S.A. Builders Ltd. vs Municipal Corporation Of Delhi
2000 Latest Caselaw 486 Del

ORDER

J.B.Goel, J.

1. These are the objections filed on behalf of the Municipal Corporation of Delhi (respondent No.1) for short (MCD) against award dated 5.8.1991 passed by Shri B.Dayal, retired Engineer in Chief of MCD as arbitrator.

2. Briefly the facts are that the Executive Engineer of MCD vide NIT No.EE-XVIII/82-83/1 dated 2.2.1983 invited tenders for "the construction of Approaches to Flyover at the level of crossing to New Rohtak Road with clover leaf, slip roads and service roads etc." M/s. S.A. Builders Ltd. (Petitioner) had submitted their tender on 25.3.1983. After correspondence between the parties their tender was accepted vide letter dated 10.11.1983 and an agreement No.4 dated 1.11.1983 was also executed by Executive Engineer (18) on behalf of the MCD and the petitioner with the approval of the Standing Committee of the Corporation (Resolution No.759 dated 3.11.1983 in item No. 552). The notice inviting tenders, correspondence entered into between the parties, letter of acceptance and the agreement formed part of the contract. The estimated cost of construction was Rs.487 lakhs and the time of completion was 24 months. The respondent had given mobilisation advance of Rs.48.70 lakhs to the petitioner which was to be adjusted @ 10% from the running bills during the stipulated period of completion. It carried interest @ 10% p.a. It appears that the work was not even started within the stipulated period, according to the petitioner, because of defaults on the part of the respondent Corporation for not making available the site. Before the work could be completed certain disputes arose between the parties as MCD charged interest on the mobilisation advance which was disputed. The respondent also did not allow full escalation charges for labour and material resulted due to delay in taking up the work. The contract between the parties in Clause No.25 provided for arbitration, arbitrator to be appointed by the Commissioner, MCD. In pursuance of this power the Commissioner vide his letter dated 23.9.1987 appointed Shri B.Dayal, Retired Engineer In Chief, MCD as the sole arbitrator subject to admissibility under the contract. The following disputes were referred to him:- (1) dispute about interest charged on mobilisation advance, (2) dispute about labour escalation i.e. whether the petitioner was entitled to 100% escalation amount under Clause 10(C), (3) escalation towards cost of material after the stipulated contract period. The learned arbitrator entered upon the reference. Petitioner submitted their statement of claim which was disputed and the respondent also submitted counter claims. Both the parties produced large number of documents and also led evidence by way of affidavits. An objection was taken on behalf of the Corporation that there was no valid arbitration agreement inasmuch as the agreement was not validly executed as required under Sections 201, 202 and 203 of the Delhi Municipal Corporation Act of 1957 (for short the Corporation Act) and the Bye-laws framed under Section 203 and 481 of the Corporation Act, the objections being that the contract was not executed by the Commissioner as required under Sections 202 and 203 thereof and it was not sealed with the seal of the Corporation and in the presence of a member of the Standing Committee nor signed by such member as required under bye-law No. 3 and as such the contract was void and consequently the arbitration agreement was also illegal and void and the appointment of arbitrator and reference of the disputes to him was not legal and valid. This was disputed on behalf of the petitioner. Learned arbitrator after considering the material before him held the preliminary issue about invalidity of the arbitration against the Corporation holding that no objection was raised at appropriate time. In short he found it barred by waiver. On merits, against recovery of interest on the mobilisation advance of Rs. 7,71,997,08 made by the respondent upto 23rd running bill he allowed claim to the extent of Rs. 4,95,194/- and awarded the amount of Rs. 2,76,803.58 to the petitioner. Claim of the respondent for further interest amounting to Rs. 27,27,200/- and interest on counter claim was disallowed. On account of labour escalation respondent had deducted 10% under Clause 10 (C) of the contract which was disallowed and the learned arbitrator allowed full 100% escalation and awarded Rs. 7,76,088.90. Claim of the petitioner for material escalation was, however, disallowed. Claim of the parties for interest and costs of arbitration were disallowed. The net result was that claim of the petitioner was allowed in respect of two claims and counter claims of MCD were disallowed. The learned arbitrator made his award on 5.8.1991.

3. On receipt of notice thereof, the petitioner filed an application under Sections 14 and 17 of the Arbitration Act 1940 (for short the Act) and on award being filed in court objections have been filed only on behalf of the Corporation (I.A. 10420/93), challenging the legality and validity of the award on various grounds. Again objection has been taken that there was no valid contract as the contract relied was void and non-est and consequently arbitration agreement in question was also void and as such there was no valid appointment of the arbitrator and the award made is without jurisdiction and is invalid.

4. No one appeared on behalf of the respondent at the time of argument and even after arguments were heard and case was reserved for judgment.

5. I have heard the learned counsel for the petitioner. First question is whether there was no valid contract and valid arbitration agreement between the parties. Learned counsel for the respondent has contended that the Executive Engineer who had executed the contract on behalf of the Municipal Corporation of Delhi was authorised to enter into the contract in view of Commissioner's authorisation given in circular dated December 27, 1979 (Annexure A to the reply), also that the Commissioner himself appointed the arbitrator and as such the objection to this effect is not legally tenable.

6. However, it is not disputed that if the contract is void, its arbitration agreement would also be void.

7. Under Section 3(2) of the Corporation Act, 1957 the Corporation constituted thereunder is a body corporate; Under Section 201 of the MCD Act, the Corporation is competent to enter into and perform any contract necessary for the purposes of this Act. Section 202 prescribes the procedure for making contracts while Section 203, the mode of execution of the contracts. Sections 202 and 203 read as under;-

"202. Procedure for making contracts:- With respect to the making of contracts, the following provisions shall have effect namely:- (a) every such contract shall be made on behalf of the Corporation by the Commissioner;

(b) no such contract, for any purpose which in accordance with any provision of this Act the Commissioner may not carry out without the approval or sanction of the Corporation or some other municipal authority shall be made by him until and unless such approval or sanction has been duly obtained;

(c) no contract (other than a contract for the acquisition of immovable property) which will involve an expenditure exceeding ten thousand rupees or such higher amount as the Corporation may fix shall be made by the Commissioner unless the same is previously approved by Standing Committee.

(d) * * * * * * * * * * * * * *

(e) * * * * * * * * * * * * * *

203. Mode of execution of the contracts:

(i) The mode of executing contracts under this Act shall be prescribed by bye-laws made in this behalf.

(2) No contract which is not made in accordance with the provisions of this Act and the bye-laws made thereunder shall be binding on the Corporation."

8. Section 481 of the Corporation Act also empowers the Corporation to frame bye-laws. In pursuance of power vested in the Corporation under Section 203 and 481 of the Corporation Act, bye-laws called as "Execution of Contract Bye-Laws 1958" have been framed. Bye-law 3 so far as relevant reads as under :-

"3.(1) Every contract entered into by the Commissioner on behalf of the Corporation shall be entered into in such manner and form as would bind him if such contract were made on his own behalf, and may in the like manner and form be varied or discharged:-

Provided that :-

(a) the common seal of the Corporation shall be affixed to every contract; and

(b) every contract for the execution of any work or the supply of any materials or goods which will involve an expenditure exceeding one thousand rupees or such higher amount as the Corporation may from time to time fix, and every contract or other instrument relating to the acquisition of immovable property, shall be in writing and shall specify:-

(i) the work to be done or the materials or goods to be supplied or the immovable property to be acquired, as the case may be;

(ii) the price to be paid for any such work, materials, goods, or immovable property; and

(iii) in the case of a contract for works or for supplies, the period within which the contract or specified portion thereof shall be carried out.

(2) The common seal of the Corporation shall remain in the custody of the municipal secretary and shall not be affixed to any contract or other instrument, except in the presence of a member of the Standing Committee, who shall sign the contract or instrument in token that the same was sealed in his presence.

(3) The signature of the said member shall be distinct from the signature of any witness to the execution of such contract or instrument."

(4) * * * * * * * * * * * * *

9. These provisions to some extent contains restrictions similar to Section 175(3) of the Government of India Act 1935 which provided; "All contracts made in the exercise of the executive authority of the Dominion or of the Province shall be expressed to be made by the Governor General or by the Governor of the Province, as the case may be, and all such contracts and all assurances of property made in the exercise of that authority shall be executed on behalf of the Governor General or Governor by such persons and in such manner as he may direct or authorise". The Supreme Court in Bhikraj Jaipuia Vs. Union of India in dealing with the validity of the contract which did not conform to the requirement of Section 175(3) held that the provisions of Section 175(3) were mandatory and if contract did not conform to the requirements prescribed by Section 175(3) no obligation enforceable at law followed therefrom. By S.2(a) of the Act "arbitration agreement" means a written agreement to submit present or future difference to arbitration and where Dominion of India is a party to such agreement, the arbitration agreement being a contract must conform to S. 175(3).

10. Again in Union of India Vs. Rallia Ram it was held that every contract to bind the Government must comply with the requirements of S. 175(3) of the Government of India Act, 1935, and waiver will not preclude the Government from pleading absence of a contract in consonance with the law. In this case it was also held that though the Government of India did not contend before the arbitrator that there was in law no arbitration agreement on which the arbitrator was competent to act that would not invest the arbitration agreement with any validity. Similar provision exists in Article 199 of the constitution of India and same legal position has been reiterated in K.P. Chowdhry Vs. State of Madhya Pradesh & others where it was held that if the agreement has not been executed in accordance with the provisions of Article 199, it cannot be enforced either by the Government or against it. Regarding purpose, object and intention behind this provision in State of Bihar Vs. M/s. Karam Chand Thapar & Brothers it was held that the intention behind this provision is that the State should not be burdened with liability based on unauthorised contracts. The provision has been made in public interest. The provision is mandatory and if the agreement is not signed by an authorised person any award delivered would be without jurisdiction. In UOI Vs. Kishori Lal Gupta and Bros. also it was held that an arbitration clause though is a collateral term of a con-tract as distinguished from its substantive terms: but none the less it is an integral part of it. If the contract is non-est in the sense that it never came legally into existence or it was void ab-initio in such case if the original contract has no legal existence, the arbitration clause also cannot operate for alongwith the original contract, it is also void.

11. The same principle will apply in case of the contracts entered into with the Corporation. The provisions of Section 202, 203 and Bye-law 3 as reproduced above make it clear that every contract on behalf of the Corporation should satisfy the following requirements: (1) it should be made on behalf of the Corporation, (2) it should be made by the Commissioner (and the Commissioner could be his delegate under Section 491 of the Corporation Act); (3) the contract for the execution of work which involves an expenditure exceeding Rs. 10,000/- shall be in writing, (4) the common seal of the Corporation should be affixed to such contract, (5) the common seal of the Corporation shall be affixed in the presence of a member of the Standing Committee, (6) such member of this Standing Committee shall sign the contract or instrument in token that the same was sealed in his presence and (7) such signature of a member shall be different from the signatures of any witness to the execution of the contract or instrument. Section 203(2) specifically mandates that the contract not made in accordance with the provisions of the Act and the Bye-laws made thereunder shall not be binding on the Corporation. The Supreme Court in Dr. H.S. Rikhy Vs. New Delhi Municipal Committee, has held;

"Where a statute makes a specific provision that a body corporate has to act in a particular manner, and in no other, that provision of the law being mandatory has to be strictly followed."

12. That was a case under the Punjab Municipal Act, 1911. It was further held that the meaning of expression "shall not be binding on the Committee", which was also the expression used in that case, meant that the agreement was void and non-enforceable. The same is the position in present case also. These provisions of the Corporation Act and the Bye-laws came for consideration in two cases before this Court, one before Single Judge in Municipal Corporation of Delhi Vs. M/s. Shail Agencies ILR 1981(2) Delhi 607 and other before the Division Bench in M/s. Dodsaul Pvt. Ltd. Vs. Delhi Electric Supply Undertaking, ILR 1984 (1) Delhi 378. In Shail Agencies it was held that as the provisions of Section 203 of the Act and the bye-laws framed thereunder were mandatory, failure to comply these provisions renders the contract void and consequently the arbitration agreement is also not legal and is void. The Division Bench also has held that these provisions of Sections 202, 203 and the bye-laws framed thereunder were mandatory and where the contract did not fulfill these conditions it was not valid agreement. It was further held that the arbitration clause which is an integral part of the contract also is not enforceable and is void. It was further held that in such a case there will be no bar of estoppel even if the objecting party appeared and took part in the proceedings without raising any such objection.

13. The principle thus is that if the contract which contains the arbitration clause is itself required to be in a particular form or is required to be signed by the parties in the particular mode prescribed, then the arbitration clause will not be valid if the contract is not in that form or is not so signed. In view of this legal position the contract of execution of work between the parties and the arbitration clause contained therein are void and non-est and are not enforceable by or against the Corporation, the appointment of arbitrator is not valid and consequently the award is without jurisdiction and is invalid and cannot be sustained. In view of this it is not necessary to go into the question of validity of the award on other grounds on its merits. In the result the objection petition is allowed on the question of invalidity of contract and arbitration agreement and the award is set aside.

S.No. 2800-A/91

In view of above finding this suit under Section 17 of the Arbitration Act is dismissed.

In the circumstances, parties are left to bear their own costs.

I.A. 10420/93 and Suit No. 2800-A/91 are disposed of.