Settlement Of Dispute By Expert Is Not Arbitration, No Intention To Submit To Independent Arbitrator: Calcutta High Court

It held that an expert, unless it is agreed otherwise, makes his own enquiries applies his own expertise and decides how to resolve a problem or a dispute or difference. It held such clauses do not reflect the intention of the parties to submit to the jurisdiction of an independent arbitrator.

“Neither, present and future disputes arising out of the contract nor disputes with regard to payment or withholding of payment arising out of the said contract in present or in future, have been included in the settlement clause.”

Brief Facts:

Mr Birendra Bhagat (“Petitioner”) sought recovery of Rs.6,68,24,995/- as per the contract for constructing a residential complex named 'Starwood.' The Petitioner alleged a breach of contract by Arch Infra Properties Private Limited (“Opposite Party”) stating that there was a delay in payments and it failed to fulfil contractual obligations. The Petitioner filed a suit for recovery of money. The Opposite Party filed a petition under Section 8 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and contended that the dispute should be resolved through the arbitration clause mentioned in the contract.

Section 8 gives power to the court to refer parties to arbitration where there is an arbitration agreement. The Commercial Court approved the application filed by the Opposite Party. Feeling aggrieved, the Petitioner challenged the decision of the Commercial Court in the Calcutta High Court (“High Court”).

The Petitioner contended that clauses 29(a) and 28(a) of the contract didn't constitute arbitration clauses for settling money claims but were mechanisms for resolving disputes related to work execution by the architect. It argued that the architect, being connected to the Opposite Party, was unfit to arbitrate. Additionally, it argued that the scope of the dispute was limited to work quality, materials, and drawings, not financial claims.

Clauses 29(a) and 29 (b) of the 2015 contract are quoted below:-

“29 Disputes/Arbitrations:

(a) For all disputes arising out regarding quality of work, drawings, materials – The Architects decision will be a binding for the Employer and the Contractor.'

(b) Disputes with suppliers etc. : All disputes with suppliers/others and interrelated problems are to be settled by the Contractor and no claim whatsoever will be entertained.”

Observations by the High Court:

The High Court referred to Clauses 29(a) and 28(a) of the contract and noted that although titled “Disputes/Arbitrations”, both clauses established an internal mechanism for dispute resolution rather than referring disputes to an independent tribunal. Clause 29(a) stated that the architect's decision regarding disputes on the quality of work, drawings, and materials shall bind both the employer and the contractor. The High Court noted that it laid down an in-house resolution mechanism, whereby the architect, overseeing the execution, settles disputes concerning the nature of work and its quality based on materials and designs.

The High Court held that neither clause met the criteria of an arbitration clause. It held that it didn't mandate the referral of all present and future disputes under the contract to an independent tribunal. Although the absence of specific terms like "arbitrators" or "arbitration agreement" does not invalidate an arbitration clause, it held that the fundamental attributes of an arbitration clause were lacking.

Further, it held that the clauses addressing payment terms failed to indicate any involvement of the architect in endorsing bills or adjudicating payment disputes. It held that the limited scope of these clauses and their focus on quality-related disputes further distanced them from constituting arbitration agreements.

The High Court referred to the decision of the Supreme Court in Jagdish Chander vs. Ramesh Chander and Ors. (2007) 5 SCC 719 where the SC held that while the absence of specific terminology does not preclude an agreement from being an arbitration clause, the clauses must demonstrate a clear intention to refer disputes to an independent tribunal. The High Court held that the clauses lacked the requisite attributes of an arbitration agreement, as they neither encompassed all disputes nor involved an independent arbitrator's determination.

The High Court held that the arbitration clauses outlined a procedure for resolving internal disputes concerning ongoing work and assigning the architect the responsibility for settling disputes related to drawings and materials that could impact work quality.

The bench held that while an arbitration agreement need not adhere to a specific form, it must reflect the parties' agreement to refer disputes arising from the contract to arbitration. It held that the courts should interpret commercial documents containing arbitration clauses in a manner that upholds the agreement's intent and lean towards enforcing arbitration clauses whenever possible. However, the bench held that:

“A common sense approach to the said clauses is that the architect who was in overall charge of the execution of the work would resolve all disputes with regard to the quality, materials and drawing of the ongoing project. The attending circumstances which can be gathered from the other clauses of the contract do not indicate that the architect had any role to play with regard to the resolution of disputes arising out of such bills.”

It held that besides arbitration, there exists another concept known as expert determination, where experts ensure successful contract implementation. Unlike arbitration, where a tribunal applies the law, an expert makes decisions based on their own inquiries and expertise, aiming for expedient project execution.

Therefore, the High Court held that Clauses 29(a) and 28(a) cannot be said to be arbitration clauses.

Consequently, the High Court held that the decision of the Commercial Court was flawed.

Case Title: Mr. Birendra Bhagat vs. Arch Infra Properties Private Limited

Case Number: CO 4354 of 2023

Advocate for the Petitioner: Mr Aniruddha Chatterjee Mr Aditya Kanodia Mr Rudrajit Sarkar

Advocate for the Respondent: Mr. Pronit Bag Mr. Ashis Kr. Mukherjee Mr S. Prasad Mr Manmatha Mondal

Date of Judgment: 07.05.2024

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