HON’BLE SRI JUSTICE V. ESWARAIAH AND HON’BLE SRI JUSTICE NOUSHAD ALI C.R.P.No.3335 of 2010 AND C.R.P.(SR).No.16466 of 2010 COMMON ORDER: (per Hon’ble Sri Justice Noushad Ali) Defendant No.1 in the suit O.S.No.1153 of 2009 instituted by the respondent No.1 herein (plaintiff) in the Court of the IV Senior Civil Judge, City Civil Court, Hyderabad aggrieved by the common order in I.A.No.709 of 2009 and I.A.No.562 of 2009 dated 19.02.2010 has filed these Civil Revision Petitions. C.R.P.No.3335 of 2010 has been filed against the orders in I.A.No.709 of 2009 rejecting the application filed under Section 8 (1) and (3) of the Arbitration and Conciliation Act, 1996 (for short ‘the Act’) to refer the parties to participate and continue the proceedings before the Sole Arbitrator (the second respondent herein/Defendant No.2), who has been appointed in terms of Clause 21.3 of the Agreement dated 18.02.2006. C.R.P.(SR) No.16466 of 2010 has been filed against the orders in I.A.No.562 of 2009 whereby the court below granted injunction restraining the second respondent (Defendant No.2) from continuing the arbitration proceedings till the disposal of the suit. As an appeal under Order 43 Rule 1 C.P.C., would lie against an order passed under Order 39 Rule 1 C.P.C., on the objection taken by the Registry on the maintainability of this Civil Revision Petition under Article 227 of the Constitution of India, this revision petition was not assigned regular number. For the sake of convenience, the petitioner (Defendant No.1) would be referred as Principal Contractor, Respondent No.1 herein (Plaintiff) as Sub-Contractor and Respondent No.2 herein (Defendant No.2) as Arbitrator. Brief facts as per the plaint averments are; Irrigation and CAD Department, Government of A.P., awarded a contract and entrusted to the Principal Contractor, the work relating to investigation, soil exploration, preparation of designs and drawings, estimates including construction of spillway for Indira Sagar Project across river Godavari at Ramayyapeta Village in West Godavari District. The principal contractor, in turn, entrusted part of the said work described as “Earth Work Excavation” to the sub-contractor under Piece Rate Contract Agreement dated 18.02.2006. The value of the work was Rs.70,68,60,000/-, out of which an extent of Rs.67,21,72,078/- value of work was executed and part of the bills were paid up to 30.01.2008. An amount of Rs.7,01,08,688/- is due from the principal contractor. Without paying the said amount, the principal contractor addressed a letter dated 1.02.2008 with false allegations and requested to remobilize the machinery and vehicles on the site to achieve the required progress in the execution of work. The principal contractor, thereafter, terminated the contract vide letter dated 8.2.2008 purportedly as per Clause 20.1 of the Agreement dated 18.02.2006 to which the sub-contractor submitted a reply letter dated 22.02.2008, requesting the principal contractor to settle the issues stated therein. There was no amicable settlement, but unilaterally the principal contractor addressed a letter dated 1.04.2009 to the Arbitrator requesting his acceptance for his appointment as Arbitrator as per Clause 21.3.1 of the said Agreement. A second letter dated 27.04.2009 was addressed to the second respondent herein appointing him as the Arbitrator to conduct arbitral proceedings at Hyderabad. Pursuant thereto, the Arbitrator conducted preliminary meeting on 19.05.2009. A representative of the sub-contractor attended the said meeting and opposed continuance of proceedings. The sub-contractor also submitted objections dated 28.07.2009 objecting to the constitution of the Arbitral Tribunal and requested the Arbitrator not to insist upon its participation, and to terminate all further arbitral proceedings. Despite the said objections, the Arbitrator proceeded to hear the matter on 13.09.2009. Since the Arbitrator was insisting to continue the proceedings, the sub-contractor filed the suit, inter alia, contending that the appointment of second respondent as Arbitrator is without any pre- existing arbitrable dispute/claims and without notifying to the sub- contractor as to which dispute/claims were sought to be resolved in the said arbitral proceedings and that there is no express consent or request of the sub-contractor for appointing the Arbitrator, and the appointment is mala fide. The sub-contractor sought for a decree against the Principal Contractor and the Arbitrator (Defendants 1 and 2) as follows:- (A) That a decree be passed against the defendants 1 and 2, declaring the letters (1) No.MPL/HYD/100/4/2009/6614, dated 01.04.2009 and (2) No.MPL/HYD/100/4/2009/6984, dated 27.04.2009 of 1st defendant for appointing 2nd defendant as Sole Arbitrator, as arbitrary and illegal and the defendant No.2 is not entitled to conduct Arbitration Proceedings between the defendant No.1 and plaintiff; (B) that a decree of consequential injunction be passed against the defendants from proceeding with Arbitration pursuant to the letter No.MPL/HYD/100/4/2009/6984, dated 27.04.2009, appointing the 2nd defendant as Sole Arbitrator by the 1st defendant; (C) that to award costs of the suit to the plaintiff; and (D) that to grant such other better relief/s in favour of the plaintiff which this Hon’ble Court may deem it just and proper under the circumstances of the case. Upon filing the said suit, the sub-contractor also filed I.A.No.562 of 2009 under Order XXXIX Rule 1 and 2 CPC to restrain the Arbitrator from proceeding with the arbitration proceedings. The principal contractor on his part filed I.A.No.709 of 2009 under Section 8 (1) and (3) of the Act seeking to refer the parties to participate and continue the arbitral proceedings before the Arbitrator. The principal contractor pleaded that the parties are governed by the Agreement dated 18.02.2006 and Clause 21.3 thereof provides for resolution of disputes through Arbitration. The sub-contractor entered appearance before the Arbitrator on 19.05.2009. The Arbitration proceedings are properly initiated in terms of the Agreement and initially the sub-contractor accepted the appointment of the Arbitrator and voluntarily participated in the proceedings, thereafter raised objections on false and frivolous grounds vide letter dated 28.07.2009. The Arbitrator registered the said objection as I.A.No.1 and fixed the date of hearing on 12th and 13th of September, 2009. Existence of agreement, appointment of Arbitrator, conduct of arbitral proceedings and the other issues ancillary thereto, are all the issues which would fall for consideration before the Arbitrator and such issues are not amenable to the jurisdiction of the Civil Court. The sub-contractor filed counter in I.A.No.709 of 2009 and opposed the relief sought in the said I.A., pleading that the subject matter of the suit is not the same as the dispute/claim between the parties but the suit is filed questioning the propriety and legality of appointment of the second respondent herein as Sole Arbitrator unilaterally without raising/notifying the dispute and compelling to agree for Arbitration to resolve such a dispute/claim in terms of Clause 21.3 of the Agreement. The appointment of Arbitrator is in violation of the procedure contemplated under Section 11 (5) and (6) of the Act, and its appearance on 19.05.2009 would not take away its right to object to the constitution of the Arbitral Tribunal and the objections filed on 28.07.2009 before the Arbitrator would not affect its right to file the suit. Section 8 of the Act is not applicable to the subject matter of the suit as it is not the subject matter of Arbitration Agreement. The appointment of Arbitrator is under challenge in the suit and as such, the Arbitrator is not competent to adjudicate the alleged disputes raised by the principal contractor. The principal contractor selected the second defendant, who hails from the State of Madhya Pradesh as Arbitrator due to some nexus between them. The appointment of the second respondent as Sole Arbitrator is mala fide and wrongful. In the affidavit filed in support of I.A.No.562 of 2009 the sub- contractor while reiterating the above pleas also pleaded that if the Arbitrator is allowed to continue the Arbitration proceedings, it would suffer irreparable loss and injury as it would be constrained to wait till the award is passed to challenge the same under Section 34 of the Act. Both parties marked documents in I.A.No.562 of 2009. Particularly, the principal contractor marked Exs.R.1 and R.2 and the sub-contractor marked Exs.P.1 to P.26. The Court below clubbed both I.A.Nos.562 and 709 of 2009 and disposed of the same by common order dated 19.02.2010. The Court below allowed I.A.No.562 of 2009 and granted injunction, but dismissed I.A.No.709 of 2009, declining to refer the matter for Arbitration on the only ground that the principal contractor failed to refer the matter for conciliation before appointing the Arbitrator as per Clause 21.3.1 of Ex.R.1-Agreement dated 18.02.2006 so as to enable the sub-contractor to ventilate his grievances before the conciliators. As a consequence of dismissal of the said I.A.No.709 of 2009, the Court below allowed I.A.No.562 of 2009 and granted injunction. We may at the outset point out that the approach of the Court below and the reasons assigned in dismissing the application filed under Section 8 of the Act in I.A.No.709 of 2009 does not commend acceptance. While deciding an application filed under Section 8 of the Act, the Court would consider to the extent whether the matter brought before it is the subject matter of the Arbitration Agreement and whether such an application is accompanied by the original Arbitration Agreement or a duly certified copy thereof. It is not open to the Court to enter into any other area of dispute and adjudicate on the propriety or legality of the procedure adopted for the appointment of the Arbitrator. We are of the considered opinion that the Court below misdirected itself in rejecting the application on the ground that the appointment of Arbitrator was not preceded by referring the matter for conciliation. The order in I.A.No.709 of 2009, in our considered view, is unsustainable on this ground. The learned Senior Counsel appearing for the sub- contractor fairly would not dispute this position. Having held so, ordinarily we would have remanded the matter for reconsideration on the question of referring the parties to Arbitration, but both the learned counsel would pursue for a decision on this issue in order to avoid multiplicity of proceedings. We would, therefore, proceed to consider. Heard Sri S. Niranjan Reddy, learned counsel on behalf of the principal contractor and Sri E. Manohar, learned Senior Counsel instructed by Sri Ch. Poornachandra Rao on behalf of the sub- contractor. The learned counsel for the principal contractor while reiterating the facts, would submit that the parties are governed by the terms and conditions of the Agreement dated 18.02.2006. Noticing the shortcomings in the execution of work, the principal contractor addressed a letter No.MPL/HYD/CA/2/Spillway /2008/109/462, dated 1.02.2008 to the sub-contractor drawing its attention to the shortcomings and the obligations as per Clauses 2.0, 6.0, 12.0, 13.0, 15.0, 21.0, 22.0 and 23.0 of the Agreement, inter alia, called upon the sub-contractor to honour the Agreement, to take serious note of the issues, to mobilize the machinery and vehicles on the site immediately within seven days and start works without further delay and show the required progress duly cautioning that upon failure, the principal contractor would be compelled to enforce all contractual rights to deal with the issues mentioned in the said letter. The sub-contractor did not act as per the directions. Therefore, the principal contractor by a further letter dated 8.02.2008, terminated the Agreement as per clause 20.1 of the Agreement. By the said letter the sub-contractor was duly informed that as per Clause 20.2 it had absolute authority to appoint another agency to execute leftover work and all the costs incurred thereon would be recovered from the sub-contractor. In reply to the said letter, the sub-contractor addressed a letter dated 22.02.2008 denying that it had not remobilized the machinery, further stating that the machinery was under repairs and would be redeployed soon after the repairs were carried out. The sub-contractor questioned the termination of contract as not warranted and demanded to release all payments for the works done. The sub-contractor also demanded that the site should not be entered till the accounts were settled. The learned counsel would therefore submit that the aforesaid letters dated 1.02.2008 and 8.02.2008 addressed by the contractor, and the reply letter dated 22.02.2008 of the sub-contractor, gave raise to a dispute between the parties. As the mutual settlement of the said dispute could not be resolved, one, Sri H. P. Jaiswal of Bhopal, Madhya Pradesh, was appointed as conciliator by invoking Clause 21.2 of the Agreement. On failure of the conciliation proceedings, the Managing Director of the principal contractor appointed one G.S. Palnitkar (the second respondent herein) as the Sole Arbitrator as per Clause 21.3.1 by letter dated 1.04.2009 to conduct proceedings in accordance with the provisions of the Act, and to hold the proceedings at Hyderabad, A.P., and the said appointment was duly communicated to the sub- contractor and sought for acceptance of the same by the second respondent herein. On acceptance, the Managing Director appointed the second respondent herein as the Arbitrator by letter dated 27.04.2009, which was also communicated to the sub-contractor. The Arbitrator entered reference and held preliminary hearing on 19.05.2009. Both the parties appeared before the Arbitrator. Later the sub-contractor filed objections dated 28.07.2009, inter alia opposing constitution of the Arbitral Tribunal on the ground that the appointment of the Arbitrator was without notice to it and without there being a pre- existing “dispute” or “disputes” raised and notified by the principal contractor, thereby the appointment is not lawful. The said objection was numbered as I.A.No.1. The Arbitrator, thereupon, after issuing notice dated 5.08.2009 heard the parties on 12/13.09.2009. In the meanwhile, the sub-contractor filed the above suit and submitted written arguments dated 23.12.2009 raising further objections before the Arbitrator, contending that the Arbitral Tribunal did not follow the procedure provided under Section 12 of the Act and the matter is subjudice before the civil Court and the dispute, which pertains to assessing the quantities of earth work executed and leftover work, required voluminous evidence, which can only be adjudicated by the civil Court. Similarly, the principal contractor also submitted written arguments opposing the said objections of the sub-contractor. The Arbitrator overruled the objections and accordingly passed orders on 6.02.2010. The learned counsel would submit that the subject matter of the suit is thus same as in the arbitration and since the arbitrator is seized of the same subject matter, the civil Court cannot legally proceed with the suit, but refer the matter to Arbitration in terms of Section 8 of the Act. He would also contend that on such reference, the order in I.A.No.562 of 2009 would, as a consequence, become unsustainable. The learned counsel would place reliance on the judgments of the Apex Court in P. Anand Gajapathi Raju and others v. P.V.G. Raju (dead) and others[1]; Hindustan petroleum Corporation Limited v. Pinkcity Midway Petroleums[2]; SBP & Co. v. Patel Engineering Limited and another[3]; Citibank, N.A. v. TLC Marketing PLC and another[4]; and Branch Manager, Magma Leasing and Finance Limited and another v. Potluri Madhavilata and another[5]. On the other hand, Sri E. Manohar, learned Senior Counsel for the sub-contractor would submit that there is no arbitral dispute between the parties. In the absence of an arbitral dispute, Arbitrator cannot be appointed by invoking Clause 23 of the Agreement. In the suit, the very appointment of Arbitrator is challenged as illegal and the said relief cannot be an arbitrable issue to be decided by the Arbitrator. The subject matter of the suit is thus different from the subject matter covered by the Agreement, and as such, the provisions of Section 8 of the Act cannot be applied. Though the Agreement was terminated vide letter dated 8.02.2008, the sub-contractor submitted a reply thereto vide letter dated 22.02.2008 justifying the execution of large volume of work and hence termination of Agreement was not warranted. The principal contractor after receipt of the said notice did not react intending to implement the termination of Agreement nor made any further demands, nor indicated the existence of any dispute. The principal contractor unilaterally appointed the Arbitrator without the consent of the sub-contractor. The Civil Court is therefore competent to entertain the suit as presented. The said suit is neither expressly nor impliedly barred under the provisions of Section 9 of C.P.C., as such the Civil Court rightly declined to accept the relief sought for by the principal contractor to refer the matter for arbitration under Section 8 of the Act. Reliance has been placed on Superintending Engineer, N.S. Left Canal Circle and another v. International Constructions Company, Governerpet[6]. In reply to the aforesaid contentions, Sri S. Niranjan Reddy, learned counsel for the principal contractor would submit that the consequences which emanated from the letter dated 1.02.2008 and the subsequent exchange of letters dated 8.02.2008 and 22.02.2008 and the objections dated 28.07.2009 raised by the sub-contractor before the Arbitrator would unequivocally disclose existence of an arbitrable dispute and the subject matter of the said dispute is the same as presented in the suit. In any event, whether such dispute exists in fact, whether the Arbitrator has been validly appointed and whether the Arbitrator has jurisdiction to adjudicate on the dispute – all such questions could be validly raised before the Arbitrator himself and the Arbitrator might rule on his own jurisdiction as provided under Section 16 of the Act. The undisputed facts are that there is an agreement dated 18.02.2006 between the parties in pursuance of which the Principal Contractor entrusted for execution of work “Earth Work Excavation” under piece rate contract to the Sub-Contractor subject to the conditions contained therein. The said agreement provides for Dispute Resolution Mechanism in Clause 21.0 through mutual settlement, conciliation and arbitration and the Managing Director, Madhucon is authorized to appoint a Conciliator/Arbitrator. The relevant clauses are as under : “21.0 DIFFERENCES OR DIPSUTES 21.1 Mutual Settlement of Disputes 21.1.1 Except where otherwise provided for in the contract, all disputes shall in the first place be resolved through mutual discussions, negotiations, deliberations and consultations associating senior executives of both the parties to dispute. 21.2 Conciliation 21.2.1 If the efforts to resolve all or any of the disputes through mutual settlement fail, such disputes shall be referred to the sole conciliator to be appointed by the Managing Director of Madhucon under the Arbitration and Conciliation Act, 1996. 21.2.2 The settlement agreement shall be final and binding on the parties. The settlement agreement shall have the same status and effect of an arbitration award. 21.3 Arbitration 21.3.1 If the efforts to resolve all or any of the disputes through conciliation fails, such disputes shall be referred to the sole Arbitrator to be appointed by the Managing Director, Madhucon. There shall be no objection to the PRC if the sole Arbitrator so appointed is an employee of Madhucon. In case the Arbitrator so appointed is unable to act for any reason, Managing Director of Madhucon in the event of such inability, shall appoint another person to act as an Arbitrator in accordance with the terms of the contract. Such persons shall be entitled to proceed with reference from the stage at which it was left incomplete by his predecessor. 21.3.2 Subject to the aforestated conditions, the provisions of the Arbitration and Conciliation Act, 1996 or any statutory modification or re-enactment thereof and the rules made thereunder and for the time being in force shall apply to the conciliation and arbitration proceedings under this clause. 21.4 Pending resolution of disputes and differences, the work shall continue without hindrance as per schedules and shall not be either slowed down or stopped. If the work is slowed down or stopped during the period of dispute, the PRC shall be responsible for the loss of work or delays and any loss sustained by Madhucon due to such actions by the PRC, shall be made good by the PRC either by direct payment or through deductions from any payments due to the PRC.” It is also not in dispute that the Principal Contractor by Ex.P1 Letter No.MPL/HYD/CA/2/Spillway/2008/109/462, dated 01-02-2008 apprised the Sub-Contractor of the relevant clauses of the agreement viz., 2.0, 6.0, 12.0, 13.0, 15.0, 21.0, 22.0 and 23.0 and called upon the Sub-Contractor to remobilize the machinery within seven days and show progress in the execution of work and in case of failure, the contractor would be under compulsion to enforce all the contractual rights. The Sub-Contractor allegedly failed to recommence the execution of the work, as a result of which the Principal Contractor vide letter No.MPL/HYD/CA/2/Spillway/ 2008/112/511, dated 08-02-2008 terminated Ex.R.2-agreement dated 18.02.2006. Responding to the said letter of termination, the Sub-Contractor addressed Ex.P.2-reply letter dated 22.02.2008 stating that the machinery was under repairs and that despite bad payments, which were either delayed or partly paid, a turn over of about 65.00 lakhs cubic meters work had been executed leaving a balance of a meager 1.00 lakh cubic meters alone. Stating that the termination of contract was not warranted, the Sub- Contractor demanded settlement of accounts and release of payments for the work done and other amounts due. The Principal Contractor was duly required not to enter the site till the account was settled and such settlement would not bind the termination of the contract. These documents, i.e., Ex.P.1-letter dated 01.02.2008 and letter dated 08.02.2008 addressed by the Principal Contractor to the Sub- Contractor and Ex.P.2-reply letter dated 22.02.2008 addressed by the Sub-Contractor to the Principal Contractor, are the crucial documents, an analysis of which is necessary to determine whether there is an arbitrable dispute between the parties. As mentioned earlier, Ex.P.1 letter dated 01.02.2008 is the origin, through which the Principal Contractor expressed his dissatisfaction on the progress of work and apprised the Sub- Contractor of its obligations under Ex.R.1-Agreement. Attention of the Court was specifically drawn to clauses 2.0, 6.0, 12.0, 13.0, 15.0, 21.0, 22.0 and 23.0. Clause 2.0 relates to the general conditions which inter alia provides in clause 2.4 that the work should conform to certain requirements and technical specifications and standards under the relevant manuals, circulars, directions of the Irrigation and CAD Department and all those relevant conditions as are applicable to the Principal Contractor. Based on the said clause, the Sub-Contractor was required to achieve slopes of the canal sites as per the contract documents and in default it would not get full payment for uncompleted works. Clause 6.0 relates to the time frame for completion of work. Clause 6.2 sets out the schedule and under clause 6.3 time being the essence of contract, the sub-contractor was apprised of its failure to adhere to the programme due to which the required rate of progress could not be achieved resulting in financial loss. Clause 13.0 relates to the mode of payments. As per Clauses 13.1.1 and 13.1.3 monthly payments are based on the work actually done at the site as agreed and approved by the principal contractor depending on the drawings submitted and check measurements carried out. Based on the said clause the sub-contractor was informed that the payment for the month of December 2007 was already made and the request for upward revision of unit prices was declined as per Clause 13.3.1 except in respect of items as per Clause 13.3.2. Clause 15.0 relates to retention of 5% of the value of the work executed as security until the completion of the whole of the work. Clause 21.0 relates to disputes resolution mechanism. Clause 21.4 provides that pending such resolution of disputes, the work should continue to be done without hindrance as per schedules without being slowed down or stopped. Based on the said Clause, the sub-contractor was required to honour the Agreement. Clause 22 relates to confidentiality, which the sub-contractor was required to maintain. Clause 23.0 in general and Clause 23.4 in particular provides that the contract would be in force until the completion of execution of work or till its cancellation under Force Majeure or other reasons. Based on all the aforesaid Clauses and the shortcomings, the principal contractor called upon the sub-contractor to remobilize the machinery and commence the work and ensure progress within seven days, duly cautioning that failure to do so, would entail in enforcement of contractual rights. The principal contractor thereupon exercised its right and terminated the contract by letter dated 8.02.2008. The sub-