Dispute Agreed To Be Resolved By Authority Other Than Arbitrator Becomes Arbitrable If Such Authority Fails To Take A Decision: Kerala High Court

The Kerala High Court has ruled that if a dispute is to be adjudicated upon by an authority other than the Arbitrator as per the agreement between the parties, but the said Authority fails to/ refuses to take a decision, then such dispute would become arbitrable. 

While partly allowing an appeal, the Division Bench comprising Justice P.B. Suresh Kumar and Justice C.S Sudha elaborately examined the scope of 'excepted matters' and held as such:

• If a dispute is to be adjudicated upon by an authority other than the Arbitrator as per the agreement and if the parties have agreed to accept the decision of that authority as final and binding, the same would be an excepted matter and will not be arbitrable.
• However, in the absence of a decision by the said authority, the dispute would become arbitrable:
  

Brief Facts:

The appellant contractor was awarded some electrification work in furtherance of a tender process initiated by the Chief Engineer on behalf of the Centre. The parties entered into an agreement and the appellant executed the work.

While drawing the final bills, certain claims of the appellant were not accepted, the dispute was referred to arbitration as provided for in the agreement.  

The Arbitrator allowed a few claims and rejected the rest. The respondents approached the Court under Section 34 of the Arbitration and Conciliation Act challenging the arbitral award for allowing claims 9-13 and 13A-13E (dealing with classification of the soil strata).

It was their case that these claims were not arbitrable since as per Clause 3.1.10 of MES Standard Schedule of Rates (SSR), such disputes are to be decided by the Garrison Engineer (GE).

The Arbitrator had discarded this argument on the premise that the materials on record did not disclose that the GE had taken a decision regarding soil classification and therefore, the disputes relating to the said claims are arbitrable.

The lower court, however, allowed the O.P. on the ground that disputes relating to claims 9 -13 and 13A -13E are covered by Clause 3.1.10 of SSR and not arbitrable, being "excepted matters". 

Aggrieved by the same, the appellants moved the High Court.

Relevant Findings:

(i) Whether there is any infirmity in the award of the Arbitrator insofar as it relates to claims 9-13 and 13A-13E? 

The respondents argued that the award was patently illegal since disputes regarding the classification of the strata of soil met with during the excavation works ought to be decided by the GE. They added that they were not arbitrable since the arbitration clause specifically excludes such disputes from its scope and the lower court conceded.

The High Court primarily found the lower court's decision to be legally unsustainable on the ground that a court exercising power under Section 34 of the Act cannot reappraise the evidence and come to a different conclusion on a question of fact. 

However, placing reliance on General Manager, Northern Railway & Anr. v. Sarvesh Chopra, (2002) 4 SCC 45, the High Court agreed that if a dispute is to be adjudicated upon by an authority other than the Arbitrator as per the agreement and if the parties have agreed to accept the decision of that authority as final and binding, the same would be an excepted matter and will not be arbitrable. 

A close reading of Clause 3.1.10 of SSR shows that the parties had agreed to abide by GE's decision on the classification of the soil strata. At the same time, it was found that this clause neither precluded the appellant from raising a dispute regarding such classification nor did it empower the GE to refrain from deciding such a dispute.

The Court found that the clause only provides that adverse decision by the GE in matters covered by the regulations will be final and binding on the appellant, i.e., they cannot challenge the same. In other words, if GE's decision is favourable to the appellant, the terms of the agreement will be modified suitably to let the appellant claim their legitimate dues consequent on the decision.

"It is thus evident that if the GE does not decide the dispute falling under Clause 3.1.10 of SSR, the appellant would be deprived of their legitimate dues which they would have been entitled to, had the decision of the GE been favourable to them."

Since the materials on record did not indicate the parties' intention for the appellant to suffer a loss on account of GE's failure or refusal to make a decision, their contemplation at the time of entering into the agreement was that a dispute falling within the scope of Clause 3.1.10 is raised will be decided by the GE.

"Even otherwise, conditions in the agreement which would make the claim of a party an excepted matter for the purpose of the arbitration clause provided for in the agreement, are to be scrupulously followed." 

(ii) Whether the dispute required to be adjudicated by the GE as per the contract, if not adjudicated by the GE, would become arbitrable.

Clause 3.1.10 does not bar the appellant from making appropriate claims in the event of a favourable decision by the GE. When interpreted as such, the matter covered therein would be an excepted matter and therefore not arbitrable even if there is no decision. Consequently, the party aggrieved would be entitled to file a suit.

The question is whether the parties have intended that the appellant should take recourse to the remedies available to them before a civil court in the event of failure or refusal on the part of the GE to take a decision in respect of a matter covered by Clause 3.1.10. 

In the arbitration clause, it was mentioned all disputes between them except the excepted matters shall be resolved through arbitration. The parties did not envision a situation where some of the disputes were resolved through arbitration and others through remedies available before the civil court. 

The Court, therefore, decided that in the absence of a decision by the GE on a dispute covered by Clause 3.1.10 of SSR, the dispute would become arbitrable:

"If that be so, according to us, if there is failure or refusal on the part of the GE to take a decision as provided for in Clause 3.1.10 of SSR, the dispute would cease to be an excepted matter."

As such, it was held that there was no infirmity in the decision of the Arbitrator regarding claims 9-13 and 13A-13E.

Appeal Partly Allowed:

As such, the arbitral award was restored and the decision of the lower court in so far as it ruled that claims 9-13 and 13A-13E as excepted matters was quashed. 

Claims 1 and 2 which were rejected by the Arbitrator in the beginning were dismissed by the High Court as well on the ground that they went against the spirit of competitive bidding. 

Therefore, the appeal was partly allowed. 

The appellant was represented by Senior Advocate K.L. Varghese and Advocates Ranjith Varghese, Rahul Varghese and Santha Varghese. Senior Panel Thomas Mathew Nellimoottil, ASG Vijaya Kumar and CGC K. Thyagarajeshwaran appeared for the respondents. 

Case Title: M/s B.E. Billimoria & Co. Ltd. v. Union of India & Anr.

Click Here To Read/Download The Order