M/S Larsen & Toubro Ltd vs M/S Mohan Lal Harbans Lal Bhayana

2. An agreement dated 29.2.1988 was entered into between the Standing Conference of Public Enterprises (SCOPE) and the appellant namely Larsen & Toubro (L&T Ltd.). This agreement was for construction of Twin Tower Office Complex at Laxmi Nagar District Centre, Delhi which was awarded by the SCOPE to the appellant. Original contract value for this work was stipulated at Rs.27.48 Crores. Works comprised of the Civil Works and also subsidiary works, that could be ordered from time to time by SCOPE/Architect. This agreement also permitted the appellant to sub-contract. Accordingly, the appellant entered into an agreement dated 3.3.1988 with the respondent. While retaining the civil works with itself, the appellant awarded finishing works including brickworks, wood works, flooring, furnishing, aluminum works and other miscellaneous works including waterproofing etc. to the respondent. It was a pass through contract on a back to back basis. The value of sub contract was stated as Rs.12.08 crores. Clause 2 of this agreement dated 3.3.1988 pertains to the payments which were to be made by the appellant to the respondent. As can be seen from the reading of this Clause, as reproduced below, amount under this sub contract was payable to the respondent by the appellant only on receipt of corresponding receipts from SCOPE:

5. The position which prevailed up to this stage was that for the works undertaken by the respondent, it could receive the payments only when such payments were made by SCOPE to the appellant. Further, all questions and disputes between the appellant and the respondent were to be referred to a sole arbitrator where the claim was up to Rs.10 lakhs and three arbitrators for claims beyond 10 lakhs. The arbitrator(s) was not supposed to deal with “excepted matters”, so stated in the certificates. However, even if the award of the arbitrator/umpire was in favour of the respondent, respondent could not receive payment under the said award unless such a payment was received by the appellant from SCOPE under the award. In that event, the respondent was to provide an opportunity to the appellant to raise those claims with SCOPE. On receiving the payments from SCOPE either under the arbitration award between SCOPE and the appellant or otherwise, the appellant was supposed to honour the award passed in favour of the respondent. In essence, the parties understood that as the Principal/Employer was SCOPE, for whom the work was to be performed by virtue of main agreement dated 29.2.1988 entered into between parties and the sub contract between the appellant and respondent was on back to back basis, any work done by the respondent was for the benefit of SCOPE and ultimately liability for honoring the claims of the respondents was that of SCOPE and the appellant was not supposed to make any payment from its coffers.

6. The parties even acted on the basis of aforesaid understanding initially. There were certain claims of the respondent and the appellant in turn raised those claims with SCOPE. A settlement was reached between the appellant and SCOPE with respect to those claims whereby the appellant was given a sum of Rs.2.15 crores by SCOPE. The appellant and the respondent entered into an agreement dated 31.1.1990 for apportioning the aforesaid amount, whereby a sum of RS.77.40 lacs was paid to the respondent towards full and final settlement of claims/ price escalation on works due to hindrance caused in execution of work and to complete the balance work. At the same time, another important understanding was also reached between the parties. While making this apportionment, the modalities of settling the disputes between the parties through arbitrator also underwent a significant change. This is clear from Clause (viii) of the first supplementary agreement which reads as under:

7. This clause acknowledges the fact that for the work done by the respondent under the sub contract, there could be two kinds of situations. There could be a situation where there would be disputes and differences between the appellant and the respondent for the works done by the respondent. This could be regarding the workmanship or the amounts payable for the work done etc. There could also be a situation where SCOPE is not satisfied with the workmanship or may raise dispute about the quantum of bills etc. resulting into denial of payment or short payment to the appellant for the work undertaken by the respondent under the sub contract. The Clause (viii) in the first supplementary agreement provided that such disputes will be deemed to have been raised jointly between the respondent and appellant on the one side and SCOPE on the other side. For this reason, this Clause further provided that appellant was to refer such disputes to SCOPE for settlement by negotiation failing which arbitration (as per mechanism provided in the Clause between the appellant and SCOPE). In order to lodge these claims suitably and properly, the respondent was supposed to assist and cooperate the appellant. Such an assistance was expected in successfully pursuing arbitration as well. Reason for such a collaborative effort, with synergy between the two parties synergize, was too obvious. Since the respondent has undertaken the work, its inputs could immensely help the appellant in prosecuting the claims efficaciously and potently. Further, by participating the respondent would have satisfaction that its interest is appropriately taken care of. It was even supposed to bear proportionate cost of arbitration. It was, thus, clear intention that the claims of the respondent were to be taken up by the appellant and raise with SCOPE and in the event SCOPE disputing those claims, get those claims adjudicated through arbitration. In that sense, both the appellant and respondent were on one side as co-claimants. However, since the respondent is not a party to the main agreement dated 29.9.1988 which is entered into between the appellant and SCOPE, the respondent was supposed to give the assistance and cooperate in the manner provided in this Clause. It is for this reason that this Clause unambiguously further provided that in view of the arbitration between the appellant and SCOPE, pertaining to the claims of the respondent as well, even if the disputes between the appellant and the respondent were deemed to have been settled and were not referable to arbitration again between these two parties.

8. On reading Clause 25 in the original agreement pertaining to the process of arbitration along with the modified mechanism agreed to between the parties in the aforesaid first supplementary agreement, the parties for making the change is clearly discernable. As per the original clause, the disputes between the appellant and the respondent were to be referred to the arbitral tribunal. After the rendition of award by the arbitral tribunal, money was still not payable under the award to the respondent. Instead, in order to recover those moneys from SCOPE, it was for the appellant to file a similar claim on SCOPE and on receiving the payment from SCOPE under the award, the appellant was to give the money to the respondent as per the award between the appellant and the respondent. It amounted to indulging in double exercise, viz. (1) an arbitration between the parties herein and thereafter another arbitration relating to subject matter between the appellant and SCOPE. (2) In order to rationalize and eliminate the dual exercise, the parties agreed that instead of resorting to arbitration between themselves, both would join together and prefer those claims with SCOPE. This modified process of arbitration, as envisaged in the first supplementary agreement, was much more rationale which appealed to reason.

9. The next event which took place cemented the aforesaid mechanism between the parties. It appears that there were further claims of the respondent which were raised by the appellant with SCOPE. SCOPE agreed to make payments and to apportion those payments between the appellant and the respondent, these two parties entered into another supplementary agreement dated 8.12.1993. The recital to this agreement is of paramount importance for our purposes. It records:

10. The parties acted as per modified understanding. It was further agreed whatever claims are received by the appellant from the SCOPE, they shall be shared between the appellant and respondent in the ratio of 67:33. The understanding between the parties that for any claims of the respondent, both the parties were to join together and raise claims against SCOPE was reinforced by Clause 6 in the said agreement which again provided an underlined message that in so far as the appellant and the respondent are concerned, they shall not resort to any arbitration between themselves on this account. For better appreciation, we reproduce Clause 6 herein below, of the second supplementary agreement, dated 8.12.1993:

13. Some further claims, out of the aforesaid contract arose and the appellant submitted those claims to SCOPE in October, 2000 which were up to date in November 2000. These were made jointly by these parties on SCOPE in August 2001. They were up dated again in December 2002 and January 2003 in concert with each other.

14. Now the stage came which led to present proceedings. While the things stood at the aforesaid level, the respondent decided to close the contract sometime in the year 2002. We are not required to go into the nitty gritty of this event viz. as to whether the respondent abandoned the site or it had completed the project. Suffice it is to note that the respondent raised many claims with the appellant and also served legal notice dated 31.1.2004 in this behalf. It nominated its arbitrator and called upon the respondent to appoint its arbitrator for settling the disputes between them. The appellant replied by denying the contents of the legal notice. This denial of the appellant prompted the respondent to file the application under Section 11 of the Act seeking a direction to the appellant to appoint its arbitrator. The exact prayer made in this application was as under:

20. In such a scenario, when the final bill is almost at the stage of finalization the only aspect that can be taken care of at this stage is to hasten the process of arbitration, in case after the passing of the final bill by SCOPE, some claims of the respondent still survive.

21. Accordingly while allowing this appeal and setting aside the order of the High Court, we would like to give the following directions, in order to balance the equities:

(4) In either of the aforesaid arbitrations, the arbitral tribunal shall endeavour to render its award within six months from the date of the constitution of the arbitral tribunal.

22. The appeal is allowed and disposed of in the aforesaid terms.