Karnataka State Construction Corporation Limited, Bangalore vs S.V. Engineering Constructions, Nellore, Andhra Pradesh

Hari Nath Tilhari, J.-These appeals involve a common question of law as to whether in those cases the respective clauses, which will be referred hereinafter, do amount to or do constitute an arbitration clause or not? As such, these appeals are being dealt with and are being disposed of by this common judgment.

In all these appeals, applications were made under Section 8 read with Section 20 of the Arbitration Act, 1940 and the Trial Court in A.C. No. 4 of 1995, which has given rise to Appeal No. 4533 of 1996, allowed the application and appointed the Arbitrator vide order dated 31-8-1996. Similarly in A.C. No. 2 of 1995 giving rise to Appeal No. 4534 of 1996, the learned Civil Judge concerned allowed the application under Section 8 read with Section 20 of the Arbitration Act and appointed the Arbitrator vide order dated 31-8-1996. In A.C. No. 3 of 1995 giving rise to Appeal No. 4535 of 1996, the learned Civil Judge had also allowed the application under Section 8 read with Section 20 of the Arbitration Act and appointed the Arbitrator as mentioned in its order dated 31-8-1996. It is the Karnataka State Construction Corporation who felt aggrieved with allowing of these applications and has come up in appeal by filing the above mentioned three appeals.

The other facts giving cause of action or right to move the applications are not very material at this stage to be mentioned as the question before the Court is: Whether the respective clauses in the respective agreement, to be referred hereinafter, do amount to an arbitration clause and do relates to construction of the respective clauses of those agreements. So, those clauses are going to be referred herewith.

With reference to Miscellaneous First Appeal No. 4533 of 1996 arising from Arbitration Case No. 4 of 1995, it may be mentioned that the agreement had been entered into between the present appellant and the respondent for the execution of the balance work of earth work excavation from Ch. 16500-M to 17000-M at the rates approved by the Managing Director, Karnataka State Construction Corporation Limited, Bangalore, vide letter No. KSCC/Tch/91-92/6443, dated 23-3-1992. The agreement was entered into on 16-2-1993. It is clause or para 23 of this agreement that has to be construed. Clause/para 23 of the agreement reads as under.-

"23. Regarding any dispute arising out of this contract, the decision of the Managing Director, Karnataka State Construction Corporation Limited, will be final and will be binding on the second Party."

As regards Miscellaneous First Appeal No. 4534 of 1996 arising from A.C. No. 2 of 1995, the agreement is dated 30-6-1993 which had been arrived at between the appellant and the respondent for executing the balance work of excavation of cutting and covering of Ch. 15675-M to 16125-M in Hemavathi Canal ''Y'' alignment. Clause 25 of that agreement is material for the purpose of this appeal. It reads as under.-

"Regarding any dispute arising out of this contract, the decision of the Managing Director, Karnataka State Construction Corporation Limited, will be final and will be binding on the second party."

That, as regards Miscellaneous First Appeal No. 4535 of 1996 arising out of order dated 30-6-1993 in A.C. No. 3 of 1995, the agreement is dated 22-7-1991. Clause 14 of this agreement is also in the same language as the clauses referred to above with reference to earlier agreements. Clause 14 of the agreement also reads as under.-

"14. Regarding any dispute arising out of this Contract, the decision of the Managing Director, Karnataka State Construction Corporation Limited, will be final and will be binding on the second party."

The learned Civil Judge, in all these cases, has construed the above mentioned clauses as constituting an arbitration agreement providing for settlement of disputes between the parties to an agreement by arbitration.

On behalf of the appellant, the learned Counsel for the appellant contended that the Court below erred in law in holding the above mentioned clause to be an arbitration clause. The learned Counsel contended that as the agreement did not contain an arbitration clause and the Court below misconstrued that clause as arbitration clause, the Court below acted illegally in passing the order of appoinment of the Arbitrator in these cases and therefore, the respective orders passed by the learned Civil Judge in all these three arbitration cases, which are the subject-matter of appeal in these three appeals, is illegal and bad and requires to be set aside. This has been the only contention raised on behalf of the appellant which has hotly been contested by the learned Counsel for the respondent.

Before proceeding further, it would be appropriate to have glance of material provisions. Section 8 of the Arbitration Act empowers the Court to appoint an Arbitrator or an umpire, in the circumstances and in the cases referred to in clauses (a), (b) or (c) thereof. If any party serves a written notice on the other party or on the Arbitrator, as the case may be, to concur in the appointment or appointments or in supplying the vacancy relating to Arbitrator or umpire, as the case may be, and if no appointment is made within fifteen days after the service of the aforesaid notice, then the party who gave the notice may move an application for such appointment under Section 8, and Section 8 further provides that the Court may, after giving the other party an opportunity of being heard, appoint an Arbitrator or Arbitrators or an umpire, as the case may be, who shall have like powers to act in the reference and to make an award as if he or they had been appointed with the consent of all the parties. Chapter III of the Arbitration Act, 1940, provides for arbitration with intervention of a Court where there is no suit pending. Section 20 provides that where any of the parties have entered into an arbitration agreement before the institution of any suit with respect to the subject-matter of the agreement or any part thereof and where a difference has or differences have arisen to which the agreement applies, then either both the parties or any of them may apply to the Court having jurisdiction in the matter, relating to the agreement or which relates to the agreement under Section 20, and along with that application, the agreement has to be filed. The section provides that after notice being given to all the parties in the agreement other than the applicants, requiring them to show cause within the time specified in the notice as to why the agreement should not be filed, and on no sufficient cause being shown, the Court has power and has been directed to order the agreement to be filed and thereafter the Court shall make an order of reference to the Arbitrator appointed by the parties, whether by agreement or otherwise, and in cases where parties are unable to agree upon the name of the Arbitrator, the Court is required to appoint an Arbitrator and to refer that matter. Both the sections require, as it is the first ingredient, that there should be an arbitration agreement between the parties. What is an arbitration agreement has been defined in Section 2(a) of the Arbitration Act, 1940. It reads as under:

"Section 2(a).-Arbitration agreement means a written agreement to submit present or future differences to arbitration, whether an Arbitrator is named therein or not."

The section indicates that the arbitration agreement is an agreement entered into between the parties to refer a dispute arising out of or under a contract for arbitration and to be bound by its decision, i.e., both the parties agree to be bound by the decision of the Arbitrator and it shall be binding on both the parties and not on only one of the parties. In the case of K.K. Modi v K.N. Modi and Others, AIR 1998 SC 1297. Their Lordships of the Supreme Court, while dealing with the attributes of an arbitration agreement, laid down as under.- "17. Among the attributes which must be present for an agreement to be considered as an arbitration agreement are:

(1) The arbitration agreement must contemplate that the decision of the Tribunal will be binding on the parties to the agreement.

(2) That the jurisdiction of the Tribunals to decide the rights of parties must derive either from the consent of the parties or from an order of the Court or from a statute, the terms of which make it clear that the process is to be an arbitration.

(3) The agreement must contemplate that substantive rights of parties will be determined by the agreed Tribunal.

(4) That the Tribunal will determine the rights of the parties in an impartial and judicial manner with the Tribunal owing an equal obligation of fairness towards both sides.

(5) That the agreement of the parties to refer their disputes to the decision of the Tribunal must be intended to be enforceable in law and lastly.

(6) The agreement must contemplate that the Tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the Tribunal.

The other factors which are relevant include, whether the agreement contemplates that the Tribunal will receive evidence from both sides and hear their contentions or at least give the parties an opportunity to put them forward; Whether the wording of the agreement is consistent or inconsistent with the view that the process was intended to be an arbitration, and whether the agreement requires the Tribunal to decide the dispute according to law."

It was further observed.- "21. Therefore, our Courts have laid emphasis on (1) existence of disputes as against intention to avoid future disputes; (2) the Tribunal or forum so chosen is intended to act judicially after taking into account relevant evidence before it and the submissions made by the parties before it; and (3) the decision is intended to bind the parties. Nomenclature used by the parties may not be conclusive. One must examine the true intent and purport of the agreement. There are, of course, the statutory requirements of a written agreement, existing or future disputes and an intention to refer them to arbitration".

The above decision reveals the first attribute for an agreement to be that an arbitration agreement must contemplate that decision of the Tribunal is to be binding on parties and that agreement must contemplate that substantive rights will be decided and determined by agreed Tribunal and the process should be intended to be arbitration and the agreement must contemplate the Tribunal will take decision upon the dispute formulated when reference thereof is made to it. When we apply these tests to the above referred clauses of the above referred exhibits, we are unable to hold that said clauses can be said to amount to an arbitration agreement as firstly the said clauses do not say and provide that the decision will be binding on both the parties. It only says that the decision will be binding on the second party. It does not provide that the dispute arising between the parties to the contract shall be referred to the Managing Director, Karnataka State Construction Corporation Limited, Bangalore, and it does not contemplate that the decision will be given by the Managing Director as an Arbitrator. It does not, as mentioned earlier, very clearly says that the decision of the Managing Director will be final and will be binding on both the parties. It means it does not say that it will be binding on both the parties to the agreement. There is no use of expression "reference" also in these above referred clauses. It does not indicate that the parties had agreed to refer that dispute to the Managing Director. The clauses appear to be one sided as saying that regarding any dispute arising out of the contract or agreement, the decision of the Managing Director of the Karnataka State Construction Corporation Limited, Bangalore, shall be final and will be binding on the second party. The clauses do not spell out the duty on the part of the Managing Director to record the evidence and to hear both the parties before deciding the dispute. The clauses only indicate that whatever decision the Managing Director will take, that shall be final and binding only against the contractor-second party and not as final and binding on both the parties. When I so opine, I find support for my view from the decision in the case of Bharat Bhushan Bansal v Uttar Pradesh Small Industries Corporation Limited, Kanpur, AIR 1999 SC 899. In the case of State of Uttar Pradesh v Tipper Chand, AIR 1980 SC 1522, a question had arisen for consideration of Clause 22 of the agreement involved in the case which clause 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 Allahabad High Court had opined that the clause does not contain such an agreement. Their Lordships of the Supreme Court affirmed the view of the Allahabad High Court and opined that the clause in question did not amount to an arbitration agreement. In that case also, the agreement only provided that the decision of Superintending Engineer shall be binding on the contractor and it did not provide that it will be binding on both the parties. In this view of the matter, in our opinion, there has been no arbitration clause and the clauses, referred to above with respect to each case, do not amount to an arbitration agreement or arbitration clause. Therefore, the application under Sections 8/20 of the Arbitration Act in each of the three cases/appeals has wrongly been allowed. All the three appeals, as such, are allowed and the orders challenged in these appeals are hereby set aside. Costs made easy.