THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY ARBITRATION APPLICATION No.94 of 2010 ORDER This application has been taken out under sub Section 6 of Section 11 of the Arbitration & Conciliation Act, 1996 read with the Scheme for appointment of Arbitrators 2000, for resolution of the disputes between the parties relatable to the agreement dated 26-03-1998. The respondent entrusted the work of widening and strengthening Kadapa-Tadipatri Road (APSH-3) (herein after referred to as ’APSH-3 Project’) to the applicant and an agreement came to be entered between the parties on 26-3-1998. The work has to be completed within 24 months reckoning from 1-5-1998 and the expected date of completion was 30-04-2000. The applicant completed the work on 24-12- 2000 excluding the works of ROD and its approaches. The respondent (herein referred to as an “employer”) extended the completion period upto 24-12-2000. The Defect Liability Certificate was issued by the Engineer on 31-05-2002 delinking the works of ROB and its approaches. The applicant completed the de-linked works of ROB and its approaches on 30-06-2004 and the Defect Liability Certificate for de-linked works of ROB and its approaches was issued by the engineer on 9-3-2006. The respondent vide letter dated 18-5-2008 opined that certain claims raised by the applicant are to be resolved between the parties. The Defect Liability Certificate came to be issued and thereafter, the applicant submitted draft final statement, but the same has not been settled by the employer. Therefore, the applicant invoked the arbitration clause in the contract and nominated Justice T.N.C.Rangarajan, retired Judge of this Court, as its Arbitrator and requested the employer to appoint its nominee within 30 days. There being no response to the said letter, the applicant approached this Court seeking appointment of an Arbitrator. It appears that the applicant also approached Indian Roads Congress, which informed the applicant that there was no consensus emerged between the two parties and thereby, expressed its inability to proceed further in the matter vide letter dated 29th June, 2010. Hence, this application. Notice to the respondent came to be ordered on 28-07-2010. The respondent entered appearance and filed counter. It is stated in the counter-affidavit that the application is pre-mature since the applicant has not exhausted the procedure contemplated under the contract with regard to resolution of the disputes between the parties, and that, unless and until the said procedure is exhausted, he cannot be permitted to invoke sub Section 6 of Section 11 of the Arbitration and Conciliation Act, 1996. It is suffice to refer paragraph No.6 of the counter- affidavit, which reads as hereunder: “I submit that the arbitration agreement contained in COPA 67 is an elaborate mechanism for resolution of dispute which may arise between the parties. The resolution of the dispute comprises of two tiers, one being the Dispute Review Board and the another Arbitral Tribunal. It provides that any dispute which arise between the parties, either party is required to issue a mandatory Notice of Dispute to the other party for its amicable settlement. Failing settlement between the parties within 14 days of issue of Notice of Dispute, either party is entitled to refer the dispute to the DRB and the DRB is required to give its recommendations within 56 days. If the recommendations are not acceptable to either party or the DRB fails to give recommendations then the aggrieved party or parties are entitled to issue a mandatory Notice to Commence the Arbitration to the other party. In the present contract with the applicant the following is the record of dispute resolution. a. First set of claims – The applicant approached the DRB on 19-09-2002 and the DRB gave their recommendations on 30-08-2003 subsequently the matter was referred to Arbitral Tribunal. b. Second set of claims. The applicant approached the DEB on 12-5-2005 and the DRB failed to give recommendations by 2.7.2005. Subsequently the matter was referred to Arbitral Tribunal. c. 3rd set of set of claims. The respondent approached the DRB on 9-9-2005 and the DRB gave recommendations on 13-12- 2005. Subsequently the matter was referred to Arbitral Tribunal. d. 4th set of set of claims. The applicant approached the DRB on 29-09-2005 and the DRB failed to give recommendation in the extended time. Subsequently the matter was referred to 4th Arbitral Tribunal. e. 5th set of present claims. The applicant wanted to approach to the Arbitral Tribunal on the ground that DRB has already resigned. I submit that the DRB resigned on 25-06-2006 and as per the contract both parties are required to replace their DRB members within 28 days failing which the IRC is designated authority to appoint the DRB members. The applicant did not resort to the procedure provided in the contract of Notice of Dispute under Rule 9 (a) and Notice to Commence the Arbitration under COPA 67.1, and instead asked the respondent to appoint the arbitrator, on refusal to appoint the arbitrator by the respondent, the Applicant approached the designated authority that is Chairman, Executive Committee Indian Roads Congress for appointment of the Arbitrator. Based on the plea of respondent pertaining to limitation as well as not complying with the procedure provided to enforce the arbitration clause, the designated authority rightly refused to appoint the arbitrator. The DRB recommendations are condition precedent to invoke the arbitration clause.” Heard the learned counsel appearing for the parties. Learned counsel appearing for the applicant submits that the applicant has followed the procedure contemplated in the contract by raising dispute before the engineer and the engineer has not settled the dispute and thereupon sought for reference of the dispute to the Disputes Review Board. Since the Disputes Review Board came to be terminated, the applicant approached the Indian Roads Congress and even the Indian Roads Congress expressed its inability to proceed further. In these circumstances, the applicant having no other go approached this Court invoking the arbitration clause 67.3 in the contract seeking for appointment of an Arbitrator for resolution of the disputes between the parties. A further submission has been made that the respondent-employer himself addressed a letter to the Chief Engineer, (R&B), CRN and Managing Director, APRDC, Hyderabad, seeking reference of the disputes to the arbitrator and the Chief Engineer communicated to the applicant about the request of the employer and also being the matter under consideration by the Government. Learned counsel refers the letter dated 14-10-2009 emanating from the Chief Engineer (R&B) CRN & Managing Director. The relevant portion of the letter reads as under: “Adverting to the reference cited M/s. Ircon International Ltd is informed that the employer has requested the Government to permit this office to approach the Arbitration directly by passing the DRB as appointment of new DRB at this juncture may be futile and waste of lot of time and money. As soon as the approval is accorded by the Government the same shall be informed accordingly and further proceedings shall be done as per the contract conditions.” Learned counsel also refers the letter, dated 18-5- 2008, emanating from the Engineer, who is the designated authority under the contract, wherein he directed the parties to settle the disputes among themselves. Learned Government Pleader for arbitration submits that a separate procedure has been prescribed with regard to resolution of disputes between the parties and since the applicant has not followed the dispute resolution mechanism, it is not entitled to approach this Court seeking appointment of an arbitrator. Learned counsel took me to Clause 67.3 and Clause 4 of Annexure-A to Conditions of Particular Application. By referring these clauses, learned Government Pleader contends that the applicant has to agitate his claim before the Disputes Review Board. In support of his submission, reliance has been placed on the decision of this Court in D.Raja Reddy vs. Director General, National Institute of Agricultural Extension Management, Hyderabad[1] and MMTC Ltd., New Delhi v. Rashtriya Ispat Nigam Ltd., Visakhapatnam Steel Plant, A.P.[2]. There is no dispute with regard to proposition of law that when a particular procedure has been contemplated for resolution of the disputes in the contract, the said procedure is required to be exhausted before invoking the arbitration clause in the contract. It is no more in dispute that a Board has been constituted for resolution of the disputes relatable to regular activities i.e., if disputes encounter in the process of execution of the work, the Board terminates its regular activities after expiry of the Defects Liability Period. However, the Board shall remain available to process any dispute referred to it by either party. Clause 4 of Annexure A to Conditions of Particular Application reads as hereunder: “The Board shall begin its activities following the signing of a Board Member’s Declaration of Acceptance by all three Board Members, and it shall terminate these activities as set forth below: (a) The Board shall terminate its regular activities when either (i) the Defects Liability Period referred to in Sub-Clause 49.1 (or, if there are more than one, the Defects Liability Period expiring last) has expired, or (ii) the Employer has expelled the Contractor from the Site pursuant to Sub-Clause 63.1, and when, in either case, the Board has communicated to the parties and the Engineer its Recommendations on all disputes previously referred to it. (b) Once the Board has terminated its regular activities as provided by the previous paragraph, the Board shall remain available to process any dispute referred to it by either party. In case of such a referral, Board Members shall receive payments as provided in paragraphs 7(a)(ii), (iii) and (iv).” The activities of the Board are detailed in Clause 4 of Annexure A to Conditions of Particular Application. A reading of Clause 4 indicates that after expiry of the Defects Liability Period, the regular activities stands terminated. By referring to Clause 7 ( c ) of Annexure A to Conditions of Particular Application, learned counsel for the applicant contended that beginning with the next month after the Defect Liability Certificate referred to clause No.48 has been issued, the Board members shall no longer receive any monthly retainer fee. In a way, his contention is that after expiry of the Defect Liability Certificate, the Board ceases to function, in which case, reference of the dispute to the Board, which is not in existence does not arise. The contention of the learned counsel for the applicant appears to be impressive at the first blush, but on close scrutiny of the entire record, I do not detain myself long to reject the contention of the learned counsel. It is evident from Clause 42 that in case of a dispute being referred, the Board Members shall receive payments as provided in Clause 7 ( a ) (ii), (iii) and (iv). It indicates that in case of dispute being referred, they shall continue to receive the remuneration. Board has been constituted by the consent of the parties. How the members to Board are to be nominated is detailed in Clause 67.1. For better appreciation, I may refer to Clause 67.1, which reads as hereunder: “If any dispute arises between the Employer and Contractor in connection with, or arising out of, the Contract or the execution of the Works, whether during the execution of the Works or after their completion and whether before or after the repudiation or other termination of the Contract, including any disagreement by either party with any action, inaction, opinion, instruction, determination, certificate or valuation of the Engineer, the matter in dispute shall, in the first place, be referred to the Disputes Review Board (“the Board”). The Board shall be established by the signing of a Board Member’s Declaration of Acceptance ( as required by paragraph 12 of Annex A to these Conditions of Particular Application) by all three Board Members. “The Board shall comprise three Members experienced with the type of construction involved in the Works and with the interpretation of contractual documents. One Member shall be selected by each of the Employer and the Contractor and approved by the other. If either of these Members is not so selected and approved within 28 days of the date of the Letter of Acceptance, then upon the request of either or both parties such Member shall be selected as soon as practicable by the Appointing Authority specified in the Appendix to Bid. The third Member shall be selected by the other two and approved by the parties. If the two Members selected by or on behalf of the parties fail to select the third Member within 14 days after the later of their selections or if within 14 days after the selection of selection of the third Member, the parties fail to approve that Member, then upon the request of either or both parties such third Member shall be selected promptly by the same Appointing Authority specified in the Appendix to Bid who shall seek the approval of the proposed third Member by the parties before selection but, failing such approval, nevertheless shall select the third Member. The third Member shall serve as Chairman of the Board. “In the event of death, disability, or resignation of any Member, such Member shall be replaced in the same manner as the Member being replaced was selected. If for whatever other reason a Member shall fail or be unable to serve, the Chairman ( or failing the action of the Chairman then either of the other Members) shall inform the parties and such non- serving Member shall be replaced in the same manner as the Member being replaced was selected. Any replacement made by the parties shall be completed within 28 days after the event giving rise to the vacancy on the Board. Failing which the replacement shall be made by the Appointing Authority in the same manner as described above. Replacement shall be considered completed when the new Member signs the Board Member’s Declaration of Acceptance. Throughout any replacement process the Members not being replaced shall continue to serve and the Board shall continue to function and its activities shall have the same force and effect as if the vacancy had not occurred, provided, however, that the Board shall not conduct a hearing nor issue a Recommendation until the replacement is completed. “Either the Employer or the Contractor may refer a dispute to the Board in accordance with the provisions of Annex A to these Conditions of Particular Application. “If either the Employer or the Contractor is dissatisfied with any Recommendation of the Board, or if the Board fails to issue its Recommendation within 56 days after receipt by the Chairman of the Board of the written Request for Recommendation, then either the Employer or the Contractor may, within 14 days after his receipt of the Recommendation, or within 14 days after the expiry of the said 56 day period, as the case may be, given notice to the other party, with a copy for information to the Engineer, of his intention to commence arbitration, as hereinafter provided, as to the matter in dispute. Such notice shall establish the entitlement of the party giving the same to commence arbitration, as hereinafter provided, as to such dispute and, subject to Sub-Clause 67.4, no arbitration in respect thereof may be commenced unless such notice is given. “If the Board has issued a Recommendation to the Employer and the Contractor within the said 56 days and no notice of intention to commence arbitration as to such dispute has been given by either the Employer or the Contractor within 14 days after the parties received such Recommendation from the Board, the Recommendation shall become final and binding upon the Employer and the Contractor. “Whether or not it has become final and binding upon the Employer and the Contractor, a Recommendation shall be admissible as evidence in any subsequent dispute resolution procedure, including any arbitration or litigation having any relation to the dispute to which the recommendation relates. “All Recommendations which have become final and binding shall be implemented by the parties forthwith, such implementation to include any relevant action of the Engineer. “Unless the Contract has already been repudiated or terminated, the Contractor shall in every case, continue to proceed with the Works with all due diligence and the Contractor and the Employer shall give effect forthwith to every decision of the engineer unless and until the same shall be revised as a result of the operation of this Sub-Clause 67.1 or as hereinafter provided in an arbitral award. If during the contract period, the Employer and the Contractor are of the opinion that the Disputes Review Board is not performing its functions properly, the Employer and the Contractor may together disband the Disputes Review Board and reconstitute it. A new board shall then be selected in accordance with the provisions applying to the selection of the original Board as specified above, except that words “within 28 days after the letter of Acceptance” shall be replaced by the words “within 28 days after the date on which the notice disbanding the original Board became effective”. The employer and the Contractor shall jointly sign a notice specifying that the Board shall stand disbanded with effect from the date specified in the notice. The notice shall be posted by a registered letter with AD or delivered personally to each Member of the Board. A member shall be deemed to have received the delivery of the letter even if he refuses to do so”. A plain reading of the above clause indicates that for replacement of any member, the same procedure which has been stipulated for selecting a member is to be followed. No doubt, as on this day, there are no members on the Board. For nominating members of the Board, the parties have to follow the procedure contemplated under Clause 67.1. First, the parties have to nominate the members to be on the Board, then the disputes are required to be referred to it. The applicant has to follow the said procedure before invoking sub Section 6 of Section 11 of the Arbitration and Conciliation Act, 1996. Accordingly, the application is dismissed reserving liberty to the applicant to follow the procedure as contemplated in Clause 8 of Annexure A to Conditions of Particular Application. __________________________ B.SESHASAYANA REDDY,J rkk Dated: 29-7-2011 [1] 1999(2) Arb.LR 212 (AP) [2] 2010 (5) ALD 137