Kerala High Court
C.T. Chacko vs Kerala State Electricity Board on 4 August, 1989
Equivalent citations: AIR1990KER280, AIR 1990 KERALA 280, (1989) 2 KER LT 460
JUDGMENT Krishnamoorthy, J.
1. Plaintiff in a suit under Section 20 of the Arbitration Act is the appellant. He was awarded a contract by the Kerala State Electricity Board (hereinafter mentioned as the Board) for the work of "S.A.S. -- Construction of a Masonary Dam across Kullar" and the contract for the above work Ext. B11 dated 13-1-1.978 was entered into. It was 7% above the estimate rate. Though he made all arrangements for doing the work with all enthusiasm and sincerity, he was not able to do it on account of failure of the concerned authorities of the Board to duly perform their obligation under the contract. The plaintiff has alleged in detail the defaults committed by the Board which prevented him from completing the work in time (the details of which are not very relevant to resolve the controversy in this case). In spite of all this, the plaintiff completed a major portion of foundation excavation. In the meanwhile, the Board terminated the contract as per Ext. A3 dated 23-10-1980 at the risk and cost of the plaintiff. This is illegal, improper and'unjustifiable and he is entitled to be relieved of and exonerated from executing the balance work. There are many claims pending settlement with the defendant. They were submitted before the authorities, but there was no response and disputes and differences have arisen. The plaintiff has enumerated the various disputes between the parties in paragraph 11 of the plaint, including the validity and legality of Ext. A3 order terminating the contract at his risk and cost. The plaintiff further alleged that all disputes and differences are to be resolved by arbitration as provided in the agreement. Terms of references have not been agreed to and so the plaintiff filed the suit under Section 20 to order the agreement to be filed in Court and to refer the disputes to an arbitrator to be appointed by Court.
2. Defendant filed a preliminary objection dated 23-6-1981, contending that by virtue of Clause 57(f) of Part III of Ext. B11 agreement, there shall not be any arbitration of any dispute or claim, once the work is completed or contract is terminated and in case work is stopped unilaterally or abandoned by the contractor. According to the Board the plaintiff stopped the work on 16-5-1980 unilaterally and as the plaintiff did not resume the work in spite of several notices and requests, the Board was forced to terminate the contract. According to them, the Arbitration agreement will cease to have effect once the contract is terminated or abandoned by the contractor and that having happened in this case, the plaintiff is not entitled to an order under Section 20 of the Arbitration Act. The Board filed a written statement on 26-8-1981 reiterating the above objection and also putting forth their defence on the merits of the plaintiffs claim.
3. By order dated 21-12-1981 the trial Court referred the disputes to arbitration. Board filed C.R.P. No. 325 of 1982 and this Court set aside the order and remanded the matter to consider the applicability of Section 20 and the scope of Clause 57(f) of the agreement. After remand, on analysing the evidence the lower Court came to the conclusion that there was termination of the contract by the Board by issuing Ext. A3 order and that there was unilateral stoppage of work by plaintiff. Consequently the Court below came to the conclusion that the bar under Sub-clause (f) of Clause 57 of Part III will come into play and the plaintiff will not be entitled to have the matter referred to an arbitrator. This appeal by the plaintiff is against the above order.
4. Before this Court counsel for the appellant, apart from challenging the above findings, raised a further contention that the question as to whether a reference to arbitrator is barred by virtue of Clause 57(f) of the agreement is also a matter to be determined by arbitration and not by the Court in a proceeding under Section 20. In other words, according to counsel, when the legality and propriety of the termination order is challenged by the plaintiff or the stoppage of work by him was due to reasons beyond his control and due to the default of the Board in performing their obligation and not a unilateral abandonment, it is a matter to be decided by the arbitrator and not by the Court. It is his further contention that the arbitrator has jurisdiction to decide his own jurisdiction under the arbitration agreement. It will be advantageous to read the relevant provisions of the arbitration clause in Exhibit B11 agreement. Clause 57 of Part III of Ext. B11 provides for arbitration in case of disputes or conflicts if any arising regarding the application of the contract. Clause (a) provides that the contractor shall move the Chief Engineer first in respect of any matter and Clause (b) provides that if he is dissatisfied with any decision he shall give notice requiring him to refer the matter in dispute to arbitration and the time limit for the above is also provided therein. Clause (c) provides that the arbitration shall be by two members, one selected by the Board arid the other by the contractor. Clause (d) deals with the power of arbitrator .to award costs. Clauses (e) and (f) are to the following effect:--
"(e) If work under the contract has not been completed when a dispute is referred to arbitration the work shall continue to be executed by the contractor during the arbitration proceedings.
(f) There shall not be any reference to arbitration of any dispute or claim, once the work is completed or contract is terminated and in case work is stopped unilaterally or abandoned by the contractor."
The question to be decided is as to whether the Court is competent to decide the question whether the contingencies mentioned in Clause (f) exist or not and whether the reference to arbitration can be refused on any of the grounds mentioned in the above clause or is it for the arbitrator himself to decide his own jurisdiction. It is clear from Clause (f) that the arbitrator will not have jurisdiction to settle the disputes if any of the contingencies mentioned in that clause exist. We are of the opinion that it is for the Court to decide as to whether the arbitration clause is in force or not in a given contingency. No direct authorities on this question were brought to our notice, but counsel for the appellant relied on the following passage in R. G. Insurance Co. v. Pearey Lal, AIR 1952 SC 119 at p. 121 :
"the test is whether recourse to the contract by which the parties are bound is necessary for the purpose of determining the matter in dispute between them. If such recourse to the contract is necessary, then the matter must come within the scope of the arbitrator's jurisdiction. In the present case, both the parties admit the contract and state that they are bound by it. Indeed, the appellant-company, in order to make good its contention, is obliged to rely and does rely on that part of Clause 7 of the policy which states that if the company should disclaim liability and the claim be not referred to arbitration within 12 months of such disclaimer, the claim shall be deemed to have been abandoned. Evidently, the company cannot succeed without calling in aid this clause and relying on it. Again, respondent 1 does not say that he is not bound by the clause but states that the matter was referred to arbitration before any valid disclaimer was made. The position, therefore, is that one party relying upon the arbitration clause says that there has been a breach of its terms and the other party, also relying on that clause, says that there has been no breach but on the other hand the requirements of that clause have been fulfilled. Thus, the point in dispute between the parties is one for the decision of which the appellant is compelled to invoke to his aid one of the terms of the insurance agreement. It is thus clear that the difference between the parties is a difference arising out of the policy and the arbitrator had jurisdiction to decide it, the parties having made him the sole judge of all differences arising out of the policy."
The question which arose in that case was as to whether the arbitration agreement was in force. The arbitration clause in that case contained a provision to the following effect .:--
"If the company shall disclaim liability to the insured for any claim hereunder and such claim shall not within twelve calendar months from the date of such disclaimer have been referred to arbitration under the provisions herein contained then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable here-under."
The dispute in that case was as to whether the Insurance Company disclaimed liability as contemplated in the clause and their Lordships held that it is a dispute coming within the scope of the Arbitration Clause namely whether there is a breach of condition or not. It is further observed in paragraph 9 of the judgment :
"Again, no question of determining the effect of the arbitration agreement arises, because there is no dispute between the parties as to what it means. The language of the arbitration clause is quite clear, and both parties construe it in the same way. The real question between them is whether respondent 1 has or has not complied with the conditions of the agreement. But this question does not turn on the effect of the agreement."
But here the effect of the arbitration agreement has to be decided before making a reference and the fact that one of the contingencies mentioned in Clause (f) namely termination of contract has occurred is an admitted fact. The dispute is only as to whether it was proper and legal, and for the applicability of Clause (f) it is not necessary to decide the legality or propriety of the termination as we have stated later in this judgment. In that view the above decision is not applicable to the facts of this case.
5. Counsel for the appellant relied on the decision in Chris Brown Ltd. v. Genossenschaft, (1953) 2 All ER 1039, and the following passage at Page 1042 :
"If the facts had shown that the only dispute which the arbitrators had considered was the dispute whether the contract was validly made or not, then, of course, the award would have been valueless. The arbitrators cannot determine their own jurisdiction. The question which has arisen is: What is the position if the dispute embraced not merely the question whether the contract was validly made or not, which would be in excess of the jurisdiction of the arbitrators to determine, but also other questions which they could properly determine? I think that the answer to that question becomes clear if one bears in mind the fundamental principles which govern the acts of arbitrators in those matters. It is clear that at the beginning of any arbitration one side or the other may challenge the jurisdiction of the arbitrator. It is not the law that arbitrators, if their jurisdiction is challenged or questioned, are bound immediately to cease to act, and to refuse to act, until their jurisdiction has been determined by some Court which has power to determine it finally. Nor is it the law that they are bound to go on without investigating the merits of the challenge and determine the matter in dispute leaving the question of their jurisdiction to be held over until it is determined by some Court which had power to determine it. They might then be merely wasting their time and everybody else's. They are not obliged to take either of those courses. They are entitled to inquire into the merits of the issue whether they have jurisdiction or not, not for the purpose of reaching any conclusion which will be binding on the parties, because that they cannot do, but for the purpose of satisfying themselves, as a preliminary matter, whether they ought to go on with the arbitration or not. If it became abundantly clear to them that they had no jurisdiction as, for example, it would be if the submission which was produced was not signed, or not properly executed, or something of that sort, then they might well decide not to proceed with the hearing. They are entitled, in short, to make their own inquiries in order to determine their own course of action, but the result of that enquiry has no effect whatsoever on the rights of the parties. That is plain, I think, from the burden that is put on a plaintiff who is suing on an award. He is obliged to prove not only the making of the award but that the arbitrators had jurisdiction to make the award. The principle omnia praesumuntur does not apply to proceedings of arbitration tribunals or, indeed, to the proceedings of inferior tribunals of any sort. There is no presumption that merely because an award has been made that, therefore, it is; a valid award. It has to be proved by the party who sues on it that it was made by the arbitrators within the terms of their authority, that is, with jurisdiction. Jurisdiction has to be proved affirmatively."
Their Lordships were considering in that case the validity of an award by an arbitrator and not a question as to whether the Court should decide the question as to whether a reference to arbitration shall be made in a given contingency where the arbitration clause ceases to have effect or should refer that matter also to arbitration. The Court was only considering the question as to what an arbitrator should do when his jurisdiction is challenged before him. The decision is also an authority for the position that whatever may be the decision of the arbitrator on the question of jurisdiction, the ultimate decision has to be taken by the Court. This decision is no authority for resolving the controversy in the present case.
6. Russel on Arbitration (20th Edn.) dealing with the authority of an arbitrator to decide his own jurisdiction states as follows at page 91 :
"It can hardly be within the arbitrator's jurisdiction to decide whether or not a condition precedent to his jurisdiction has been fulfilled. It has indeed several times been said bluntly that an arbitrator has no power to decide his own jurisdiction and in one case where rules of an institution prepared to conduct arbitrations gave the arbitrator such power, the Court will ignore this when asked to enforce the award, and decide the question itself."
In Commercial Arbitration by Mustill and Boyd (1982 Edn.) it is said as follows at page 82 :
"Just as an arbitrator cannot make a binding award as to the existence of a contract which, if it does exist, is the source of his authority to act, so also does he lack the power to make a binding decision as to the existence of the facts which are said to found his jurisdiction."
7. The other case about which mention has to be made, the facts of which are the nearest with the 'present one is Smith v. Martin, (1925) 1 KB 745. A building contract provided that an arbitration should not take place "until after completion of the work's". In that case two questions arose: (1) as to whether the arbitrator had jurisdiction to decide the question whether the whole work was completed on which his jurisdiction depended and (2) whether "until after the completion of works" in condition 32 meant until after completion of the whole of the works contracted for and not merely unit after completion of so much of the work as the contractor was under the circumstances bound to perform. On the first question their Lordships observed as follows :
"The only doubt that I at one time entertained in this matter was whether, having regard to the form of the contract, it might not be said that the parties, by giving the arbitrator power to deal with disputes arising on the construction of the contract, had empowered him to decide whether the works had been completed or not. But our attention was called to a case of Pethick Brothers v. Metropolitan Water Board (reported in (1911) Hudson on Building Contracts, 4th Edn., Vol. ii, p. 456), in which it was held by the Court of Appeal that where a right to go to arbitration depends on the happening of an event, the arbitrator has no jurisdiction to decide whether the event has happened. A finding therefore in the present case that the works were completed before the commencement of the arbitration was outside the jurisdiction of the arbitrator."
On the second question their Lordships held that the words "after the completion of the works" meant the completion of the whole work and not merely the completion of so much of the work as the contractor was bound to perform under the circumstances. This decision is an authority for the position that the arbitrator has no authority to decide His jurisdiction and the contingency on the basis of which alone an arbitration clause will come into operation has happened irrespective of its legality and propriety.
8. Section 20 of the Arbitration Act gives power to the Court to pass an order under that section only if there is an arbitration agreement with respect to the subject-matter and differences have arisen to which the arbitration agreement applies. From the wording of the above Section and from the authorities mentioned above, we are clearly of the opinion that the Court has to decide before making a reference to an arbitrator as to whether an arbitration agreement is in operation in a given contingency as provided in the agreement between the parties, for otherwise it will be clothing an arbitrator with jurisdiction which he does not possess. If a reference comes before an arbitrator otherwise than through Court and his jurisdiction is challenged the matter may be different about which we are not called upon to decide in this case.
9. The next question to be decided is as to whether any of the contingencies mentioned in Clause 57(f) of the agreement has arisen in the case so that there shall not be any reference to arbitration. A combined reading of Sub-clauses (e) and (f) of Clause 57 makes it clear that arbitration of differences is contemplated only when the work is in progress and not afterwards. There shall not be a reference to arbitration of any dispute or claim once the work is completed or the contract is terminated and in case work is stopped unilaterally or abandoned by the contractor. Here admittedly the contract was terminated by the Board under Ext. A3 order dated 23-10-1980. But the case of the appellant is that the order terminating the contract unilaterally is not legal or proper and so the prohibition under Sub-clause (f) will not come into play. For the purpose of Sub-clause (f) it is sufficient that there is a termination of the contract and the legality or propriety of it is immaterial for the applicability of Clause (f). The observation by the Supreme Court in Damodar Valley Corporation v. K. K. Kar, AIR 1974 SC 158 (para 8), is apposite in the context:--
"In certain circumstances, it may be that there has been a termination of the contract unilaterally and as a consequent the parties may agree to rescind the contract. In such a situation the rescission would put an end to the performance of the contract, in future, but it may remain alive, for claiming damages either for previous breaches or for the breach which constituted the termination."
If the termination is illegal it may give rise to a cause of action to the plaintiff for damages and vice versa to the Board if the stoppage of work by the plaintiff was wrongful. In either case once there is a termination rightly or wrongly, the arbitration clause ceases to have effect and the rights of parties, if any, have to be determined in any other, manner sanctioned by law. The dictum in Smith v. Martin, (1925) 1 KB.745, referred to earlier also lends support to the view which we are taking.
10. The lower Court has come to the conclusion that the plaintiff has unilaterally stopped the work and that thereby he abandoned the work. Counsel for the appellant contended and placed before us certain materials to show that the stoppage of work was not intentional and that by force of circumstances and due to the non-cooperation of the Board in discharging their obligations he was forced to stop the work, so that there is no abandonment of the work, to attract Sub-clause (f). The counsel for the Board refuted the above contention. It is not necessary to finally decide as to whether there is an abandonment by the Contractor as there is termination of the contract which will attract Clause 57(f), It is said that the Board has filed O.S. No. 538 of 1983 on the file of the Sub Court, Trivandrum for damages. The legality and propriety of the termination order and whether the stoppage of work by plaintiff was justified are matters to be decided in the suit. The finding on this aspect by the trial Court is vacated with liberty to agitate that question in the suit.
11. The last contention of the appellant is that in any view of the matter, the lower Court should have referred at least the two questions which the Board was agreeable in I.A. No. 5213(a)/81. The above I.A. was filed in the Court below in the following circumstances. During the progress of work, by Ext.A10 notice dated 21-2-80, the plaintiff raised certain disputes and nominated his arbitrator as contemplated under the contract. and requested the Board to nominate its arbitrator. In reply to that under Ext.A1 dated 25-3-1980 the Board nominated its arbitrator and requested the plaintiff to settle the terms of reference by contacting the Chief Engineer (Civil). Nothing happened in pursuance to this. It is in this context that the Board filed I.A. No. 5213(a)/81 alleging that there is no arbitration agreement and that if the Court finds that there are arbitrable disputes, only the disputes which were the subject-matter of Exts. A1 and A10 alone should be referred. There is no unconditional agreement to refer the question mentioned therein, but it was contended only as an alternate contention that at best only the disputes that arose during the continuance of the work could be referred. No reference was admittedly made before the termination of the contract, and the present request to refer those questions now after the termination of the contract, against the provision of Clause 57(f) has only to be declined.
In the result, we find no merit in the appeal and the same is dismissed, but, in the circumstances without any order as to costs.