Karnataka High Court
State Of Karnataka And Anr. vs Prabhakar Reddy on 14 July, 2003
Equivalent citations: 2004(2)ARBLR150(KAR), 2004(2)KARLJ67, AIR 2004 (NOC) 71 (KAR), 2004 AIR - KANT. H. C. R. 75, (2004) 3 ICC 240, (2003) 4 KCCR 2586, (2004) 2 KANT LJ 67, (2004) 2 ARBILR 150
Author: Tirath S. Thakur
Bench: Tirath S. Thakur
JUDGMENT Tirath S. Thakur, J.
1. The short question that arises for consideration in this appeal is whether a valid arbitration agreement exists between the parties so as to call for a reference to the Arbitrator for adjudication of the disputes between them. The question is concluded by the decision of the Supreme Court in State of Uttar Pradesh v. Tipper Chand, and that of this Court in State of Karnataka v. Sudhakar Reddy and Ors., M.F.A. Nos. 1552, 1553 and 1973 of 1993, DD: 13-12-1994. The Supreme Court as also this Court have interpreted a similar clause appearing in the agreement executed between the parties in those cases and held that the same did not constitute an arbitration agreement so as to warrant the reference of the disputes to the Arbitrator for adjudication. The question arises in the following backdrop.
2. The respondent is a Class-I Contractor registered in Public Works Department of the Government of Karnataka. A certain civil work relating to the construction of a high level bridge on Kolhar-Talikot road was allotted to the respondent in terms of an agreement dated 20th September, 1985 executed between the Executive Engineer and the respondent. The estimated cost of the work was Rs. 55.58 lakhs approximately. The work had to be completed within thirty-six months from the date it was allotted, i.e., by 6th December, 1989 excluding the monsoon period. On account of the failure of the respondent to keep pace with prescribed schedule for the completion of the work, the Executive Engineer rescinded the contract in terms of an order dated 15th January, 1990 imposing penalty of Rs. 30,15,762/- on the respondent for his failure to complete the work. The respondent also it appears raised certain disputes claiming a reference to the Arbitrator in terms of Clause 30 of the agreement for adjudication thereof. Since no such reference was made, the respondent filed Arbitration Case No. 4 of 1992 before the III Additional Civil Judge of Bijapur in terms of Sections 8 and 20 of the Arbitration Act, 1940 for a direction to the appellant-Executive Engineer to file the original arbitration agreement in the Court and for reference of the dispute to the Arbitrator for adjudication. The said petition has been allowed by the Court below in terms of its order dated 18th February, 1997 impugned in this appeal. The Court has relying upon the decisions of the High Court of Delhi in Mrs. Sushila Seth and Ors. v. State of Madhya Pradesh , Uttam Wires and Machines (Private) Limited v. State of Rajasthan and Anr. and the decision of the High Court of Allahabad in State of Uttar Pradesh and Anr. v. Sardul Singh Kulwant Singh and Anr. (DB), held that Clause 30 found in the agreement executed between the parties constitutes an arbitration agreement and envisages adjudication of dispute between the parties by way of arbitration. It has accordingly allowed the petition filed by the respondent-Contractor and referred the dispute raised by him for the arbitration of Sri M.S. Ramanathan, Retired Chief Engineer at Mysore. Aggrieved, the State Government has preferred the present appeal against the said order.
3. Appearing for the appellants learned Government Advocate in the petition argued that Clause 30 of the a, cement executed between the parties does not constitute an arbitration agreement so as to call for a reference to Arbitrator. He urged that this Court had in Sudhakar Reddy's case, supra, considered the effect of a similar clause and declared that the same did not constitute an arbitration agreement. He also drew our attention to the judgment of the Supreme Court in Tipper Chand's case, supra and State of Maharashtra v. Ranjit Constructions C.A. No. 4700 of 1985, where clauses identical to the one with which we are concerned in the instant case fell for interpretation. The Court had upon consideration of the provisions of the Arbitration Act and the language employed in the clause declared that the same did not constitute an arbitration agreement. He urged that the Court below was in error in holding that Clause 30 appearing in the agreement executed between the parties constituted an arbitration agreement which could provide a sound basis for a reference to the Arbitrator.
4. Clause 30 of the agreement executed between the parties reads as under;
"Except where otherwise specified in the contract and subject to powers delegated to him by Government under the Code Rules then in force, the decision of the Chief Engineer for the time being shall be final, conclusive and binding on all parties to the contract upon all questions relating to the meaning of the specifications, design, drawing and instructions hereinbefore mentioned and as to the quality of workmanship, or materials used on the work, or as to any other question, claim, right, matter or things whatsoever, in any way arising out of or relating to the contract, designs, drawing, specifications, estimates, instructions, orders or those conditions, or otherwise concerning the works, or the execution or failure to execute the same, whether arising during the progress of the work, or after the completion or abandonment thereof".
5. Placed in juxta-position is Clause 22 of the agreement with which the Supreme Court was concerned in Tipper Chand's case, supra. The said clause was couched similarly and read as under:
"Except where otherwise specified in the contract the decision of the Superintending Engineer for the time being shall be final, conclusive and binding on all parties to the contract upon all questions relating to the meaning of the specifications, design, drawing and instructions hereinbefore mentioned. The decision of such Engineer as to the quality of workmanship, or materials used on the work, or as to any other question, claim, right, matter or things whatsoever, in any way arising out of or relating to the contract, designs, drawing specifications, estimates, instructions, orders or these conditions, or otherwise concerning the works, or the execution or failure to execute the same, whether arising during the progress of the work, or after the completion or abandonment of the contract by the contractor, shall also be final, conclusive and binding on the contractor".
The question before the Supreme Court as noticed earlier was whether the clause extracted above constituted an arbitration agreement between the parties. The answer was in negative. The reasons are available in the following paragraph of the judgment:
"After perusing the contents of the said clause and hearing learned Counsels for the parties we find ourselves in complete agreement with the view taken by the High Court, Admittedly, the clause does not contain any express arbitration agreement. Nor can such an agreement be spelled out from its terms by implication, there being no mention in it of any dispute, much less of a reference thereof. On the other hand, the purpose of the clause clearly appears to be to vest the Superintending Engineer with supervision of the execution of the work and administrative control over it from time to time".
The above reasoning is applicable on all fours to the clause with which we are concerned in the instant appeal. The clause does not admittedly contain any arbitration agreement nor can any such agreement be spelt out by implication. There is no mention in the clause of any dispute much less of a reference thereof. As observed by the Supreme Court, the clause was meant to vest the Chief Engineer with the supervision of execution of the work and the administrative control over it from time to time. Respectfully following the view taken by the Supreme Court in the case of Tipper Chand, supra, we have no difficulty in holding that Clause 30 of the agreement executed between the parties does not constitute an arbitration agreement between the parties for making reference to the Arbitrator.
6. In Sudkakar Reddy's case, supra, decided by the Division Bench of this Court by its order dated 13th December, 1994 also, the question was whether the clause with which we are concerned constituted an arbitration agreement. It is noteworthy an agreement executed between the parties in the said case also related to execution of civil work by the contractor on behalf of the State Government. After noticing the decision of the Supreme Court in Tipper Chand's case, supra, this Court dealt with the submissions made on behalf of the contractor that there were certain distinguishing features which would render the ratio of judgment of the Supreme Court in Tipper Chand's case inapplicable to the case on hand. Those contentions were turned down by this Court in the following words:
"A reading of the judgment of the Supreme Court in Tipper Chand's case, supra, will show that the Supreme Court did not base their conclusion on the above two factors. The decision of the Supreme Court rests mainly on the fact that there was no mention of any dispute much less of a reference in the clause under consideration. In fact, the Supreme Court has distinguished some earlier decisions on this matter by having stress on the persons or absence of reference to disputes or differences in the relevant clause. Distinguishing the decision in Dewan Chand v. State of Jammu and Kashmir AIR 1961 J and K 58, the Supreme Court after extracting the relevant clause which arose for consideration in that case pointed out that in that case the use of the words "any dispute between the contractor and the department" were significant and then in view of the use of those words the decision in that case that clause amounts to an arbitration agreement was correct. Likewise the Supreme Court referred to the decision of Ram Lal Jagan Nath v. Punjab State through Collector, Hissar and Anr. , pointed out that the clause considered in that case referred not only to a dispute between the parties to the contract but also specifically mentioned a reference to the Superintending Engineer and must therefore be held to have been rightly interpreted as an arbitration agreement. It is therefore clear that before a clause in the contract could be interpreted to be an arbitration agreement, it is not sufficient if the clause stipulates that the decision of the authority referred to therein is final and binding on all the parties in respect of the matter stated therein. It is only where the clause indicates that the decision of the authority referred to therein is final and binding on all the parties in case of disputes or differences between the parties, then an implied arbitration agreement could be spelt out".
Apart from the decision of the Supreme Court in Tipper Chand's case, supra, the issue stands concluded by another decision of the said Court in the case of Ranjit Constructions, supra, in which the Supreme Court was interpreting are almost identical clause in the agreement executed between the parties in that case. Clause 30 of the said agreement was as under:
"Except where otherwise specified in the contract and subject to 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, design, drawing and instructions hereinbefore mentioned and as to the quality of workmanship, or materials used on the work, or as to any other question, claim, right, matter or things whatsoever, in any way arising out of or relating to the contract, designs, drawing specifications, estimates, instructions, orders or those conditions, or otherwise concerning the works, or the execution or failure to execute the same, whether arising during the progress of the work, or after the completion or abandonment thereof".
The above clause is similar to the clause in the instant case, the only difference being in regard to the authority whose decision is made final. The other difference appears in regard to the expression "subject to the powers delegated to him by the Government under the Code Rules then in force". After considering the terms of the clause relying upon the judgment made in Tipper Chand's case, supra, the Supreme Court observed:
"On going through the two clauses viz., the one which arises for consideration in this case and the other which arose for consideration in Tipper Chand's case, supra, hold that the clause which arises for consideration in this case also does not entitle either of the parties to seek a reference to an Arbitrator under the provisions of the Arbitration Act, 1940 of any dispute arising under the contract".
The ratio of the above decision is in our view squarely applicable to the instant case also.
7. In the light of the above, therefore, we have no hesitation in holding that the Court below was in error in interpreting Clause 30 of the agreement as an arbitration agreement between the parties to justify a reference of the disputes to the Arbitrator. This appeal accordingly succeeds and is hereby allowed. The impugned order passed by the Court below is set aside and Arbitration Case No. 4 of 1992 filed by the respondent-contractor dismissed but in the circumstances without any order as to costs. The dismissal of the petition shall not prevent the contractor to seek such other redress as may be open to him in law.