Calcutta High Court Strikes Down Arbitration Clause As Unconstitutional, Upholds Subcontractor's Right To Independent Dispute Resolution

Further, it allowed the Indian Oil Corporation (IOCL) to unilaterally decide whether a dispute could be referred to arbitration, thus depriving the subcontractor of an independent right to raise disputes.

Brief Facts:

The matter pertained to works contracts issued to M/s Zillion Infraprojects Pvt Ltd (Petitioner) by Bridge and Roof Company (India) Limited (B&R) (Respondent). The principal contract was executed between Indian Oil Corporation of India Limited (IOCL) and the respondent concerning work involving mechanical equipment, erection, and pending works. The Petitioner was subcontracted to perform this work. Disputes and differences arose between the Petitioner and the Respondent which led to the filing of petitions under Section 11 of the Arbitration andConciliation Act, 1996 for appointment of arbitrator.

The relevant clause in both works contracts was Clause 14.0. The Petitioner argued that this clause provided for the resolution of disputes between the Petitioner/sub-contractor and B&R. However, if the Petitioner wishes to refer the matter to arbitration, it must approach B&R with a request substantiating its claim. Only if B&R feels justified in initiating arbitration will it invoke the arbitration clause with IOCL. It highlighted that the inherent lopsidedness of the clause and argued that even if the Petitioner sought to raise a dispute by invoking the arbitration clause, it must approach B&R despite the dispute being against B&R itself.

Another injustice in the clause as argued by the Petitioner was that the Petitioner must bear its portion of expenses regarding its claim without participating in the arbitral process. It argued that the conditions of the arbitration clause were unreasonable and violated Article 14 of the Constitution.

The Petitioner argued that since the intention to refer disputes to arbitration was expressed in the clause, the portion of the clause violating Article 14 of the Constitution should be struck down. It argued that it should be permitted to independently refer the matter to arbitration in disputes between the Petitioner and B&R.

The relevant arbitration clause is reproduced below:

“14.0 The Arbitration of disputes if any between IOCL & B&R will be final & binding upon the subcontractor. No dispute can be adjudicated separately through arbitration or any other similar forum for any disputes between the subcontractor & B&R. However in case the subcontractor desires B&R to raise certain disputes pertaining to its claim for reference to arbitration, the subcontractor shall approach B&R with such request substantiating its claim and incase B&R feels justified to initiate an arbitration (decision of concerned General Manager of B&R in this regard will be final & binding), the arbitration may be invoked by B&R with M/s. IOCL and decision of the arbitrator will be final and binding upon the subcontractor for all disputes. However the subcontractor has to bear prorata cost of its portion of claim of arbitration expenses. The jurisdiction of Court, if situation so arises, in any circumstances shall be at Kolkata.”

Observations by the High Court:

The High Court noted that the clause was divided into two distinct parts. The first part pertained to disputes between the subcontractor and the contractor which stated that such disputes cannot be resolved through arbitration or any alternative dispute resolution forum. The second part was that if the subcontractor wishes to raise a dispute against IOCL, it must seek the contractor's decision on whether to include this claim in the arbitration proceedings against IOCL.

The Petitioner challenged this clause on the grounds of violating Article 14 of the Constitution and argued that the second part of the clause was unjust and violated party autonomy.

However, the High Court held that the second part of the clause was severable from the first part. Striking down the second part does not affect the first part, which clearly barred any dispute between the subcontractor and the contractor from being referred to arbitration. The High Court also examined the compliance of the arbitration clause with Section 7 of the Arbitration Act. Section 7 defines an arbitration agreement as an agreement to submit to arbitration all or certain disputes arising between the parties. The High Court noted that the clause provided a clear bar against arbitration for disputes between the subcontractor and the contractor, using negative language to indicate this prohibition.

Further, it held that there was nothing in the other parts of the clause to suggest a right to refer exclusive disputes between the subcontractor and the contractor to arbitration. The clause only pertained to disputes involving IOCL, where the subcontractor may add its component subject to the contractor's discretion, without any participatory rights. Consequently, the bench held that there was no violation of Section 7 of the Arbitration Act concerning disputes between the subcontractor and the contractor.

The bench noted that the dispute arose exclusively between the subcontractor and the contractor, with no involvement from IOCL.

Referring to the decision of the Supreme Court in the cases such as precedents such as NBCC (India) Ltd. v. Zillion Infraprojects Pvt. Ltd. 2024 LiveLaw (SC) 246 and M.R. Engineers v. Som Datt Builders, 2009 (9) SCALE 298, the High Court held that an arbitration clause from another contract can only be incorporated by specific reference. In the absence of such incorporation, it held that the subcontractor could not benefit from the arbitration clause in the agreements between IOCL and the contractor. Therefore, the only operative arbitration clause is Clause 14.0 in the agreement between the subcontractor and the contractor, which explicitly precluded arbitration for disputes arising exclusively between them.

The Petitioner further alleged a violation of Article 14 of the Constitution and argued that the restriction to refer matters between the Petitioner and the Respondent to arbitration limits the forum to civil courts and other forums under general law. The High Court noted that clause 14.0 of the agreement merely stated that such disputes cannot be adjudicated through arbitration or any other “similar forum,” meaning any other Alternative Dispute Resolution forum. The High Court held that it does not remove the Petitioner's remedy under general law to move the civil court or any other forum, if available under any other law.

The High Court held that the Petitioner cannot selectively accept certain terms of the agreement while challenging others.

However, the High Court held that the second part of the clause imposed unreasonable restrictions on the Petitioner regarding disputes with IOCL. The bench held that the Petitioner has the right to raise the issue with the Respondent and join an arbitration initiated by the Respondent against IOCL. It held that this provision violated Article 14 of the Constitution in two ways: first, the petitioner is not allowed to participate in the proceedings despite being required to bear the expenses for its portion of the claim; second, the reference of the dispute to the adjudicatory forum was entirely at the Respondent's discretion which deprived the Petitioner of its independent right to raise a dispute before the appropriate adjudicatory authority.

Therefore, the High Court held that the second part of the arbitration clause, being violative of Article 14, should be struck down concerning the Petitioner. Consequently, it held that the Petitioner was free to raise any dispute against IOCL alone or against both IOCL and the Respondent before the competent civil court or any other authority with adjudicatory power under any other statute.

Case Title: M/s Zillion Infraprojects Pvt Ltd Vs Bridge and Roof Co India Ltd

Case Number: AP-COM No. 77 of 2024 and AP No. 407 of 2022

Advocate for the Petitioner: Mr. Kishore Datta, Sr. Adv. Mr. Soumen Das, Adv. Mr. Altamash Alim, Adv. Ms. Promita Ghose, Adv.

Advocate for the Respondent: Mr. Amitabh Shukla, Adv. Mr. Mohit Gupta, Adv. Mr. Prakash Ch. Pandey, Adv.

Date of Judgment: 08.07.2024

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