IN THE HIGH COURT OF HIMACHAL PRADESH SHIMLA OMP No.113 of 2005: IN Civil Suit No.56 of 2004. Order reserved on : 2.5.2006. Date of decision: 07-06-2006 Satluj Jal Vidyut Nigam Limited ….Plaintiff-Non-applicant -Versus- M/s.Nathpa Jhakri Joint Venture ….Defendant-applicant Coram: The Hon’ble Mr.Justice Deepak Gupta, Judge. Whether approved for reporting? Yes For the Plaintiff: Mr.G.C.Gupta, Senior Advocate with Mr.Mohinder Gautam, Advocate. Mr.Sanjay Karol, Senior Advocate with M/s.Ankush Sood & Aman Sood, Advocates. For the Defendant: M/s.E.R.Kumar and Sameer Parekh, Advocates and Ms.Yogita Dutta, Advocate. Deepak Gupta, J. The plaintiff Satluj Jal Vidyut Nigam Limited is a joint venture of the Government of India and Government of Himachal Pradesh formerly known as Nathpa Jhakri Power Corporation (hereinafter referred to as the plaintiff Corporation). The plaintiff Corporation was established for construction and setting up of a 1500 Mega Watt (MW) Hydro Electric Power Project on river Satluj known as Nathpa Jhakri Project. The plaintiff in turn entered into a contracts with various other parties including the defendant for 2 carrying out some portions of the work relating to the construction and erection of the Project. The present dispute relates to Contract No.3 of 1993 entered into between the parties on 24.6.1993 whereby the plaintiff had entrusted the construction of civil work for a Head Race Tunnel from Station 16042 m to 27295 m, including surge shaft to the defendant. Differences arose between the parties with regard to the method to be employed for the excavation work keeping in view the fact that the geological nature of the rock face encountered during the course of excavation was found to be different from that envisaged at the time of execution of contract. According to the Contractor it had to spend much more money on account of the change in geological situation and, therefore, laid a claim for enhanced payment. Initially the claim was made to the Engineer-in- charge for written instructions and decision as per the modified clause 67 of the general conditions of contract. No reply was received and thereafter the Contractor filed a written appeal before the Chairman-cum-Managing Director of the plaintiff-Corporation. This authority also took no decision and as such the contractor referred the matter to the Dispute Review Board (hereinafter referred to as the DRB). The DRB on receipt of the reference issued notices to the plaintiff- Corporation and reply to the claim was filed. The DRB heard both the parties and passed an award for Rs.31,82,293/- in favour of the Contractor on 3.5.2003. This decision of the DRB was a majority decision. The plaintiff paid the amount as per the order of 3 the DRB but has challenged the same by filing the present suit which was filed on 15.12.2004. The defendant has contested the suit and supported the decision of the DRB and one of the preliminary objection raised is that the order of the DRB is an arbitral award which can only be challenged according to the provisions of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the 1996 Arbitration Act) and, therefore, the suit is not maintainable. An application being OMP No.113 of 2005 was also filed alongwith the written statement with the prayer that since the Arbitral Tribunal (DRB) has passed the award in terms of the 1996 Arbitration Act as such the present suit is barred under the provisions of Sections 5, 34(1), 35 and 36 of the said Act. Reply to this application has been filed by the plaintiff. At the time of hearing of this application I was informed by the learned counsel of the parties that there are number of other suits wherein the same point is involved and, therefore, I permitted the counsel who are appearing in other matters to address me on the limited question as to whether the order of the DRB amounts to an Arbitral award or not? An interesting question of law which arises for decision in the present OMP is whether the order/adjudication of the Dispute Review Board for individual claims up to Rs.50 million (Rs.5 crores) amounts to an arbitral award within the meaning of Arbitration Act and as such whether such decision/adjudication can only be challenged in proceedings under the Arbitration Act? 4 It would be appropriate to give a brief factual background to appreciate the rival contentions of the parties. The plaintiff as observed above was engaged in the construction of 1500 MW Hydro Electric Power Project. For this purpose it divided the various civil work into separate works and global tenders were invited. On 24.6.1993 Contract No.3 of 93 was entered into between the parties for work of contract Lot 2.2 involving the construction of civil works for head race tunnel from station 16042 M to 27295 M including a surge shaft. It is the case of the plaintiff which has been admitted by the defendant that the project was a World Bank aided project and the World Bank insisted that there should be a clause in the contract entered into between the parties where there should be procedure prescribed for some form of pre-arbitration dispute resolution such as mediation, adjudication etc. There is no dispute between the parties that modified Clause 67 was incorporated at the instance of the World Bank which was virtually financing the project. Modified Clause-67 and the Annexure-A thereto runs into almost 15 pages. However, the salient features of this clause which are relevant for the decision of the present case are set-out hereunder: In case the Contractor feels that he is entitled to higher payment since the work he is being asked to do is outside the requirement of the work envisaged by the contract he shall promptly ask the Engineer-in-charge (EIC) to give his written instructions or decision. The EIC is required to give his decision within 30 days of 5 such request. Upon receipt of such decision the contractor is to proceed without delay to comply with such instructions or decision. In case the EIC fails to give his instructions or decision within the stipulated period or if the Contractor is not satisfied with the same the Contractor can file written appeal to the CMD of the plaintiff Corporation. The CMD has to consider the written appeal and take a decision within 30 days of the receipt of the appeal. In case the CMD does not take a decision or his decision is not acceptable to the Contractor the Contractor can approach the DRB. The necessary portion of the clause which is the bone of contention between the parties reads as follow: “If the contractor is dis-satisfied with this decision, the Contractor, within a period of fifteen days from the receipt of the decision, shall indicate to the CMD, NJPC his intention to refer the matter to the Disputes Review Board (DRB) and within a period of another fifteen days shall formally appeal to the Disputes Review Board. The constitution of the Disputes Review Board and the procedure to be adopted by it for resolving the disputes is elaborated in the Annex-A, provided, however, all such disputes which may arise prior to the Constitution of the Board, shall be taken up for consideration at its first meeting convened not later than 30 days upon its Constitution. As specified under Para 1 of Annex-A, the disputes involving the individual claims upto Rs.50.00 (fifty ) million shall be binding on the NJPC and the Contractor. In the case of the dispute involving individual claim beyond Rs.50.00 (fifty) million, if in spite of the recommendations/ decision of the Disputes Review Board, the Dispute remains unresolved, either party, within 15 days of the receipt of the aforesaid 6 recommendations/decision of the Board, may appeal the decision back to the Board for review. However, if even after this review of its recommendations/decision by the Dispute Review Board, the two parties still fail to resolve the dispute, either party may resort to arbitration. In that case, within a period of 30 days of the receipt of the Disputes Review Board’s final recommendations/decision, the party desiring to resort to arbitration shall indicate its intention to refer the dispute to Arbitration, failing which, the said final recommendations/decision of the Disputes Review Board shall be conclusive and binding.” There is also a clause which stipulates that in case of arbitrations the parties would be governed by the Indian Arbitration Act, 1940 and the statutory amendments thereof. Annexure-A which relates to the structure of the DRB and the procedure to be followed by it give an indication of the intention of the parties while entering into this agreement. This will help the Court to determine whether in cases where the value of the claim does not exceed Rs.50 million (Rs.5 crores) the decision/recommendations of the DRB is an arbitral award or merely a recommendation. It is clear from a reading of a modified Clause 67 as well as the Annexure thereto that a 3-tier or 4-tier dispute redressal mechanism system was provided. A contractor is first supposed to approach the EIC; in case he is unsatisfied he is to approach the CMD in appeal; in case he is still unsatisfied he can approach the DRB. According to the applicant-defendant the decision of the DRB in claims upto the value of Rs.50 million are final and in the nature of an arbitral award under the Arbitration Act. 7 Annexure-A contains the following important clause which is reproduced below: “The recommendations/decision of the Disputes Review Board in respect of the disputes involving individual claims upto Rs.50.00 (fifty) million shall be binding on the NJPC and the Contractor”. The DRB consists of three members; one member to be selected by the NJPC and approved by the Contractor; one member to be selected by the Contractor and approved by the NJPC; and the third member is to be appointed by the two members themselves. Another important clause of Annexure-A of modified Clause 67 reads as follows: “It is imperative that Board members show no partiality to either the Contractor or the NJPC, or have any conflict of interest. The criteria and limitations for membership shall be as follows: (a) No member shall have an ownership interest in any party to the Contract, or a financial interest in the Contract, except for payment for services on the Disputes Review Board. (b) Except of fee-based consulting services on other projects, no member shall have been employed by either party within a period of two years prior to award of the Contract. (c) No member shall have had substantial prior involvement in the Project, of a nature which could compromise his/her ability to impartially resolve disputes. 8 (d) No member shall be employed by any party to the contract during the life of the Contract, except as a Disputes Review Board member. (e) During the life of the Contract, no discussion or agreement shall be made between any Disputes Review Board member and any party to the contract for employment after the Contract is completed. Before their appointments are made, the first two prospective members shall submit complete disclosure statements for the approval of both the NJPC and contractor. Each statement shall include a resume of experience and a declaration describing all past, present and anticipated or planned future relationships to this Project and with all parties involved in this Contract. The third Board member shall supply such a statement to the first two Board members before his appointment is finalized.” Para 6 of the Annexure lays down the procedure for the conduct of hearings by the DRB. The salient features of this para are that normally the DRB shall decide the dispute referred to it within one month and in case of complex matters may take more than one month. The DRB shall give opportunity to both the Contractor and the NJPC to be heard and to lead evidence. The DRB can request the parties to file written arguments and documents which shall be supplied to the opposite party to facilitate the DRB at the time of hearing. The representatives of the both parties would be permitted to be present at all hearings. The DRB has the power to ask questions and seek clarifications. After hearing the DRB is to meet in private to formulate its recommendations/decision supported 9 by reasoning. The final recommendations/decision would be submitted as a written report to both the parties. A tripartite agreement was also entered into between the NJPC, Contractor and the Disputes Review Board with regard to the procedure, constitution and remuneration etc. of the Members of the DRB. M/s.E.R.Kumar and Sameer Parekh, learned counsel for the applicant-Contractor have submitted that the DRB has all the attributes of an Arbitral Tribunal. According to them as far as the disputes upto the value of Rs.50 million are concerned the decision of the DRB is in the nature of an arbitral award. The reference of a dispute has to be made to the DRB. The DRB is to consist of three impartial members who are supposed to disclose any conflict of interest before their appointment. The nominee of each party is appointed as Member of the DRB only when the other party accepts the proposal. The DRB has the right to examine and call for evidence and to follow the principles of natural justice. The DRB has to decide the dispute after hearing the parties and is required to give a reasoned decision. Therefore, according to them the order of the DRB in cases involving individual claims not exceeding Rs.50 million is a final decision in the nature of an award and only in cases involving individual claims above this value is it in the nature of recommendation. On the other hand Mr.G.C.Gupta, learned senior counsel on behalf of the plaintiff has contended that the tripartite agreement entered into between the plaintiff, the defendant and the DRB shows 10 that the DRB is a contracting party and, therefore, cannot be termed to be an arbitral tribunal. It is also contended that the agreement to refer the disputes to the DRB is not a submission to arbitration in terms of Section 7 of the Arbitration Act. It is also contended that modified Clause 67 only gives a right to the Contractor and not to the NJPC and therefore an agreement by which only the claims of one side can be referred for decision cannot be termed as an arbitration agreement. Mr.Sanjay Karol, learned senior counsel appearing for the plaintiff in other Civil Suits involving the same point contended that the recommendations of the DRB are in the nature of recommendation of an expert body not binding upon the parties and are in the nature of a pre-arbitration stage adjucation. According to him the decision/recommendation of the DRB cannot be executed as a decree under Section 36 of the Arbitration Act. He submits that in case Clause 67 is read as a whole it is clear that the intention of the parties was that the decision of the DRB even in relation to individual claims valuing upto Rs.50 million only would only be a recommendation and not an arbitral award. The parties have cited various judgments. In State of U.P. vs. Tipper Chand, (1980) 2 SCC 341, the Clause which was interpreted was as follows: “Except where otherwise specified in the contract the decision of the Superintending Engineer for the time being shall be final, conclusive and binding on all parties to the contract upon all questions relating to the meaning of the specifications, design, drawing and instructions hereinbefore 11 mentioned. The decision of such Engineer as to the quality of workmanship, or materials used on the work, or as to any other question, claim, right, matter or things whatsoever, in any way arising out of or relating to the contract, designs, drawing specifications, estimates, instructions, orders, or 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 of the contract by the contractor, shall also be final, conclusive and binding on the contractor.” Interpreting this clause the Apex Court held: “4.After perusing the contents of the said clause and hearing learned counsel for the parties we find ourselves in complete agreement with the view taken by the High Court. Admittedly the clause does not contain any express arbitration agreement. Nor can such an agreement be spelled out from its terms by implication, there being no mention in it of any dispute, much less of a reference thereof. On the other hand, the purpose of the clause clearly appears to be to vest the superintending Engineer with supervision of the execution of the work and administrative control over it from time to time.” In Smt.Rukmanibai Gupta vs. Collector, Jabalpur and others, (1980) 4 SCC 556 the clause which was interpreted was in the following terms: “15.Whenever any doubt, difference or dispute shall hereafter arise touching the construction of these presents or anything herein contained or any matter or things connected with the said lands or the working or non-working thereof or the amount or payment of any rent or royalty reserved or made payable hereunder in the matter in difference shall be decided by the lessor whose decision shall be final.” 12 The apex Court considered this clause and held as follows: “6.Does Clause 15 spell out an arbitration agreement? Section 2(a) of the Arbitration Act, 1940, defines ‘arbitration agreement’ to mean a written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not. Clause 15 provides that any doubt, differences or dispute, arising after the execution of the lease deed touching the construction of the terms of the lease deed or anything therein contained or any matter or things connected with the said lands or the working or non-working thereof or the amount or payment of any rent or royalty reserved or made payable thereunder, the matter in difference shall be decided by the lessor whose decision shall be final. The reference has to be made to the lessor and the lessor is the Governor. His decision is declared final by the terms of the contract. His decision has to be in respect of a dispute or difference that may arise either touching the construction of the terms of the lease deed or disputes or differences arising out of the working or non-working of the lease or any dispute about the payment of rent or royalty payable under the lease deed. Therefore, Clause 15 read as a whole provides for referring future disputes to the arbitration of the Governor. Arbitration agreement is not required to be in any particular form. What is required to be ascertained is whether the parties have agreed that if disputes arise between them in respect of the subject-matter of contract such dispute shall be referred to arbitration, then such an arrangement would spell out an arbitration agreement. A passage from RUSSELL ON ARBITRATION, 19th Edn., p.59, may be referred to with advantage: If it appears from the terms of the agreement by which a matter is submitted to a person’s decision that the intention of the parties was that he should hold an 13 inquiry in the nature of a judicial inquiry and hear the respective cases of the parties and decide upon evidence laid before him, then the case is one of an arbitration. In the clause under discussion there is a provision for referring the disputes to the lessor and the decision of the lessor is made final. On its true construction it spells out an arbitration agreement.” In State of Orissa and another vs. Damodar Das, (1996) 2 SCC 216 the clause was worded similarly to the clause in Tipper Chand’s case (supra) and the Apex Court distinguished the judgment in Rukmanibai Gupta’s case (supra) and held that the clause did not amount to an arbitration agreement. Similar view was taken by the Apex Court in Nav Bharat Construction Co. vs. State of Rajasthan and others, (1996) 7 SCC 89. On behalf of the plaintiff-non-applicant great reliance has been placed on the judgment of the Apex Court in K.K.Modi vs. K.N. Modi and others, (1998) 3 SCC 573. Since this case appears to be the sheet anchor of the submissions of the plaintiff it would be necessary to give the background of the case. Differences and disputes arose between the two branches of the Modi family. To resolve these disputes negotiations took place with the help of financial institutions and ultimately a memorandum of understanding (MOU) was entered into between both the groups. The settlement was arrived at as per the terms of the MOU under which the shares and assets of various Companies were required to be valued in the manner specified in the MOU. Valuation was to be done by M/s. S. 14 B. Billimoria and Co. and division of the Companies was to be made in accordance with the scheme to be prepared by Bansi S. Mehta and Co. Clause-9 of the MOU provided that if any disputes or clarifications relating to the implementation arose then the same were to be referred to the Chairman of the IFCI. Clause 9 reads as follows: “Implementation will be done in consultation with the financial institutions. For all disputes, clarifications etc. in respect of implementation of this agreement, the same shall be referred to the Chairman, IFCI or his nominees whose decision will be final and binding on both the groups.” The reports were submitted by M/s.S.B.Billimoria and Company as well as M/s.Bansi S. Mehta and Company. Both groups of the Modi family were not satisfied with these reports and represented to the Chairman and Managing Director of the IFCI in terms of Clause 9. The Chairman and Managing Director in turn formed a Committee of experts to assist him in the matter and a decision was taken by him in consultation with both the groups. The Chairman of the IFCI submitted his detailed decision/report. This decision was not filed in the Court as an award nor did any party apply for making it rule of the Court. Thereafter, one of the groups challenged the validity of the said decision and the question arose whether the decision of the Chairman of the IFCI in terms of Clause 9 quoted hereinabove amounted to an arbitral award or not. The Apex Court referred to the treatise of MUSTILL AND BOYD in their book on COMMERCIAL ARBITRATION, 15 and held that the following attributes must be present for an agreement to be an arbitration agreement: “17.Among the attributes which must be present for an agreement to be considered as an arbitration agreement are: (1) The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement, (2) That the jurisdiction of the tribunal to decide the rights of parties must derive either from the consent of the parties or from an order of the court or from a statute, the terms of which make it clear that the process is to be an arbitration, (3) the agreement must contemplate that substantive rights of parties will be determined by the agreed tribunal, (4) that the tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides, (5) that the agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law and lastly, (6) the agreement must contemplate that the tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the tribunal. 18.The other factors which are relevant include, whether the agreement contemplates that the tribunal will receive evidence from both sides and hear their contentions or at least give the parties an opportunity to put them forward; whether the wording of the agreement is consistent or inconsistent