Mohan Lal Harbanslal Bhayana vs Larsen And Toubro Ltd.
2007 Latest Caselaw 865 Del

JUDGMENT

Vikramajit Sen, J.

1. The Applicant has initiated the present action under Section 11 of the Arbitration and Conciliation Act, 1996 ('A & C Act' for short) praying for the appointment of an arbitrator on behalf of the Larsen and Toubro Limited (for short L&T), the Respondent herein, in accordance with Clause 25 of the Contract dated 3.3.1988 as modified by Supplementary Agreements dated 31.1.1990 and 6.2.1995. L&T had entered into a contract with the Standing Conference of Public Enterprises (for short SCOPE) on 29.2.1988 for the construction of SCOPE Twin Tower, Plot No. 2, Laxmi Nagar, Delhi-110 092. L&T thereafter entered into a sub-contract with the Applicant firm Mohan Lal Harbans Lal Bhayana (for short MHB). In brief, MHB had agreed to complete Items 3 to 8 of the Abstract of Costs at a final price of Rs. 12,08,40,464.40/- based on the agreed Bill of quantities, specifications, drawings etc. Actual payment being based on the unit rates and the quantity of work executed. Clause 9 of this Agreement stipulated that all disputes connected therewith shall be deemed to have arisen only in the Courts in Delhi which would have jurisdiction to determine them. The parties hereto had agreed to settle the disputes by arbitration as recorded in Clause 25 of the Agreement dated 3.3.1988, which reads as follows:

CLAUSE - 25 : SETTLEMENT OF DISPUTES BY ARBITRATION:

Except where otherwise provided in the contract, all questions, disputes, certificates excluding "excepted matters" relating to this contract shall be referred to a Sole Arbitrator in case claims are up to and including Rs. 10 lakhs to be appointed by the General Manager (Civil), L&T and for claiming over Rs. 10 lakhs by a panel of 3 Arbitrators of whom one will be appointed by General Manager (Civil), L&T, the other by MHB and an umpire appointed in advance jointly by the two Arbitrators. The "excepted matters" relate to matters concerning designs, specifications, instructions, orders and quality of work of materials, work as executed or materials supplied and defects, lapses defaults by MHB thereof and for which the Architects decision is final and these matters cannot be arbitrated upon. It will be no objection to any such appointment that arbitrator(s) so appointed is/are L&T's employees(s), that they had to deal with the matters to which the contract relates and that in the course of his duties as L&T's employees, he had expressed view on all or any of the matters in dispute or difference. The arbitrator(s) to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason, General Manager (Civil), L & T shall appoint on the occasion of such to act as arbitrator(s) in accordance with the terms of the contract. Such person(s) shall be entitled to proceed with the reference from the stage at which it was left by his/their predecessor(s). It is also a term of this contract that no person other than a person appointed by General Manager(Civil), L&T as aforesaid should act as arbitrator and, if for any reason that is not possible, the matter is not to be referred to arbitration at all.

Subject as aforesaid, the provisions of the Arbitration Act, 1940 or any statutory modification of reenactment thereof and the rules made there under for the time being in force shall apply to the arbitration proceeding under this clause. It is a term of the contract that the party invoking arbitration shall specify the dispute or disputes to be referred to arbitration under this clause together with the amount or amounts claimed in respect of each such dispute.

It is also a term of the contract that if MHB do not make any demand for arbitration in respect of any claim(s) in writing within 30 days of receiving the intimation from L & that the bill is ready for payment, the claim(s) of MHB will be deemed to have been waived and absolutely barred and L & T shall be discharged and released of all liabilities under the contract in respect of those claims. Not withstanding anything contained in this agreement, the parties shall not be entitled to invoke reference of dispute to the arbitration after acceptance of the final payment until it is so recorded on the bill that the same was being received under protest. No Award of the Arbitration/Umpire shall be binding on L&T unless MHB had furnished complete opportunity to L&T to file a similar claim on SCOPE and only upon L&T receiving any payment from SCOPE under any Award which L&T may get in its favor on the subject matter of this work.

(a) The arbitrator (s) may from time to time with the consent of the parties enlarge the time for making and publishing the award.

2. Thereafter, a Supplementary Agreement was executed between the parties on 31.1.1990 - its Recitals refer to the Agreement dated 3.3.1988; records that the completion of the work has been delayed for various reasons beyond the control of MHB; notes that the reasons stated by MHB were the abnormal increase in cost of material and labour due to various hindrances caused by SCOPE resulting in delay in project execution; mentions that SCOPE and L&T had amended their main contract to give effect to the settlement reached in a joint meeting, inter alia agreeing to the extension of time, escalation in prices dues to hindrances, and all other claims whether made or not. The First Supplementary Agreement dated 31.1.1990 between the parties contains the following Clause:

(viii) The agreement provides that all disputes between the parties shall be settled through arbitration. It is now expressly agreed that any dispute or difference which MHB might have with the L & T under the agreement or the SCOPE might have with the L & T under the main contract between them relating to the part of work that is to be executed by MHB, shall be deemed disputes jointly between MHB & L & T and SCOPE under the main contract and L & T will refer all such disputes to SCOPE for settlement by negotiation. If SCOPE does not settle the same by negotiation, then L & T will refer the said disputes for arbitration with SCOPE Along with any other disputes which L & T might have with the SCOPE in terms of the arbitration clause provided in the said main contract. MHB shall in such an event, help prepare claims and statement of case relating to their scope of work and render all assistance and cooperation as may be required in successfully pursuing the arbitration. MHB shall bear proportionately cost of arbitration relating to their scope of work. The award of the arbitrator on all such matters in dispute claims and counterclaims relating the MHB's scope of work shall be binding on both MHB and L & T and all such disputes between MHB and L & T shall be deemed to have been settled accordingly and shall not be referable to arbitration again between MHB and L & T under the agreement.

3. As already mentioned above, yet another Supplementary Agreement was entered into between the parties on 8.8.1993 which recorded that MHB had preferred certain claims on L&T which the latter had raised on SCOPE, all of which were rejected by SCOPE. This led to the invocation of arbitration clause by L&T pursuant to the contract subsisting between SCOPE & L&T. The following Clauses of the Second Supplementary Agreement dated 8.12.1993 have been referred to by learned Counsel for L&T:

3. That in the event of an award ensuing and if the same specifically relates to claim or claims of each of the parties as referred in the arbitration claim statements, then each party shall share the claims as per the award. If any claim or claims awarded relates partly to L&T and partly to MHB, then the said awarded claim will be shared after realisation in the proportion of the amounts referred to in Annexure `A', which gives the split up amount of each claim as between L&T and MHB.

...

6. That L&T and MHB shall not undertake any other arbitration as between them in respect of the claims referred to pending arbitration, except to share the proceeds or liabilities as stated above by way of accord and satisfaction.

4. Thereafter, the Third Supplementary Agreement dated 6.2.1995 was entered into between the parties, which inter alia contains the following Clauses:

5. Any claim arising after the date covered by the said Award, shall be as far as possible settled mutually by negotiation. It is mutually agreed by the parties that any such disputes, shall be identified but shall not be referred to arbitration on the owner until the completion of the project. This would facilitate concentration of the concerted efforts of the parties for timely completion of the project. The reference of disputes if any to arbitration after completion of the project shall be in accordance with the terms of first supplementary agreement dated 31.1.1990. Any further arbitration if referred to the owner after completion of the work, the Award arising out of this arbitration shall be shared in proportion of the claims preferred relating to the work of each of the parties herein.

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16. The parties further agree, amend and modify Clause 25 of the General Condition of Contract dated 3.3.1988 which deals with settlement of Disputes by Arbitration to the limited extent that in the event of any fresh reference of dispute/s to arbitration, the Arbitrator or Arbitrators, as the case may be shall be bound to give speaking Award. This Clause 25 is subject to the terms of the first supplementary agreement dated 31.1.1990 which modified the agreement dated 3.3.1988.

5. After exchange of copious correspondence MHB caused legal Notice dated 31.7.2004 to be served on L&T. It was, inter alia, acknowledged therein that in the Third Supplementary Agreement dated 6.2.1995, by virtue of Clause 5, the parties had agreed that all claims arising thereafter would not be raised until the completion of the project; that the project stood completed in July, 2002 when it was inaugurated by SCOPE. However, as on 11.4.2004, claims amounting to Rs. 26,63,00,616.53/- were outstanding in favor of MHB, in respect of which despite several reminders no payments had been made. The legal Notice also states that MHB had given ample opportunity to L&T to file claims on SCOPE, which it has failed to do, leaving no alternative but to invoke Clause 25 in the Contract dated 13.3.1988. MHB had also notified L&T that it had appointed Mr. A.P. Pracer, retired ADG, CPWD, as its Arbitrator and called upon L&T to nominate its arbitrator in terms of the said Clause within fifteen days. In the Reply dated 13.9.2004 by Shri S. Guru Krishna Kumar, Advocate for L&T, the factum of the project having been completed in July, 2002 has been admitted. The stand on behalf of the L&T is that MHB is precluded from raising any disputes since the role of L&T was only to receive claims from MHB but that they were not obliged to forward all such claims and demands to SCOPE. It has been denied on behalf of the L&T that there were any admitted or disputed claims. It has been asserted that L&T was not bound to refer all disputes to arbitration and that as between the parties hereto no arbitration agreement exists. It was also admitted on behalf of the L&T that some, but not all the claims, had in fact been referred by L&T to the arbitration pending between SCOPE and L&T. Quite inexplicably, it is also submitted that the Agreement dated 3.3.1988 does not contain an Arbitration Clause. The request of MHB to refer disputes to arbitration was turned down.

6. L&T has raised these very Objections in the pending proceedings asserting that the agreement to refer disputes to arbitration stood expressly rescinded by the subsequent agreements and that contemporaneous correspondence fortifies the clear intention of the parties not to enter into any arbitration as between themselves. It has been asserted in these proceedings that arbitration was initiated against SCOPE by L&T, in which some of the claims of MHB had been included, and the second Supplementary Agreement made provisions for sharing the proceeds thereof. Paradoxically, learned Counsel for L&T has contended that if any ambiguity in the sundry terms of the contract between the parties is perceived, the earlier clause would prevail over the later in terms of settled law. This argument has been raised with regard to the interplay between Clauses 5 and 16 of the third Supplementary Agreement dated 6.2.1995. Both these Clauses have already been reproduced above. So far as Clause 5 is concerned it merely records that efforts shall be made to mutually settle the disputes between the parties and specifically that reference of disputes to arbitration, after completion of the project, shall be in terms of the first Supplementary Agreement dated 31.1.1990. It also records the manner in which the proceeds of the Award shall be divided between the parties. This Clause does not annihilate Clause 25, which has been specifically referred to in the succeeding Clause 16. On a holistic reading of various Agreements between the parties, I cannot accept the argument of learned Counsel for the Respondent that Clause 25 of the Agreement dated 3.3.1988 had been rescinded. Instead, the parties had resolved firstly to settle their disputes by negotiations between themselves and secondly not to commence arbitration inter se till the completion of the project. This must mean that they could be free to initiate steps towards resolution of their claims thereafter.

7. Forbes v. GIT AIR 1921 PC 209 relied upon by learned Counsel for L&T militates against it since it lays down that if in a Deed a later clause destroys altogether the obligations created by an earlier one, the later clause is to be rejected. This decision was followed by their Lordships in Radha Sundar Dutta v. Mohd. Jahadur Rahim 1958 SCR 1309. It should be noted that Clause 25 is contained in Agreement dated 3.3.1988. The alleged mutual inconsistency is between clauses in the subsequent Agreement viz. third Supplementary Agreement dated 6.2.1995. Even if this Agreement is to be looked at, Clause 5 does not annihilate Clause 25 of the earlier Agreement and this is amply clear from a reading of the subsequent clause therein, namely, Clause 16.

8. Law guarantees a redressal system for all disputes. The normal forum is that of civil courts. With the evolution of arbitration, an option is available to parties to have their disputes resolved outside the civil court system. A resolve to arbitrate upon disputes is usually found in commercial contracts, which are not merely intricate and complicated, but most often require that the adjudicator should possess specialised knowledge. The parties hereto had agreed to take recourse to arbitration in view of clear terms of Clause 25 of the Agreement dated 3.3.1988 which has not been cancelled by any of the three Supplementary Agreements. L&T need not have agreed to on arbitration clause, but once having agreed thereto, in the absence of an unequivocal and clear renunciation of the said Clause, it is bound by the compact. In the course of arguments Mr. Guru Krishna Kumar, learned Counsel for the L&T, had indicated that it was not in the interest of L&T to forward all the claims of MHB since considerable business was expected to be done by L&T with the Government. These are wholly irrelevant considerations. Viewed from another angle, had MHB filed a civil suit for recovery of money against L&T (MHB has no privity of contract with SCOPE), it is almost certain that L&T would have resisted the suit by adverting to Clause 25. This may be speculative but it is based on jural experience. All Objections which have been raised before the Court could easily have been raised before the Arbitrator. By not accepting MHB's request for appointment of an arbitrator, made in 2004, disputes have been festering for three years.

9. In the memorandum submitted on behalf of L&T it has been stated that - "The claims which have been left out/reduced "and which would be referred to SCOPE" are found at Sl. Nos. 8 to 11 along with the brief reasons for non referral of the same. The claims preferred by MHB which have already been referred in entirety to SCOPE are set out in Sl. Nos. 1 to 7". It has further been submitted on behalf of L&T that - "Pertinently, the completion certificate has yet to be issued. SCOPE has insisted that there are still balance works to be completed and rectification to be carried out in the building complex, all of which are referable to MHB's scope of works. Importantly, this has been repeatedly raised by SCOPE, which has reiterated that the finalisation of the claims made by L&T (both of itself and of MHB) would be taken only thereafter. Therefore, the claims are still under process/consideration and have not been rejected finally in the negotiation which is going on under the terms of contract between L&T and SCOPE. One should not lose sight of the fact that the parties had agreed that the Project would first be completed and only thereafter arbitration would be commenced. Since the Project has been completed in 2002, there is now no impediment whatsoever in adjudication of all the claims of MHB. There is no merit in the submission that the appointment of arbitrators should be further delayed. The other objection on behalf of L&T that SCOPE should have been impleded as a party is wholly without merit. There is no privity of contract between MHB and SCOPE and in view of the decision of the Supreme Court in Sukanya Holdings (P) Limited v. Jayesh H. Pandya joinder of a 3rd party into the arbitration would be inappropriate.

10. The question that now remains is whether L&T should still be called upon to appoint its own arbitrator. In B.W.L. Ltd. v. MTNL 2000 IV AD (D) 165, after noting that the Respondents had failed to appoint an arbitrator even though one year had elapsed since the demand in this regard had been lodged. In the present case almost three years have been lost so far as the claimant is concerned. I had observed that it has become commonplace for persons possessing the power of appointment of an arbitrator not to act at all or to behave with such obduracy as to render the arbitration clause meaningless. Accordingly, the power to appoint an arbitrator had been held to have been forfeited, with the result that the Arbitrator was appointed by the Court. The same approach commends itself in the present case also. If defaulting or recalcitrant parties are permitted to exercise their contractual rights vexatious litigation is encouraged. B.W.L. Ltd. was noted by their Lordships in Datar Switchgears Ltd. v. Tata Finance Ltd. , where it has been held that the right to appoint an arbitrator stands extinguished after the opposite party moves the Court under Section 11 of the A&C Act. Thus, the right of L&T under Clause 25 stands forfeited. This view has also been followed by the Hon'ble Supreme Court as is evident on a reading of Punj Lloyd Limited v. Petronet MHB Limited (2006) 2 SCC 638, and on the perusal of this passage from Shin Satellite Public Co. Limited v. Jain Studios Limited :

30. Finally, it was submitted by the respondent that if this Court is not upholding the objection of the respondent and is inclined to grant the prayer of the petitioner, some time may be granted to the respondent to make an appointment of an arbitrator. It was not done earlier because according to the respondent, Clause 23 was not enforceable. The learned Counsel for the petitioner objects to such a prayer. According to him, a letter/notice was issued and in spite of request by the petitioner, the respondent had failed to exercise his right to appoint an arbitrator. At this belated stage, now, the respondent cannot be permitted to take advantage of its own default. In my opinion, since there is failure on the part of the respondent in making appointment of an arbitrator in accordance with the agreement, the prayer cannot be granted.

11. In these circumstances I appoint Justice A.B. Saharya, Retd. Chief Justice, High Court of Punjab & Haryana, as the Arbitrator which by virtue of Clause 25 should have been appointed/nominated by L&T. He shall settle his own fee. Justice Saharya and the Arbitrator nominated by MHB, namely, Shri A.P. Pracer shall appoint an Umpire in consonance with Clause 25.

12. A.A. 264 of 2004 is allowed. L&T shall pay costs of these proceedings quantified at Rs. 20,000/- to MHB.

13. OMP 410 of 2004 has been filed by invoking Section 9 of the A & C Act, praying inter alia that L&T be directed to deposit in Court the entire amount of Rs. 40,41,63,706/- allegedly due to MHB by L&T together with interest at the rate of 18 per cent per annum. On the first hearing my learned Brother, Mukul Mudgal, J. had appointed Local Commissioners to record measurements. No other orders were urged or passed during the pendency of the petition. I do not consider it necessary or expedient to pass any other orders or directions at this stage. Parties may obviously exercise their rights to approach the arbitral Tribunal, as envisaged in Section 17 of the A & C Act should that be considered necessary. This petition stands disposed of with no order as to costs.

14. A copy of this Judgment be sent to the learned Arbitrator forthwith.