The Supreme Court has ruled that an arbitrator cannot give an award on issues which have been excepted in the contract. In this case, Harsha Constuctions vs Union of India, the agreement contained an arbitration clause which gave a list of items which should not be referred to arbitration. They should be decided by the chief engineer. However, when disputes arose over extra payment for additional work done on the project, the arbitrator gave an award on all issues. The firm moved the Andhra Pradesh High Court which dismissed the petition. The Supreme Court dismissed the contractor's appeal stating that the terms of the contract should be strictly followed and "there cannot be a presumption or a conclusion that the parties had agreed to refer the issue to the arbitrator."
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.534 OF 2007
M/s Harsha Constructions
... Appellant
Versus
Union of India & Ors.
... Respondents
J U D G M E N T
ANIL R. DAVE, J.
Dated;September 05, 2014.
1.
Aggrieved
by
the
judgment
dated
9th
September, 2005 delivered by the High Court of
Judicature, Andhra Pradesh at Hyderabad, in CMA
No.476 of 2005, this appeal has been filed by M/s
Harsha Constructions, a contractor, against Union
of India and its authorities.
Hereinafter, the
appellant has been described as a 'Contractor'.
2.
The
Union
of
India
had
entered
into
a
contract for construction of a road bridge at a
level crossing and in the said contract there was
a clause with regard to arbitration.
The issue
with which we are concerned in the instant case,
in a nutshell, is as under:-
“When in a contract of arbitration,
certain
disputes
are
expressly
“excepted”, whether the Arbitrator can
arbitrate on such excepted issues and
what
are
the
consequences
if
the
Arbitrator decides such issues?”
3. For the purpose of considering the issue, in
our opinion, certain clauses incorporated in the
contract
are
relevant
and
those
clauses
are
reproduced hereinbelow :-
“Clause 39. Any item of work carried out
by the Contractor on the instructions of
the Engineer which is not included in
the accepted schedule of rates shall be
executed at the rates set forth in the
“Schedule
of
Rates,
South
Central
Page 2
3
Railway”
modified
by
the
tender
percentage and where such items are not
contained in the latter at the rates
agreed upon between the Engineer and the
Contractor before the execution of such
items of work and the Contractor shall
be bound to notify the Engineer at least
seven days before the necessity arises
for the execution of such items of work
that the accepted schedule of rates does
not include a rate or rates for the
extra work involved.
The rates payable for such items
shall be decided at the meeting to be
held
between
the
Engineer
and
the
contractor in as short a period as
possible after the need for the special
item has come to the notice.
In case
the contractor fails to attend the
meeting after being notified to do so or
in the event of no settlement being
arrived at the Railway shall be entitled
to execute the extra works by other
means and the contractor shall have no
claim for loss or damage that may result
from such procedure.
Provided that if
the Contractor commences work or incurs
any expenditure in regard thereto before
the rates are determined and agreed upon
as lastly mentioned, then and in such a
case
the
Contractor
shall
only
be
entitled to be paid in respect of the
work carried out or expenditure incurred
by him prior to the date of the rates as
aforesaid according to the rates as
shall
be
fixed
by
the
Engineer.
However,
if
the
contractor
is
not
satisfied with the decision of the
Engineer in this respect he may appeal
Page 3
4
to the Chief Engineer within 30 days of
getting the decision of the Engineer
supported by the analysis of the rates
claimed. The Chief Engineer's decision
after hearing both the parties in the
matter would be final and binding on the
contractor and the Railway.”
“Clause-63.
All
disputes
and
differences
of
any
kind
whatsoever
arising out of or in connection with the
contract whether during the progress of
the work or after its completion and
whether
before
or
after
the
determination of the contract shall be
referred
by
the
Contractor
to
the
Railway and the Railway shall within a
reasonable time after receipt of the
contractor's
presentation
make
and
notify decisions on all matters referred
to by the contractor in writing provided
that matters for which provision has
been made in Clause 18, 22(5), 39,
45(a), 55, 55-A(5), 61(2) and 62(1)
(xiii)(B)(e)(b)
of
the
General
Conditions of contract or in any Clause
of
the
Special
conditions
of
the
contract shall be deemed as 'Excepted
matters' and decisions thereon shall be
final and binding on the contractor;
provided further that excepted matters
shall stand specifically excluded from
the purview of the arbitration clause
and
shall
not
be
referred
to
arbitration.”
Page 4
5
4.
Upon perusal of Clause 63 of the aforestated
contract, it is quite clear that the matters for
which
provision
had
been
made
in
Clauses
18,
22(5), 39, 45(a), 55, 55-A(5), 61(2) and 62(1)
(xiii)(B)(e)(b)
of
the
General
Conditions
of
Contract were “excepted matters” and they were
not to be referred to the arbitrator.
5.
In the instant case, we are concerned with a
dispute
which
had
arisen
with
regard
to
the
amount payable to the contractor in relation to
extra work done by the contractor.
6.
Upon perusal of Clause 39, we find that in
the event of extra or additional work entrusted
to the contractor, if rates at which the said
work was to be done was not specified in the
contract, the amount payable for the additional
work done was to be discussed by the contractor
with the concerned Engineer and ultimately the
rate was to be decided by the Engineer. If the
Page 5
6
rate fixed by the Engineer was not acceptable to
the contractor,
the contractor
had to
file an
appeal to the Chief Engineer within 30 days of
getting
Chief
the
decision
Engineer’s
of
the
decision
Engineer
about
and
the
the
amount
payable was to be final.
7.
was
It is not in dispute that some work, which
not
covered
under
the
contract
had
been
entrusted to the contractor and for determining
the amount
payable for
the said
work, certain
meetings had been held by the contractor and the
concerned Engineer but they could not agree to
any rate.
Ultimately, some amount was paid in
respect of the additional work done, which was
not
acceptable
to
the
contractor
but
the
contractor accepted the same under protest.
8.
In addition to the aforestated dispute with
regard to determination of the rate at which the
contractor was to be paid for the extra work done
Page 6
7
by it, there were some other disputes also and in
order to resolve all those disputes, Respondent
No.5, a former Judge of the High Court of Andhra
Pradesh, had been appointed as an Arbitrator.
9.
The
learned
Arbitrator
decided
all
the
disputes under his Award dated 21.9.2002 though
the contractor had objected to arbitrability of
the
disputes
Arbitrator
as
which were not
per Clause 39
referable
of
the
to
the
Contract.
Being aggrieved by the Award, Union of India had
preferred an appeal before the Chief Judge, City
Civil Court, Hyderabad under Section 34 of the
Arbitration
and
Conciliation
Act,
1996
(hereinafter referred to as “the Act”) and the
said appeal was allowed, whereby the Award was
set aside.
10.
Before the City Civil Court, in the appeal
filed under Section 34 of the Act, the following
two issues had been framed :-
Page 7
8
(a) Whether the dispute was in relation to
an
“excepted
matter”
and
was
not
arbitrable?
(b)
Whether the claimant was entitled to
the amounts awarded by the Arbitrator?
11.
The Court decided the appeal in favour of
the respondent and against the contractor.
Being
aggrieved by the order dated 8.4.2005 passed by
the
XIVth
Additional
Chief
Judge,
City
Civil
Court, Hyderabad, CMA No.476 of 2005 was filed by
the contractor before the High Court and the High
Court was pleased to dismiss the same by virtue
of
the
impugned
judgment
and
therefore,
the
contractor has filed this appeal.
12.
The
learned
counsel
appearing
for
the
appellant-contractor had mainly submitted that as
per Clause 39 of the contract, the Engineer of
the
respondent
authorities
was
duty
bound
to
decide the rate at which payment was to be made
for
the
through
extra
work
negotiations
done
by
between
the
the
contractor,
parties.
A
Page 8
9
final decision on the said subject was taken by
the
respondent
authorities
without
the
contractor's approval and therefore, there was a
dispute
between
the
parties.
He
had
further
submitted that no specific decision was taken by
the Engineer and therefore, there was no question
of filing any appeal before the Chief Engineer
and
as
the
Chief
Engineer
did
not
take
any
decision, the aforestated clauses, viz. Clauses
39 and 64 would not apply because clause 64 would
“except” a decision of the Chief Engineer, but as
the Chief Engineer had not taken any decision,
there was no question with regard to “referring
to” clause 39.
He had, therefore, submitted that
the Award in toto was correct and the High Court
had wrongly upheld the dismissal of the Award by
the trial Court.
13.
The
learned
counsel
had,
thereafter,
referred to the judgments delivered by this Court
in General Manager, Northern Railway and another
Page 9
10
v. Sarvesh Chopra [(2002) 4 SCC 45] and Madnani
Construction Corporation (P) Limited v. Union of
India & ors.[(2010) 1 SCC 549] to substantiate
his case.
14.
The
learned
counsel
had,
thereafter,
submitted that the appeal deserved to be allowed
and
the
judgment
confirming the
delivered
by
order passed
the
High
by the
Court
City Civil
Court deserved to be quashed and set aside.
15.
the
There was no representation on behalf of
Union
of
India
and
therefore,
we
are
constrained to consider the submissions made by
learned counsel for the appellant only.
16.
in
Upon perusal of both the clauses included
the
contract,
hereinabove, it
disputes
were
which
have
is crystal
not
been
referred
clear that
arbitrable.
Some
to
all the
of
the
disputes which had been referred to in Clause 39
were specifically not arbitrable and in relation
Page 10
11
to
the
said
negotiate
disputes
with
respondent
the
and
satisfied
the
concerned
if the
the
with
contractor
rate
had of
Engineer
contractor
to
the
was not
by the
determined
Engineer, it was open to the contractor to file
an appeal against the decision of the Engineer
before the Chief Engineer within 30 days from the
date
of
communication
of
the
decision
to
the
contractor.
17.
In the instant case, there was no finality
so far as the amount payable to the contractor in
relation
concerned,
to
the
because
extra
the
work
said
done
dispute
by
was
it
is
never
decided by the Chief Engineer. In the aforestated
circumstances,
when
the
disputes
had
been
referred to the Arbitrator, the disputes which
had been among “excepted matters” had also been
referred to the learned Arbitrator.
Page 11
12
18.
Upon perusal of the case papers we find that
before
the
learned
Arbitrator,
the
contractor
did object to the arbitrability of the disputes
covered under Clause 39, but the Arbitrator had
decided the said issues by holding that the same
were not “excepted matters” but arbitrable.
19.
the
The question before this Court is whether
Arbitrator
could
have
decided
the
issues
which were not arbitrable.
20.
Arbitration
arises
from
a
contract
and
unless there is a specific written contract, a
contract
with
regard
presumed. Section
specifies that
to
7(3)
the
arbitration
of
the
contract
with
cannot
Act
be
clearly
regard
to
arbitration must be in writing. Thus, so far as
the referred
disputes
which
have
been
to
in
Clause 39 of the contract are concerned, it was
not open to the Arbitrator to arbitrate upon the
said
disputes
as
there
was
a
specific
clause
Page 12
13
whereby the said disputes had been “excepted”.
Moreover,
when
the
law
specifically
makes
a
provision with regard to formation of a contract
in
a
particular
presumption
contract
with
is
manner,
regard
not
there
to
entered
a
cannot be any
contract if the
into
by
the
mode
prescribed under the Act.
21.
If a non-arbitrable dispute is referred to
an Arbitrator and even if an issue is framed by
the Arbitrator in relation to such a dispute, in
our opinion, there cannot be a presumption or a
conclusion to
the effect
that the
parties had
agreed to refer the issue to the Arbitrator.
In
the instant case, the respondent authorities had
raised an objection relating to the arbitrability
of the aforestated issue before the Arbitrator
and yet the Arbitrator had rendered his decision
on the said “excepted” dispute.
In our opinion,
the Arbitrator could not have decided the said
“excepted” dispute.
Page 13
14
22.
We, therefore, hold that it was not open to
the Arbitrator to decide the issues which were
not
arbitrable
and
the
relates to disputes
disputes is concerned,
award,
regarding
is
bad
so
far
as
it
non-arbitrable
in
law
and
is
hereby quashed.
23.
We also take note of the fact that the
contract had been entered into by the parties on
24.4.1995
and
the
contractual
finalised on 31.3.1997.
work
had
been
The Award was made on
21.9.2002 and therefore, we uphold the portion of
the award so far as it pertains to the disputes
which were arbitrable, but so far as the portion
of the arbitral award which determines the rate
for
extra
work
done
by
the
contractor
is
concerned, we quash and set aside the same.
24.
Needless to say that it would be open to
the contractor to take appropriate legal action
for recovery of payment for work done, which was
Page 14
15
not forming part of the contract because the said
issue decided by the Arbitrator is now set aside.
25.
For the reasons recorded hereinabove, the
appeal is partly allowed with no order as to
costs.
.......................................J.
(ANIL R. DAVE)
.............................................J.
(VIKRAMAJIT SEN)
New Delhi
September 05, 2014.
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