Indian Statistical Institute vs A2Z Constructions
2018 Latest Caselaw 2186 Del

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*    IN THE HIGH COURT OF DELHI AT NEW DELHI
%                                              Pronounced on: 09.04.2018
+       ARB.A. 38/2015
       INDIAN STATISTICAL INSTITUTE                ..... Appellant
                     Through   Mr.Neeraj Chaudhari, Mr.Ravjyot
                               Singh and Mr.S.A.Srinivas, Advocates

                     versus
       A2Z CONSTRUCTIONS                                  ..... Respondent
                   Through              Mr.Dilraj Kumar, Adv.

       CORAM:
       HON'BLE MR. JUSTICE JAYANT NATH

JAYANT NATH, J.

1. This appeal is filed under section 37(2) (a) of the Arbitration and Conciliation Act, 1996 seeking to impugn the order dated 6.4.2015 by which order the learned Tribunal concluded that the Arbitral Tribunal has no jurisdiction in the matter relating to arbitration between the parties.

2. The case of the appellant is that the work for construction of Mess Building, (Civil and Allied Work) was awarded to the respondent vide letter dated 7.2.2011. The total costs of the work after rebate was Rs.2,71,89,805/-.

3. On 16.8.2011 a New Mess Building Construction Evaluation Committee was constituted to oversee and evaluate the work. Various observations about the adverse performance of the respondent were made by the Committee. It is the case of the appellant that the respondent has carried out the works with several irregularities. The respondent is also said to have

Arb.Appeal 38/2015 Page 1 taken excess payment of Rs.84,51,625/- which he has been asked to return to the claimant alongwith other expenses.

4. Accordingly, as disputes had arisen between the parties, the same were referred to Shri K.S.Gangadharan, Sole Arbitrator who was appointed by the Head, ISI, Delhi Centre, in terms of the Arbitration Clause. Pursuant to certain allegations made by the respondent, the said Shri K.S.Gangadharan the learned Sole Arbitrator resigned on 11.6.2014. In his place Shri K.K.Verma was appointed as the Sole Arbitrator on 16.6.2014.

5. In the course of arbitration proceedings the respondent filed an application under section 16 of the Arbitration and Conciliation Act, 1996 seeking dismissal of the arbitration proceedings. It was pleaded in the application that an allegation is being made by the appellant that there is collusion between the respondent Contractor and the Engineer Incharge, namely, the employee of the appellant. Reference was made to submissions of the appellant stating that it is common knowledge that unscrupulous contractors do approach and influence soft targets among the officials of the government organisations to find favours and exploit them to serve their unethical purposes. It was pleaded that the appellants have themselves raised issue of integrity of their own officials to prove that the certificates issued by such officials were a result of exploitation. It was also pointed out that there are allegations that the respondent was hand in gloves with the engineer concerned whereas in terms of the contract the respondent is bound to abide by the instructions of the engineer incharge. It was also pleaded that the certificate given by the competent engineer of the appellant has been disowned by the appellant. It was also pointed out that the appellant has lodged an FIR against the respondent contractor and also against some of its

Arb.Appeal 38/2015 Page 2 own officials. Hence, it was pleaded that the present arbitration case cannot be decided by the Hon'ble Arbitrator being beyond his jurisdiction.

6. The learned Arbitrator by the impugned order dated 6.4.2015 noted the submissions of the respondent that a Committee was constituted by the Director, ISI, Kolkata to look into the irregularities in respect of the construction of the New Mess Building. The learned arbitrator also noted that the Committee concluded that there is ample evidence of the contractor Mr.H.K.Sachdeva, Mr.Vishwa Bandhu, Engineer (Civil) and Mr.J.P.Singh, Architect acting in collusion and conspiracy to make wrongful gains out of the entire project. The inflated estimates, the submission of the inflated bills and the subsequent payments made under these inflated figures points to involvement of all the three persons. The learned Arbitrator concluded that the collusion can be established only by interrogating the suspects. It was also stated that the appellant has raised an accusing finger at some unidentifiable members of the staff. Identifying the suspects amongst the staff would require substantial investigation which can only be done by the authorities vested with legal powers to interrogate the suspects. The learned Arbitrator concluded that the arbitral tribunal has no powers under the Arbitration Act to summon and interrogate anyone for establishing allegation of collusion. Hence, the plea of the respondent was accepted and an order was passed that the tribunal has no jurisdiction to adjudicate the disputes raised in arbitration.

7. I have heard learned counsel for the parties.

8. The agreement between the parties contains the following arbitration clause.

"36.ARBITARTION

Arb.Appeal 38/2015 Page 3 Except where otherwise provided in the contract, all questions and disputes relating to the interpretation of the specifications, designs, drawings and instructions herein before mentioned, and as to the quality or 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 relating to the contract, designs, specifications, estimates, instructions, orders on 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 thereof, shall be referred to the sole arbitration of the person appointed by the Head- Indian Statistical Institute. The arbitrator to whom the matter is originally referred, being unwilling or unable to act for any reason, Head-Indian Statistical Institute, Delhi Centre 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 reference from the stage at which it was left by his predecessor. The arbitrator shall give a speaking award. The award of the arbitrator shall be final and binding on the parties. The cost of the arbitrator shall be borne equally by both the parties.

It is also 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 the contractor does not make any demand for arbitration in respect of any claim in writing within 90 days of receiving the intimation from the Employer that the final bill is ready for payment, the claim of the contractor will be deemed to have been waived and absolutely barred and the Employer shall be discharged and released of all liabilities under the contract in respect of these claims.

The arbitrator may from time to time with consent of parties enlarge the time for making publishing the award. Subject as aforesaid the provisions of the Arbitration and Conciliation Act, 1996, or any statutory modification or re-enactment thereof and

Arb.Appeal 38/2015 Page 4 the rules made there under and for the time being in force shall apply to the arbitration reference under this clause."

9. A perusal of the statement of claims filed by the appellant before the learned Arbitrator would show that it has been averred in the said statement of facts that the appellant observed that quality of work done by the respondent was not in order. Consequently, a New Mess Building Construction Evaluation Committee was constituted which pointed out certain defects in the work done by the respondent and suggested remedial measures. Certain inspections were carried out in which the respondent did not participate. Concrete core test was carried out by Shri Ram Institute in which again the respondent did not participate. It is further stated that the measurement in the bills recorded were without proper details and were not correct. Based on these averments and other such averments, the claim petition was filed.

10. The appellant sought relief regarding the following claims before the learned Arbitrator:-

Claim No.1 Claim for the amount to be recovered being Rs.84,58,947/- Excess payment made to contractor during Execution of work.

Claim No.2 Claim for the expenditure incurred for pay Rs.4,42,050/-

       Payment to experts appointed to various
       Committees, Obtaining test results from
       Testing Laboratory etc.

       Claim No.3




Arb.Appeal 38/2015                                                        Page 5
        Claim for the expenditure on demolition of          Rs.8,12,070/-
       Works and structures rejected

       Claim No.4
       Claim for the expenditure on legal advice from      Rs.2,50,000/-

Lawyers. Balance, if any, shall be paid at the time of final bill.

11. It is only after filing of the claim petition that an FIR was got registered by the appellant on 26.06.2013 under Sections 420/468 IPC. In the FIR certain allegations have been made against Sh.Vishwa Bandhu, an employee of the appellant, Sh.H.K.Sachdeva, proprietor of the respondent and Sh.J.P.Singh, Architect.

12. It is thereafter the respondent has filed an application under Section 16 of the Arbitration and Conciliation Act relying upon the judgment of the Supreme Court in N.Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 seeking relief from the learned arbitrator to dismiss the arbitration case in terms of the section 16 of the Arbitration and Conciliation Act.

13. The learned arbitrator allowed the said application of the respondent holding that the learned arbitral tribunal has no jurisdiction to adjudicate upon the disputes. A perusal of the impugned order would show that the learned Arbitrator has noted the submissions of the respondent and has recorded his findings as follows:-

23. From the submissions made by the parties, it has emerged that the core issue of the entire case is the oft repeated allegation of 'collusion'. Whether there was 'collusion' or not can be established only by interrogating the suspects. Apart from the respondent contractor and the Engineer (Civil) allegedly involved in 'collusion', the claimant has also pointed

Arb.Appeal 38/2015 Page 6 accusing finger at some other unidentified members of staff of ISI.

24. To identify the suspects amongst the members of staff of ISI, sustained interrogation is needed which can be done only by the authority vested with legal powers to summon and interrogate the suspects. After invoking arbitration the claimant realized and rightly so that AT has no powers under the Arbitration Act to summon and interrogate anyone for establishing the allegation of 'collusion'. Accordingly, acting on the advice of its own 'Committee' [Ref: Para 22 above], the claimant decided to lodge FIR with the police.

25. In view of the' above, it is held that there is merit in the plea of the respondent as per its application dated 27.12.2014 that AT has no jurisdiction in the instant case.

26. It is hereby ordered that the arbitral tribunal has no jurisdiction in the aforesaid matter of arbitration between the claimant Indian Statistical Institute and the respondent M/s A2Z Constructions.

14. I may look at the legal position regarding the power of the Arbitrator to hold the arbitration proceedings are not maintainable. The Supreme Court in a recent judgment in the case A.Ayyasamy vs. A.Paramasivam and Others, 2016 (10) SCC 386 while interpreting section 8 of the Arbitration Act elaborated on the powers of the court to refer the parties to arbitration or to permit continuation of the suit under section 8 of the Act. The court held as follows:-

"18. When the case involves serious allegations of fraud, the dicta contained in the aforesaid judgments would be understandable. However, at the same time, mere allegation of fraud in the pleadings by one party against the other cannot be a ground to hold that the matter is incapable of settlement by arbitration and should be decided by the civil court. The

Arb.Appeal 38/2015 Page 7 allegations of fraud should be such that not only these allegations are serious that in normal course these may even constitute criminal offence, they are also complex in nature and the decision on these issues demands extensive evidence for which the civil court should appear to be more appropriate forum than the Arbitral Tribunal. Otherwise, it may become a convenient mode of avoiding the process of arbitration by simply using the device of making allegations of fraud and pleading that issue of fraud needs to be decided by the civil court. The judgment in N. Radhakrishnan [N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] does not touch upon this aspect and the said decision is rendered after finding that allegations of fraud were of serious nature. .................................

25. In view of our aforesaid discussions, we are of the opinion that mere allegation of fraud simpliciter may not be a ground to nullify the effect of arbitration agreement between the parties. It is only in those cases where the court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by the civil court on the appreciation of the voluminous evidence that needs to be produced, the court can sidetrack the agreement by dismissing the application under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself. Reverse position thereof would be that where there are simple allegations of fraud touching upon the internal affairs of the party inter se and it has no implication in the public domain, the arbitration clause need not be avoided and the parties can be relegated to arbitration. While dealing with such an issue in an application

Arb.Appeal 38/2015 Page 8 under Section 8 of the Act, the focus of the court has to be on the question as to whether jurisdiction of the court has been ousted instead of focusing on the issue as to whether the court has jurisdiction or not. It has to be kept in mind that insofar as the statutory scheme of the Act is concerned, it does not specifically exclude any category of cases as non-arbitrable. Such categories of non-arbitrable subjects are carved out by the courts, keeping in mind the principle of common law that certain disputes which are of public nature, etc. are not capable of adjudication and settlement by arbitration and for resolution of such disputes, courts i.e. public fora, are better suited than a private forum of arbitration. Therefore, the inquiry of the Court, while dealing with an application under Section 8 of the Act, should be on the aforesaid aspect viz. whether the nature of dispute is such that it cannot be referred to arbitration, even if there is an arbitration agreement between the parties. When the case of fraud is set up by one of the parties and on that basis that party wants to wriggle out of that arbitration agreement, a strict and meticulous inquiry into the allegations of fraud is needed and only when the Court is satisfied that the allegations are of serious and complicated nature that it would be more appropriate for the Court to deal with the subject-matter rather than relegating the parties to arbitration, then alone such an application under Section 8 should be rejected."

15. Hence, it is only in a case where the alleged fraud is of such a nature that the facts constitute a criminal offence and the said facts are also complex in nature and a decision on the issues demands extensive evidence that the Civil Courts would be the appropriate forum to adjudicate. Merely making allegations of fraud would not have any implication and the arbitration clause need not be avoided.

In the same judgment, it was also noted as follows:

"45.1. First and foremost, it is necessary to emphasise that the judgment in N. Radhakrishnan does not subscribe to the broad proposition that a mere allegation of fraud is ground enough not

Arb.Appeal 38/2015 Page 9 to compel parties to abide by their agreement to refer disputes to arbitration. More often than not, a bogey of fraud is set forth if only to plead that the dispute cannot be arbitrated upon. To allow such a plea would be a plain misreading of the judgment in N. Radhakrishnan. As I have noted earlier, that was a case where the appellant who had filed an application under Section 8 faced with a suit on a dispute in partnership had raised serious issues of criminal wrongdoing, misappropriation of funds and malpractice on the part of the respondent. It was in this background that this Court accepted the submission of the respondent that the arbitrator would not be competent to deal with matters "which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation". Hence, it is necessary to emphasise that as a matter of first principle, this Court has not held that a mere allegation of fraud will exclude arbitrability. The burden must lie heavily on a party which avoids compliance with the obligation assumed by it to submit disputes to arbitration to establish the dispute is not arbitrable under the law for the time being in force. In each such case where an objection on the ground of fraud and criminal wrongdoing is raised, it is for the judicial authority to carefully sift through the materials for the purpose of determining whether the defence is merely a pretext to avoid arbitration. It is only where there is a serious issue of fraud involving criminal wrongdoing that the exception to arbitrability carved out in N. Radhakrishnan may come into existence.

45.2. Allegations of fraud are not alien to ordinary civil courts. Generations of judges have dealt with such allegations in the context of civil and commercial disputes. If an allegation of fraud can be adjudicated upon in the course of a trial before an ordinary civil court, there is no reason or justification to exclude such disputes from the ambit and purview of a claim in arbitration. Parties who enter into commercial dealings and agree to a resolution of disputes by an arbitral forum exercise an option and express a choice of a preferred mode for the resolution of their disputes. Parties in choosing arbitration place priority upon the speed, flexibility and expertise inherent in

Arb.Appeal 38/2015 Page 10 arbitral adjudication. Once parties have agreed to refer disputes to arbitration, the court must plainly discourage and discountenance litigative strategies designed to avoid recourse to arbitration. Any other approach would seriously place in uncertainty the institutional efficacy of arbitration. Such a consequence must be eschewed."

Mere allegation of fraud would not exclude the arbitrability of the disputes. A heavy burden lies on a party who seeks discharge of the obligation to submit disputes to Arbitration and for the court to hold that the disputes are not arbitrable under the law for the time being in force.

16. Reference may also be had to the judgment of the Supreme Court in Booz Allen and Hamilton Inc. vs. SBI Home Finance Limited and Others, (2011) 5 SCC 532. Here also, while interpreting section 8 of the Act the court held as follows:-

"35. The Arbitral Tribunals are private fora chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of courts and tribunals which are public fora constituted under the laws of the country. Every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of the Arbitral Tribunals is excluded either expressly or by necessary implication. Adjudication of certain categories of proceedings are reserved by the legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not expressly reserved for adjudication by public fora (courts and tribunals), may by necessary implication stand excluded from the purview of private fora. Consequently, where the cause/dispute is inarbitrable, the court where a suit is pending, will refuse to refer the parties to arbitration, under Section 8 of the Act, even if the parties might have agreed upon arbitration as the forum for settlement of such disputes."

17. On criminal offence the court held as follows:-

Arb.Appeal 38/2015 Page 11 "36. The well-recognised examples of non-arbitrable disputes are:

(i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding-up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

......

44.......This Court further clarified that while matters like criminal offences and matrimonial disputes may not be the subject-matter of resolution by arbitration, matters incidental thereto may be referred to arbitration: (Meena Vijay Khetan case [(1999) 5 SCC 651] , SCC p. 669, para 35) "35. ... Reference is made there to certain disputes like criminal offences of a public nature, disputes arising out of illegal agreements and disputes relating to status, such as divorce, which cannot be referred to arbitration. It has, however, been held that if in respect of facts relating to a criminal matter, say, physical injury, if there is a right to damages for personal injury, then such a dispute can be referred to arbitration (Keir v. Leeman [(1846) 9 QB 371 : 115 ER 1315] ). Similarly, it has been held that a husband and a wife may refer to arbitration the terms on which they shall separate, because they can make a valid agreement between themselves on that matter...."

18. Clearly, where the reference to criminal aspects is incidental the same would not constitute a ground to hold that the dispute is not of an arbitrable nature.

Arb.Appeal 38/2015 Page 12

19. A perusal of the statement of claim filed by the appellant here would show that the basic contention of the appellant is that on appointing a New Mess Building Construction and Evaluation Committee on 16.8.2011, the Committee found some illegalities and irregularities in the work of the respondent. The claim notes the observations of the committee and other tests carried out including the test of Shri Ram Institute. It is stated that the measurements in the bills have been recorded without proper details and are incorrect. The measurements were taken again of the work done with prior notice to the respondent and the quantities actually executed by the respondent were worked out. There are said to be number of irregularities in raising of the bills. Other such defects are given in detail. Based on these averments, the above claims are filed.

There is no reference of a claim being made based on any fraud perpetuated by the respondent nor is there reference to any facts which may constitute a criminal offence. Merely because after having filed the statement of claims sometimes in December 2012 subsequently the appellants have chosen to file an FIR cannot be a ground to hold that the dispute is incapable of adjudication through the mechanism of arbitration. Filing of the FIR by the appellant per se would not be a ground to hold that the disputes between the parties are incapable of being adjudicated through the mechanism of the arbitration. The claim petition is a simple case for recovery of money paid in excess to the respondent. The onus to prove that excess payments have been made to the respondent would squarely be on the appellants. There are no reasons to hold that the disputes are not arbitral.

20. Further, the findings recorded by the learned Arbitrator to allow the application of the respondent under section 16 of the Act are misplaced. The

Arb.Appeal 38/2015 Page 13 learned Arbitrator holds that where there is an allegation of collusion, it would require interrogation of the suspects. Similarly, he holds that there are accusing fingers being pointed out at some unidentified members of the staff. He further holds that to identify these members would require interrogation and the learned Arbitrator does not have such power to summon and interrogate anyone. This finding is entirely misplaced and misconceived. The interrogation is to be done by the police at the time of investigation of the FIR. The learned Arbitrator is not investigating the facts stated in the FIR. The simple case before the learned Arbitrator was as to whether the respondent is liable to refund excess payment and also pay the other dues of the appellant. The question of the learned Arbitrator interrogating any suspect would not and does not arise.

21. The impugned order is erroneous and is liable to be set aside. The said order wrongly holds that the disputes are not capable of being adjudicated through Arbitration. I accordingly quash the impugned order dated 6.4.2015. The matter is remanded back to the arbitral tribunal for fresh adjudication, as per law. It may be noted that anything said herein would not in any manner influence the investigation of the FIR filed by the appellants.

                                                     (JAYANT NATH)
                                                         JUDGE
APRIL 09, 2018
n/v




Arb.Appeal 38/2015                                                       Page 14