Neeta Sawant CARAP-688-2025

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

COMMERCIAL ARBITRATION APPLICATION NO. 688 OF 2025

M/s. Sowil Limited …..APPLICANT

: VERSUS :

Deputy Chief Engineer

(Construction) Bhusawal ….RESPONDENT

Mr. Shardul Singh with Mr. Smeet Savla & Ms. Priyal Gandhi i/b

M/s. SHS Chambers, for Applicant

Mr. Narayan Bubna with Ms. Pooja Malik, for Respondent

CORAM : SANDEEP V. MARNE, J.

Reserved On :14 January 2026.

Pronounced On : 28 January 2026.

Judgment:

1) This is an application under Section 11 of the Arbitration

and Conciliation Act, 1996 (Arbitration Act) for appointment of

arbitrator for adjudication of disputes and differences between the

parties arising out of contract dated 7 May 2018. While there is no

dispute between the parties about existence of arbitration

agreement, the clause contains a restrictive condition for

arbitration. The relevant clause in the contract provides for

resolution of disputes by arbitration only to the extent of 20% of the

value of the contract. The value of the contract was

Rs.84,52,157.61/- whereas the estimated claim amount is Rs.3

crores and accordingly Railways have opposed appointment of

arbitrator.

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PAGE NO. 1 of 36

28 JANUARY 2026

NEETA

SHAILESH

SAWANT

Digitally

signed by

NEETA

SHAILESH

SAWANT

Date:

2026.01.28

18:55:26

+0530

Neeta Sawant CARAP-688-2025

2) A tender notice was issued by the Respondent-Central

Railways on 10 November 2017 for execution of work of preparation

of design and structural drawings for major and important bridges

for the upcoming Manmad- Jalgaon 3

rd

line project. The Applicant

participated in the tender process and was a successful bidder.

Letter of Acceptance dated 12 February 2018 was issued in favour

of the Applicant which indicated that the total value of the contract

as Rs.84,52,157.61/-. Under the contract, the Applicant was

supposed to complete the entire scope of work by provision of

detailed designs and drawings for 22 bridges within 9 months.

Various extensions were granted in favour of the Applicant for

completion of the work. The contract has been terminated by the

Respondent on 23 December 2021 and the Applicant was debarred

from executing the remaining scope of work. Applicant challenged

termination by �ling Writ Petition No.2887/2023, which was

disposed of on 11 June 2025 granting liberty to the Applicant to �le

application under Section 11 of the Arbitration Act. Accordingly, the

Applicant has �led the present Application under Section 11 of the

Arbitration Act.

3) Mr. Singh, the learned counsel appearing for the

Applicant submits that the parties have agreed to resolve the

disputes and differences by arbitration and that the contract

contains Clause-39 providing that the stipulations under Clauses-63

and 64 of the General Conditions of Contract (GCC) would be

applicable for settlement of claims of the contractor. He would

therefore submit that unreasonable condition is put in Clause 39 of

the contract that provisions of Clauses 63 and 64 of the GCC are

applicable only for settlement of claims of disputes between the

parties for value less than or equal to 20% of the value of the

contract. He submits that imposition of this condition is both

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Neeta Sawant CARAP-688-2025

arbitrary, as well as discriminatory. That there is no cap for the

Respondent-Railways to have its claims/counterclaims decided

through arbitration and the maximum cap is arbitrarily and

selectively applied to the Applicant. He would then take me through

Clause-64 of the GCC in support of his contention that no restriction

is imposed for decision of counterclaims by the Railways.

4) Mr. Singh further submits that the restriction of non-

arbitrability of claims exceeding 20% of the value of contract is

aimed at discouraging the Contractors from raising full claims and to

restrict them within the limit of 20%. That such unfair bargain

between the parties cannot be permitted to operate and that

therefore the restriction of 20% claim value is required to be

invalidated while preserving the balance part of arbitration

agreement.

5) Mr. Singh would submit that while deciding application

under Section 11 of the Arbitration Act, this Court is empowered to

decide on validity or reasonableness of condition stipulated in the

arbitration clause. In support, he relies on judgment of the Apex

Court in Lombard Engineering Limited Versus. Uttarakhand Jal

Vidyut Nigam Limited

1

. He relies on judgment of the Apex Court in

ICOMM Tele Limited Versus. Punjab State Water Supply and

Sewerage Board and Another

2

in support of his contention that

when an arbitration clause provides for unfair bargaining strength

between the parties, the same can be declared invalid by the Court.

That in ICOMM Tele Limited though the restriction for deposit of

10% claim amount is applied equally to both the parties, the Apex

Court still declared the clause to be invalid as being arbitrary to

Article 14 of the Constitution of India. Relying on Constitution bench

1 2024 4 SCC 341

2 2019 4 SCC 401

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judgment of Central Organisation for Railway Electri�cation Versus

ECI SMO MCML JV A Joint Venture Company

3

(CORE), Mr. Singh

submits that the principle of equality applies even at the stage of

appointment of arbitrator. He would submit that in the present case,

the arbitration clause creates inequality by restricting the claims of

the Contractor at 20% while not imposing similar restriction on the

Railways. He relies upon judgment of the Apex Court in Shin

Satellite Public Company Limited Versus Jain Studios Limited

4

where stipulation in the arbitration clause for waiver of right of

appeal is held to be invalid. He submits that the Apex Court has

recognized the principle in Shin Satellite Public Company Limited

(supra) that if the contract is in severed parts, some of which are

legal and unenforceable, lawful parts can be enforced provided they

are severable.

6) Mr. Singh further submits that under Section 11 Court

can make appointment of arbitrator and leave the issue of

jurisdiction in the form of �nancial cap to be decided by the

arbitrator. He relies on judgment of Rajasthan High Court in Jai

Salasar Balaji Construction Company Versus. Union of India

5

. Mr.

Singh would accordingly pray for constitution of Arbitral Tribunal in

the light of express agreement between the parties to resolve the

disputes and differences by arbitration.

7) Mr. Bubna the learned counsel appearing for the

Respondent-Railways would oppose the Application submitting that

the parties have expressly agreed to resolve the disputes and

differences between them by arbitration only if the claim is below

20% of the contract value. That Clause 39 of the contract expressly

provides that if claim is above 20% of the contract value, the same

3 2025 (4) SCC 641

4 2006 (2) SCC 628

5 SB Arbitration Application No. 52 of 2016 decided on 18 August 2017

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would not be governed by arbitration. He submits that the clause is

not aimed at discouraging the contractor from claiming more than

20% of the contract value and that the contractor is free to institute

civil suit against Railways if he wants to prosecute claim in excess of

20% of the contract value. That in the present case, the Applicant

has declared the estimated value of the claim at Rs.3 crores which is

400% more than the contract value of Rs.84,52,157.61/-.

8) Mr. Bubna relies on judgment of this Court in Railtech

Infraven Pvt. Ltd. versus. Union of India and Another

6

in support of

his contention that the condition restricting claim at 20% of the

contract value is upheld by this Court. He also relies upon judgment

of the Apex court in State of AP and another versus Obulu Reddy

7

in

support of his contention that similar monetary restriction for

references of disputes to arbitration is considered and applied by the

Apex Court. He also relies upon judgment of Madhya Pradesh High

Court in Seth Mohanlal Hiralal Construction Company Versus. Union

of India and Another

8

and of the Apex Court in Deepak Kumar

Bansal Versus union of India and Another

9

is referred to, in support

of the contention that the condition of 20% value of contract is

repeatedly applied by Courts. He would submit that the restriction of

reference of claim of only 20% of the contract value to arbitration is

provided considering peculiar practice followed by contractors to

raise baseless and escalated claims after securing the amounts

under the bills. He would pray for dismissal of the Application.

9) Rival contentions of the parties now fall for my

consideration.

6 2014 SCC Online Bom 1662

7 1999 (9) SCC 568

8 2018 SCC Online MP 847

9 2009 (3) SCC 293

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10) The short issue that arises for consideration is whether

the Arbitral Tribunal can be constituted by this Court in exercise of

powers under Section 11(6) of the Arbitration Act in the light of

estimated claim of the Applicant exceeding 20% of the value of

contract. The total value of the contract awarded to the Applicant

was Rs.84,52,157.61/- whereas in para-46 of the Application, the

Applicant has declared that its estimated value of the claim is Rs. 3

crores towards losses suffered by it due to unlawful termination.

Para 46 of the Application reads thus:

46.  The Applicant claims an estimated amount of Rs.3,00,00,000/-

(Rupees Three Crores) towards the losses suffered by the Applicant

due to the illegal and unlawful to rescission /termination, illegal

invocation of the Bank Guarantee, recovery of the amounts due to

the Application by the Respondent, etc under the Contract. The

Petitioner reserves its right to vary its claim at the time of

submitting claims before the Arbitral Tribunal.

11) The contract executed between the parties contains

arbitration Clause-39 which reads thus :-

39. ARBITRATION:

The provisions 63 and 64 of the GCC will be applicable only for

settlement of claims of disputes between the Parties for values less

than or equal to 20% of the value of the contract and when the

claims or disputes are of value more than 20% of the value of

contract, provision of clauses 63 & 64 and other relevant clauses of

GCC will not be applicable and arbitration will not be a remedy for

settlement of such disputes.

39.1 The contractor shall not be entitled to ask for reference to

arbitration before COMPLETION of the work assigned to him under

this contract. The contractor shall seek reference to arbitration to

settle disputes only ONCE within the ambit of condition 39.1 above.

39.2 In terms of clause 63 of General Conditions of Contract-2014,

the disputes and differences, for which provision has been made in

"Special Conditions of Contract" included in tender documents as

above, shall also be deemed as "Excepted matters' and decisions of

the Railway authority thereon shall be �nal and binding on the

contractor and these 'Excepted matter shall stand speci�cally

excluded from the purview of the arbitration clause and not

referred to arbitration.

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39.3 Arbitrators to be appointed only by General Manager of

Railways.

39.4 The Claimant Contractor shall seek reference to Arbitration to

settle the disputes only within the ambit of conditions of mentioned

above.

39.5 CLAIMS: As per Clause No.43 (1) & 43(2) of General condition

of contract:-

Clause No:- 43(1):- Monthly statement of claims:- The contractor

shall prepare and furnish to the Engineer once in every month an

account giving full and detailed particulars of all claims for any

additional expenses to which the contractor may consider himself

entitled to and of all extra or additional works ordered by the

Engineer which he has executed during the preceding month and

no claim for payment for and such work will be considered which

has not been included in such particulars.

Clause No 43(2)- Signing of "NO CLAIM Certi�cate: The contractor

shall not be entitled to make any claim whatsoever against the

Railway under or by virtue of or arising out of this contract, nor

shall the railway entertain or consider any such claim, if made by

the contractor, after he shall have signed a "NO CLAIM" Certi�cate

in favour of the railway in such form as shall be required by the

railway after the works are �nally measured up. The contractor

shall be from disputing the correctness of the items covered by "NO

CLAIM Certi�cate or demanding a clearance to Arbitration In

respect thereof.

(emphasis added)

12) Thus, under Clause 39 of the contract, the provisions of

Clauses 63 and 64 of the GCC applies only for settlement of claims

between the parties for value less than or equal to 20% of the value

of contract. Clause-39 further provides that when claims or disputes

exceed 20% of the contract value, provisions of Clauses 63 and 64

and other relevant clauses of GCC would not be applicable and

arbitration would not be a remedy for settlement of such disputes.

13) Since Clause 39 refers to Clauses 63 and 64 of the GCC, it

would be necessary to refer to the said clauses as well:-

63. Matters Finally Determined By The Railway: 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

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contract, shall be referred by the contractor to the GM and the GM

shall, within 120 days after receipt of the contractor's

representation, make and notify decisions on all matters referred

to by the contractor in writing provided that matters for which

provision has been made in Clauses 8, 18, 22(5), 39, 43(2), 45(a),

55, 55-A(5), 57, 57A,61(1), 61(2) and 62(1) to (xlll)(B) of

Standard General Conditions of Contract or in any Clause of the

Special Conditions of the Contract shall be deemed as 'excepted

matters' (matters not arbitrable)and decisions of the Railway

authority, thereon shall be �nal and binding on the contractor;

provided further that 'excepted matters' shall stand speci�cally

excluded from the purview of the Arbitration Clause. 

64.(1) Demand For Arbitration:

64.(1) (1) In the event of any dispute or difference between the

parties hereto as to the construction or operation of this contract,

or the respective rights and liabilities of the parties on any matter

in question, dispute or difference on any account or as to the

withholding by the Railway of any certi�cate to which the

contractor may claim to be entitled to, or if the Railway fails to

make a decision within 120 days, then and in any such case, but

except in any of the "excepted matters" referred to in Clause 63 of

these Conditions, the contractor, after 120 days but within 180

days of his presenting his �nal claim on disputed matters shall

demand in writing that the dispute or difference be referred to

arbitration.

64.(1) (ii) The demand for arbitration shall specify the matters

which are in question, or subject of the dispute or difference as also

the amount of claim  item-wise. Only such dispute(s)or

difference(s) in respect of which the demand has been made,

together with counter claims or set off, given by the Railway, shall

be referred to arbitration and other matters shall not be included in

the reference.

64.(1) (iii) (a) The Arbitration proceedings shall be assumed to

have commenced from the day, a written and valid

demand for arbitration is received by the Railway.

(b) The claimant shall submit his claim stating the

facts supporting the claims alongwith all the relevant

documents and the relief or remedy sought against

each claim  within a period of 30 days from the date of

appointment of the Arbitral Tribunal.

(C) The Railway shall submit its defence statement

and counter claim(s), if any, within a period of 60

days of receipt of copy of claims from Tribunal

thereafter, unless otherwise extension has been

granted by Tribunal.

(d) Place of Arbitration: The place of arbitration

would be within the geographical limits of the

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Division of the Railway where the cause of action

arose or the Headquarters of the concerned Railway

or any other place with the written consent of both

the parties.

64.(1) (iv) No new claim shall be added during proceedings by

either party. However, a party may amend or supplement the

original claim or defence thereof during the course of arbitration

proceedings subject to acceptance by Tribunal having due regard to

the delay in malding it.

64.(1) (v) If the contractor(s) does/do not prefer his/their speci�c

and �nal claims in writing, within a period of 90 days of receiving

the intimation from the Railways that the �nal bill is ready for

payment, he/they will be deemed to have waived his/their claim(s)

and the Railway shall be discharged and released of all liabilities

under the contract in respect of these claims.

64.(2) Obligation During Pendency Of Arbitration: Work under the

contract shall, unless otherwise directed by the Engineer, continue

during the arbitration proceedings, and no payment due or payable

by the Railway shall be withheld on account of such proceedings,

provided, however, it shall be open for Arbitral Tribunal to consider

and dedde whether or not such work should continue during

arbitration proceedings.

64.(3) Appointment of Arbitrator:

64.(3) (a)(i) In cases where the total value of all claims in question

added together does not exceed Rs. 25,00,000 (Rupees twenty �ve

lakh only), the Arbitral Tribunal, shall consist of a Sole Arbitrator

who shall be a Gazetted Of�cer of Railway not below JA Grade,

nominated by the General Manager. The sole arbitrator shall be

appointed within 60 days from the day when a written and valid

demand for arbitration is received by GM. 

64. (3) (a)(ii) In cases not covered by the Clause 64(3)(a)(i), the

Arbitral Tribunal sh consist of a Panel of three Gazetted Railway

Of�cers not below JA Grade or 2 Railway Gazett Of�cers not below

JA Grade and a retired Railway Of�cer, retired not below the rank

of SAG Of�cer, as the arbitrators. For this purpose, the Railway will

send a panel of more than 3 names of Gazetted Railway Of�cers of

one or more departments of the Railway which may also include 

the names of retired railway of�cer empanelled to work as Railway

Arbitrator to the contractor within 60 days from the day when a

written and valid demand for arbitration is received by the GM.

Contractor will be asked to suggest to General Manager at least 2

names out of the panel for appointment as contractor's nominee

within 30 days from the date of dispatch of the request by Railway.

The General Manager shall appoint at least one out of them as the

contractor's nominee and will, also simultaneously appoint the

balance number of arbitrators either from the panel or from outside

the panel, duly indicating the 'presiding arbitrator" from amongst

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the 3 arbitrators so appointed. GM shall complete this exercise of

appointing the Arbitral Tribunal within 30 days from the receipt of

the names of contractor's nominees. While nominating the

arbitrators, it will be necessary to ensure that one of them is from

the Accounts Department. An of�cer of Selection Grade of the

Accounts Department shall be considered of equal status to the

of�cers in SA grade of other departments of the Railway for the

purpose of appointment of arbitrator.

64.(3) (a)(iii) If one or more of the arbitrators appointed as above

refuses to act as arbitrator, withdraws from his of�ce as arbitrator,

or vacates his/their of�ce/of�ces or is/are unable or unwilling to

perform his functions as arbitrator for any reason whatsoever or

dies or in the opinion of the General Manager fails to act without

undue delay, the General Manager shall appoint new

arbitrator/arbitrators to act in his/their place in the same manner

in which the earlier arbitrator/arbitrators had been appointed.

Such re-constituted Tribunal may, at its discretion, proceed with

the reference from the stage at which it was left by the previous

arbitrator (s).

64.(3) (a)(iv) The Arbitral Tribunal shall have power to call for

such evidence by way of af�davits or otherwise as the Arbitral

Tribunal shall think proper, and it shall be the duty of the parties

hereto to do or cause to be done all such things as may be necessary

to enable the Arbitral Tribunal to make the award without any

delay. The Arbitral Tribunal should record day to-day proceedings.

The proceedings shall normally be conducted on the basis of

documents and written statements.

64.(3) (a)(v) While appointing arbitrator(s) under Sub-Clause (i),

(ii) & (iii) above, due care shall be taken that he/they is/are not the

one/those who had an opportunity to deal with the matters to

which the contract relates or who in the course of his/their duties

as Railway servant(s) expressed views on all or any of the matters

under dispute or differences. The proceedings of the Arbitral

Tribunal or the award made by such Tribunal will, however, not be

Invalid merely for the reason that one or more arbitrator had, in

the course of his service, opportunity to deal with the matters to

which the contract relates or who in the course of his/their duties

expressed views on all or any of the matters under dispute.

64.(3) (b)(i) The arbitral award shall state item wise, the sum and

reasons upon which it is based. The analysis and reasons shall be

detailed enough so that the award could be inferred therefrom.

64.(3) (b)(ii) A party may apply for corrections of any

computational errors, any typographical or clerical errors or any

other error of similar nature occurring in the award of a Tribunal

and interpretation of a speci�c point of award to Tribunal within 60

days of receipt of the award.

64(3) (b) (iii) A party may apply to Tribunal within 60 days of

receipt of award to make an additional award as to claims

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presented in the arbitral proceedings but omitted from the arbitral 

award 

64.(4) In case of the Tribunal, comprising of three Members, any

ruling on award shell be made by a majority of Members of

Tribunal. In the absence of such a majority, the views of the

Presiding Arbitrator shall prevail. 

64.(5) Where the arbitral award is for the payment of money, no

interest shall be payable on whole or any part of the money for any

period till the date on which the award is made.

64.(6) The cost of arbitration shall be bome by the respective

parties. The cost shall inter-alla include fee of the arbitrator(s), as

per the rates �xed by Railway Board from time to time and the fee

shall be borne equally by both the parties. Further, the fee payable

to the arbitrator(s) would be governed by the instructions issued

on the subject by Railway Board from time to time Irrespective of

the fact whether the arbitrator(s) is/are appointed by the Railway

Administration or by the court of law unless speci�cally directed by

Hon'ble court otherwise on the matter.

64.(7) Subject to the provisions of the aforesaid Arbitration and

Conciliation Act 1996 and the rules thereunder and any statutory

modi�cations thereof shall apply to the arbitration proceedings

under this Clause.

14) Since the claim of the Applicant exceeds 20% value of the

contract (it is approximately 400% of the value of contract)

Railways have opposed constitution of Arbitral Tribunal contending

that there is no arbitration agreement for adjudication of disputes

and differences in respect of the claims raised by the Applicant.

Existence of arbitration agreement under Section 7 of the

Arbitration Act is a

sine-qua-non for exercise of power by the Court

under Section 11 for appointment of an arbitrator. In the present

case, there is arbitration agreement between the parties. However,

there is a restrictive covenant in the arbitration agreement and

parties have agreed that the disputes only to the extent of claims

upto 20% of the contract value would be resolved through private

arbitration and disputes concerning claims exceeding 20% of the

contract value would not be resolved by arbitration. There is positive

as well as negative covenant in Clause 39 of the contract which not

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only provides for dispute resolution mechanism by arbitration in

respect of claims only upto and below 20% of the contract value but

it speci�cally provides that any claim exceeding 20% of contract

value shall not be adjudicated through arbitration. There is thus no

agreement between the parties to resolve disputes relating to the

claim of the Applicant, which is almost 400% of the contract value.

Faced with the above situation, the Applicant has sought to

challenge the restrictive stipulation of 20% of the contract value.

Before considering the challenge of the Applicant, it must however

be observed at the very outset that though oral challenge is raised to

the said restrictive covenant, no speci�c ground in that regard is

pleaded in the arbitration application. Ordinarily therefore this

Court would have been justi�ed in not permitting the Applicant to

raise a challenge to the restrictive covenants in the Arbitration

Agreement in absence of pleadings, however since parties have

canvassed detailed submissions on enforceability of the restrictive

covenant in the arbitration agreement, I proceed to decide the

challenge raised by the Applicant.

15) According to the Applicant, restrictive covenant in the

arbitration agreement providing for dispute resolution mechanism

of claims upto 20% of the contract value is discriminatory since such

restrictive covenant does not apply to Railways. In my view, the

submission is not only misplaced but also speculative. Careful

perusal of Clause 39 of the contract indicates that the same uses the

expression ‘only for settlement of claims of disputes between the

parties for values less than or equal to 20% of the value of contract’.

Thus use of the expression ‘between the parties’ does not seem to

suggest that the restrictive covenant is applicable only

qua the

Applicant and not to Railways. In any case, it is not necessary to

delve deeper into this aspect as the issue of appointment of

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arbitrator is required to be decided before any counterclaim can be

made by the Railways. The Court cannot speculate whether

Railways would raise any counterclaim and what would be the value

of such counterclaim. Clause 39.4 uses the words ‘claimant

contractor’ who is required to seek reference to arbitration to settle

the disputes only within the ambit of conditions mentioned in Clause

39.3. Clause 39.3 provides for appointment of arbitrator by the

General Manager which now cannot be enforced in the light of

development of law on the subject of unilateral appointment of

arbitrator. However, when an application is made to the Court for

appointment of Arbitrator, the Court would consider only the value

of the claim of the Contractor and then constitute the Arbitral

Tribunal. What would be the value of the counterclaim �led by the

Railways would be in the realm of speculation at that point of time.

Therefore, the value of counterclaim raised by the Railways cannot

be a determinative factor for deciding whether the dispute can be

referred to arbitration or not in the light of restrictive covenant in

the arbitration agreement. I am therefore not impressed by the

submission of Mr. Singh that the restrictive covenant in the

arbitration agreement is discriminatory.

16) It is further sought to be contended that the restrictive

covenant for arbitration in respect of the claims upto only 20% of the

contract value is aimed at discouraging the contractors from raising

claims in excess of 20% of the contract value against the railways. I

am unable to agree. What parties have agreed under Clause 39 is

that claims upto 20% of the contract value would be adjudicated

through arbitration and that the claims exceeding 20% of the

contract value can be adjudicated in other proceedings. Thus, Clause

39 does not seek to prevent the contractors from seeking

adjudication of claims exceeding 20% of the contract value. In the

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event the contractor decides to claim amount in excess of 20% of

contract value from the Railways, he needs to �le civil suit since

such disputes are not agreed to be resolved by arbitration.

17) The principle of party autonomy would apply and the

intention of parties in agreeing for resolution of disputes through

arbitration must be appreciated. Party autonomy is the foundational

principle granting parties the freedom to mutually de�ne their

dispute resolution process. Party autonomy would therefore also

include freedom to mutually agree that only part of dispute would be

resolved by arbitration. Once arbitration agreement is arrived at, it

does not mean that every dispute has to be resolved only by

arbitration. It is for parties to decide whether all or selective

disputes are to be resolved by arbitration. Parties here have clearly

intended that claims of only particular value would be adjudicated

through arbitration while claims exceeding the agreed value would

be resolved through other remedies. It is for the parties to agree as

to whether the disputes would be resolved through arbitration or not

and the Court cannot force the parties to have the disputes resolved

through the mechanism of private arbitration. If there was no

arbitration agreement at all, could Applicant have insisted for

appointment of arbitrator? The answer is obviously in the negative.

Therefore, since parties have expressly agreed that disputes

exceeding 20% of the contract value would not be resolved through

arbitration, the Court cannot force parties to resolve their disputes

through arbitration. The Court would have no jurisdiction to appoint

an arbitrator under Section 11 of the Arbitration Act if there is no

arbitration agreement between the parties to decide the claim of a

particular value.

18) Imposition of restriction of reference of dispute for

arbitration only in respect of the claims upto 20% of the contract

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value is sought to be justi�ed by Railways by contending that the

same is imposed essentially to curb tendency on behalf of the

Contractors to �rst receive certi�ed bill amount and thereafter raise

baseless and escalated claims against the Railways. It is contended

that therefore only genuine claims upto 20% of the contract value

can be permitted leaving open remedy for contractors to adopt other

civil remedies if claims exceed 20% of the contract value. In my

view, it is not really necessary to go into validity of reasons as to

why the restriction is imposed in the arbitration agreement. As

observed above, arbitration is essentially governed by the principle

of ‘party autonomy’. The Applicant has agreed that only claims upto

20% of contract value would be adjudicated through arbitration and

that the remedy of arbitration would not be available if claim

amount exceeds 20% of contract value. Once there is agreement

between the parties for adjudication of only certain disputes, it is not

for the Court to overstep its jurisdiction and direct that even those

disputes which are not covered by arbitration agreement must also

be referred to arbitration. The stated objective of the Railways

behind the restrictive covenant is to curb raising of baseless and

in�ated claims by the contractors. However, the restriction still does

not prevent or restrict the contractor from raising claims above 20%

of contract value. The parties have agreed that if claim is below 20%

of contract value, the same can be adjudicated in an informal

manner through private arbitration and if claim exceeds 20% of

contract value, the Contractor will adopt usual civil remedy of �ling

a suit. In my view, therefore a restrictive covenant in the

arbitration agreement cannot be unreasonable for putting an

embargo on right to sue of the Contractor. It does not violate the

provisions of Section 28 fo the Contract Act in any manner.

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19) Now I proceed to examine the challenge raised by the

Applicant to the restrictive covenant in the arbitration agreement,

which does not permit adjudication of disputes exceeding 20% of the

contract value through the mechanism of arbitration. It is contended

by the Applicant that the restrictive covenant is both

discriminatory, as well as arbitrary and causes violence to equality

clause enshrined in Article 14 of the Constitution.

20) Before proceeding to examine Applicant’s challenge to

the restrictive covenant in the arbitration agreement, it is �rst

required to be considered as to whether this Court, while exercising

power of appointment of arbitrator under Section 11(6) of the

Arbitration Act, can consider validity of condition in the arbitration

agreement. The law in this regard is now settled by the three Judge

Bench judgment of the Apex Court in Lombardi Engineering Limited

(supra). It Is held that while considering an application under

Section 11(6) of the Arbitration Act for appointment of arbitrator,

the Court can also test the validity or reasonableness of condition

stipulated in the arbitration clause on the touchstone or anvil of

Article 14 of the Constitution of India. The Apex Court held in

Lombardi Engineering Limited paras-70 to 72, 75 ,78, 80, 81 and

83 as under :-

70. The vociferous submission on the part of the learned counsel

appearing for the respondent, that this Court while considering an

application under Section 11(6) of the 1996 Act for the

appointment of arbitrator should not test the validity

reasonableness of the conditions stipulated in the arbitration

clause on the touchstone or anvil of Article 14 of the Constitution,

is without any merit or substance.

71. It would be too much for the respondent to say that it is only the

writ court in a petition under Article 226 of the Constitution that

can consider whether a particular condition in the arbitration

clause is arbitrary.

72. It is not for the �rst time that this Court is looking into the

arbitration clause falling foul of Article 14 of the Constitution while

deciding Section 11(6) application. 

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75. What is relevant to note in all the above referred decisions of

this Court is the phrase "operation of law". This phrase is of wider

connotation and covers the 1996 Act as well as the Constitution of

India and any other Central or State law. 

78. Our Constitution is the paramount source of law in our country.

All other laws assume validity because they are in conformity with

the Constitution. The Constitution itself contains provisions that

clearly provide that any law which is in violation of its provisions is

unlawful and is liable to be struck down. As contained in Article 13,

which provides that all laws which were made either before the

commencement of the Constitution, or are made after it, by any

competent authority, which are inconsistent with the fundamental

rights enshrined in the Constitution, are, to the extent of

inconsistency, void. This again unveils the principle of Grundnorm

which says there has to be a basic rule. The Constitution is the basic

and the ultimate source of law.

80. Thus, in the context of the arbitration agreement, the layers of

the Grundnorm as per Kelsen's theory would be in the following

hierarchy:

(i) Constitution of India, 1950;

(ii) Arbitration and Conciliation Act, 1996 & any other

Central/State law;

(iii) Arbitration agreement entered into by the parties in

light of Section 7 of the Arbitration and Conciliation Act,

1996.

81. Thus, the arbitration agreement, has to comply with the

requirements of the following and cannot fall foul of:

(i) Section 7 of the Arbitration and Conciliation Act;

(ii) any other provisions of the Arbitration and Conciliation

Act, 1996 & Central/State Law;

(iii) Constitution of India, 1950.

83. The concept of "party autonomy" as pressed into service by the

respondent cannot be stretched to an extent where it violates the

fundamental rights under the Constitution. For an arbitration

clause to be legally binding it has to be in consonance with the

"operation of law" which includes the Grundnorm i.e. the

Constitution. It is the rule of law which is supreme and forms parts

of the basic structure. The argument canvassed on behalf of the

respondent that the petitioner having consented to the pre-deposit

clause at the time of execution of the agreement, cannot turn

around and tell the Court in a Section 11(6) petition that the same

is arbitrary and falling foul of Article 14 of the Constitution is

without any merit. 

(emphasis added)

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21) Thus, Court exercising power of appointing arbitrator

under Section 11 of the Arbitration Act can also determine validity

of condition in the arbitration agreement. Now I proceed to examine

whether the restrictive covenant in the arbitration agreement is

discriminatory or arbitrary or causes violence to Article 14 of the

Constitution of India.

22) I have already held that the restrictive covenant not

providing for arbitration in respect of claims above 20% of contract

value is not discriminatory. For holding the clause to be

discriminatory, the Applicant �rst needs to establish that the same

puts any unreasonable restriction on legal action to be initiated by it.

Thereafter it needs to be demonstrated that such unreasonable

restriction is not applicable to the Railways. In the present case

however the Applicant is unable to demonstrate that the restrictive

covenant is unreasonable or it prevents it from exercising legal

remedies in respect of its claims. Therefore it is not even necessary

to examine the second aspect of applicability of the said restriction

to Railways. The plea of discrimination is sought to be raised in a

speculative manner that Railways can �le a counterclaim exceeding

20% of the contract value. The parties have agreed that when the

claim is to be raised by the contractor, arbitration would be available

only in respect of claims upto 20% of the contract value. In my view

therefore it cannot be contended that the clause is discriminatory.

Having failed to demonstrate that the restrictive covenant in the

arbitration agreement is discriminatory, it is sought to be suggested

that the restriction is arbitrary.

23) Applicant has relied upon judgment of the Apex Court in

ICOMM Tele Limited (supra) in which the arbitration clause

provided for deposit of 10% of the claim amount by the claimant

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with further covenant for forfeiture of the deposited 10% amount.

Such condition in the arbitration agreement was challenged as being

unfair bargain between the contractor and the principal. The

condition was justi�ed by the Principal by contending that the same

applied equally to both parties. The Apex Court held that the

condition was not discriminatory as it applied equally to both the

parties. The Apex Court however held that arbitrariness is a

separate and distinct facet of Article 14 and found that the said

condition in the arbitration agreement was arbitrary and violative of

Article 14 of the Constitution of India. Referring to the judgment in

ABL International limited Versus. Export Credit Guarantee

Corporation

10

, the Apex Court held that even within the contractual

spheres, the requirement of Article 14 to act fairly, justly and

reasonably by persons, who are State authorities or

instrumentalities, continues. The Apex Court held that the condition

of deposit of 10% claim amount was unjust to a party losing in the

arbitration on account of provision for forfeiture of the same. The

Apex Court further held that such condition for deposit amounted to

a clog on the process of alternate dispute resolution process through

arbitration. It is held that deterring a party to arbitration from

invoking the alternate dispute resolution process by condition of

pre-deposit of 10% claim amount would discourage arbitration

contrary to the object of declogging the Court system. The Apex

Court held in paras-16, 17, 19, 23 to 27 as under :-

16. Thus, it must be seen as to whether the aforesaid Clause

25(viii) can be said to be arbitrary or discriminatory and violative

of Article 14 of the Constitution of India.

17. We agree with the learned counsel for the respondents that the

aforesaid clause cannot be said to be discriminatory in that it

applies equally to both However, Respondent 2 and the appellant.

arbitrariness is a separate and distinct facet of Article 14.

10 2004 3 SCC 553

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19. We have thus to see whether Clause 25(viii) can be said to be

arbitrary and violative of Article 14 of the Constitution of India.

23. The important principle established by this case is that unless it

is �rst found that the litigation that has been embarked upon is

frivolous, exemplary costs or punitive damages do not follow.

Clearly, therefore, a "deposit-at-call" of 10 per cent of the amount

claimed, which can amount to large sums of money, is obviously

without any direct nexus to the �ling of frivolous claims, as it

applies to all claims (frivolous or otherwise) made at the very

threshold. A 10 per cent deposit has to be made before any

determination that a claim made by the party invoking arbitration

is frivolous. This is also one important aspect of the matter to be

kept in mind in deciding that such a clause would be arbitrary in

the sense of being something which would be unfair and unjust and

which no reasonable man would agree to. Indeed, a claim may be

dismissed but need not be frivolous, as is obvious from the fact that

where three arbitrators are appointed, there have been known to

be majority and minority awards, making it clear that there may be

two possible or even plausible views which would indicate that the

claim is dismissed or allowed on merits and not because it is

frivolous. Further, even where a claim is found to be justi�ed and

correct, the amount that is deposited need not be refunded to the

successful claimant. Take for example a claim based on a

termination of a contract being illegal and consequent damages

thereto. If the claim succeeds and the termination is set aside as

being illegal and a damages claim of Rupees One crore is �nally

granted by the learned arbitrator at only ten lakhs, only one-tenth

of the deposit made will be liable to be returned to the successful

party. The party who has lost in the arbitration proceedings will be

entitled to forfeit nine-tenths of the deposit made despite the fact

that the aforesaid party has an award against it. This would render

the entire clause wholly arbitrary, being not only excessive or

disproportionate but leading to the wholly unjust result of a party

who has lost an arbitration being entitled to forfeit such part of the

deposit as falls proportionately short of the amount awarded as

compared to what is claimed.

24. Further, it is also settled law that arbitration is an important

alternative dispute resolution process which is to be encouraged

because of high pendency of cases in courts and cost of litigation.

Any requirement as to deposit would certainly amount to a clog on

this process. Also, it is easy to visualise that often a deposit of 10

per cent of a huge claim would be even greater than court fees that

may be charged for �ling a suit in a civil court. This Court in State

of J&K v. Dev Dutt Pandit 16, has held: (SCC pp. 349-50, para 23) 

"23. Arbitration is considered to be an important alternative

disputes redressal process which is to be encouraged

because of high pendency of cases in the courts and cost of

litigation. Arbitration has to be looked up to with all

earnestness so that the litigant public has faith in the speedy

process of resolving their disputes by this process. What

happened in the present case is certainly a paradoxical

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situation which should be avoided. Total contract is for Rs

12,23,500. When the contractor has done less than 50 per

cent of the work the contract is terminated. He has been

paid Rs 5,71,900. In a Section 20 petition he makes a claim

of Rs 39,47,000 and before the arbitrator the claim is

in�ated to Rs 63,61,000. He gets away with Rs 20,08,000

with interest at the rate of 10 per cent per annum and penal

interest at the rate of 18 per cent per annum. Such type of

arbitration becomes subject of witticism and do not help the

institution of arbitration. Rather it brings a bad name to the

arbitration process as a whole. When claims are in�ated out

of all proportions not only that heavy costs should be

awarded to the other party but the party making such

in�ated claims should be deprived of the costs. We,

therefore, set aside the award of costs of Rs 7500 given in

favour of the contractor and against the State of Jammu and

Kashmir."

25. Several judgments of this Court have also reiterated that the

primary object of arbitration is to reach a �nal disposal of disputes

in a speedy, effective, inexpensive and expeditious manner. Thus,

in Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd. 12,

this Court held: (SCC p. 250, para 39)

"39. In Union of India v. U.P. State Bridge Corpn. Ltd. 18 this

Court accepted the view 19 that the A&C Act has four

foundational pillars and then observed in para 16 of the

Report that: (SCC p. 64)

'16. First and paramount principle of the �rst pillar is 'fair,

speedy and inexpensive trial by an Arbitral Tribunal'.

Unnecessary delay or expense would frustrate the very

purpose of arbitration. Interestingly, the second principle

which is recognised in the Act is the party autonomy in the

choice of procedure. This means that if a particular

procedure is prescribed in the arbitration agreement which

the parties have agreed to, that has to be generally resorted

to."

(emphasis in original)

26. Similarly, in Union of India v. Varindera Constructions Ltd. 20,

this Court held: (SCC p. 797, para 12)

"12. The primary object of the arbitration is to reach a �nal

disposition in a speedy, effective, inexpensive and

expeditious manner. In order to regulate the law regarding

arbitration, legislature came up with legislation which is

known as the Arbitration and Conciliation Act, 1996. In

order to make arbitration process more effective, the

legislature restricted the role of courts in case where matter

is subject to the arbitration. Section 5 of the Act speci�cally

restricted the interference of the courts to some extent. In

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other words, it is only in exceptional circumstances, as

provided by this Act, the court is entitled to intervene in the

dispute which is the subject-matter of arbitration. Such

intervention may be before, at or after the arbitration

proceeding, as the case may be. In short, court shall not

intervene with the subject-matter of arbitration unless

injustice is caused to either of the parties."

27. Deterring a party to an arbitration from invoking this

alternative dispute resolution process by a pre-deposit of 10 per

cent would discourage arbitration, contrary to the object of de-

clogging the court system, and would render the arbitral process

ineffective and expensive.

24) In my view, the judgment of the Apex Court in ICOMM

TELE Limited (supra)would have no application to the peculiar facts

and circumstances of the case. In ICOMM Tele Limited, there was no

option left to the contractor/claimant but to deposit 10% of the claim

amount as a precondition for arbitration. Since there was an

arbitration clause, �ling of suit by a party not willing to deposit 10%

of claim value, was not an option. Thus, the contractor/claimant

incapable of depositing 10% of claim value was debarred from

exercising any remedy to enforce the claim. The clause did not

provide that if 10% deposit of claim value was not made, the

contractor/claimant was free to exercise remedy before Civil Court.

Furthermore, the clause provided for forfeiture of 10% deposit in the

event of the claimant losing in the claim. Thus, as against well-

established principles governing award of costs of arbitration

against the losing party, the contract provided for forfeiture of

entire 10% of deposited amount. It is in the light of these peculiar

circumstances where the condition in the arbitration clause

discouraged the contractor/claimant from raising any claim that the

condition is held to be violative of Article 14 of the Constitution by

the Apex Court. In the present case, however, the arbitration clause

does not put any restriction on the claimant from exercising the

remedies in respect of the claim. So long as the claim is below 20% of

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the contract value, the disputes can be resolved through arbitration.

It is only when the claim exceeds 20% of the contract value, that the

arbitration clause does not apply and the contractor is free to �le a

Civil Suit to enforce the claim. In my view, therefore the arbitration

clause does not impose any embargo on the contractor in enforcing

the entire claim against the Railways. Therefore, the judgment in

ICOMM Tele Limited is clearly distinguishable and the principles

discussed therein would have no application to the peculiar facts of

the present case.

25) The judgment of the Constitution Bench in CORE (supra)

is relied upon in support of the contention that the concept of

equality applies right since the stage of appointment of arbitrator.

The Apex Court has held in pars-67, 68, 70 and 71 as under:

67. Section 18 contains the principle of natural justice to give full

opportunity to parties to present their case.  In Union of India v.

Vedanta Ltd. , Indu Malhotra, J., writing for a three-Judge Bench,

observed that the "[f]air and equal treatment of the parties is a

non-derogable and mandatory provision, on which the entire edi�ce

of the alternative dispute resolution mechanism is based". The

purpose of Section 18 is to give the arbitral process a semblance of

judicial proceedings by infusing the principles of equality and

fairness.  The theoretical basis for this understanding stems from

the fact that arbitrators are authorities vested with powers to

resolve disputes under the law. 

68. The �rst part of Section 18 provides that "parties shall be

treated with equality". The broad nature of the prescription has to

be complied with not only by the Arbitral Tribunals, but also by the

parties while giving expression to party autonomy. The principle

has to be followed in all procedural contexts of arbitral proceedings,

including the stage of appointment of arbitrators.  According to

Peter Binder, the principle of equal treatment of parties "means

that no party may be given preference in the arbitrator-selection

process regardless of how strong its bargaining power may be". 

Countries such as Germany,  the Netherlands,  Spain,  and Estonia 

allow the party that has been disadvantaged by an asymmetric

appointment clause to request courts to appoint an arbitrator or

arbitrators. The underlying principle is that the courts should not

recognise and enforce agreements that are unfair and biased. 

70. The concept of equality under Article 14 enshrines the principle

of equality of treatment. The basic principle underlying Article 14

is that the law must operate equally on all persons under like

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circumstances.  The implication of equal treatment in the context of

judicial adjudication is that "all litigants similarly situated are

entitled to avail themselves of the same procedural rights for relief,

and for defence with like protection and without discrimination" . In

Union of India v. Madras Bar Assn., a Constitution Bench held that

the right to equality before the law and equal protection of laws

guaranteed by Article 14 of the Constitution includes a right to

have a person's rights adjudicated by a forum which exercises

judicial power impartially and independently. Thus, the

constitutional norm of procedural equality is a necessary

concomitant to a fair and impartial adjudicatory process.

71. Arbitration is an adversarial system. It relies on the parties to

produce facts and evidence before the Arbitral Tribunal to render a

decision. Procedural equality is generally considered to contain the

following indicia (1) equal capability of parties to produce facts and

legal arguments; (ii) equal opportunities to parties to present their

case; and (iii) neutrality of the adjudicator. In an adversarial

process, formal equality is important because it helps secure

legitimate adjudicative outcomes and create a level playing �eld

between parties.

26) In CORE, (supra) the Apex Court has dealt with the issue

of unilateral appointment of arbitrator and has accordingly

highlighted the issue of equal treatment to both the parties to

arbitration. The observations are made in the Apex Court in the light

of power conferred on one party to arbitration to choose the

arbitrator. While there can be no dispute about the principle that

equality would apply even at the stage of appointment of arbitrator,

in the present case, the restrictive covenant in the arbitration

agreement does not suffer from the vice of discrimination nor it

causes violence to the principle of equality enshrined in Article 14 of

the Constitution.

27) Judgment of the Apex Court in Shin Satellite Public

Company Limited (supra) is relied upon by the Applicant, in which

the arbitration clause provided for a condition that the arbitrator’s

determination shall be �nal and binding between the parties and

that parties waive all rights of appeal or objection in any jurisdiction.

Since the arbitration agreement sought to give �nality to the award

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and prevented parties from exercising remedies under Sections 34

and 37 of the Arbitration Act, the Apex Court held such condition to

be invalid. The judgment is relied on to highlight the principle that a

Court can severe legal and enforceable part of the contract from

unenforceable and invalid part. The Apex Court held in paras-15 and

27 as under:-

15. It is no doubt true that a court of law will read the agreement as

it is and cannot rewrite nor create a new one. It is also true that the

contract must be read as a whole and it is not open to dissect it by

taking out a part treating it to be contrary to law and by ordering

enforcement of the rest if otherwise it is not permissible. But it is

well settled that if the contract is in several parts, some of which

are legal and enforceable and some are unenforceable, lawful parts

can be enforced provided they are severable. 

27. The proper test for deciding validity or otherwise of an

agreement or order is "substantial severability" and not "textual

divisibility". It is the duty of the court to sever and separate trivial

or technical parts by retaining the main or substantial part and by

giving effect to the latter if it is legal, lawful and otherwise

enforceable. In such cases, the court must consider the question

whether the parties could have agreed on the valid terms of the

agreement had they known that the other terms were invalid or

unlawful. If the answer to the said question is in the af�rmative, the

doctrine of severability would apply and the valid terms of the

agreement could be enforced, ignoring invalid terms. To hold

otherwise would be

"to expose the covenanter to the almost inevitable risk of

litigation which in nine cases out of ten he is very ill-able to

afford, should he venture to act upon his own opinion as to

how far the restraint upon him would be held by the court to

be reasonable, while it may give the covenantee the full

bene�t of unreasonable provisions if the covenanter is

unable to face litigation".

28) Thus, in Shin Satellite Public Company Limited, (supra)

the Apex Court has recognized the principle of severance of

unenforceable and invalid part of contract from valid and

enforceable part. Ordinarily, therefore if a condition in the

arbitration agreement is found to be unconstitutional, invalid or

unenforceable, the entire arbitration agreement would not be

rendered invalid and can be severed and preserved. However, in the

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present case, the condition of adjudication of disputes only upto 20%

of the contract value by arbitration is not found to be

unconstitutional, invalid or unenforceable and therefore there is no

occasion to apply the principle of severance.

29) Mr. Singh has relied upon judgment of Single Judge of

Rajasthan High Court in Jai Shankar Balaji Construction Company

(supra) which involved similar arbitration clause of applicability of

Clauses 63 and 64 of GCC only in respect of claims less than or equal

to 20% of the contract value. The other issue before the Rajasthan

High Court was about validity of Clauses 64(i) to 64(iv) of GCC,

which prevented the party from raising any claims beyond the

period of 90 days after receiving intimation from Railways that �nal

bill was ready for payment, which clause in the GCC is held to be

invalid and unenforceable in the light of provisions of Section 28 of

the Indian Contract (Amendment) Act, 1996. So far as the validity

of condition of arbitrability of claims only upto 20% of the contract

value, the judgment of Rajasthan High Court is inconclusive. Though

the issue of validity of the said condition was raised before the

Rajasthan High Court, it was ultimately found that several work

orders were issued to the contractor and the Court held that value of

all work orders was required to be taken into consideration for

determining the total value of contract. The Rajasthan High Court

held as under:

Adverting now to the argument that wherever the claim is more

than 20% of the contract value, Clause 64 of the GCC would not be

applicable. Reliance in this connection is placed by the respondent –

the Railways on Clause 86 of the GCC, which reads as under:-

“The provision of Clause 63 & 64 of General

Conditions of Contract will be applicable only for

settlement of claims or disputes between the parties

for value less than or equal to 20% of the value of

contract and when claims and disputes are of value

more than 20% of the value of the contract,provision

of clause 63 & 64 and other clause of the General

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Conditions of Contract will not be applicable and

arbitration will not b e a remedy for settlement of

such disputes.”

The Railways in this regard has relied on two judgments of a

coordinate bench of this court, namely, M/s. Sisram Bir Singh and

Others Vs. Union of India and Another – 2006 (3) WLC (Raj.574

and M/s. Trimurti Constructions Vs. Union of India and Another –

2006 (3) WLC (Raj.) 680. Opposing this argument,learned counsel

for the petitioner has relied on the judgment of the Supreme Court

in Deepak Kumar Bansal Vs. Union of India and Another – (2009) 3

SCC 223. In that case, the High Court refused to appoint Arbitrator

on the ground that the Circular of respondent Union of India dated

11.06.2003, inserting Clause 18 in the original contract, debarred

reference to arbitration if the claim amount was in excess of 20% of

the total contract value. It was canvassed before the Supreme

Court that in addition to the value of the work originally awarded,

three additional work orders were subsequently issued and if they

are all added together, the total value of the contract cannot be said

to be in excess of 20% of the contract value. The Supreme Court

reversed the judgment of the High Court and remitted the matter

for appointment of arbitrator. The judgment of the Supreme Court

in Deepak Kumar Bansal, supra, was followed by a coordinate

bench of this Court in Sh. Shyam Construction Vs. Union of India

and Another – 2013 (2) CDR 1046 (Raj).

The petitioner has also canvassed and in my view rightly, that the

respondents would not be justi�ed in refusing to make a reference

by relying on the value of the original contract of the work

awarded. Subsequently issued work orders also ought to be

considered for assessing the total value of the work vis-a-vis the

extent of the claim to decide whether or not it exceeds 20% of the

contract value. Besides, the claimant/contractor can also demand

the refund of the earnest money, and the security deposit and can

also claim interest, if not the damages, all of which have to be

treated as part of the claim. The Supreme Court in a recent

judgment in Hyder Consulting (UK) Ltd. Vs. State of Orissa –

(2015) 2 SCC 189, while interpreting the word “sum” mentioned in

Section 31(7) of the Act of 1996, vis-a-vis ‘claim” in the context of

the grant of pre-award interest under Section 31(7)(a) and post-

award interest under Section 31(7)(b) of the Act of 1996, held that

under Section 31(7)(a) of the Act of 1996 the arbitral tribunal is

empowered to include pre-award interest in the sum for which

award is made, which then becomes part and parcel of the same

award. It would however be always open to the Railways to raise

such objection before the Arbitrator, who is, as per Section 16 of

the Act, competent to rule on his own jurisdiction whether the

claim, being less than 20% of the total value of the work is

arbitrable or not but denying reference to arbitrator on this count

would neither be just nor lawful.

30) Mr. Singh has submitted that the Rajasthan High Court

in Jai Salaskar Balaji Construction Company has left it to the

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Arbitrator to decide the objection of application of 20% limit to the

claim of the contractor under Section 16 of the Arbitration Act.

Though what Mr. Singh contends is not entirely wrong, the said

course of action is adopted by the Rajasthan High Court considering

the fact that there were multiple work orders/contracts and upon

consideration of cumulative value of all work orders/contracts, the

claim was not breaching the 20% ceiling. Thus what is left to be

decided by the Arbitral Tribunal is whether the claim exceeds 20% of

the value of all work orders or not. Also, the following quoted part of

the judgment of Rajasthan High Court in Jai Salasar Balaji

Construction Company seeks to create confusion as if the Court has

declared restrictive covenant for arbitration of only claims upto 20%

of the contract value as void :-

In view of the above analysis of law and facts, the condition

contained in Clause 64(1)(iv) of the GCC, which assumes waiver of

the claim by the contractor and discharge and release of the

Railways of all its liabilities under contract in respect of the claims,

is held to be void in view of Section 28(b) of the Indian Contract

Act.

31) However, what is declared void under Section 28(b) of

the Contract Act is Clause 64.1(iv) of the GCC which restricted the

contractor from raising any dispute after expiry of period of 90 days

from the date of receipt of intimation from Railways about �nal bill

being ready for payment. It is well established principle of law that a

judgment is an authority for what it decides and not for what can be

decided therefrom. (SEE: Commissioner Of Customs (Port), Chennai

Versus. Toyata Kirloskar Motor Pvt. Ltd.

11

and Secundrabad Club

and Others Versus. CIT-V and Another

12

) Therefore, the judgment of

the Rajasthan High Court in Jai Salasar Balaji Construction

Company is not an authority on the issue of validity of condition in

11 2007(5) SCC 371

12 2024 (18) SCC 310

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the arbitration agreement for resolution of disputes in respect of

only those claims which do not exceed 20% of the contract value.

32) On the other hand, a learned Single Judge of this Court in

Railtech Infraventure Pvt Ltd (supra) has considered enforceability

of condition of 20% ceiling for arbitrability. In case before the

learned Single Judge, there was similar arbitration clause which is

quoted in para-5 of the judgment as under :-

5. The Respondents have �led their Af�davit-in-Reply dated 22 nd

September, 2014, wherein it is contended that the above

Application �led by the Applicant is not maintainable as the

Applicant has deliberately suppressed clause 31.1 of the tender

document. It is submitted that the said Clause 31.1 restricts the

operation of Clauses 63 and 64 of the GCC. The said clause 31.1 of

the tender conditions is reproduced hereunder:

"31.1 The provision of clauses 63 and 64 of General

Conditions of contract will be applicable only for settlement

of claims of disputes between the parties for value less than

or equal to 20% of the value of the contract and when the

claims or disputes are of value more than 20% of the value of

contract, provision of clause 63 and 64 and other relevant

clauses of the General Conditions of Contract will not be

applicable and arbitration will not be a remedy for

settlement of such disputes."

33) It was sought to be contended before the learned Single

Judge in Railtech Infraventure Pvt Ltd that the issue of arbitrability

of claim exceeding 20% of the value of contract needs to be left open

to be decided by the arbitrator. This Court, however rejected the

contention and held in para-11 as under :-

11. In the present case, the Applicant has not contended that

Clause No. 31.1 of the tender document is not applicable, or that

the same should not be read with Clauses 63 and 64 of the GCC. The

Learned Advocate for the Applicant has informed the Court that

though the claim of the Applicant exceeds more than 20 per cent of

the value of the Contract, the issue as to whether the same is

arbitrable or not has to be decided by the learned Arbitrator. In my

view, this submission cannot be accepted. The issue as to whether

there exists an Arbitration Agreement between the Parties has to

be decided by the Court, once the same is raised in an Application

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under Section 11 of the Act by the Respondent. Reading of Clauses

63 and 64 along with Clause 31.1 of the tender document, leaves no

doubt that the Parties have agreed to refer their disputes to

arbitration only if the claim between the parties is for a value less

than or equal to 20 per cent of the value of the Contract, and it is

further agreed that when the claims or dispute are of a value more

than 20 per cent of the value of the Contract, the provision of

Clauses 63 and 64 and other relevant Clauses of the GCC will not be

applicable, and arbitration will not be a remedy for settlement of

such disputes. In view thereof and more so since the Applicant has

admitted before this Court that the value of its claim before the

Arbitrator exceeds 20 per cent of the value of the contract, there

exists no Arbitration Agreement between the parties to refer their

disputes to arbitration. The issue involved in the present case

cannot be compared with the issues raised by the parties before the

Hon'ble Supreme Court in the case of National Insurance Company

Ltd. (supra) and Arasmeta Captive Power Company Pvt. Ltd.

(supra), and therefore the ratio of the said Judgment is not

applicable to the present case. The same is the case with the

decision of the learned Single Judge of this Court in the case of

Sanjay B. Jawlekar (supra). In view thereof, the above Arbitration

Application is dismissed.  

34) It also appears that in Deepak Kumar Bansal, (supra)

the Apex court has taken note of similar restrictive covenant in the

arbitration agreement wherein claims exceeding 20% of the total

costs of the work were not agreed to be resolved through arbitration.

The Apex Court did not hold such restrictive covenant to be

unenforceable but held that the supplementary work orders were

also required to be taken into consideration while determining the

entire contract value for application of 20% limit. It would be

apposite to quote paras-11, 12 and 13 which reads thus :-

11. The respondents, in their objection to the application under

Section 11(6) of the Act, raised a plea that question of appointment

of an arbitrator, in the facts and circumstances of the present case,

could not arise in view of the fact that the claim, as put forward by

the appellant, was an amount being an excess of 20% of total cost of

the work, which is prohibited in terms of the Circular issued on 11-

6-2003. The High Court accepted this plea of the respondent and

rejected the application on the grounds mentioned hereinearlier.

12. In our view, the High Court has misdirected itself in holding

that the claim was in excess of 20% of the total cost of the work.

Admittedly, the work was for a sum of Rs 32,17,641.29 (original)

and three additions viz. Rs 4,99,471.36, Rs 3,25,865.02 and Rs

2,17,748.63 totalling Rs 42,60,726.30, which cannot be in excess

of 20% of the total cost of the work.

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13. The High Court has only considered the original work order

that was for Rs 32,17,641.29, which, in our view, must be taken

into account along with three supplementary work orders of Rs

4,99,471.36, Rs 3,25,865.02 and Rs 2,17,748.63 as mentioned

hereinearlier. Therefore, the High Court was wrong in holding that

since the value of the claim of the appellant was more than 20% of

the value of the work and in view of the circular issued by the

respondent, the claim must be held to be more than 20% of the

value of the work and, therefore, disputes could not be referred to

arbitration. Even assuming that the claim was in excess of 20% of

the total cost of the work, even then, the Circular, which came into

effect from 11-6-2003 would not be applicable in the case of the

appellant.

35) The judgment in Deepak Kumar Bansal is followed by

Madhya Pradesh High Court in Seth Mohanlal Hiralal Construction

Company in which it is held in paras-9, 10, 11 as under :-

9. This Court in the matter of Diamond Agencies v. Union of India,

2014 (3) MPLJ 137 considering the general conditions of contract

63 and 64 and also taking note of the special condition II in a case

where the similar controversy was involved has held as under:-

"5. However, it is pertinent to mention here that at the stage

of consideration of application under section 11(6) of the

Act the Court may not be able to decide whether the

particular dispute can be referred to the arbitration, but the

Court can examine whether a particular dispute falls within

the purview of the arbitration clause on admitted facts and

in such a case as it is not necessary to record evidence. In

case of Deepak Kumar Bansal v. Union of India, 2010 (2)

MPLJ (SC) 516 = (2009) 3 SCC 223 2009 Arb. W.L.J.

252(SC), the supreme Court dealt with pan materia clause,

which prohibited the reference of dispute to an Arbitrator, in

case the claim was more than 20% of the value of contract

and, therefore, it was held that dispute can be referred to the

Arbitrator. In other words, if the claim is more than 20% of

the value of contract the dispute cannot be referred for

arbitration.  

6. In the backdrop of well-settled legal proposition, the facts

of the case may be seen. Admittedly, the value of the

contract is Rs. 1,24,12,320/-. The petitioner has, admittedly,

submitted the claim to the tune of Rs. 32,24,472/-, which is

25.98% of the contract value.

Clauses 63 and 64 of the General Conditions of Contract provide for

reference of the dispute between the parties to the arbitration. The

relevant extract annexed by the petitioner himself Page 58 of the

application, reads as under:-

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Neeta Sawant CARAP-688-2025

"11. Arbitration. The provisions of Clauses 63 and 64 of the

General Conditions of Contract will be applicable only for

settlement of claims or disputes between the parties for

values less than or equal to 20% of the value of the contract."

7.- Thus, in view of the preceding analysis, on admitted acts

of the case, the dispute raised by the petitioner falls beyond

the purview of Clauses 63 and 64 of the General Conditions

of Contract, which provide for arbitration. Therefore, the

dispute cannot be referred for arbitration and the

respondents have rightly rejected the claim of the petitioner

for referring the dispute to the arbitration."

10. In the present case also the record re�ects that the claim of the

petitioner is of about a sum of Rs. 253.77 lakhs which is more than

20% of the total contract value ie. Rs. 5,55,34,728.73. Hence, no

arbitration agreement exists in respect of dispute in question.

11. Counsel for applicant has placed reliance upon the order dated

14/7/2017 passed by the Rajasthan High Court in SB Arbitration

Application No. 15/16, but in view of the judgment of this court in

the matter of Diamond Agencies (supra), the applicant is not

entitled to the bene�t of the single bench order of Rajasthan High

Court.

36) In State of AP Versus Obulu Reddy, (supra) the issue

before the Apex Court was about interpretation of certain GOMs

issued by the State Government. GOM No.403 dated 4 October 1983,

which governed the contract in question, provided for arbitration by

the panel as per valuation of amount. Arbitration was provided in

respect of the claims only upto Rs.50,000/- and for claims above

Rs.50,000/- the Court of competent jurisdiction was to decide the

disputes. The claim in question raised by the Respondent therein

was for Rs.83 lakhs and accordingly the reference was denied. The

Respondent �led application under Section 8 of the Arbitration Act,

1940 which was allowed and the disputes were referred to sole

arbitrator. The State Government challenged the appointment of

arbitrator before the High Court which dismissed the Government’s

Revision. During pendency of Appeal before the Division Bench of

the High Court, another GOM No. 160 dated 1 June 1987 was issued

by the State Government clarifying that if claims were over

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Rs.50,000/-, the same could be decided by the Arbitrator or by a

Civil Court. It appears that there were two con�icting decisions in

State of Andhra Pradesh Versus. I Devendra Reddy

13

it was held

that GOM dated 1 June 1987 was only prospective and did not apply

to cases where claims arose out of contracts prior to issuance of the

said GOM. On the other hand, in Vishakhapatnam Urban

Development Authority Versus V. Narayana Raju

14

, the Apex Court

held that the subsequent GOM was clari�catory in nature. The

dispute has been referred to large Bench as to whether the GOM

No.160 dated 1 June 1987 is clari�catory or prospective in nature.

Though we are concerned with the said dispute about the nature of

GOM dated 1 June 1987, what Mr. Bubna wants this Court to note is

the fact that the Apex Court has given effect to the clause in the

arbitration agreement which restricted arbitration only in respect of

the claims upto particular value. Though judgment of the Apex Court

in State of AP Versus. Obulu Reddy cannot be cited as an authority in

support of an abstract principle that a condition speci�ed in

arbitration agreement restricting arbitration only to claim for

speci�ed value is constitutional or enforceable, this Court does take

note of the fact that the Apex Court in three decisions in I. Devendra

Reddy, Vishakapatnam Urban Development Authority and State of

AP Versus Obulu Reddy did not strike down the restrictive covenant

in the arbitration agreement providing for arbitration only in

respect of the claim of speci�ed value. Far from setting aside the

said clauses as unconstitutional or unenforceable, the Apex Court

has interpreted the same.

37) The conspectus of the above discussion is that parties

have speci�cally agreed for resolution of disputes and differences in

respect of the claims upto 20% of the contract value. The restrictive

131999 (9) SCC 571

14 1999 (9) SCC 572

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covenant in the arbitration agreement does not defeat the remedy of

the Applicant in any manner. All that it does is to restrict the

mechanism of dispute resolution through private arbitration to

claims upto 20% of the contract value. Applicant is free to pursue

the remedy in respect of the claim exceeding 20% of the contract

value and Clause 39 of the contract or Clauses 63 and 64 of the GCC

do not restrict such remedy of the Applicant in any manner. All that

the Applicant will have to do is to pursue remedy before Civil Court

and not before the Arbitrator.

38) No doubt, the dispute resolution mechanism through

private arbitrations is increasingly encouraged. The mechanism of

dispute resolution through arbitration has de-clogged the pressure

on conventional courts to a large extent. However, the dispute

resolution mechanism through arbitration still continues to be a

matter of agreement between the parties. Parties are free to agree

whether to resolve the disputes through arbitration or not. When

they have the freedom to choose the dispute resolution mechanism,

what must necessarily be recognized is also the freedom to choose

arbitration as dispute resolution mechanism only in respect of the

agreed claims. It cannot be that once there is an arbitration

agreement, every claim under the contract must be resolved

through such arbitration especially when parties speci�cally agree

for exclusion of certain nature of claims. A classic illustration in this

regard is to be found in the insurance contracts. Many times, the

dispute resolution mechanism by arbitration is agreed by the parties

in an insurance contract only in respect of quantum of claim and not

disputes relating to repudiation of the claim. In such contracts,

disputes relating to repudiation cannot be subject to private

arbitration. In several judgments, this restrictive covenant has been

enforced. In Oriental Insurance Company Limited Versus.

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Narbheram Power and Steel Private Limited

15

the Apex Court has

held as under :-

23. It does not need special emphasis that an arbitration clause is required

to be strictly construed. Any expression in the clause must unequivocally

express the intent of arbitration. It can also lay the postulate in which

situations the arbitration clause cannot be given effect to. If a clause

stipulates that under certain circumstances there can be no arbitration,

and they are demonstrably clear then the controversy pertaining to the

appointment of arbitrator has to be put to rest.

39) In insurance contracts, the restrictive covenant not

providing for arbitration for resolution of disputes relating to

repudiation has been enforced by the Courts in Vulcan Insurance Co.

Ltd. Versus Maharaj Singh and another

16

and M/s. Mallak

Specialities Pvt. Ltd. Versus. The New India Assurance Co. Ltd

17

.

40) Applying the above principles to the present case, in my

view, Railways cannot be forced to go for arbitration when it has not

agreed for resolution of disputes relating to claims exceeding 20% of

the contract value by arbitration.

41) In my view, therefore there is no agreement between the

parties for arbitration in respect of the Applicant’s claim which it

has quanti�ed at Rs.3 crores in the light of contract value merely

being Rs.84,52,157.61/-. In absence of arbitration agreement, this

Court is unable to exercise jurisdiction under Section 11 of the

Arbitration Act.

15 (2018) 6 SCC 534

16 (1976) 1 SCC 943

17 CARBAP 65 OF 2022 DECIDED ON 30 November 2022

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42) Consequently, the Application fails. It is accordingly

dismissed. Considering the facts and circumstances of the case,

there shall be no order as to costs.

[SANDEEP V. MARNE, J.]

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