The Food Corporation of India vs M. Ramachandra Rao

In this appeal, u/s 39 of the Arbitration Act, the appellant challenges the judgment and decree, dated 19th March, 1986, in O.S.No. 1100 of 1983 on the file of the II Additional Judge, City Civil Court, Hyderabad, as being illegal. The first defendant in the suit is the appellant. The respondent herein filed the suit u/s 20 of the Arbitration Act (hereinafter referred to as ''the Act'') praying that the Chief Engineer (Retd.) - second defendant therein, (Now it is stated before us by the learned counsel that it is a mistake for first defendant) may be ordered to file the agreement entered into between the plaintiff and the first defendant and to refer the six claims specified therein to the arbitrator already appointed by the first defendant, who was impleaded as second defendant therein. It would be apt to note a few facts leading to the filing of the suit.

The respondent here in is a contractor undertaking civil works of construction from the Government and statutory Corporations. In the year 1977 the respondent entered into an agreement with the appellant for construction of food-grain godowns having 13,340 tonnes capacity, having been found to be the highest bidder. In execution of that work certain disputes arose between the parties. The respondent made as many as nine claims and requested the appellant to refer them to an arbitrator pursuant to the arbitration clause in the agreement. The appellant referred three claims only to the arbitrator on 9-8-1982 . On 14-9-1982 the respondent addressed a letter to the appellant requesting it to refer the remaining six claims also to the arbitrator. The appellant declined to accede to that request and intimated the same by its letter dated 6-12-1982. In so far as the three claims, which were referred to the arbitrator, were concerned the respondent participated in the arbitration proceedings. On 30-8-1983 award was passed in respect of the three claims and we are told that it was also made rule of the Court. In respect of the remaining six claims the respondent filed the present suit on 16-7-1983. In the said suit the defendant, inter alia, pleaded that the plaintiff-respondent herein, having proceeded under Chapter-II of the Act, was precluded from invoking Section 20 of the Act. The trial Court, by judgment dated March 19, 1986, rejected the contention of the defendant, directed filing of the arbitration agreement into court, appointed the second defendant as arbitrator as he had already adjudicated the other three claims and referred the six claims in question to him for adjudication. Aggrieved by the judgment of the trial court, the present appeal is field by the defendant.

Sri. K.V. Ramana Rao, learned counsel for the appellant, contends that in view of the provisions of Sub-section (1) of Section 20 of the Act the suit is not maintainable, as the respondent has proceeded under Chapter-II of the Act in respect of three claims, which were already adjudicated by the arbitrator and the award was also made rule of the Court. Sri. K. Ramakrishna Reddy, learned counsel for the respondent, on the other hand contends that in respect of the claims, which have been referred to the arbitrator, the respondent did not take any steps under Chapter-II of the Act, therefore, the decree under appeal is unassailable.

The short question that arises for consideration in this appeal is- whether on the facts and in the circumstances of the case, the respondent is precluded from invoking Section 20 of the Act.

It has already been stated above that the respondent entered into an agreement for construction of godowns for the appellant. In execution of that work, disputes arose between the parties. Out of nine, three claims were referred and six claims were not referred to the arbitrator by the appellant. The parties participated in the proceedings before the arbitrator, who passed award in respect of the three claims. In these circumstances, whether the respondent is precluded from invoking Section 20 of the Act.

We shall read here Section 20(1) of the Act which is in the following terms:

"20. Application to file in Court arbitration agreements:-

(1) Where any person having entered into an arbitration agreement before the institution of any suit with respect to the subject-matter of the agreement or any part of it, and where a difference has arisen to which the agreement applies, they or any of them instead of proceeding under Chapter II, may apply to a court having jurisdiction in the matter to which the agreement relates that the agreement be filed in Court."

From a perusal of the provision extracted above, it is clear that to invoke the above Section the following three conditions must be satisfied:- (1) there must be an arbitration agreement; (2) it should have been entered into before the institution of any suit with respect to the subject-matter of the suit; and (3) a difference must have arisen to which the agreement applies. If these three conditions are satisfied, the parties or any of them are/is given an option to apply to the Court having jurisdiction in the matter to which the agreement relates that the agreement be filed in court, instead of proceeding under Chapter-II of the Act. Chapter-II, which comprises of Sections 3 - 19,deals with arbitration without intervention of a court. In a case where the parties to an agreement appoint an arbitrator for adjudication of the disputes which have arisen between them, the provisions of Chapter-II would apply. Chapter-III contains only one Section, Section 20, which deals with arbitration with intervention of a court where there is no suit pending. Under this chapter, the appointment of arbitrator is made with the intervention of the Court. It has already been noticed that where a difference arises to which the agreement applies, the parties have to make a choice whether to proceed under Chapter-II, or under Chapter-III. This leads us to the question-what is the difference that has arisen between the parties in this case?

It would be appropriate to refer to the agreement here. Clause 25 of the agreement, which deals with reference to arbitration, is as follows:

"Clause 25. Except where otherwise provided in the contract, all questions and disputes relating to the meaning of the specifications, designs, drawings 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 thing whatsoever, in any way arising out of or relating to the contract, designs, drawings, specifications, estimates, instruction, 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 work or after the completion, abondonment or there of shall be referred to the sole arbitration of a person appointed by the Managing Director, Food Corporation of India, at the time of dispute or if there be no Managing Director, the Administrative head of the said Corporation at the time of such appointment. It will be no objection to any such appointment, that the arbitrator so appointed is a Corporation employee, that he had to deal with the matters to which the contract relates, and that in the course of his duties as Corporation employee he had expressed views on all or any of the matters in dispute or difference. The arbitrator to whom the matter is originally referred being transferred or vacating his office or dying or being unable to act for any reason such Managing Director or administrative head as aforesaid at the time of such transfer, vacation of office or inability to act, shall appoint another person to act as arbitrator in accordance with the terms of the contract. Such person shall be entitled to proceed with the references from the above at which it was left by his predecessor. "It is also a term of this contract that no person other than a person appointed by the Managing Director or administrative head of the Corporation as aforesaid shall act as arbitrator and if, for any reason, that is not possible, the matter is not to be referred to arbitration at all."

The costs and venues of arbitration shall be at the discretion of the arbitrator.

Subject as aforesaid the provisions of the Arbitration Act, 1940, or any statutory modification or the enactment thereof and the rules made thereunder and for the time being in force shall apply to the arbitration proceedings under this clause. The arbitrator (s) may from time to time with the consent of the parties enlarge the time for making and publishing the award

New Clause in all the agreements (arbitration Clause):

"In all the cases where the amount of the claim in dispute is Rs. 25,000/-and above, the arbitrator shall record his reason for the award."

It is a term of the contract that the party invoking arbitration under this clause shall specify the disputes and/or differences to be referred to arbitration together with the amount (s) claimed in respect of each such dispute/difference.

It is also a term of the contract that if the contractor does not make any demand for arbitration in respect of any claims in writing within ninety days of receiving the intimation from the F.C.I, that the bill is ready for payment, the claim of the contrator will be deemed to have been waived and absolutely barred and the F.C.I, shall be discharged and released of all liabilities under the contract in respect of those claims."

From a perusal of the above clause, it is clear that if differences arose between the parties from the first stage till the completion of the work or even thereafter, it is not necessary for any of the parties to wait till the completion of the work without raising any dispute or claim. From time to time, disputes may arise and the parties may refer them to arbitration under the agreement as and when they arise. Merely because a party made different claims after the whole work is executed pursuant to the agreement, it cannot be said that all the claims have to be taken as one difference. In our view, it is not the claim alone that has to be taken as difference, but the action of making the reference or the action declining to refer the claim that would also be the subject matter of the difference between the parties for purposes of Section 20 of the Act.

Admittedly, the respondent made nine claims. Out of them, three claims were referred to the arbitrator. There was, therefore, no difference with regard to the three claims, which were adjudicated by an arbitrator appointed without the intervention of the Court to which Chapter-II applies. The difference, however, is with regard to not referring the remaining six claims in respect of which the respondent made request on 14-9-1982 and the appellant rejected on 6-12-1982. It is a common ground that with regard to these six claims no proceedings were initiated under Chapter-II. Therefore, in our view, the respondent was entitled to invoke the provisions of Chapter-Ill, namely, Section 20 of the Act.

We shall now refer to the decisions cited by the learned counsel for the parties.

Sri. K.V. Ramana Rao, learned counsel for the appellant, relied on a Division Bench decision of this Court in Ravu Venkata Surya Rao Vs. Ravu Venkata Rao and Others, . in support of his submission that the suit is not maintainable. In that case the differences which arose out of the decree passed in a partition suit, were referred to arbitration pursuant to an agreement, dated 28-12-1956. Accordingly the arbitrator entered on reference. The award was to be passed within four months. The period expired and the appellants therein gave notice to the arbitrator not to proceed with the arbitration. The respondents did not apply to the Court to enlarge the time for making the award u/s 28 of the Act. After a long time thereafter, an application was made u/s 20 of the Arbitration Act. The question before the Court was whether that application was maintainable. After a considering the scope of Section 20, the Division Bench observed that Sub-clauses (4) and (5) furnish clear indicia of the appropriate stage at which the provisions of Section 20 could be availed of, and that it was manifest that they were to be availed of before an arbitrator has entered on reference. It was pointed out that the words "instead of proceeding under Chapter-II" further clarify the stage at which that provision was available. It was held that if that stage was passed and the proceedings were started under Chapter-II, the provisions of Section 20 would not be available and therefore, the application made by the respondent therein was not maintainable. It may be noticed that there an arbitrator was already appointed in regard to the differences that arose between the parties under Chapter-II , which were pending before the arbitrator; while so in respect of the same differences Section 20 was subsequently invoked. Therefore, the Division Bench held that Section 20 was not applicable. As pointed out above, in this case the subject matter of Section 20 suit was not proceeded with under Chapter-II.

The next case relied upon by the learned counsel is a decision of the Calcutta High Court in Maheswari and Co. Pvt. Ltd. and Another Vs. The Corporation of Calcutta, . In that case an application u/s 20 read with Section 41 of the Arbitration Act was filed praying for an injunction restraining the respondent therein from opening or accepting any tender or entering into a contract with any third party pursuant to the notice issued inviting tenders. There,the appellant had entered into a contract with the respondent to supply pipes and collars. When disputes arose between the parties, the appellant appointed his arbitrator and gave notice to the respondent. The respondent also nominated its arbitrator. At that stage application u/s 20 read with Section 41 was filed. Objection was taken that the application was not maintainable. Sabyasachi Mukhariji J, as he then was, held that Sub-section (1) of Section 20 of the Act provided option to the parties, but it did not exclude operation of the other provisions of Section 20 insofar as they were applicable even in a case where parties had chosen to make a reference to proceed with arbitration under Chapter-II of the Act. It was further held that Sub-section (4) of Section 20 was clear indication of the fact that where arbitration agreement was filed, the court could and had a right to make either an order directing the arbitrator to proceed in accordance with the arbitration agreement by the parties or appoint an arbitrator directly which was a consequential order following from the filing of the arbitration agreement. The learned Judge further held that Chapter-II of the Arbitration Act did not deal with filing of arbitration agreement, therefore, insofar as Section 20 in its substantive provision dealt with rights of the parties for filing of arbitration agreement, there was no parallel provision in Chapter-II and in such a situation no question of having exercised option by the parties did arise and that an interim order could be granted u/s 41 even without an application u/s 20. As observed above, Section 20 itself provides an option to the parties either to have arbitration without intervention of the Court under Chapter-II, or to proceed under Chapter-Ill. In our view, absence of parallel provision in Chapter-II as in Section 20 for filing of arbitration agreement, has no bearing on the exercise of option u/s 20(1) of the Act.

From the above discussion, it follows that in the instant case the difference with reference to six claims was not proceeded under Chapter-II. Therefore, the respondent was not precluded from invoking Section 20 of the Act for filing of the agreement and appointment of an arbitrator in respect of the six claims. In this view of the matter, we do not find any illegality in the order under appeal. The appeal is accordingly dismissed with costs.

Immediately after pronouncement of this judgment, sri. K.V. Ramana Rao seeks leave to appeal to the Supreme Court. We are unable to certify that the case involves a substantial question of law of general importance, which needs to be decided by the Supreme Court. Oral application for leave is, therefore, rejected.