split into two parts so as to consider one part to give rise

to difference or dispute and another part relating to execution of work, its

workmanship etc. It is settled now that a clause in the contract must be read as a

1

Page 18 whole. If the construction suggested by the respondent is given effect then the

decision of the Public Health Engineer would become final and it is not even

necessary to have it made rule of the court under the Arbitration Act. It would be

hazardous to the claim of a contractor to give such instruction and give power to

the Public Health Engineer to make any dispute final and binding on the

contractor. 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.”

(emphasis supplied)

18. In K.K. Modi v. K.N. Modi (supra), this Court interpreted

Clause 9 of the Memorandum of Understanding signed by two groups of Modi

family. Group ‘A’ consisted of Kedar Nath Modi (younger brother of Seth

Gujjar Mal Modi and his three sons) and Group ‘B’ consisted of five sons of

Seth Gujjar Mal Modi. To resolve the disputes and differences between two

groups, the financial institutions, which had lent money, got involved.

Ultimately, a Memorandum of Understanding was signed by the parties on

24.1.1989, Clause 9 of which reads as under:

“Implementation will be done in consultation with the financial institutions. For

all disputes, clarifications etc. in respect of implementation of this agreement,

the same shall be referred to the Chairman, IFCI or his nominees whose

decisions will be final and binding on both the groups.”

The Chairman, Industrial Finance Corporation of India (IFCI) formed a

committee of experts to assist him in deciding various questions. The committee

of experts and the Chairman held discussion with both the groups. On 8.12.1995,

1

Page 19 the Chairman, IFCI gave his detailed report / decision. In his covering letter, the

Chairman indicated that the Memorandum of Understanding had been

substantially implemented during 1989 to 1995 and with his decisions on the

disputes / clarifications given by him, it will be possible to implement the

remaining part. The report of the Chairman was neither filed in the competent

Court as an award nor any application was submitted for making the report a rule

or decree of the Court. However, the Chairman issued series of directions for

implementing the report. On 18.5.1996, the appellants filed a petition under

Section 33 of the 1940 Act in the Delhi High Court challenging report dated

8.12.1995 by asserting that it was an award in arbitration proceedings. The

opposite parties filed civil suit in the High Court to challenge the report of the

Chairman.

One of the questions formulated by this Court was whether

Clause 9 of the Memorandum of Understanding constituted an Arbitration

Agreement and whether the decision of the Chairman, IFCI constituted an

award. The two Judge Bench first culled out the following attributes of an

Arbitration Agreement:

“(1) The arbitration agreement must contemplate that the decision of the tribunal

will be binding on the parties to the agreement,

(2) that the jurisdiction of the tribunal to decide the rights of parties must derive

either from the consent of the parties or from an order of the court or from a

statute, the terms of which make it clear that the process is to be an arbitration,

1

Page 20 (3) the agreement must contemplate that substantive rights of parties will be

determined by the agreed tribunal,

(4) that the tribunal will determine the rights of the parties in an impartial and

judicial manner with the tribunal owing an equal obligation of fairness towards

both sides,

(5) that the agreement of the parties to refer their disputes to the decision of the

tribunal must be intended to be enforceable in law and lastly,

(6) the agreement must contemplate that the tribunal will make a decision upon a

dispute which is already formulated at the time when a reference is made to the

tribunal.

The other factors which are relevant include, whether the agreement

contemplates that the tribunal will receive evidence from both sides and hear

their contentions or at least give the parties an opportunity to put them forward;

whether the wording of the agreement is consistent or inconsistent with the view

that the process was intended to be an arbitration, and whether the agreement

requires the tribunal to decide the dispute according to law.”

The Court then referred to several precedents including English cases and held:

“In the present case, the Memorandum of Understanding records the settlement

of various disputes as between Group A and Group B in terms of the

Memorandum of Understanding. It essentially records a settlement arrived at

regarding disputes and differences between the two groups which belong to the

same family. In terms of the settlement, the shares and assets of various

companies are required to be valued in the manner specified in the agreement.

The valuation is to be done by M/s S.B. Billimoria & Co. Three companies

which have to be divided between the two groups are to be divided in

accordance with a scheme to be prepared by Bansi S. Mehta & Co. In the

implementation of the Memorandum of Understanding which is to be done in

consultation with the financial institutions, any disputes or clarifications relating

to implementation are to be referred to the Chairman, IFCI or his nominees

whose decision will be final and binding. The purport of clause 9 is to prevent

any further disputes between Groups A and B. Because the agreement requires

division of assets in agreed proportions after their valuation by a named body

and under a scheme of division by another named body. Clause 9 is intended to

clear any other difficulties which may arise in the implementation of the

agreement by leaving it to the decision of the Chairman, IFCI. This clause does

not contemplate any judicial determination by the Chairman of the IFCI. He is

2

Page 21 entitled to nominate another person for deciding any question. His decision has

been made final and binding. Thus, clause 9 is not intended to be for any

different decision than what is already agreed upon between the parties to the

dispute. It is meant for a proper implementation of the settlement already arrived

at. A judicial determination, recording of evidence etc. are not contemplated.

The decision of the Chairman, IFCI is to be binding on the parties. Moreover,

difficulties and disputes in implementation may not be between the parties to the

Memorandum of Understanding. It is possible that the valuers nominated in the

Memorandum of Understanding or the firm entrusted with the responsibility of

splitting some of the companies may require some clarifications or may find

difficulties in doing the work. They can also resort to clause 9. Looking to the

scheme of the Memorandum of Understanding and the purpose behind clause 9,

the learned Single Judge, in our view, has rightly come to the conclusion that

this was not an agreement to refer disputes to arbitration. It was meant to be an

expert’s decision. The Chairman, IFCI has designated his decision as a decision.

He has consulted experts in connection with the valuation and division of assets.

He did not file his decision in court nor did any of the parties request him to do

so.”

(emphasis supplied)

19. In Bharat Bhushan Bansal v. U.P. Small Industries

Corporation Limited, Kanpur (supra), a two Judge Bench interpreted Clauses 23

and 24 of the agreement entered into between the parties for execution of work

of construction of a factory and allied buildings of the respondent at India

Complex, Rai Bareli. Those clauses were as under:

“Decision of the Executive Engineer of the UPSIC to be final on certain matters

23. Except where otherwise specified in the contract, the decision of the

Executive Engineer shall be final, conclusive and binding on both the parties to

the contract on all questions relating to the meaning, the specification, design,

drawings and instructions hereinbefore mentioned, and as to the quality of

workmanship or materials used on the work or as to any other question

whatsoever in any way arising out of or relating to the designs, drawings,

specifications, estimates, instructions, orders or otherwise concerning the works

or the execution or failure to execute the same whether arising during the

2

Page 22 progress of the work, or after the completion thereof or abandonment of the

contract by the contractor shall be final and conclusive and binding on the

contractor.

Decision of the MD of the UPSIC on all other matters shall be final

24. Except as provided in clause 23 hereof, the decision of the Managing

Director of the UPSIC shall be final, conclusive and binding on both the parties

to the contract upon all questions relating to any claim, right, matter or thing in

any way arising out of or relating to the contract or these conditions or

concerning abandonment of the contract by the contractor and in respect of all

other matters arising out of this contract and not specifically mentioned herein.”

It was argued on behalf of the appellant that Clause 24 should be construed as an

arbitration clause because the decision of the Managing Director was binding on

both the parties. The two Judge Bench analysed Clauses 23 and 24 of the

agreement, referred to the judgment in K.K. Modi v. K.N. Modi (supra), State

of U.P. v. Tipper Chand (supra), State of Orissa v. Damodar Das (supra) and

observed:

“In the present case, the Managing Director is more in the category of an expert

who will decide claims, rights, or matters in any way pertaining to the contract.

The intention appears to be more to avoid disputes than to decide formulated

disputes in a quasi-judicial manner. In para 18.067 of Vol. 2 of Hudson on

Building and Engineering Contracts. Illustration (8) deals with the case where,

by the terms of a contract, it was provided that the engineer

“shall be the exclusive judge upon all matters relating to the construction,

incidents, and the consequences of these presents, and of the tender,

specifications, schedule and drawings of the contract, and in regard to the

execution of the works or otherwise arising out of or in connection with the

contract, and also as regards all matters of account, including the final balance

payable to the contractor, and the certificate of the engineer for the time being,

given under his hand, shall be binding and conclusive on both parties.”

2

Page 23 It was held that this clause was not an arbitration clause and that the duties of the

Engineer were administrative and not judicial.

Since clause 24 does not contemplate any arbitration, the application of the

appellant under Section 8 of the Arbitration Act, 1940 was misconceived. The

appeal is, therefore, dismissed though for reasons somewhat different from the

reasons given by the High Court. there will, however, be no order as to costs.”

20. In Civil Appeal No.3680/2005 - Vishnu (dead) by L.Rs. v.

State of Maharashtra and others decided on 4.10.2013, this Court considered the

question whether Clause 30 of B-1 Agreements entered into between the

Government of Maharashtra and the appellant is in the nature of an arbitration

clause. That clause was substantially similar to the clauses being considered in

these cases. After noticing precedents on the subject, the Court observed:

“In terms of Clause 29 of B-1 Agreement, the Superintending Engineer of the

Circle was invested with the authority to approve all works to be executed under

the contract. In other words, the Superintending Engineer was to supervise

execution of all works. The power conferred upon him to take decision on the

matters enumerated in Clause 30 did not involve adjudication of any dispute or

lis between the State Government and the contractor. It would have been

extremely anomalous to appoint him as Arbitrator to decide any dispute or

difference between the parties and pass an award. How could he pass an award

on any of the issues already decided by him under Clause 30? Suppose, he was

to decline approval to the designs, drawings etc. or was to object to the quality of

materials etc. and the contractor had a grievance against his decision, the task of

deciding the dispute could not have been assigned to the Superintending

Engineer. He could not be expected to make adjudication with an un-biased

mind. Even if he may not be actually biased, the contractor will always have a

lurking apprehension that his decision will not be free from bias. Therefore,

there is an inherent danger in treating the Superintending Engineer as an

Arbitrator. This facet of the problem was highlighted in the judgment of the two

Judge Bench in Bihar State Mineral Development Corporation and another v.

Encon Builders (I)(P) Limited (2003) 7 SCC 418. In that case, the agreement

entered into between the parties contained a clause that any dispute arising out of

the agreement shall be referred to the Managing Director of the Corporation and

2

Page 24 his decision shall be final and binding on both the parties. After noticing several

precedents, the two Judge Bench observed:

“There cannot be any doubt whatsoever that an arbitration agreement must

contain the broad consensus between the parties that the disputes and differences

should be referred to a domestic tribunal. The said domestic tribunal must be an

impartial one. It is a well-settled principle of law that a person cannot be a judge

of his own cause. It is further well settled that justice should not only be done

but manifestly seen to be done.

Actual bias would lead to an automatic disqualification where the decision-

maker is shown to have an interest in the outcome of the case. Actual bias

denotes an arbitrator who allows a decision to be influenced by partiality or

prejudice and thereby deprives the litigant of the fundamental right to a fair trial

by an impartial tribunal.

As the acts of bias on the part of the second appellant arose during execution of

the agreement, the question as to whether the respondent herein entered into the

agreement with his eyes wide open or not takes a back seat. An order which

lacks inherent jurisdiction would be a nullity and, thus, the procedural law of

waiver or estoppel would have no application in such a situation.

It will bear repetition to state that the action of the second appellant itself was in

question and, thus, indisputably, he could not have adjudicated thereupon in

terms of the principle that nobody can be a judge of his own cause.” ”

21.To the aforesaid proposition, we may add that in terms of Clause 29(a)

and similar other clauses, any dispute or difference irrespective of its

nomenclature in matters relating to specifications, designs, drawings, quality of

workmanship or material used or any question relating to claim, right in any way

arising out of or relating to the contract designs, drawings etc. or failure on the

contractor’s part to execute the work, whether arising during the progress of the

work or after its completion, termination or abandonment has to be first referred

to the Chief Engineer or the Designated Officer of the Department. The Chief

Engineer or the Designated Officer is not an independent authority or person,

2

Page 25 who has no connection or control over the work. As a matter of fact, he is

having over all supervision and charge of the execution of the work. He is not

required to hear the parties or to take evidence, oral or documentary. He is not

invested with the power to adjudicate upon the rights of the parties to the dispute

or difference and his decision is subject to the right of the aggrieved party to

seek relief in a Court of Law. The decision of the Chief Engineer or the

Designated Officer is treated as binding on the contractor subject to his right to

avail remedy before an appropriate Court. The use of the expression ‘in the first

place’ unmistakably shows that non-adjudicatory decision of the Chief Engineer

is subject to the right of the aggrieved party to seek remedy. Therefore, Clause

29 which is subject matter of consideration in most of the appeals and similar

clauses cannot be treated as an Arbitration Clause.

22.As a corollary to the above, we hold that the judgment of the Designated

Judge in Mysore Construction Company v. Karnataka Power Corporation Ltd.

(supra) lays down the correct law.

23.Before parting with the case, we may notice the judgments relied upon by

the learned counsel for the contractors and find out whether the proposition laid

down therein supports their argument that Clause 29 and other similar clauses in

the agreements entered into between the parties should be treated as arbitration

clause.

2

Page 26 24. The facts of Mallikarjun v. Gulbarga University case (2004)

1 SCC 372 were that the respondent-University had accepted the tender

submitted by the appellant for construction of an indoor stadium. In pursuance of

the work order issued by the competent authority, the appellant completed the

construction. Thereafter, he invoked the arbitration clause for resolution of the

disputes which arose from the execution of the project. Superintending Engineer,

PWD, Gulbarga Circle was entrusted with the task of deciding the disputes. The

parties filed their respective claims before the Superintending Engineer. He

considered the same and passed an award. The appellant filed execution petition

in the Court of Principal Civil Judge (Senior Division), Gulbarga. The

respondent filed an objection petition under Section 47 of the CPC. The

Executing Court rejected the objection. The University challenged the decision

of the Executing Court and pleaded that the agreement on the basis of which the

dispute was referred to the Superintending Engineer was not an arbitration

agreement and, as such, award made by him cannot be treated as one made under

the 1940 Act. The High Court accepted the plea of the University and set aside

the order of the trial Court. Clause 30 of the agreement which came up for

interpretation by this Court was as under:

“The decision of the Superintending Engineer of Gulbarga Circle 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, designs, drawings and

instructions hereinbefore mentioned and as to the quality of workmanship or

material 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 designs,

2

Page 27 drawings, specifications, estimates, instructions, orders or those 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

abandonment thereof in case of dispute arising between the contractor and

Gulbarga University.”

After analyzing the aforesaid clause and making a reference to essential

elements of arbitration agreement enumerated in Bihar State Mineral

Development Corporation v. Encon Builders (I)(P) Limited (supra), a three

Judge Bench held:

“Applying the aforesaid principle to the present case, clause 30 requires the

Superintending Engineer, Gulbarga Circle, Gulbarga, to give his decision on any

dispute that may arise out of the contract. Further, we also find that the

agreement postulates present or future differences in connection with some

contemplated affairs inasmuch as there also was an agreement between the

parties to settle such difference by a private tribunal, namely, the Superintending

Engineer, Gulbarga Circle, Gulbarga. It was also agreed between the parties that

they would be bound by the decision of the Tribunal. The parties were also ad

idem.

In the aforesaid view of the matter, it must be held that the agreement did

contain an arbitration clause.”

The Bench distinguished the judgment in Bharat Bhushan Bansal’s case by

making the following observations:

“A bare comparison of clause 30 of the contract agreement involved in the

present matter and clauses 23 and 24 involved in Bharat Bhushan Bansal case

would show that they are not identical. Whereas clause 30 of the agreement in

question provides for resolution of the dispute arising out of the contract by

persons named therein; in terms of clause 24, there was no question of decision

by a named person in the dispute raised by the parties to the agreement. The

matters which are specified under clauses 23 and 24 in Bharat Bhushan Bansal

case were necessarily not required to arise out of the contract, but merely claims

2

Page 28 arising during performance of the contract. Clause 30 of the agreement in the

present case did provide for resolution of the dispute arising out of the contract

by the Superintending Engineer, Gulbarga Circle, Gulbarga. For that reason, the

case relied upon by the learned counsel for the respondent is distinguishable.

Once clause 30 is constituted to be a valid arbitration agreement, it would

necessarily follow that the decision of the arbitrator named therein would be

rendered only upon allowing the parties to adduce evidence in support of their

respective claims and counter-claims as also upon hearing the parties to the

dispute. For the purpose of constituting the valid arbitration agreement, it is not

necessary that the conditions as regards adduction of evidence by the parties or

giving an opportunity of hearing to them must specifically be mentioned therein.

Such conditions, it is trite, are implicit in the decision-making process in the

arbitration proceedings. Compliance with the principles of natural justice inheres

in an arbitration process. They, irrespective of the fact as to whether recorded

specifically in the arbitration agreement or not are required to be followed. Once

the principles of natural justice are not complied with, the award made by the

arbitrator would be rendered invalid. We, therefore, are of the opinion that the

arbitration clause does not necessitate spelling out of a duty on the part of the

arbitrator to hear both parties before deciding the question before him. The

expression “decision” subsumes adjudication of the dispute. Here in the instant

case, it will bear repetition to state, that the disputes between the parties arose

out of a contract and in relation to matters specified therein and, thus, were

required to be decided and such decisions are not only final and binding on the

parties, but they are conclusive which clearly spells out the finality of such

decisions as also their binding nature.

A clause which is inserted in a contract agreement for the purpose of prevention

of dispute will not be an arbitration agreement. Such a provision has been made

in the agreement itself by conferring power upon the Engineer-in-Charge to take

a decision thereupon in relation to the matters envisaged under clauses 31 and 32

of the said agreement. Clauses 31 and 32 of the said agreement provide for a

decision of the Engineer-in-Charge in relation to the matters specified therein.

The jurisdiction of the Engineer-in-Charge in relation to such matters are limited

and they cannot be equated with an arbitration agreement. Despite such clauses

meant for prevention of dispute arising out of a contract, significantly, clause 30

has been inserted in the contract agreement by the parties.

The Superintending Engineer, Gulbarga Circle, Gulbarga, is an officer of the

Public Works Department in the Government of Karnataka. He is not an officer

of the University. He did not have any authority or jurisdiction under the

agreement or otherwise either to supervise the construction works or issue any

direction(s) upon the contractor in relation to the contract job. He might be an ex

officio member of the Building Committee, but thereby or by reason thereof, he

2

Page 29 could not have been given nor in fact had been given an authority to supervise

the contract job or for that matter issue any direction upon the contractor as

regards performance of the contract.”

(emphasis supplied)

25. In Punjab State v. Dina Nath (supra), a two Judge Bench was

called upon to consider whether clause 4 of work order No.114 dated 16.5.1985

constituted an arbitration agreement. The clause in question was as under:

“Any dispute arising between the department and the contractor/society shall be

referred to the Superintending Engineer, Anandpur Sahib, Hydel Circle No.1,

Chandigarh for orders and his decision will be final and acceptable/binding on

both the parties.”

After noticing the judgment in K.K. Modi v. K.N. Modi, the Court observed:

“Keeping the ingredients as indicated by this Court in K.K.Modi in mind for

holding a particular agreement as an arbitration agreement, we now proceed to

examine the aforesaid ingredients in the context of the present case:

(a)Clause 4 of the Work Order categorically states that the

decision of the Superintending engineer shall be binding on

the parties.

(b)The jurisdiction of the Superintending Engineer to decide the

rights of the parties has also been derived from the consent of

the parties to the Work Order.

(c)The agreement contemplates that the Superintending

Engineer shall determine substantive rights of parties as the

clause encompasses all varieties of disputes that may arise

between the parties and does not restrict the jurisdiction of

the Superintending Engineer to specific issues only.

(d)That the agreement of the parties to refer their disputes to the

decision of the Superintending Engineer is intended to be

enforceable in law as it is binding in nature.

2

Page 30 The words “any dispute” appears in clause 4 of the Work Order. Therefore, only

on the basis of the materials produced by the parties in support of their

respective claims a decision can be arrived at in resolving the dispute between

the parties. The use of the words “any dispute” in clause 4 of the Work order is

wide enough to include all disputes relating to the said Work Order. Therefore,

when a party raises a dispute for non-payment of money after completion of the

work, which is denied by the other party, such a dispute would come within the

meaning of “arbitration agreement” between the parties. Clause 4 of the Work

Order also clearly provides that any dispute between the department and the

contractor shall be referred to the Superintending Engineer, Hydel Circle No.1,

Chandigarh for orders. The word “orders” would indicate some expression of

opinion, which is to be carried our, or enforced and which is a conclusion of a

body (in this case Superintending engineer, Hydel Circle No.1, Chandigarh).

Then again the conclusion and decision of the Superintending Engineer will be

final and binding on both the parties. This being the position in the present case

and in view of the fact that clause 4 of the Work Order is not under challenge

before us, the decision that would be arrived at by Superintending Engineer,

Hydel Circle No.1, Chandigarh must also be binding on the parties as a result

whereof clause 4 must be held to be a binding arbitration agreement.”

The Bench distinguished the judgment in State of Orissa v. Damodar Das (supra)

by making the following observations:

“From a plain reading of this clause in Damodar Das it is evident that the powers

of the Public Health Engineer were essentially to supervise and inspect. His

powers were limited to the questions relating to the meaning of the

specifications, drawings and instructions, quality of workmanship or materials

used on the work or as to any other question, claim, right, matter, drawings,

specifications, estimates, instructions, orders or these conditions or otherwise

concerning the works or the execution or failure to execute the same. However,

in the case before us, the Superintending Engineer was given full power to

resolve any dispute arising between the parties which power in our view is wide

enough to cover any nature of dispute raised by the parties. The clause in the

instant case categorically mentions the word “dispute” which would be referred

to him and states “his decision would be final and acceptable/binding on both the

parties.”

3

Page 31 26. Krishna Bhagya Jala Nigam Ltd. v. G.Harishchandra Reddy

(supra) was decided on the peculiar facts of that case. The contract which was

subject matter of interpretation in that case contained Clause 29. When the

respondent raised disputes and called upon the Chief Engineer to act as an

Arbitrator, the latter refused to do so. The Designated Judge allowed CMP

No.26/1999 filed under Section 11 of the 1996 Act and directed the Chief

Engineer to act as an Arbitrator. Thereafter, both the parties filed their respective

statements before the Arbitrator and produced evidence. The Arbitrator passed

award dated 25.6.2000. The appellant – Krishna Bhagya Jala Nigam Ltd. filed a

petition under Section 34(2)(v) of the 1996 Act. The Civil Court confirmed the

award of the Arbitrator. Appeal filed against the judgment of the Civil Court

was dismissed by the High Court. Before this Court, an argument was raised that

Clause 29 of the contract was not an arbitration clause. While rejecting the

argument, the two Judge Bench observed:

“We do not find any merit in the above arguments. The plea of “no arbitration

clause” was not raised in the written statement filed by Jala Nigam before the

arbitrator. The said plea was not advanced before the civil court in Arbitration

Case No. 1 of 2001. On the contrary, both the courts below on facts have found

that Jala Nigam had consented to the arbitration of the disputes by the Chief

Engineer. Jala Nigam had participated in the arbitration proceedings. It

submitted itself to the authority of the arbitrator. It gave consent to the

appointment of the Chief Engineer as an arbitrator. It filed its written statements

to the additional claims made by the contractor. The Executive Engineer who

appeared on behalf of Jala Nigam did not invoke Section 16 of the Arbitration

Act. He did not challenge the competence of the Arbitral Tribunal. He did not

call upon the Arbitral Tribunal to rule on its jurisdiction. On the contrary, it

submitted to the jurisdiction of the Arbitral Tribunal. It also filed written

arguments. It did not challenge the order of the High Court dated 10-9-1999

3

Page 32 passed in CMP No. 26 of 1999. Suffice it to say that both the parties accepted

that there was an arbitration agreement, they proceeded on that basis and,

therefore, Jala Nigam cannot be now be allowed to contend that clause 29 of the

contract did not constitute an arbitration agreement.”

27.One of the questions which arose for consideration in Karnataka State

Road Transport Corporation and another v. M. Keshava Raju (supra) was

whether the appointment of Arbitrator under Section 11 of the 1996 Act was

proper. The facts of that case show that on an application filed by the respondent

under Section 11 of the 1996 Act, the Designated Judge appointed an Arbitrator.

After hearing the parties, the Arbitrator passed award dated 15.10.1998 whereby

he allowed some claims of the respondent. The objections filed by the appellant

under Section 34 of the 1996 Act were rejected by VI Additional City Civil

Judge, Bangalore. In the appeal filed against the judgment of the trial Court, the

High Court formulated the following points:

“(1)Whether the appellant can be permitted to raise the ground regarding the

alleged want of jurisdiction in this Court to refer the dispute between the parties

to an Arbitrator under Section 11 of the Act, for the first time, in this appeal.

(2)Whether the ground regarding the legality and justification on the part of

the Arbitrator to Award a sum of Rs. 2,85,000 towards reimbursement of

overhead charges and another sum of Rs. 2,85,000 towards compensating the

loss of profits was raised before the Court below, and if it was not raised,

whether such plea can be allowed to be raised in this appeal for the first time and

if the above plea was in fact raised before the Court below, whether the

Arbitrator is justified in awarding a sum of Rs. 2,85,000 towards reimbursement

of overhead charges and another sum of Rs. 2,85,000 towards compensating loss

of profits having regard to Clause 15(a) of the agreement.”

The Division Bench referred to Section 16 and held:

3

Page 33 “In our considered opinion, the above plea cannot be entertained for more than

one reason. Firstly, one of the objects in enacting the Act is to have early

completion of arbitration proceedings minimising the supervisory role of Courts

in arbitral process. Sections 4, 5 and 16 of the Act have been enacted to give

effect to that object. Secondly, even the method of arbitration as a dispute

resolution mechanism and the procedure envisaged for that are intended to reach

the finality to resolve the dispute between the parties as quickly as possible.

Therefore, it is imperative that the party raising jurisdiction point, should raise

such plea at the earliest, that is to say, at the threshold of the proceeding. If that

is not insisted, it is trite, the very object in enacting the Act, on the basis of the

'UNCITRAL Modern Law', would be defeated. The jurisdiction plea now raised

for the first time in the Memorandum of Appeal was not raised either directly or

by necessary implication before this Court in C.M.P. No. 4/1996 or before the

Arbitrator or before the Court below. The appellant having acquiesced in the

jurisdiction of the Arbitral Tribunal without any demur and protest, having

participated in the proceedings and having suffered an award cannot now turn

round and raise the plea that the orders of this Court in C.M.P. No. 4 of 1996, the

award of the Arbitrator and the judgment of the Civil Court dated 20-6-2000 in

Arbitration Suit No. 6 of 1998 are nullity.

Thirdly, the appellant should be deemed to have waived his right to object to the

jurisdiction of the Arbitrator to pass the impugned award in terms of the

provisions of Section 4 of the Act. Section 4 reads as follows :-

"(4) Waiver of right to object

A party who knows that -

(a) any provision of this Part from which the parties may derogate, or

(b) any requirement under the arbitration agreement,

has not been complied with and yet proceeds with the arbitration without stating

his objection to such non-compliance without undue delay or, if a time limit is

provided for stating that objection, without that period of time, shall be deemed

to have waived his right to so object."

17. Section 4 narrates the circumstances in which the party, who knowingly fails

to object the non-compliance of any non-mandatory provisions of Part-I or any

requirement under the arbitration agreement by the other party, is deemed to

have waived his right to object. This section is based on general principles such

as "estoppel" or "venire contra factum proprium". It is intended to help the

arbitral process function efficiently and in good faith. If there is non-compliance

of any non-mandatory provision of Part I or of any requirement of the arbitration

agreement by a party to an arbitration agreement of which the other party to the

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Page 34 agreement though has the knowledge of such non-compliance but does not

object without undue delay, or if a time limit is provided for stating that

objection and no objection is taken within that period of time, such a party later

on can neither raise objection about that non-compliance of any provision of Part

I nor any requirement of the arbitration agreement since such party shall be

deemed to have waived its objection. Though, in order to apply the doctrine of

waiver by invoking Section 4, the first condition is that the non-compliance must

be of non-mandatory provision of Part I or of any requirement under the

arbitration agreement, certain mandatory provisions of the Act also provide for a

grant of waiver in the event of failure to object. For example, sub-sections (2)

and (3) of Section 16 are one of such mandatory provisions. Section 16 (2) of the

Act provides that a plea that the Arbitral Tribunal does not have jurisdiction

shall be raised not later than the submission of the statement of defence. Section

16 (3) of the Act provides that a plea that the Arbitral Tribunal is exceeding the

scope of its authority shall be raised as soon as the matter alleged to be beyond

the scope of its authority is raised during the arbitral proceedings.”

28.Thus, none of the judgments relied upon by learned counsel for the

contractors is of any help to their cause.

29.In the result, Civil Appeal Nos. 1586, 1587, 1588, 4187, 5496, 6323, 6327

and 6328 of 2004; Civil Appeal Nos. 558-560 of 2006; Civil Appeals arising out

of SLP(C) Nos. 16117, 17147, 24655 and 26073 of 2004; Civil Appeals arising

out of SLP(C) Nos. 5951, 12552 and 12553 of 2006, Civil Appeal arising out of

SLP(C) No. 8597 of 2009 and Civil Appeal arising out of SLP(C) No. 13528 of

2012 are dismissed. However, liberty is given to the appellants to avail

appropriate legal remedy for recovery of the amount, if any, due from the

respondents.

30.Civil Appeals arising out of SLP(C) Nos. 28087-28088, 28089, 29227-

29230 and 31975 of 2011 and Civil Appeal No.1374 of 2013 are allowed. The

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Page 35 orders passed by the Designated Judge, which are subject matter of challenge in

the five appeals are set aside. It is, however, made clear that the respondents

shall be free to avail appropriate legal remedies for recovery of the amount, if

any, payable to them in terms of their respective agreements.

..….………………….…J.

(G.S. SINGHVI)

..….………………….…J.

(V. GOPALA GOWDA)

..….………………….…J.

(C. NAGAPPAN)

New Delhi,

October 25, 2013.

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