2007 (5) TMI 564 - SC - Companies Law

Supreme Court: Work Order Clause 4 is a valid arbitration agreement under Arbitration Act

Punjab State And Others Versus Dina Nath

The Supreme Court held that Clause 4 of the Work Order constituted an arbitration agreement under the Arbitration Act, 1940, as it demonstrated the ... Whether Clause 4 of Work Order No.114 dated 16th of May, 1985 which says that any dispute arising between the department and the contractor/society shall be referred to the Superintending Engineer, Anandpur Sahib, Hydel Circle No. 1 Chandigarh for orders and his decision will be final and acceptable/binding on both the parties' constituted an arbitration agreement? Held that:- Demand notice was served on the appellants by the respondent on 16th April 1990 and the application under section 20 of the Act was filed on 13th November 1990 which is admittedly within the period of limitation as contemplated under Article 137 of the Limitation Act. The right to apply accrued for the difference arising between the parties only when service of demand notice was effective, which should be the date for holding that the difference had already arisen between the parties. Such being the settled law, we are of the view that the application under section 20 of the Act was clearly filed within the period of limitation. Appeal dismissed. Issues Involved:1. Whether Clause 4 of the Work Order constitutes an arbitration agreement.2. Whether the application under Section 20 of the Arbitration Act, 1940 was filed within the period of limitation.Detailed Analysis:1. Whether Clause 4 of the Work Order constitutes an arbitration agreement:The core issue in these appeals is whether Clause 4 of Work Order No.114 dated 16th May 1985, which states, 'Any dispute arising between the department and the contractor/society shall be referred to the Superintending Engineer, Anandpur Sahib, Hydel Circle No. 1 Chandigarh for orders and his decision will be final and acceptable/binding on both the parties,' constitutes an arbitration agreement.The parties had entered into a contract for specific works, and disputes arose regarding final measurements and payments. The respondent requested arbitration as per Clause 4, which the appellants did not comply with, leading to legal proceedings.The trial court held that Clause 4 must be construed as an arbitration agreement under Section 2(a) of the Arbitration Act, 1940. The appellate court reversed this decision, stating that Clause 4 was not an arbitration agreement and the application was barred by limitation. The High Court restored the trial court's decision, leading to the current appeals.The Supreme Court examined whether Clause 4 could be considered an arbitration agreement. It emphasized that an arbitration agreement does not need specific terminology but must show the parties' intention to refer disputes to arbitration and treat the decision as final. The Court cited previous judgments, including Rupmani Bai Gupta v. Collector of Jabalpur and Bihar State Mineral Development Corporation v. Encon Building, to support this interpretation.The Court noted that Clause 4, despite lacking the words 'arbitration' and 'arbitrator,' satisfied the essential requirements of an arbitration agreement. The clause indicated that any dispute would be referred to the Superintending Engineer, whose decision would be final and binding. This intention to arbitrate and the binding nature of the decision fulfilled the criteria for an arbitration agreement.The Court further referenced K.K. Modi v. K.N. Modi, which laid down tests for determining an arbitration agreement, including the enforceability of the tribunal's decision and the tribunal's role in resolving substantive disputes. The Court found that Clause 4 met these criteria, as it provided for the Superintending Engineer to resolve any dispute between the parties.The Court distinguished the present case from State of U.P. v. Tippar Chand and State of Orissa v. Damodar Das, where the clauses in question did not constitute arbitration agreements due to their limited scope and supervisory nature. In contrast, Clause 4 in the present case was broader and intended to resolve any dispute.2. Whether the application under Section 20 of the Arbitration Act, 1940 was filed within the period of limitation:The trial court held that the application under Section 20 was filed within the limitation period, while the appellate court disagreed. The High Court restored the trial court's decision.The Supreme Court referred to S. Rajan v. State of Kerala and Hari Shankar Singhania v. Gaur Hari Singhania, which established that the right to apply for arbitration accrues when a dispute arises, marked by the service of a demand notice. In this case, the demand notice was served on 16th April 1990, and the application was filed on 13th November 1990, well within the three-year limitation period under Article 137 of the Limitation Act.The Court found the appellate court's view erroneous and upheld the High Court's decision that the application was timely.Conclusion:The Supreme Court concluded that Clause 4 of the Work Order constitutes an arbitration agreement and that the application under Section 20 was filed within the limitation period. The appeals were dismissed with no orders as to costs.