INTRODUCTION
The Hon’ble Supreme Court of India (“SC”) by its judgment dated October 04, 2013 has dealt with the issue whether a departmental dispute resolution clause which is inserted in the contract for smooth execution of works would qualify to be an arbitration clause and after carefully perusing Clause 30 as mentioned in the agreement have held as under:
The Superintending Engineer was made overall in-charge of all works to be executed under the contract, he was considered by the parties to be the best person who could provide immediate resolution of any controversy relating to specifications, designs, drawings, quality of workmanship or material used, etc.
It was felt that if all this was left to be decided by the regular civil Courts, the object of expeditious execution of work of the project would be frustrated. This is the primary reason why the Superintending Engineer of the Circle was entrusted with the task of taking decision on various matters.
As such there is nothing in the language of Clause 30 from which it can be inferred that the parties had agreed to confer the role of arbitrator upon the Superintending Engineer of the Circle.
BRIEF FACTS
a) The Appellant submitted tenders for the “Tondapur Medium Project”, Jalgaon and Hatnoor Canal Division No. 3, Chopda, District Jalgaon which were accepted by the Competent Authority and five agreements (“B-1 Agreements”) were executed between the parties i.e. the appellant and the competent authority on May 19, 1983 and October 5, 1983.
b) Thereafter the Appellant in January 1985 abandoned the work and submitted bills for the work already done and claimed damages in lieu of the alleged loss suffered by the Appellant.
c) The Appellant, four (4) years thereafter, sometime in 1989 served a notice under Section 80 Code of Civil Procedure and filed Civil Suit before the trial Court for declaring the recovery proceedings initiated against the Appellant by the Defendants as illegal, and null and void.
d) During the pendency of the suit, the Appellant filed an application under Section 21 of the Arbitration Act, 1940 (“the 1940 Act”) and prayed that the matter may be referred to an Arbitrator by appointing the Superintending Engineer or any other Arbitrator as the sole Arbitrator in terms of Clause 30 of B-1 Agreement.
e) The application under the 1940 act was dismissed by the trial Court vide order dated July 29, 1994 on the ground that both the parties had not given consent for making a reference to an Arbitrator.
f) Soon thereafter, the Appellant filed an application under Order VI Rule 17 Code of Civil Procedure for leave to amend the plaint and incorporate an additional prayer for reference of the dispute to an Arbitrator.
g) The application was allowed by the trial Court vide order dated September 27, 1994.
h) The Respondents challenged the aforesaid order in Civil Revision Application No. 153/1995, which was partly allowed by the learned Single Judge of the High Court and the order of the trial Court granting leave to the Appellant to amend the prayer clause was set aside.
i) In the meanwhile, the Appellant filed application dated February 3, 1995 under Section 20 of the 1940 Act for settlement of accounts and prayed that Respondent No. 3 and 4 be directed to file Arbitration Agreement in terms of Clause 30 of B-1 Agreement executed between the parties and an Arbitrator be appointed to decide all the disputes.
j) On June 17, 1995, the trial Court directed the parties to adduce evidence on the nature of Clause 30 of B-1 Agreement.
k) After considering the evidence adduced by the parties and by placing reliance on some judgments of the High Courts, the trial Court allowed the application and declared that Clause 30 of B-1 Agreement is an arbitration clause and appointed Shri D.G. Marathe, Chief Engineer (PWD) as an Arbitrator.
l) A Civil Revision Application was filed by the Respondents against the order of the trial Court, which was allowed by the learned Single Judge of the Bombay High Court and it was held that Clause 30 of B-1 Agreement cannot be treated as an arbitration clause.
m) In support of this conclusion, the High Court relied upon the judgment of the SC i.e. State of Maharashtra v. Ranjeet Construction.
n) That being aggrieved by the order of the High Court, the appellant herein preferred a Special Leave Petition wherein the Honorable SC was kind to issue notice.
RELEVANT CLAUSES
Clause 29 of the Agreement
All works to be executed under the contract shall be executed under the direction and subject to the approval in all respects of the Superintending Engineer of the Circle for the time being, who shall be entitled to direct at what point or points and in what manner they are to be commenced, and from time to time carried on.
Clause 30 of the Agreement
Except where otherwise specified in the contract and subject to the powers delegated to him by Government under the Code rules then in force the decision of the Superintending Engineer of the 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, herein before 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, if any way arising, out of, or relating to or the contracts designs, 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 abandonment thereof.
Paragraph 224 of the Maharashtra Public Works Manual, as amended by Government CM. No. CAT-1070/460-DSK. 2, dated: May 09, 1977, reads as under:
Para 224-Clause 30 of B-1 and B-2 Agreement forms lays down that the decision of the Superintending Engineer in certain matters relating to the contract would be final. The Superintending Engineer's decision taken under this clause should be considered as that taken as an Arbitrator and this should be considered as the decision taken under the Arbitration Act. The decisions taken by the Superintending Engineer under the other clauses should be considered different from his decision taken under Clause 30 of B-1 and B-2 tender agreement as an arbitrator.
LEGAL ISSUE
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?
ARGUMENTS ADVANCED
The Appellant argued that the impugned order is liable to be set aside because the High Court's interpretation of Clause 30 of B-1 Agreement is contrary to the law laid down in Mallikarjun v. Gulbarga University (2004) 1 SCC 372 and Punjab State v. Dina Nath (2007) 5 SCC 28 and emphasized that Clause 30 of B-1 Agreement makes the decision of the Superintending Engineer binding on all parties to the agreement and, therefore, the trial Court was right in treating the same as an arbitration clause.
The Appellant further argued that in view of circulars dated May 09, 1977, August 12, 1982 and May 21, 1983 issued by the State Government, Clause 30 of B-1 Agreements has to be treated as an arbitration clause and the Respondents had no right to challenge the reference made by the trial Court and thereby question the wisdom of the State Government.
The Respondents relied upon the judgments of this Court in State of U.P. v. Tipper Chand (1980) 2 SCC 341, State of Orissa v. Damodar Das (1996) 2 SCC 216 and Bharat Bhushan Bansal v. U.P. Small Industries Corporation Ltd., Kanpur (1999) 2 SCC 166 and argued that Clause 30 of B-1 Agreement cannot be construed as an arbitration clause simply because the decision of the Superintending Engineer is made binding on all parties to the contract.
The Respondents further submitted that the judgment in Mallikarjun v. Gulbarga University (supra) is clearly distinguishable because Clause 30 of the Agreement, which was interpreted in the case was substantially different from the one under consideration as the Superintending Engineer of Gulbarga Circle was not directly involved in the execution of contract between the University and the Appellant, whereas Superintending Engineer, who has been named as the officer in Clause 30 of B-1 Agreement entered into between the Appellant and the State Government was overall in charge of the work.
ANALYSIS OF PAST PRECEDENT WITH REFERENCE TO THE CASE AT HAND
STATE OF U.P v. TIPPER CHAND
The SC after perusing the contents of the necessary clauses and hearing both the parties, were in agreement with the view taken by the High Court as the clause did not contain any express arbitration agreement and further no arbitration agreement could be spelled out from the terms by implication.
The SC observed that 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 from time to time.
STATE OF MAHARASHTRA v. RANJEET CONSTRUCTION
Two Judge bench of the SC interpreted Clause 30 of the agreement entered into between the parties, which is almost identical to the clause under consideration, relied upon the judgment in State of U.P. v. Tipper Chand and held that Clause 30 cannot be relied upon for seeking a reference to an Arbitrator of any dispute arising under the contract.
STATE OF ORISSA v. DAMODAR DAS
Three Judge Bench of the SC interpreted Clause 21 and referred to Clause 25 of the agreement, relied upon the judgment in State of U.P. v. Tipper Chand and held that the said clause cannot be interpreted as providing resolution of dispute by an Arbitrator.
K.K. MODI v. K.N. MODI
The SC while discussing the essentials that conclude the existence of an arbitration agreement, interpreted Clause 9 of the Memorandum of Understanding (“MOU”) signed by the parties and held that Clause 9 of the MOU was not an agreement to refer disputes to arbitration but was an agreement to refer disputes to an expert for his decision.
PUNJAB STATE v. DINA NATH
Two Judge Bench of the SC after noticing the words “any dispute” in Clause 4 of the work order and referring to the judgment in K.K. Modi v. K.N. Modi held that 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. Hence Clause 4 may be held to be a binding arbitration agreement.
BHARAT BHUSHAN BANSAL v. U.P. SMALL INDUSTRIES CORPORATION LIMITED, KANPUR
Two Judge Bench of the SC 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 and observed that 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 and the intention appears, to be, more to avoid disputes than to decide formulated disputes in a quasi-judicial manner.
Thus it was held that this clause was not an arbitration clause and that the duties of the Engineer were administrative and not judicial.
MALLIKARJUN v. GULBARGA UNIVERSITY
The three judge bench of the SC after analyzing the necessary clause and making a reference to essential elements of arbitration agreement enumerated in Bihar State Mineral Development Corporation v. Encon Builders (I)(P) Limited observed that the agreement executed between the parties is in the form of an arbitration agreement, as it postulates that present or future differences in connection with some contemplated affairs, in as much as there also was an agreement between the parties, were to be settled by a private tribunal, namely, the Superintending Engineer, Gulbarga Circle, Gulbarga. The parties were also ad idem as it was also agreed that both parties would be bound by the decision of the Tribunal.
Note:The Superintending Engineer, Gulbarga Circle, Gulbarga was not an officer of the University and he did not have any authority or jurisdiction either to supervise the construction work or issue any direction to the contractor in relation to the project.
DECISION OF THE COURT
A two (2) judge bench of the SC discussed the submission of the parties at considerable length and held as under:
A conjoint reading of Clauses 29 and 30 of B-1 Agreements entered into between the parties shows that the Appellant had to execute all works subject to the approval in all respects of Superintending Engineer of the Circle, who could issue directions from time to time about the manner in which work was to commence and execute.
By virtue of Clause 30, decision of the Superintending Engineer of the Circle was made final, conclusive and binding on all the parties in respect of all questions relating to the meaning of the specifications, designs, drawings, quality of workmanship or materials used on the work or any other question relating to claim, right, matter or things arising out of or relating to the contract designs, drawings, specifications, estimates, instructions, orders, etc.
These two clauses by which the Superintending Engineer was given all supervisory control were incorporated for smooth execution of the works in accordance with the approved designs and specifications and also to ensure that quality of work is not compromised.
The power conferred upon the Superintending Engineer of the Circle was in the nature of a departmental dispute resolution mechanism and was meant for expeditious sorting out of problems which could crop up during execution of the work.
Since the Superintending Engineer was made overall in-charge of all works to be executed under the contract, he was considered by the parties to be the best person who could provide immediate resolution of any controversy relating to specifications, designs, drawings, quality of workmanship or material used, etc. It was felt that if all this was left to be decided by the regular civil Courts, the object of expeditious execution of work of the project would be frustrated. This is the primary reason why the Superintending Engineer of the Circle was entrusted with the task of taking decision on various matters. However, there is nothing in the language of Clause 30 from which it can be inferred that the parties had agreed to confer the role of arbitrator upon the Superintending Engineer of the Circle.
The issue deserves to be looked into from another angle. 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 Anr. v. Encon Builders (I)(P) Limited (2003) 7 SCC 418.
In view of the above discussion, the SC was pleased to hold that the High Court had rightly held that Clause 30 of B-I Agreement is not an Arbitration Agreement and the trial Court was not right in appointing the Chief Engineer as an Arbitrator as a clause which is inserted in a contract agreement for the purpose of prevention of dispute will not be an arbitration agreement.
The SC further observed that the circulars issued by the State Government may provide useful guidance to the authorities involved in the implementation of the project but the same are not conclusive of the correct interpretation of the relevant clauses of the agreement and, in any case, the Government's interpretation is not binding on the Courts.
CONCLUSION
In light of the facts of this case, the SC while keeping in mind the essentials of an Arbitration Agreement and differentiating between the powers conferred on an interested party under the terms of the contract for expeditious resolving of problems, which could crop up during execution stage of work, and an arbitration agreement, have rightfully held that a clause which is inserted in a contract for the prevention of disputes and expeditious implementation of the project shall not be treated as an arbitration agreement.
Also the courts have rightfully held that since the Superintending Engineer was to supervise execution of all works, it would have been extremely anomalous to appoint him as an Arbitrator to decide any dispute or difference between the parties wherein he could not be expected to adjudicate with an un-biased mind. That even if the Superintending Engineer may not be biased, the contractor will always have a lurking apprehension that the decision of the Superintending Engineer will not be free from bias. Therefore, there is an inherent danger in treating the Superintending Engineer as an Arbitrator.
