Super Express Construction vs Prem Kutir Coop. Group Housing ...
2004 Latest Caselaw 822 Del

JUDGMENT

Vikramajit Sen, J.

1. This Petition under Section 20 of the Arbitration Act raises the intricate implications and complexities of arbitration clauses especially those containing a term excepting or excluding some matters from this method of dispute resolution, which is a substitute forum for the civil courts. Owing to its legal significance arbitration clauses have necessitated careful drafting, and therefore have attracted the attention of legal luminaries across the globe. In order to obviate contradictions arising from careless or inept drafting, we now have the benefit of the availability of these clauses having been debated upon and drafted at international conventions. The present case will demonstrate their importance. In the absence of an arbitration clause in a contract, the parties would have to approach a Court of Law to settle the dispute. However, where a typical exclusion clause is found within an arbitration clause the usual effect is that out of the many disputes that must be settled in arbitral proceedings, some of them may have to referred to yet another person, usually architect or engineer intricately involved in the performance of the contract itself. The decision of this nominated person is intended to be final, in contradistinction to the Award passed by the Arbitrator(s), which under the repealed 1940 Act had to obtain jural imprimatur by being declared Rule of Court. The legislature has attempted to advance the applicability of an Award by enacting that unless Objections are filed within ninety days the Award would become executable; and further by restricting the grounds on which the Award can be assailed. However, instead of providing stringent conditions for the grant of a stay of execution akin to Order 41 Rule 5 of the Civil Procedure Code, the 1996 Act contains the retrograde provision of an automatic stay during the hearing of Objections. Coming back to the question of `excluded matters', the decision delivered thereon is not appealable. Courts would not interfere in these decisions unless the audi alterum partem rule had been transgressed (see B.L.W. Versus M.T.N.L. 85 DLT 84); they were not treated as awards and did not require to be granted approval as Rule of Court. Current arbitration clause continue to contain exemption terms, thereby making their scope even sharper.

2. The Petition has been pending for over one decade partially for the reason that it had been dismissed for non-prosecution earlier. During the pendency of the Petition a Local Commissioner had been appointed by the Court who had taken measurements and had made an inventory of the goods lying at the site. The Respondent has asserted that the Petitioner neglected to come forward to carry out joint measurements; instead they lodged their claims on 15.7.1992 and immediately thereafter filed the Petition on 17.7.1992. It is argued that in this span of two days the Architect could not possibly have adjudicated all those claims which, in any event, were in the nature of accepted/excepted matters as articulated in the Arbitration Clause itself, which reads as follows:

The Arbitration Clause

Settlement of Dispute, Arbitration.

All disputes and differences of any kind whatever arising out of or in connection with the contract or the carrying out of the works (whether during the progress of the works or after their completion, and whether before or after the determination abandonment or breach of the contract) shall be referred to and settled by the Architects who shall state their decision in writing. Such decision may be in the form of a final certificate or otherwise. The decision of the Architect with respect to any of the accepted matters shall be final and without appeal. But of either the employer of the contractor be dissatisfied with the decision of the Architect or any matter question or the dispute of any kind (except any of the accepted matters) or as to the withholding by the Architect of any certificate of which the contractors) may within 28 days after receiving notice to such decision give a written notice to the other party through the Architects requiring that such matters in disputes be arbitrated upon, such written notice shall specify the matters which are in dispute and such dispute or difference of which such written notice has been given and no other shall be and is hereby referred to the arbitration and final decision of a single arbitrator being a fellow of the Indian Institute of Architects to be agreed upon and appointed by both the parties or in case of disagreement to the appointment of a single arbitratory to the arbitration of two Arbitrators being both Fellow of the Indian Institute of Architects or fellow of Institute of Engineers or Equivalent one to be appointed by each party, which Arbitrators shall before taking upon themselves the burden of reference appoint an umpire.

The Arbitrator, the Arbitrators or the Umpire shall have power to open up, review and revise may certificate, opinion, requisition or notice, save in regard to the accepted matters to determine all matters in dispute which shall be submitted to him or them and of which notice shall have been given as aforesaid. Upon every or any such reference the cost of and incidental to the reference and award respectively shall be in the discretion of the Arbitrators or Arbitrator or the Umpire who may determine the amount thereof, or direct the same to be taxed as between Attorney and Client or as between party and shall direct by whom and to whom and in what manner the same shall be borne and paid. The submission shall be deemed to be a submission to Arbitration within the meaning of the Indian Arbitration Act 1940 or any statutory modification thereof. The award of the Arbitrator or Arbitrators or the umpire shall be final and binding on the parties. Such reference except as to the with-holding by the Architects of any Certificates to which the contractor claims to be entitled shall not be opened or opened upon until after the completion or alleged completion of the works or until after the practical cossation if the works arising from any cause unless with written consent of employer and the contractor. Provided always that the employer shall not with-hold the payment of the interim certificate not the contractor except with the consent in writing of the Architects in any way delay the carrying out of the works by reason of any such matter, question or dispute referred to Arbitration but shall proceed with the work with all the diligence and shall until the decision of the Arbitrator or Arbitrators or the Umpire be given abide by the decision of the Architects and no Award of the Arbitrator or Arbitrators or the Umpire shall relieve the contractor of his obligations to adhere strictly to the Architect's instructions with regard to the actual carrying out of the works. The Employer and the Contractor hereby also agreed that Arbitration under this clause shall be a condition precedent to any right of Action under the contract.

3. It may be noted that the word used in the Arbitration Clause is `accepted' and not `excepted'. There is a tendency to use these words as if they were interchangeable and this may stem in large measure from their phonetic similarity. It is for this reason that it may be preferable to use the word `excluded' instead of accepted or excepted i.e. excluded from the purview of arbitration. However, it has become common-place to read the word `accepted' as interchangeable with `excepted', or in the alternative to arrive at the same conclusion by taking the meaning to be an acceptance of the parties that a decision taken on such aspects of the dispute, if taken by a designated person, would have to be accepted by both the parties and thereby become impervious to any challenge whatsoever. In Webster's Encyclopedic Unabridged Dictionary the preposition `except' as "with the exclusion of; excluding; save." The Concise Oxford English Dictionary defines `except' as "not including; other than." The Clause before me is replete with typographical as well as grammatical errors. I have compared all reproductions thereof available in the records but the errors have been replicated everywhere, possibly because of a careless lifting of this clause from some other document. The Clause is also circuitous, circumlocutory and confusing, everything that it should not be. What it intends to convey is that all disputes and differences of any kind shall first be decided by the Architect(s) whose decision shall be final with regard to an accepted (sic. excepted) matters. If after the decision of the Architect(s) any party is dissatisfied on any other type of dispute, the matter can then be referred to `arbitration'. Significantly, the Clause does not indicate or circumscribe the disputes which should be treated to have been excluded or excepted from the purview of arbitration. Some indication, although most unsatisfactory, as to what are the excluded matters can be gleaned from Clause 4 of the Agreement dated 23.11.1989 (reproduced in paragraph 4 below) and these are matters pertaining to materials, workmanship, accounts and as to the intended reproduction of the Clauses of the Agreement or any document attached thereto. The Arbitration Clause states that decisions on these categories of disputes shall be final and binding on both parties and may be made Rule of Court. The confusion is worse confounded when it is noted that if the decision of the Architect is to made the Rule of the Court then obviously it partakes of the nature of an Award and therefore loses much if not all of the characteristics of excepted or excluded matters. The Arbitration Clause is palpably a hybrid one and envisages the arbitration/decision of the Architect(s) on all matters some of which would thereupon be "final and binding on both parties" but nevertheless be subject to judicial scrutiny which is implicit in its being made Rule of Court. Where there is dissatisfaction as to the decision of the Architect on all other matters, there is a built in mechanism for an Appeal to an Arbitral Tribunal whose decision is, in turn, subject to the imprimatur of the Court.

4. The contention of learned counsel for the Defendant is that all the claims that have been raised are in the nature of the `excepted matters', which by their very nature are non-arbitrable. It is contended that on a reading of the Arbitration Clause itself, it is evident that the Architect's decision on the excepted matters is final and not subject to an assault by way of an Appeal. Reliance has been placed on the following Clause 4 of the Agreement dated 23.11.1989 between the parties.

The within plans, Agreement and documents above mentioned shall from the basis of this Contract and the decision of the said Architects or other Architect or Employer for the time being as mentioned in the Conditions of Contract in reference to all matters of disputes to the materials, workmanship, or accounts, and as to the intended interpretation of the clauses of this Agreement or any other document attached hereto, shall be final and binding on both parties and may be made a rule of the Court. (underlining added)

5. The claims have been spelt out in paragraph 13 of the Petition itself which read thus:

"The Petitioner states that in the facts and circumstances, the following disputes and differences have arisen by and between the parties; and the following amounts have become due and payable to the Petitioner which is deemed to have refused to make payment as per the terms of the said telegraphic notice:-

i)Rs.15,00,372/- towards damage for breach of contract;

ii)Rs.2,20,885/- towards interest on delayed payments of R/A bills as per the terms of the contract;

iii)Rs.8,90,632/- towards idleness of labour and staff;

iv)Rs.9,22,000/- towards damages for shuttering, scaffolding, tools, plants,machinery and hire charges;

v)Rs.2,00,00/- towards refund of security/retention money with interest at the rate of 24% per annum, from the date of termination of the contract;

vi)Rs.1,00,000/- towards Income-tax deductions;

vii)Rs.3,76,800/- towards escalation charges on material;

viii)Rs.2,42,583/- towards construction of Pump House, Water Tank, Labour Huts, temporary Godown, temporary Boundary wall and temporary Offices in mud mortar;

ix)Rs.22,500/- towards material brought at site;

x)Rs.8,500/- towards the amount spent towards medical treatment of the Respondent Society's Chowkidar;

xi)Rs.1.5 lakhs towards the cost of bungling in purchase of Steel, Cement and Bricks by the Respondent Society which were wrongfully deducted from the Petitioner's R/A bills;

xii)Rs.45,000/- for providing Jamuna sand for filling in stilt portion and others;

xiii)Rs.75,000/- being the cost of empty cement bags and steel scrap;

xiv)Rs.4,10,000/- towards cost of Petitioner's material at site;

xv)Rs.19,56,073/- being the amount of the 6th R/A bill for the work done up to 31st March, 1992 including the balance of 5th R/A bill i.e. Rs.6,90,871/-.

xvi)Damage for improperly refusing to issue certificate for VIth R/A Bill by the Architect;

xvii)Rs.4,96,490/- being the amount of work done from 1.4.92 to 23.5.92 i.e., after submission of VIth R/A Bill;

xviii)Rs.10,284/- towards providing wooden window frames instead of steel window frames;

xix)Interest on the above amounts at the rate of 24% per annum; and

xx)Costs of litigation.

6. Because of the language of the sundry provisions of Arbitration Act, 1940, a duty had been cast upon the Court to go into the question of whether the claims which have been raised are beyond the scope of arbitration as they possess the characteristics of excepted/excluded matters. Consequent upon the repeal of the said Act and its replacement by the Arbitration & Conciliation Act, 1996, the scope of jural interference has become minuscule as it has now been specifically incorporated in the current statute that the Arbitrator can himself decide such questions. In the present case, however, due to the pendency of the Petition for over one decade, largely attributable to the delays caused by the Petitioner, it is the old Act which has to be applied.

7. Counsel for the Petitioner has laid substantial store on the decision of the Hon'ble Supreme Court in Vishwanath Sood Versus Union of India and Another, which in essence brings out the distinction between arbitrable claims and those which are excepted ones. In every case, the Arbitration Clause between the parties would have to be construed and therefore, except where the language is identical, a decision in one case should not to be superimposed on another. In General Manager, Northern Railway and another Versus Sarvesh Chopra, , the Apex Court has recommended and mandated that the Court should be convinced of the arbitrability of the claims prior to making the Reference. It opined that-

In the present case the claims in question as preferred are clearly covered by "excepted matters". The statement of claims, as set out in the petition under Section 20 of the Arbitration Act, does not even prima facie suggest why such claims are to be taken out of the category of "excepted matters" and referred to arbitration. It would be an exercise in futility to refer for adjudication by the arbitrator a claim though not arbitrable, and thereafter, set aside the award if the arbitrator chosses to allow such claim. The High Court was not right in directing the said four claims to be referred to arbitration.

8. As I see it, parties are free to arrive at a consensus that in connection with certain disputes/claims only would they be willing to arbitrate, whereas in others the parties would abide by the decision of a nominated person. There is also a third possibility i.e. items of dispute which have not been agreed to be settled by Arbitration, but in respect of which no person has been indicated or nominated as the decision taker. In this third category, it would be left to the Courts to decide such issues on lines similar to any other civil claim.

9. The Hon'ble Supreme Court has observed in Sarvesh Chopra's case, as follows:

The learned counsel for the respondent placed reliance on Viswanath Sood V. Union of India and Food Corpn. of India V. Sreekanth Transport to strengthen his submission that an "Excepted matter" should be one covered by a clause which provides for a departmental remedy and is not arbitrable for that reason. We have carefully perused both the decisions. Vishwanath Sood case 1 is one wherein clause 2 of the contract envisaged determination of the amount of compensation for the delay in the execution of work only by the Superintending Engineer whose decision in writing shall be final. In Food Corpn. Of India case also the relevant clause provided for the decision of the Senior Officer being final and binding between the parties. Both were considered to be "excepted matters". A decision of this Court is an authority for the proposition which it decides and not for what it has not decided or had no occasion to express an opinion on. The two decisions relied on by the learned counsel for the Respondent hold a clause providing a Departmental or an in house remedy and attaching finality to the decision therein to be an "excepted matter" because such were the clauses in the contracts which came up for the consideration of this Court. Those decisions cannot be read as holding not can be relied on as an authority for the proposition by reading them in a negative way that if a departmental remedy for settlement of claim was not provided then the claim would cease to be an "excepted matter" and such should be read as the decision of this Court.

.........

To sum up, our conclusions are: (i) while deciding a petition under Section 20 of the Arbitration Act, 1940, the court is obliged to examine whether a difference which is sought to be referred to arbitration is one to which the arbitration agreement applies. If it is a matter excepted from the arbitration agreement, the court shall be justified in withholding the reference, (ii) to be an excepted matter it is not necessary that a departmental or an "in-house" remedy for settlement of claim must be provided by the contract. Merely for the absence of provision for in-house settlement of the claim, the claim does not cease to be an excepted matter, and (iii) an issue as to arbitrability of claim is available for determination at all the three stages-while making reference to arbitration, in the course of arbitral proceedings and while making the award a rule of the court.

10. In the statutory dispensation articulated in the repealed 1940 Act, the duty was cast on the Court at the time when a Reference was to be made, to look into the claims which had been raised and refer only those which were in fact arbitrable. If this exercise is not undertaken, it will lead to vexatious proceedings, in that an Award may be solicited or invited on non-arbitrable questions which would always remain vulnerable to being set-aside by the Court either when Objections to the Award are being decided or when scrutiny of the Award is called for for the purposes of making it Rule of Court. In Continental Construction Co. Ltd. Versus State of Madhya Pradesh , the Apex Court set aside an Award which permitted extra cost to the contractor on the premise of price escalation, which was barred under a specific clause of the contract. In Prabartak Commercial Corporation Ltd. Versus The Chief Administrator Dandakaranya Project and another , the contract envisaged a settlement of rates by the Superintending Engineer only; the reference as well as the Award made on this aspect of the dispute was set aside. In Steel Authority of India Ltd. Versus J.C.Budhiraja, Government and Mining Contractor , the Apex Court held that an Award of damages of compensation, which is specifically prohibited by the contract between the parties had to be set aside as also an Award being made contrary to the prescription of limitation. In State of Andhra Pradesh Versus M/s. Associated Engineering Enterprises, Hyderabad , Jeevan Reddy, J. as his Lordship then was, speaking for the Division Bench set aside an Award which granted compensation for delay, which claim was barred by the terms of the contract.

11. Reverting to the facts of the present case, the claims were raised before the Architect on 15.7.1992 and the jurisdiction of this Court was invoked two days later. From the interpretation of the Arbitration Clause and Clause 4 of the Agreement dated 23.11.1989 given above, the disputes would have to be decided by the Architect(s) since till this stage there is virtually no difference between excepted matters and all other claims/disputes. The distinction between claims arises only post the decision of the Architect(s) since thereafter, so far as as excepted matters are concerned, no further proceedings, arbitral or of any other nature, are envisaged apart from transforming the decision of the Architect(s) on excepted/excluded matters directly as the Rule of Court. The last condition is confusing since ordinarily decisions on excepted matters do not require the Court's consideration and validation. Arbitration clauses came to be strictly interpreted for the reason that they constituted a departure from the normal practice of getting disputes resolved in civil courts. Exemption or exclusion or exception clauses are a further restriction and therefore call to be worded with precision since they would also be similarly strictly construed. In these premises since it is certainly possible to hold that every decision of the Architect(s) has to be subject to judicial scrutiny prior to their being declared as Rule of Court, because of the abstruce, equivocal and ambiguous language of the two clauses, the `accepted matters', in the present case cease to partake of that character and are therefore justiciable and `Referable' under Section 20 of the 1940 Act.

12. In these circumstances, the interim orders are recalled, the Petition is allowed, and all the claims mentioned in paragraph 13 of the Petition (reproduced above) are referred to Architect(s) for his/their decision, which should be taken within four months from their entering upon the Reference. This Petition is disposed of accordingly.