Clause Merely Providing Departmental Remedies, For Faster Resolution Of Disputes; Does Not Constitute An Arbitration Agreement: Bombay High Court

The single bench of Justice Sandeep V. Marne ruled that where a clause merely provides for departmental remedies to a contractor for faster resolution of disputes, the same would not constitute an arbitration agreement.

The Court observed that the word "arbitration" or "arbitrator" was absent in the contract executed between the parties. Rejecting the contention of the applicant that the Court must, 'by default', refer the disputes to arbitration while deciding a Section 11 application, the bench ruled that the Court must first satisfy itself regarding the existence of a valid and binding arbitration agreement between the parties.

The applicant- M/s. Mehra & Company entered into a contract with the respondent- Godawari Marathwada Irrigation Development Corporation (GMIDC), Aurangabad. After certain disputes arose between the parties, the applicant invoked the arbitration clause and filed an application under Section 11(6) of the A&C Act before the Bombay High Court, seeking appointment of the Arbitrator.

The respondent GMIDC submitted before the High Court that as per the relevant clause contained in the agreement between the parties, the dispute between the parties was required to be referred to the Superintending Engineer, whose decision shall be final, conclusive, and binding on the parties. Further, against the decision of the Superintending Engineer, the party may appeal before the Chief Engineer. The respondent contended that the same did not constitute an arbitration agreement between the parties.

The respondent Corporation placed reliance on the decision of the Bombay High Court in B.T. Patil Construction versus Maharashtra Krishna Valley Development Corporation (2014), where a similar clause, as contained in the contract between the parties, was interpreted by the High Court.

The High Court in B.T. Patil Construction (2014) had ruled that the powers given to the Superintending Engineer under the contract executed with the Maharashtra Krishna Valley Development Corporation, Pune, were in the nature of a departmental dispute resolution mechanism, meant for expeditious resolution of problems, which cannot be construed as an arbitration.

The respondent further placed reliance on the decision in M/s Akash Construction versus Chief Executive Officer (2003), where the Bombay High Court was dealing with similar clauses in a contract executed with the Zilla Parishad, Aurangabad. The High Court had concluded that the said clauses did not constitute an arbitration agreement.

The applicant M/s. Mehra & Company submitted that the Court, while dealing with an application under Section 11 of the A&C Act, must refer the matter for arbitration by default and leave the issue of arbitrability or non-arbitrability to the arbitrator.

The applicant averred that the decisions of the Bombay High Court with respect to the Section 11 application, as relied upon by the respondent, do not constitute a binding precedent. The applicant added that the Court while dealing with a Section 11 application is required to consider the true intent of the parties with respect to the dispute resolution mechanism.

It argued that mere existence of a two-tier dispute resolution system, before the Superintending Engineer and the Chief Engineer, cannot be construed to mean an absence of the arbitration agreement between the parties.

The applicant referred to the decision of the Supreme Court in Centrotrade Minerals and Metal Inc. versus Hindustan Copper Ltd. (2020), where the Supreme Court was dealing with an agreement which provided for first stage arbitration in India, with a right to appeal to a second stage arbitration in London. The Supreme Court in Centrotrade Minerals (2020) had held that there is nothing in the A&C Act that prohibits the contracting party from agreeing upon second stage arbitration.

The High Court observed that in the case of Centrotrade Minerals (2020), the relevant clause in the agreement between the parties provided for resolution of disputes through the arbitration panel of Indian Council of Arbitration. Further, the clause also provided a right to appeal to second arbitration in London.

However, in the present case, the bench reckoned that the word "arbitration" or "arbitrator" was clearly absent in the contract executed between the parties. While noting that under the contract, the Superintending Engineer was empowered to resolve the disputes, the Court concluded that the same was merely a departmental dispute resolution mechanism meant for resolving the problems expeditiously.

"While in Centrotrade, there was specific agreement for arbitration, albiet in two stages, in the present case there is complete absence of any such agreement. Therefore, mere existence of two stage dispute resolution mechanism would not mean that the same can be construed as an arbitration agreement. The judgment in Centrotrade therefore cannot be used to import an arbitration agreement, which is inherently absent, in every two tier dispute resolution mechanism system. The reliance of Mr Thigle on the Judgment in Centrotrade (supra) is completely misplaced", the Court said.

Rejecting the contention of the applicant that the Court must, 'by default', refer the disputes to arbitration while deciding a Section 11 application, the Court held that while deciding application under Section 11(6), the Court must first satisfy itself that there is a valid and binding arbitration agreement between the parties.

The bench ruled that though the power of appointment of arbitrator under Section 11 of the A&C Act do not have a precedential value, however, the same cannot be a reason to completely ignore the interpretation placed by the Bombay High Court in its previous decisions, in respect of the identical clauses, as contained in the contract between the parties.

"Even if the decisions in B.T. Patil Construction (supra) and Akash Construction (supra) are to be momentarily ignored accepting the contention of Mr Thigle that they do not have precedential value, plain and simple reading of clauses 30 (1),(2) and (3) would indicate that the parties have not alleged for resolution of the disputes by arbitration. Both clauses merely provide for departmental remedies to the contractor for faster resolution of disputes. The same cannot be treated as a valid and arbitration agreement between the parties", the Court added.

Thus, holding that there was no arbitration agreement existing between the parties, the Court dismissed the application filed by the applicant under Section 11(6) of the A&C Act.

Case Title: M/s. Mehra & Company versus State of Maharashtra

Dated: 02.12.2022 (Bombay High Court, Aurangabad)

Counsel for the Applicant: Mr Girish K. (Naik) Thigale, Advocate

Counsel for the Respondent: Mr S.S. Dande, A.G.P. for State; Mr. B.R. Surwase, Advocate

Citation: 2022 LiveLaw (Bom) 481  

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