Case: P. Dasaratharama Reddy Complex Vs. Government of Karnataka and Ors.

4. The Appellant is a contractor engaged in executing work contracts awarded by the Government of Karnataka and its instrumentalities. In 1996, the Appellant was awarded contract for construction of bridge between Yethabadi-Buyyanadoddi across Shimsha river in Malavalli. The Appellant did not complete the work by alleging lack of cooperation on the part of Chief Engineer, Communication and Building (South), Bangalore (Respondent No. 2) and then lodged claim for payment of the amount allegedly due to him. After some time, the Appellant filed an application under Section 11(6) and (8) of the Arbitration and Conciliation Act, 1996 (for short, the 1996 Act) for appointment of an Arbitrator for adjudication of all the disputes pertaining to Contract No. 5/96-97 dated 8.5.1996. The Chief Justice of the High Court assigned the application to the Designated Judge, who dismissed the same vide order dated 14.9.2001 by relying upon the judgment in Mysore Construction Co. v. Karnataka Power Corporation Ltd. ILR 2000 KAR 4953. Paragraphs 5 and 6 of that order read as under:5. The above clause requires the contractor specifically to approach the civil court, if he is not satisfied with the decision of the Chief Engineer. It does not provide for reference to arbitration. But contrary to the specific term of Clause 29, the Petitioner has sought appointment of Arbitrator instead of approaching the Civil Court.6. I had occasion to consider the question whether such a clause is an arbitration agreement in Mysore Construction Co. v. Karnataka Power Corporation Ltd. [ILR 2000 KAR 4953] and held that the said clause is not an arbitration agreement. Following the said decision and for the reasons stated therein, it has to be held that Clause 29 relied on by Petitioner is not an arbitration agreement.5. The writ petition filed by the Appellant questioning the order of the Designated Judge was dismissed by the Division Bench of the High Court by observing that Clause 29 of the Contract cannot be construed as an Arbitration Agreement or an Arbitration Clause for settlement of disputes.6. In some of the other appeals, the Appellants have challenged the orders passed by the Designated Judge rejecting their applications for appointment of Arbitrator under the relevant clause of their respective agreements.7. In the 5 appeals, Karnataka Neeravari Nigam Limited and Krishna Bhagya Jala Nigam Limited have challenged the orders passed by the Designated Judge for appointment of the Chief Engineer as an Arbitrator and directed him to adjudicate the matter in dispute.

Reasoning:
14. In Mysore Construction Co. v. Karnataka Power Corporation Limited and Ors. (supra), the learned Designated Judge referred to the passage from Russell on Arbitration (19th Edition, page 59), the judgments of this Court in K.K. Modi v. K.N. Modi and Ors. (supra), Chief Conservator of Forests, Rewa v. Ratan Singh Hans AIR 1967 SC 166 ; Smt. Rukmanibai Gupta v. the Collector, Jabalpur (supra); State of Uttar Pradesh v. Tipper Chand (1980) 2 SCC 341 ; State of Orissa v. Damodar Das (1996) 2 SCC 216 ; Bharat Bhushan Bansal v. Uttar Pradesh Small Industries Corporation Limited, Kanpur (1999) 2 SCC 166  and observed:The above decisions make it clear that an agreement or a clause in an agreement can be construed as an arbitration agreement, only if,(i) it provides for or contemplates reference of disputes or difference by either party to a private forum (other than a Court or Tribunal) or decision;(ii) it provides either expressly or impliedly, for an enquiry by the private forum giving due opportunity to both parties to put forth their cases; and(iii) it provides that the decision of the forum is final and binding upon the parties, without recourse to any other remedy and both would abide by such decision.Where there is no provision either for reference of disputes to a private forum, or for a fair and judicious enquiry, or for a decision which is final and binding on parties to the dispute, there is no arbitration agreement.The learned Designated Judge then analysed Clause 29 (old Clause 67) and recorded his observations in the following words:(a) The heading of the clause is settlement of disputes. There is no reference to either arbitration or Arbitrator.(b) Clause (a) provides that if any dispute or difference of any kind whatsoever to arise between the Executive Engineer/Superintending Engineer and the Contractor, regarding the matters mentioned therein, the dispute shall in the first place be referred to Chief Engineer, who has jurisdiction over the work specified in the contract. Thus the reference to the Chief Engineer is only the first phase of the process of settlement of disputes and not the final phase of the settlement of disputes. This is evident from the provision that when a dispute arises, it should in the first place, be referred to the Chief Engineer for decision.(c) The reference is to a person, who has jurisdiction over the contract work and not to an independent Authority nor to an officer of the Corporation, who has no connection or control over the work. In other words, the decision of Chief Engineer is a decision by a person who has overall supervision and charge of the execution of the work. This gives an indication that the decision of the Chief Engineer is not intended to be an adjudication of the rights of the parties to the dispute, but intended to be a decision of one party in regard to the claim of the other party, to enable the other party to seek relief in a Court of law, if he is not satisfied with the decision.(d) Sub-clause (b) provides that subject to other form of settlement provided in the ensuing sub-clause, the Chief Engineers decision in respect of every dispute or difference so referred, shall be final and binding upon the Contractor. This clause makes it clear that the final remedy of the Contractor is to approach the law Court for decision on the dispute. It is also significant that the decision given by the Chief Engineer is made final and binding upon the Contractor (subject to other remedies specified) and not KPC. Any decision, which is made binding only on one party and not on both the parties, cannot be an adjudicatory decision. The very principle of adjudication of a dispute is that it is binding on both the parties.(e) Clause (c) provides that if the Contractor is not satisfied with the decision of the Chief Engineer, he can approach the law Court at Karwar for settlement of the dispute The clause requires the Contractor to approach the law Court for settlement of disputes. If as contended by the Petitioner, the disputes are to be settled by way of arbitration by the Chief Engineer, acting as Arbitrator, then the question of one of the parties being permitted to approach the law Courts for settlement of the disputes does not arise. If the Chief Engineer is the Arbitrator and his decision is an award, then a party can approach the Civil Court only for setting aside the award and not for settlement of the disputes. This provision makes it clear that the decision of the Chief Engineer is not intended to be a decision by way of adjudication of the disputes/differences between the parties by way of arbitration but is intended to be merely a decision of the party (employer) which, when intimated to the other side, gives rise to a cause of action to the other party (Contractor) to approach the Civil Court for adjudication of its dispute/claim.(f) Similarly, Sub-clause (d) which provides that if the Chief Engineer does not give his decision within a particular period, the Contractor can approach the Civil Court for settlement of the dispute, again demonstrates that no finality is intended to be attached to the decision of the Chief Engineer and the final adjudication should be by the Civil Court and not by the Chief Engineer.The scheme of Clause 29 (or old Clause 67) therefore is, whenever the Contractor has a claim which is not settled by the Executive Engineer or Superintending Engineer, he has to make the claim before the Chief Engineer. If the Chief Engineer examines the matter and gives his decision which is not acceptable to the Contractor, or if the Chief Engineer does not give his decision within the time specified, the Contractor has to approach the Civil Court, by filing a civil suit and get his disputes/claims adjudicated, on merits. Use of words to approach the Civil Court for settlement of disputes makes it clear that final adjudicating authority in the case of a dispute is the Civil Court and not the Chief Engineer. Thus, the Intention of the parties is not to refer any dispute for adjudication by way of arbitration but to get adjudicated the dispute only through the normal procedure of approaching law Courts. The said clause does not also contemplate or require the Chief Engineer to hold any enquiry or hear the parties before deciding the matter. On the other hand, the clause merely requires the Chief Engineer to consider the claim of the Contractor and give his decision thereon. Such decision being on behalf of KPC, the Contractor can either accept it or approach the Civil Court for adjudication. Thus the Petitioner has failed to make out two of the three ingredientsrequirement of enquiry by the named Authority and requirement of finality by a binding decision.15. The distinction between an expert determination and arbitration has been spelt out in Russell on Arbitration, 21st Edn., in the following words:Many cases have been fought over whether a contracts chosen form of dispute resolution is expert determination or arbitration. This is a matter of construction of the contract, which involves an objective enquiry into the intentions of the parties. First, there are the express words of the disputes clause. If specific words such as arbitrator, arbitral tribunal, arbitration or the formula as an expert and not as an arbitrator are used to describe the manner in which the dispute resolver is to act, they are likely to be persuasive although not always conclusive....Where there is no express wording, the court will refer to certain guidelines. of these, the most important used to be, whether there was an issue between the parties such as the value of an asset on which they had not taken defined positions, in which case the procedure was held to be expert determination; or a formulated dispute between the parties where defined positions had been taken, in which case the procedure was held to be an arbitration. This imprecise concept is still being relied on. It is unsatisfactory because some parties to contract deliberately choose expert determination for dispute resolution. The next guideline is the judicial function of an arbitral tribunal as opposed to the expertise of the expert; ....An arbitral tribunal arrives at its decision on the evidence and submissions of the parties and must apply the law or if the parties agree, on other consideration; an expert, unless it is agreed otherwise, makes his own enquiries, applies his own expertise and decides on his own expert opinion.21. To the aforesaid proposition, we may add that in terms of Clause 29(a) and similar other clauses, any dispute or difference irrespective of its nomenclature in matters relating to specifications, designs, drawings, quality of workmanship or material used or any question relating to claim, right in any way arising out of or relating to the contract designs, drawings etc. or failure on the contractors part to execute the work, whether arising during the progress of the work or after its completion, termination or abandonment has to be first referred to the Chief Engineer or the Designated Officer of the Department. The Chief Engineer or the Designated Officer is not an independent authority or person, who has no connection or control over the work. As a matter of fact, he is having over all supervision and charge of the execution of the work. He is not required to hear the parties or to take evidence, oral or documentary. He is not invested with the power to adjudicate upon the rights of the parties to the dispute or difference and his decision is subject to the right of the aggrieved party to seek relief in a Court of Law. The decision of the Chief Engineer or the Designated Officer is treated as binding on the contractor subject to his right to avail remedy before an appropriate Court. The use of the expression in the first place unmistakably shows that non-adjudicatory decision of the Chief Engineer is subject to the right of the aggrieved party to seek remedy. Therefore, Clause 29 which is subject matter of consideration in most of the appeals and similar clauses cannot be treated as an Arbitration Clause.22. As a corollary to the above, we hold that the judgment of the Designated Judge in Mysore Construction Co. v. Karnataka Power Corporation Ltd. (supra) lays down the correct law.27. One of the questions which arose for consideration in Karnataka State Road Transport Corporation and Anr. v. M. Keshava Raju (supra) was whether the appointment of Arbitrator under Section 11 of the 1996 Act was proper. The facts of that case show that on an application filed by the Respondent under Section 11 of the 1996 Act, the Designated Judge appointed an Arbitrator. After hearing the parties, the Arbitrator passed award dated 15.10.1998 whereby he allowed some claims of the Respondent. The objections filed by the Appellant under Section 34 of the 1996 Act were rejected by VI Additional City Civil Judge, Bangalore. In the appeal filed against the judgment of the trial Court, the High Court formulated the following points:(1) Whether the Appellant can be permitted to raise the ground regarding the alleged want of jurisdiction in this Court to refer the dispute between the parties to an Arbitrator under Section 11 of the Act, for the first time, in this appeal.(2) Whether the ground regarding the legality and justification on the part of the Arbitrator to Award a sum of Rs. 2,85,000 towards reimbursement of overhead charges and another sum of Rs. 2,85,000 towards compensating the loss of profits was raised before the Court below, and if it was not raised, whether such plea can be allowed to be raised in this appeal for the first time and if the above plea was in fact raised before the Court below, whether the Arbitrator is justified in awarding a sum of Rs. 2,85,000 towards reimbursement of overhead charges and another sum of Rs. 2,85,000 towards compensating loss of profits having regard to Clause 15(a) of the agreement.The Division Bench referred to Section 16 and held:In our considered opinion, the above plea cannot be entertained for more than one reason. Firstly, one of the objects in enacting the Act is to have early completion of arbitration proceedings minimising the supervisory role of Courts in arbitral process. Sections 4, 5 and 16 of the Act have been enacted to give effect to that object. Secondly, even the method of arbitration as a dispute resolution mechanism and the procedure envisaged for that are intended to reach the finality to resolve the dispute between the parties as quickly as possible. Therefore, it is imperative that the party raising jurisdiction point, should raise such plea at the earliest, that is to say, at the threshold of the proceeding. If that is not insisted, it is trite, the very object in enacting the Act, on the basis of the UNCITRAL Modern Law, would be defeated. The jurisdiction plea now raised for the first time in the Memorandum of Appeal was not raised either directly or by necessary implication before this Court in C.M.P. No. 4/1996 or before the Arbitrator or before the Court below. The Appellant having acquiesced in the jurisdiction of the Arbitral Tribunal without any demur and protest, having participated in the proceedings and having suffered an award cannot now turn round and raise the plea that the orders of this Court in C.M.P. No. 4 of 1996, the award of the Arbitrator and the judgment of the Civil Court dated 20-6-2000 in Arbitration Suit No. 6 of 1998 are nullity.Thirdly, the Appellant should be deemed to have waived his right to object to the jurisdiction of the Arbitrator to pass the impugned award in terms of the provisions of Section 4 of the Act. Section 4 reads as follows:(4) Waiver of right to objectA party who knows that -(a) any provision of this Part from which the parties may derogate, or(b) any requirement under the arbitration agreement,has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time limit is provided for stating that objection, without that period of time, shall be deemed to have waived his right to so object.17. Section 4 narrates the circumstances in which the party, who knowingly fails to object the non-compliance of any non-mandatory provisions of Part-I or any requirement under the arbitration agreement by the other party, is deemed to have waived his right to object. This section is based on general principles such as estoppel or venire contra factum proprium. It is intended to help the arbitral process function efficiently and in good faith. If there is non-compliance of any non-mandatory provision of Part I or of any requirement of the arbitration agreement by a party to an arbitration agreement of which the other party to the agreement though has the knowledge of such non-compliance but does not object without undue delay, or if a time limit is provided for stating that objection and no objection is taken within that period of time, such a party later on can neither raise objection about that non-compliance of any provision of Part I nor any requirement of the arbitration agreement since such party shall be deemed to have waived its objection. Though, in order to apply the doctrine of waiver by invoking Section 4, the first condition is that the non-compliance must be of non-mandatory provision of Part I or of any requirement under the arbitration agreement, certain mandatory provisions of the Act also provide for a grant of waiver in the event of failure to object. For example, Sub-sections (2) and (3) of Section 16 are one of such mandatory provisions. Section 16(2) of the Act provides that a plea that the Arbitral Tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence. Section 16(3) of the Act provides that a plea that the Arbitral Tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.28. Thus, none of the judgments relied upon by Learned Counsel for the contractors is of any help to their cause.26. Krishna Bhagya Jala Nigam Ltd. v. G. Harishchandra Reddy (supra) was decided on the peculiar facts of that case. The contract which was subject matter of interpretation in that case contained Clause 29. When the Respondent raised disputes and called upon the Chief Engineer to act as an Arbitrator, the latter refused to do so. The Designated Judge allowed CMP No. 26/1999 filed under Section 11 of the 1996 Act and directed the Chief Engineer to act as an Arbitrator. Thereafter, both the parties filed their respective statements before the Arbitrator and produced evidence. The Arbitrator passed award dated 25.6.2000. The Appellant - Krishna Bhagya Jala Nigam Ltd. filed a petition under Section 34(2)(v) of the 1996 Act. The Civil Court confirmed the award of the Arbitrator. Appeal filed against the judgment of the Civil Court was dismissed by the High Court. Before this Court, an argument was raised that Clause 29 of the contract was not an arbitration clause. While rejecting the argument, the two Judge Bench observed:We do not find any merit in the above arguments. The plea of no arbitration clause was not raised in the written statement filed by Jala Nigam before the arbitrator. The said plea was not advanced before the civil court in Arbitration Case No. 1 of 2001. On the contrary, both the courts below on facts have found that Jala Nigam had consented to the arbitration of the disputes by the Chief Engineer. Jala Nigam had participated in the arbitration proceedings. It submitted itself to the authority of the arbitrator. It gave consent to the appointment of the Chief Engineer as an arbitrator. It filed its written statements to the additional claims made by the contractor. The Executive Engineer who appeared on behalf of Jala Nigam did not invoke Section 16 of the Arbitration Act. He did not challenge the competence of the Arbitral Tribunal. He did not call upon the Arbitral Tribunal to rule on its jurisdiction. On the contrary, it submitted to the jurisdiction of the Arbitral Tribunal. It also filed written arguments. It did not challenge the order of the High Court dated 10-9-1999 passed in CMP No. 26 of 1999. Suffice it to say that both the parties accepted that there was an arbitration agreement, they proceeded on that basis and, therefore, Jala Nigam cannot be now be allowed to contend that Clause 29 of the contract did not constitute an arbitration agreement.25. In Punjab State v. Dina Nath (supra), a two Judge Bench was called upon to consider whether Clause 4 of work order No. 114 dated 16.5.1985 constituted an arbitration agreement. The clause in question was as under:Any dispute arising between the department and the contractor/society shall be referred to the Superintending Engineer, Anandpur Sahib, Hydel Circle No. 1, Chandigarh for orders and his decision will be final and acceptable/binding on both the parties.After noticing the judgment in K.K. Modi v. K.N. Modi, the Court observed:Keeping the ingredients as indicated by this Court in K.K. Modi in mind for holding a particular agreement as an arbitration agreement, we now proceed to examine the aforesaid ingredients in the context of the present case:(a) Clause 4 of the Work Order categorically states that the decision of the Superintending engineer shall be binding on the parties.(b) The jurisdiction of the Superintending Engineer to decide the rights of the parties has also been derived from the consent of the parties to the Work Order.(c) The agreement contemplates that the Superintending Engineer shall determine substantive rights of parties as the clause encompasses all varieties of disputes that may arise between the parties and does not restrict the jurisdiction of the Superintending Engineer to specific issues only.(d) That the agreement of the parties to refer their disputes to the decision of the Superintending Engineer is intended to be enforceable in law as it is binding in nature.The words any dispute appears in Clause 4 of the Work Order. Therefore, only on the basis of the materials produced by the parties in support of their respective claims a decision can be arrived at in resolving the dispute between the parties. The use of the words any dispute in Clause 4 of the Work order is wide enough to include all disputes relating to the said Work Order. Therefore, when a party raises a dispute for non-payment of money after completion of the work, which is denied by the other party, such a dispute would come within the meaning of arbitration agreement between the parties. Clause 4 of the Work Order also clearly provides that any dispute between the department and the contractor shall be referred to the Superintending Engineer, Hydel Circle No. 1, Chandigarh for orders. The word orders would indicate some expression of opinion, which is to be carried our, or enforced and which is a conclusion of a body (in this case Superintending engineer, Hydel Circle No. 1, Chandigarh). Then again the conclusion and decision of the Superintending Engineer will be final and binding on both the parties. This being the position in the present case and in view of the fact that Clause 4 of the Work Order is not under challenge before us, the decision that would be arrived at by Superintending Engineer, Hydel Circle No. 1, Chandigarh must also be binding on the parties as a result whereof Clause 4 must be held to be a binding arbitration agreement.The Bench distinguished the judgment in State of Orissa v. Damodar Das (supra) by making the following observations:From a plain reading of this clause in Damodar Das it is evident that the powers of the Public Health Engineer were essentially to supervise and inspect. His powers were limited to the questions relating to the meaning of the specifications, drawings and instructions, quality of workmanship or materials used on the work or as to any other question, claim, right, matter, drawings, specifications, estimates, instructions, orders or these conditions or otherwise concerning the works or the execution or failure to execute the same. However, in the case before us, the Superintending Engineer was given full power to resolve any dispute arising between the parties which power in our view is wide enough to cover any nature of dispute raised by the parties. The clause in the instant case categorically mentions the word dispute which would be referred to him and states his decision would be final and acceptable/binding on both the parties.