Holding

The contractual clauses do not amount to an arbitration agreement, so Section 8 cannot be invoked and the appeal is dismissed.

Summary

The appellant entered into a construction contract with the respondent that contained clauses making the decisions of the Executive Engineer and the Managing Director final and binding on the parties. Disputes arose over payments and work, and the appellant sought appointment of an arbitrator under Section 8 of the Arbitration Act, 1940. The Civil Judge appointed an arbitrator, but the High Court set aside the order, holding that the contract did not contain an arbitration clause and therefore Section 8 could not be invoked. The Supreme Court examined the language of clauses 23 and 24, distinguishing an expert or certifier’s decision from a true arbitration, and held that the clauses were not arbitration agreements. Consequently, the appellant's application under Section 8 was misconceived and the appeal was dismissed.

Issues considered

Whether clauses 23 and 24 of the contract constitute an arbitration agreement within the meaning of the Arbitration Act, 1940.
Whether Section 8 of the Arbitration Act, 1940 can be invoked to appoint an arbitrator when the contract lacks an arbitration clause.
How to differentiate between an expert determination/certifier and an arbitrator under the Act.

Legislation cited

Arbitration Act, 1940s. 2(a), s. 8

Subjects

arbitration agreementArbitration Act 1940Section 8 jurisdictionexpert determinationcertifier vs arbitratorconstruction contractfinal and binding decisionarbitration clause

Judgment

A
- -t- BHARAT BHUSHAN BANSAL
v.
U.P. SMALL INDUSTRIES CORPORATION LTD., KANPUR

JANUARY 21, 1999
I
B
·• ;.._
[MRS. SUJATA V. MANOHAR AND R.C. LAHOTI, JJ.]

Arbitration Act, 1940: Sections 2(a) and 8.

Arbitration agreement-Existence of-Arbitration claus~Ingredients
of-Agreement of contract provided that in respect of questions arising from c
or relating to any claim or right, matter or thing in any way connected with
the colltract, the decision of Executive Engineer was final, conclusive and
binding on both parties to the contract-In respect of the remaining claims
the decision of the Managing Director was final, conclusive and bind-
ing-Contractor made application under S.8 for appointmellf of an Ar-
; bitrator-Civil Judge allowed the application-In appeal,· High Court while D
x upholding the finding that there was an arbitration clause held that the court
had no jurisdiction under S.8 to appoint an Arbitrator because none of the
clauses of S.8 were attracted and, therefore, set aside the order of the Civil
judge-Held : The agreement of contract does not contemplate a full-fledged
arbitration under the Arbitration Act-There/ore, application under S.8 is E
misconceived-High Court's decision is correct though for different reasons.

Section 2(a)-Arbitration agreement-There is a difference between an
expert detem1ination and an arbitration.
... Words and Phrases : F
--<
"Certifier" and "arbitrator''-Meaning of

The appellant had entered into a contract with the respondent under

_,_ which the appellant had undertaken the work of construction of factory
and allied buildings of the respondent. The agreement provided that in G
respect of certain claims the decision of the Executive Engineer was final,
conclusive and binding on both the parties to the contract. In respect of
the remaining matters the decision of the Managing Director was final,
conclusive and binding on both the parties to the contract. The agreement
did not mention that any dispute could be referred to the arbitration of H
181
RR BANSAL v. U.P. SMALLINDUS. CORPN. LTD. (SUJATAV. MANOHAR, J.) 183
..,.._
- K.K. Mohan for the Appellant.

The Judgment of the Court was delivered by
A

MRS. SUJATA V. MANOHAR, J. The appellant had entered into a
contract with the respondent under which the appellant had undertaken
the work of construction of factory and allied buildings of the respondent B
• ).-
at India Complex, Rae Bareilly. The agreement is dated 19.10.1973. Clauses
23 and 24 of the agreement are as follows :

"Decision of the Executive Engineer of the UPSIC to be final on
certain matters :
c
Clause 23 : Except where otherwise specified in the contract, the
decision of the Executive Engineer shall be final, conclusive and
binding on both the parties to the contract on all questions relating
to the meaning, the specification, design, drawings and instructions
... herein before mentioned, and as to the quality of workmanship or
materials used on the work or as to any other question whatsoever
D
-"
in any way arising out of or relating to the designs, drawings,
specifications, estimates, instructions, orders or otherwise concern-
ing the works or the execution or failure to execute the same
whether arising during the progress of the work, or after the
completion thereof or abandonment of the contract by the con- E
tractor shall be final and conclusive and binding _on the contractor.

Decision of the M.D. of the U.P.S.l.C. on all other matters shall
be final:

Clause-24 : Except as provided in Clause 23 hereof the decision F
of the Managing Director of the U.P.S.l.C. shall be final, conclusive
and binding on both the parties to the contract upon all questions
relating to any claim, right, matter or thing in any way arising out
of or relating to the contract or these conditions or concerning
abandonment of the contract by the contractor and in respect of
G
all other matter arising out of this contract and not specifically
............ mentioned herein."

There were disputes between the appellant and the respondent in
connection with the payments to be made under the terms of the said
contract and in connection with the work of the said contract. The appel- H
184 SUPREME COURT REPORTS [1999] 1 S.C.R.
· A lant made an application under Section 8 of the fodian Arbitration Act .
_,..
1940 before the Civil Judge, Kanpur. He applied for the appointment of'
an independent Arbitrator in the place of the Managing Director. The
respondent denied that there was any arbitration claus\: in the said con-
tract. The court, however, allowed the petition of the appellant under
B Section 8 of the Arbitration Act and appointed one D.D. Sharma. Executive
Engineer, as Arbitrator. In appeal, the High Court, while upholding the finding
that there was an arbitration clause, held that the court below had no juris-
diction under Section, 8 to appoint another Arbitrator in the place of Manag-
ing Director since none of the clauses of Section 8 was attracted in the present
case. The High Court, therefore, set aside the order of the court below and
C dismissed the application of the appellant under Section 8. From this judgment
the appellant has filed the present appeal.

The first question that requires consideration is whether there is any
clause in the contract which provides for arbitration between the parties.
D The relevant Clauses are Clauses 23 and 24. under Clause 23, the decision
of the Executive Engineer is final, conclusive and binding on both the
parties to the contract on all questions relating to the meaning, specifica-
tions, designs etc. and as to the quality of workmanship or materials used
or relating to any other question whatsoever in any way arising out of or
relating to the designs, drawings, specifications etc. or otherwise concern-
E ing the execution or failure to execute the same. Under Clause 24, except
as provided in Clause 23, the decision of the Managing Director of the
respondent shall be final, conclusive and binding on both the parties to the
contract upon all questions relating to any claim, right, matter or thing in
any way arising out of or relating to the contract and in respect of all other
F matters arising out of the contract and not specifically mentioned in the
said Clause. Therefore, in respect of certain claims the decision of the
Executive Engineer is final and binding on both the parties to the contract.
While in respect of the remaining matters,. the decision of the Managing
Director of the respondent is final, conclusive and binding on both the
parties to the contract. Clause 24 does not mention that any dispute can
G be referred to the arbitration of the Managing Director. Clause 24 also
does not spell out any duty on the part of the Managing Director to record
evidence or to hear both parties before deciding the questions before him.
From the wording of Clause 24 it is difficult to spell out any intention of
the parties to leave any disputes to the adjudication of the Managing
H Director of the respondent as an Arbitrator.
B.B. BANSAL v. U.P. SMAI.l. INDUS. CORPN. LID. (SUJATA V. MANOHAR, J.) 185

~- .... In the case of KK Modi v. KN. Modi & Ors., [1998) 3 sec 573, a A
... bench of this Court (of which one of us was a member) had the occasion
to consider the essential ingredients of an arbitration clause. Among the
ingredients which are described in the said judgment, two important in-
gredients are; that the agreement between the parties must contemplate
that substantive rights of parties will be determined by the agreed Tribunal
and that the Tribunal will determine the rights of the parties in an impartial
B
>
>- and judicial manner with the Tribunal owing an equal obligation of fairness
towards both sides and also that the agreement of the parties to refer their
disputes to the decision of the Tribunal must be intended to be enforceable
in law. There is a difference between an expert determination and arbitra-
tion. S.K. Chawla in the Law of Arbitration and Conciliation at page 164 c
states as follows :

"4. Arbitration agreement to be distinguished from agreement for
decision by an engineer or expert, Contracts may contain a clause
that on certain questions the decision of an engineer, architect or
,. D
another expert shall be final. The decision given in such cases by
x the engineer etc., is not an award. As pointed out by Bernstein,
such a person is under no obligation, unless the contract otherwise
provides, to receive evidence or submissions and is entitled to
arrive at his decision solely upon the results of his own expertise
and investigations. The procedure involved is not arbitration, and E
the Arbitration Act does not apply to it. The primary material on
which such person acts is his own knowledge and experience,
supplemented if he thinks fit by (i) his own investigations; and/or
{ii) material {which need not conform to rules of 'evidence') put
up before him by either party. An Arbitrator on the other hand, F

>
acts primarily on material put before him by the parties. The
determination by an engineer or an expert would involve a less
thorough investigation. Only one mind will be brought to bear on
the problem. There will be no discovery of documents, there will
not normally be any oral 'evidence' or oral submissions."
G
.,, In the present case, reading Clauses 23 and 24 together, it is quite
clear that in respect of questions arising from or relating to any claim or
right, matter or thing in any way connected with the contract, while the
decision of the Executive Engineer is made final and binding in respect of
certain types of claims or questions, the decision of the Managing Director H
186 SUPREME COURT REPORTS [1999] 1 S.C.R.
A is made final and binding in respect of the remaining claims. Both the
Executive Engineer as well as the Managing Director are expected to
determine. the question or claim on the basis of their own investigations
--
and material. Neither of the clauses contemplates a full-fledged arbitration
covered by the Arbitration Act.

B A clause very similar to the present clause was also held to be not
an arbitration clause by this Court in the case of State of Orissa & Anr. v.
Daniodar Das, [1996] 2 SCC 216. The language of that clause was very
similar to the present clause. Under the clause in question "except where
otherwise specified in this contract, the decision of the Public Health
C Engineer, for the time being", was to be final, conclusive and binding on
all parties to the contract upon all questions relating to the meaning of
specifications, drawings and instructions hereinbefore mentioned and as to
the quality of workmanship or materials used on the work, or as to any ·
other question, claim, right, matter or thing whatsoever in any way arising
D out of or relating to the contract.. ...... or otherwise concerning the works
or the execution or failure to execute the same ..........." This Court held that
this clause ·did not spell out any intention to refer any disputes and
differences between the parties to arbitration.

The wording of the clause in the present case is very similar to the
E wording which was interpreted as not an arbitration clause in the above
case. Both the above judgments of this Court have relied upon an earlier
decision of this Court in the case of State of U.P. v. Tipper Chand, [1980]
2 SCC 341. The clause which was interpreted in the above case was also
materially similar to the clause before us. Clause 22 of the contract in that
F case provided; "except where otherwise specified in the contract the
decision of the Superintending Engineer for the time being shall be final,
conclusive and binding on all parties to the contract upon all questions
relating to t~e meaning of the specifications, designs, drawings and instruc-
tions hereinbefore mentioned. The decision of such engineer as to the
quality of workmanship or materials used on the work or as to any other
G question claim, right, matter or thing whatsoever in any way arising out of
or relating to the contract, designs, drawings, specifications ......... or other-
wise concerning the works, or the execution or failure to execute the
same .........shall also be final, conclusive and binding on the contractor''.
This Court held that the clause did not contain an arbitration agreement
H either expressly or by implication. The intention was to vest the Superin-
. .,.._

RR BANSAL v_ U.P. SMALL INDUS. CORPN. LTD. [SUJATA V. MANOHAR, J.] 187

.--+ tending Engineer with supervision and administrative control over the A
work.

In Hudson's Building and Engineering Contracts, Eleventh Edition,
Volume 1, in Paragraph 6.065, while making a distinction between a
Certifier and an Arbitrator in a building contract, it has been emphasised
that essentially the Certifier in a construction contract will often be per- B
forming an administrative rather than a judicial function, and when doing
so there may often be no formulated dispute before him at all. He has been
described as a "preventer of disputes" in contradistinction to an Arbitrator
whose function can only arise once a dispute is in existence. He is not under
the same obligation to afford the parties or their representatives a full C
hearing and receive evidence from them. Thus each contractual provision
may need to be carefully scrutinised to see into which category the person
named falls.

In the present case the Managing Director is more in the category
of an expect who will decide claims, rights, on matters in any way pertaining D
to the contract. The intention appears to be more to avoid disputes than
to decide formulated disputes in a quasi-judicial manner. In paragraph
18.067 of Volume 2 of Hudson on Building and Engineering Contracts,
Illustration (8) deals with the case where, by the terms of a contract it was
provided that the engineer "shall be the exclusive judge upon all matters E
relating to the construction, incidents and the consequence of these
presents, and of the tender, specifications, schedule and drawings of the
contract, and in regard to the execution of the works or otherwise arising
out of or in connection with the contract, and also as regards all matters
of account, including the final balance payable to the contractor, and the
certificate of the engineer for the time being, given under his hand, shall F
be binding and conclusive on both parties". It was held that this clause was
not an arbitration clause and that the duties of the engineer were ad-
ministrative and not judicial.

Since Clause 24 does not contemplate any arbitration, the application G
of the appellant under Section 8 of the Arbitration Act, 1940 was miscon-
ceive. The appeal is, therefore, dismissed though for reasons somewhat
different from the reasons given by the High Court. There will, however,
be no order as to costs.

v.s.s. Appeal dismissed.