2011 (7) TMI 1027 - SC - Companies Law

Contract Clause Not an Arbitration Agreement: Appeals Allowed, High Court Orders Set Aside

STATE OF ORISSA & ORS. Versus BHAGYADHAR DASH

STATE OF ORISSA & ORS. Versus BHAGYADHAR DASH - 2011 (7) SCC 406, 2011 AIR 3409 Issues Involved:1. Whether Clause 10 of the Conditions of Contract constitutes an arbitration agreement under Section 11 of the Arbitration and Conciliation Act, 1996.Detailed Analysis:Issue 1: Essentials of an Arbitration AgreementThe judgment begins by outlining the essentials of a valid arbitration agreement as established in previous cases such as K.K. Modi vs. K.N. Modi and Bihar State Mineral Development Corporation v. Encon Builders (IP) Ltd. These essentials include:- The decision of the tribunal must be binding.- The tribunal's jurisdiction must derive from the consent of the parties, a court order, or a statute.- The agreement must contemplate that substantive rights will be determined by the tribunal.- The tribunal must act impartially and judicially.- The agreement must be enforceable in law.- The tribunal must decide upon a formulated dispute.Issue 2: Interpretation of Clause 10Clause 10 of the Conditions of Contract was scrutinized to determine if it constitutes an arbitration agreement. The clause states:- The Engineer-in-Charge can make alterations or additions to the original specifications.- If the contractor disputes the rate fixed by the Engineer-in-Charge for non-scheduled items, the decision of the Superintending Engineer will be final.Issue 3: Analysis of Judicial PrecedentsThe court examined various precedents to determine what constitutes an arbitration agreement:- K.K. Modi Case: A clause requiring disputes to be referred to a chairman was not considered an arbitration agreement as it aimed to prevent disputes rather than resolve them judicially.- State of Uttar Pradesh vs. Tipper Chand: A clause stating the decision of the Superintending Engineer would be final was not an arbitration agreement because it did not authorize parties to refer disputes for decision.- State of Orissa vs. Damodar Das: A similar clause was not considered an arbitration agreement as it lacked provision for referring disputes to arbitration.- Bharat Bhushan Bansal Case: Clauses stating the decision of an executive engineer or managing director would be final were not arbitration agreements as they did not contemplate judicial determination.- Rukmanibai Gupta Case: A clause providing for disputes to be referred to a specified authority was considered an arbitration agreement because it provided for a decision that was final and binding.- Encon Builders Case: A clause referring disputes to the managing director and making the decision final and binding was considered an arbitration agreement.- Mallikarjun Case: A clause making the decision of the Superintending Engineer final and binding was held to be an arbitration agreement.Issue 4: Analysis of Clause 10 in the Present CaseThe court analyzed Clause 10 and concluded:- It does not refer to arbitration as the mode of settlement.- It does not provide for referring disputes to arbitration.- It does not make the decision of the Superintending Engineer binding on either party.- It does not disclose any intention to make the Superintending Engineer an arbitrator.- It is intended to avoid future disputes regarding rates for non-tendered items, not to settle disputes.Issue 5: Historical Context of Arbitration Clauses in State ContractsThe court noted that the State Government had deleted a previous arbitration clause (Clause 23) from its Standard Conditions of Contract by an official memorandum dated 24.12.1981. The contracts in question did not contain this arbitration clause, indicating a conscious decision by the State Government to exclude arbitration.ConclusionThe court held that Clause 10 of the Conditions of Contract does not constitute an arbitration agreement. The appeals were allowed, the orders of the High Court appointing the arbitrator were set aside, and the applications for appointment of an arbitrator were dismissed.