M/S. GAYATRI PROJECT LTD.versusM/S. SAI KRISHNA CONSTRUCTION

                      [2013] 14 S.C.R. 1138


A                M/S. GAYATRI PROJECT LTD.
                               v.
              MIS. SAi KRISHNA CONSTRUCTION
                (Civil Appeal No. 1854 of 2007)
                      NOVEMBER 28, 2013
B
               [SURINDER SINGH NIJJAR AND
               RANJANA PRAKASH DESAI, JJ.]

       Arbitration and Conciliation Act, 1996 - s. 11 (5) and (6)
C - Application under - Maintainability - Civil works relating to
  irrigation structures - Granted to appellant by the State
  Government of Andhra Pradesh - Appellant was the main
  contractor and respondent was the sub-contractor working
  under the appellant - Agreement dated 29-01-2001 entered
D between the two parties contained an arbitration clause -
  Claim of respondent that it had executed work to the
  satisfaction of the appellant and the State Government; but
  appellant having received all the amounts from the State
  Government failed to make corresponding payments to the
E respondent after deducting commission as stipulated under
  the agreement - Counter claim of appellant that the accounts
  had been reconciled and that the parties had signed a full and
  final settlement document on 6. 6. 2003 - Full and final
  settlement dated 6. 6. 2003 not accepted by respondent -
F Dispute not resolved - Respondent moved application ul
  s. 11 (5) and (6) for appointment of Arbitrator - Plea of
  appellant that the application was liable to be dismissed
  inasmuch as agreement dated 29.1.2001 which contains the
  arbitration clause had been superseded by the full and final
G settlement agreement dated 6. 6. 2003; and respondent having
  received the entire amount in terms of the "full and final
  settlement" dated 6-6-2003 was estopped from filing the
  application u/s. 11 (5) and (6) - According to appellant, since
  the entire dispute had been settled, no reference could be
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      GAYATRI PROJECT LTD. v. SAi KRISHNA                  1139
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made to arbitration - High Court, however, allowed the              A
application u/s. 11 (5) and (6) - .On appeal, held: The question
as to whether letter dated 6-6-2003 would constitute a "full and
final settlement" would have to be determined on proper
appreciation of the evidence led by the parties - It is open to
two interpretations - Which of the two interpretations is           B
ultimately accepted will have to be decided by the appropriate
forum - Appellant is relying on the alleged settlement by way
of defence - Respondent has not accepted the same - Nor
has the respondent denied the execution of the document -
Respondent has also not claimed that the fulr and final             c
settlement was signed under coercion, undue influence, fraud,
misrepresentation or mistake - Furthermore, appellant did not
make any claim on the basis of the settlement - It would have
been different, if the appellant had made a claim on the basis
of settlement which was denied by the respondent by one or          D
more of the defences - In such circumstances, it would have
to be held that the settlement can only be challenged in
"proper proceedings" ..:. However, in the instant case, since
there is no acceptance of the full and final settlement by the
respondent which has been relied upon by the appellant, the
issue clearly had to be left to the Arbitrator to be adjudicated.   E

     Nathani Steels Ltd. vs. Associated Constructions 1995
Supp (3) SCC 324; National Insurance Company Limited vs.
Boghara Polyfab Private Limited (2009) 1 SCC 267: 2008
(13) SCR 638 - referred to.                                         F

                      Case Law Reference:
     1995 Supp (3) SCC 324 referred to                 Para 10
     2008 (13) SCR 638            referred to          Para 11      G
    CIVIL APPELLATE JURISDICTION : Civil Appeal No.
1854 of 2007.

   From the Judgment & Order dated 20.12.2006 of the High
Court of Judicature of Andhra Pradesh at Hyderabad in               H
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A Arbitration Application 55 of 2006.

       Arun Kathpalia, Angad Mehta, Sayooj Mohandas M.,
    Sanooja M., Abhijit Sengupta for the Appellant.

        K. Swami, Prabha Swami, Nikhil Swami for the
8   Respondent.

        The following Order of the Court was delivered

                              ORDER
c        1. This appeal is filed against the order passed by the High
    Court in an application under Section 11 (5) and (6) of the
    Arbitration and Conciliation Act, 1996 (for short the 'Act')
    directing that the matter be referred to arbitration by a former
    Judge of the Andhra Pradesh High Court.
D
       2. The respondent moved the aforesaid application on the
  basis that it is a partnership firm, carrying on business of civil
  works relating to irrigation structures. The Irrigation Department
  of Government of Andhra Pradesh had given the work to the
E appellant herein. Thus, the appellant was the main contractor
  and respondent was the sub-contractor working under the
  appellant. The works involved earth work excavation and
  cohesive non-swelling soil filling in KC Canal including CC lining
  and structures form KMs 156.650 to KMs 170-00 of Package
F ICB-10' in Kurnool District of Andhra Pradesh. The appellant
  identified the respondent as a suitable agency for execution of
  the work and entrusted the work to the respondent as a sub-
  contractor. After due negotiations, an agreement dated
  29.1.2001 was entered into between the parties. The
G agreement inter alia provides various terms and conditions
  including the nature of work to be executed by the respondent,
  security deposits, penalties leviable, commission to which the
  appellant would be entitled to, method of payment for the work
  undertaken, taxes and Government levies. The agreement also
  contained an arbitration clause which reads as under:-
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      GAYATRI PROJECT LTD. v. SAi KRISHNA                   1141
                CONSTRUCTION

          "All disputes relating to the original contract shall be   A
    properly referred and correspond by the work contractor.
    However, the settlement of disputes and consequential
    awards shall be to the account of principal contractor and
    work contractor. All disputes relating to the work contract
    under this agreement shall be mutually settled between the       B
    work contractor and the principal contractor. In case of any
    differences, the same will be decided by a sole arbitrator
    appointed by the principal contractor and work contractor."

     3. Clause 6 of the agreement provides that the
measurements shall be taken for the work done once in a              C
month. Payment shall be released as and when principal
contractor received payment from the Department, duly
deducting the commission and other recoveries as mentioned
in Clause 6 above. Final payment shall be released after
completion of the work satisfactorily. Clause 5 provided that the    D
work contractor (sub-contractor) shall be paid the balance
amount after deducting certain amounts from the gross amount
of running account bills. Relevant part of clause 5 is as under:-

    "The work contractor shall be paid the balance amount after      E
    deducting the following from the gross amount of running
    account bills.

    i. a. Earth work excavation in bed and slopes including
    sectioning and leveling @ 14% (Fourteen percent only) of
    Agreement rate.                                                  F

    b. Filling bed and slopes with CNS soils as directed and
    as per specifications @ 17% (Seventeen percent only) of
    Agreement rates.
                                                                     G
     ii. Sales Tax/Turnover Tax

     iii. Income Tax in the running account bills.

     iv. Value of materials etc., if any, supplied by the
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    1142     SUPREME COURT REPORTS                 [2013) 14 S.C.R.


A       department or by the principal contractor and hire charges
        of machinery given.

        v. Any other recoveries affected by the department in the
        account bills.

B        4. The agreement further provided that the final payment
    shall be released after completion of the work satisfactorily.

        5. The respondent claims that it has executed the work to
  the satisfaction of the appellant and the State Government. The
c appellant having received all the amounts from the Government
  of Andhra Pradesh failed to make corresponding payments to
  the respondent after deducting commission as stipulated under
  the agreement. The respondent, therefork, approached and
  tried to persuade the appellant to make the payment of the
0 outstanding amount after the completion of the entire work.
  However, the appellant failed to pay. Since the amounts were
  not paid by the appellant, the respondent served a Claim Notice.
  on 6.5.2004 demanding the payment of Rs.1,01,27,776/-. On
  17.8.2004, the Appellant sent a reply to the aforesaid notice
E not only disputing the various claims but also raising a counter
  claim in the amount of Rs.32, 12,950/-. The appellant claimed
  that the accounts had been reconciled. The parties had signed
  a full and final settlement document on 6.6.2003, under which
  the respondent acknowledged the receipt of certain amounts.
  The balance of Rs.17,32,843/- was to be paid in two or three
F instalments before 30.6.2003. After receiving the entire
  payment, the respondent was falsely claiming further amounts
  with mala fide intentions. On receipt of the reply with the
  counter-claim, the respondent sent a further reply reiterating its
  claim and also disputing the counter claim of the appellant as
G being frivolous and false. The responrJent in the aforesaid reply
  also stated that unless the entire claim is satisfied, it will seek
  the remedy by way of arbitration. In spite of the above, the
  appellant still made efforts to settle the entire dispute but without
  any useful results.
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       GAYATRI PROJECT LTD. v. SAi KRISHNA                   1143
                 CONSTRUCTION

      6. Instead of accepting the full and fincil settlement dated    A
6.6.2003, the respondent, in fact, raised a further claim for the
amount of Rs.25,50,048/- towards the value of HSD oil supply
and exemption of excise duties and sales tax which had been
availed by the appellant. A claim in this regard was sent to the
appellant on 30-5-2006. According to the respondent, the total        B
claim finally comes to Rs.1,26, 77 ,824/- with interest accrued
thereon at 18% per annum from 6-5-2004. The appellant on
24.6.2004 denied the aforesaid claim. The dispute not having
oeen resolved, the respondent served a legal notice on the
appellant dated 19.6.2006. The appellant again denied the             c
claim. The respondent thereafter moved the application under
Section 11 (5) and (6) of the Arbitration Act. The appellant filed
a reply to the application disputing and denying the claims of
the appellant. The appellant stated that the application for
appointment of Arbitrator is liable to be dismissed. It was
                                                                      0
pleaded that Agreement dated, 29.1.2001 which contains the
arbitration clause has been superseded by the full and final
settlement agreement dated 6.6.2003. It was further the case
of the appellant that the respondent having received the entire
amount in terms of the "full and final settlement" dated 6-6-2003
is estopped from filing the application under Section 11 (5) and
                                                                      E
(6) of the Arbitration Act. According to the Appellant, since the
entire dispute had been settled, no reference could be made
to arbitration. The appellant had also pleaded that the
respondent had failed to disclose that the parties had entered
into a full and final settlement on 6-6-2003. The plea was also       F
raised to the effect that invocation of the arbitration on 9-6-2006
is time barred as the cause of action for filing the application
arose on 6-6-2003 when the "full and final settlement" was
entered into between the parties.
                                                                      G
     7. It was also the case of the appellant that the works
executed by the respondent not being of the required standard
and specifications, were (ejected by the Government.
Consequently, the appellant had to rectify the defects and incur
extra expenses. These were liable to the deducted from the            H
    1144    SUPREME COURT REPORTS                (2013) 14 S.C.R.


A amount claimed by the respondent. It is also the claim of the
  appellant that since the works had not been satisfactorily
  completed, the agreement itself was terminated on 16-11-2001.
  The appellant had also pleaded that pursuant to the Settlement
  dated 6-6-2003, the respondent had received a sum of Rs.16
B lakhs. Therefore, there is no arbitrable dispute which can be
  referred to arbitration. It is also the case of the appellant that
  he has actually suffered a loss as it has incurred an expenditure
  of Rs.32, 13,950/- in rectification of the works which were
  unsatisfactorily performed by the respondent. The appellant also
c claims that in order to maint~in cordial relations, it had entered
  into a "full and final settlement" with the respondent with regard
  to the entire claims of the sub-contractor.

         8. Upon examination of the entire factual as well as the
    legal position, the High Court has allowed the application under
0
    Section 11 (5) and (6) of the Act. This Appeal has been filed
    against the aforesaid Judgment of the High Court.

        9. We have heard learned Counsel for the parties.

E       10. Mr. Arun Kathpalia, learned Advocate appearing for
  the appellant relied heavily on the "full and final settlement" and
  submitted that the settlement has been duly signed by a
  representative of the respondent. Therefore, the respondent
  cannot now be permitted to submit that there was no "full and
F final settlement". He further submitted that once there was "full
  and final settlement", no arbitrable dispute remains which could
  have been referred to the Arbitrator. To make good his
  submissions, Mr. Kathpalia submitted that the respondent had
  been negligent in the performance of the works which were
G entrusted to the sub-contractor. This had ultimately led to the
  termination of the Agreement on 16-11-2001. In fact, the
  appellant had incurred huge amount of expenses in rectifying
  the defects in the works executed by the respondent. Mr.
  Kathpalia relied on clauses 5 and 6 of the Agreement and
  submitted that the appellant was entitled to be compensated
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       GAYATRI PROJECT LTD. v. SAi KRISHNA                  1145
                 CONSTRUCTION

for the rectification work which had to be performed to the          A
satisfaction of the Andhra Pradesh Government. Learned
counsel also submitted that the respondent would be entitled
to the final payment only upon satisfactory completion of the
work entrusted to the sub-contractor. In order to settle the
dispute between the parties and to maintain a cordial                B
relationship, the parties have entered into a voluntary settlement
on 6-6-2003 which is evidenced by the signatures appended
on the same by the Manager of the respondent sub-contractor.
In such circumstances, learned counsel submitted that there
was no arbitrable dispute which could have been left to the          c
Arbitrator and, therefore, the judgment of the High Court
allowing the application under Section 11 (5) and (6) of the Act
is erroneous. He further submitted that in case the respondent
intend to challenge the validity of the binding nature of the
settlement, the dispute cannot be left to the Arbitrator. The
                                                                     0
settlement would form an independent contract which can only
be nullified in appropriate proceedings being taken by the
respondent.

      11. In support of the submissions, the learned counsel
relied on Nathani Steels Ltd. vs. Associated Constructions 1 •       E
Mr. Kathpalia relied on the observations made in paragraph 3
of the judgment. The learned Counsel submits that the judgment
of the High Court is erroneous and has to be set aside.

     12. On the other hand, Mr. K. Swami, learned counsel            F
appearing for the respondent submits that there is no "full and
final settlement" of the amounts which were due to the
respondent from the appellant. He further submits that the
respondent had executed all the works which were entrusted
to his client to the full satisfaction of the appellant. The claim
                                                                     G
and counter claim now made by the appellant is totally false and
without any basis. The respondent is disputing each and every
claim made by the appellant. Learned counsel further submitted
that the alleged settlement dated 6-6-2003 is a unilateral
1.   1995 Supp (3) sec 324.                                          H
    1146     SUPREME COURT REPORTS               [2013] 14 S.C.R.


A document. There is no agreement between the parties for a final
  settlement. The document has been only received and the
  Manager has signed only to indicate that the letter has been
  received. There have been no negotiations between the parties
  prior to the issuance of letter dated 6-6-2003. He submits that
B the judgment relied upon by Mr. Kathpalia is not applicable in
  the facts of this case. In fact, according to him, the matter is·
  squarely covered by the judgment of this Court in National
  Insurance Company Limited vs. Boghara Polyfab Private
  Limited2. Learned counsel has relied on paragraphs 33, 34 and
c 35 of the judgment. It is pointed out that in paragraph 33, this
  Court has considered the ratio of the judgment in Nathani
  Steels (supra) and distinguished the same. Relying upon the
  aforesaid judgment, the learned counsel submits that the
  appeal deserves to be dismissed.

D      13. Learned counsel further submitted that the receipt of
  a sum of Rs.16 lakhs subsequent to the letter dated 6-6-2003
  does not signify the acceptance by the respondent of the
  aforesaid letter as a "full and final settlement". According to the
  learned counsel, in fact, the claim of the respondent was for
E over Rs.10,00,000/- and, therefore, the amounts which were
  received by the respondent were only in part payment of the
  amount due.

         14. We have considered the submissions made by the
F   learned Counsel for the parties.

       15. In our opinion, the question as to whether letter dated
  6-6-2003 would constitute a "full and final settlement" would
  have to be determined on proper appreciation of the evidence
  led by the parties. It is, in our opinion, open to two
G interpretations. Which of the two interpretations is ultimately
  accepted will have to be decided by the appropriate forum. We
  are also not inclined to accept the submissions of Mr. Kathpalia
  that if the alleged settlement is to be doubted, it cannot be

H   2.   (2009) 1 sec 2s1.
      GAYATRI PROJECT LTD. v. SAi KRISHNA                    1147
                CONSTRUCTION

doubted before the Arbitrator. It must be remembered that the         A
appellant is relying on the alleged settlement by way of defence.
The respondent has not accepted the same. Nor has the
respondent denied the execution of the document. The
respondent has also not claimed that the full and final settlement
was signed under coercion, undue influence, fraud,                    B
misrepresentation or mistake. Furthermore, the appellant had
not made a claim on the basis of the settlement. It would have
been different, if the appellant had made a claim on the basis
of settlement which was denied by the respondent by one or
more of the defences, as noticed above. In such                       c
circumstances, following the judgment in Nathani's case
(supra), it would have to be _held that the settlement can only
be challenged in "proper proceedings". But these observations
would be applicable only if there was a clear cut acceptance
by the parties that there was a "full and final settlement".          0
     16. In fact, the matter would be squarely covered against
the appellant by the ratio of the judgment in National Insurance
Company Limited (supra) wherein this Court has considered
the cases which were earlier considered in Nathani's Steel
{supra) and observed as follows:-                                     E

     "33. Nathani Steels related to a dispute on account of non-
     completion of the con.tract. The Court found that the said
     dispute was settled by and between the parties as per
     deed dated -20.12.1980 signed by both parties. The deed          F
     referred to the prior discussions between the parties and
     recorded the amicable settlement of the disputes and
     differences between the parties in the presence of the
     Architect on the terms and conditions set out in clauses 1
     to 8 thereof. In view of it, the Court rejected the contention   G
     of the contractor that the settlement was liable to be set
     aside on the ground of mistake. A three-Judge Bench of
     this Court, after referring to the decisions in P .K. Ramaiah
     and Nay Bharat Builders, held thus: (SCC p.326, para 3)

     "3 ........ that once the parties have arrived at a settlement   H
    1148      SUPREME COURT REPORTS                [2013] 14 S.C.R.


       in respect of any dispute or difference arising under a
       contract and that dispute or the difference is amicable
       settled by way of a final settlement by and between the
       parties, unless that settlement is set aside in proper
       proceedings, it cannot lie in the mouth of one of the parties
B      to the settlement to spurn it on the ground that it was a
       mistake and proceed to invoke the Arbitration clause. If this
       is permitted the sanctity of contract, the settlement also
       being a contract, would be wholly lost and it would be open
       to one party to take the benefit under the settlement and
c      then to question the same on the ground of mistake without
       having the settlement set aside. In the circumstances, we
       think that in the instant case since the dispute or difference
       was finally settled and payments were made as per the
       settlement, it was not open to the respondent unilaterally
        to treat the settlement as non est and proceed to invoke
D
       the Arbitration clause."

           34. What requires to be noticed is that in Nav Bharat
           Builders and Nathani Steels, this Court on examination of
           facts, was satisfied that there were negotiations and
E          voluntary settlement of all pending disputes, and the
           contract was discharged by accord and satisfaction. In P.K.
           Ramaiah, the Court was satisfied that there was a
           voluntary acceptance of the measurements and full and
           final payment of the amount found due, resulting in
F          discharge of the contract, leaving no outstanding claim or
           pending dispute. In those circumstances, this Court held
           that after such voluntary accord and satisfaction or
           discharge of the contract, there could be no arbitrable
           disputes.
G
           36. In Damodar Valley Corporation, the question that arose
           for consideration of this Court was as follows: (SCC p. 144
           para 4)

                  "where one of the parties refers a dispute or
H                 disputes to arbitration and the other party takes a
      GAYATRI PROJECT LTD. v. SAi KRISHNA                     1149
                CONSTRUCTION

           plea that there was a final settlement of all claims,       A
           is the Court, on an application under Sections 9(b)
           and 33 of the Act, entitled to enquire into the truth
           and validity of the averment as to whether there was
           or was not a final settlement on the ground that if
           that was proved it would bar a reference to the             B
           arbitration inasmuch as the arbitration clause itself
           would perish."

            In that case the question arose with reference to a
    claim by the supplier. The purchaser required the supplier
    to furnish a full and final receipt. But the supplier did not      c
    give such a receipt. Even though there was no discharge
    voucher, the purchaser contended that the payments made
    by it were in full and final settlement of the bills. This Court
    rejected that contention and held that the question whether
    there has been a settlement of all the claims arising in           D
    connection with the contract also postulates the existence
    of the contract which would mean that the arbitration
    clause operates. This Court held that the question whether
    there has been a full and final settlement of a claim under
    the contract is itself a dispute arising 'upon' or in relation     E
    to' or 'in connection with' the contract; and where there is
    an arbitration clause in a contract, notwithstanding the plea
    that there was a full and final settlement between the
    parties, that dispute can be referred to arbitration. It was
    also observed that mere claim of accord and satisfaction           F
    may not put an end to the arbitration clause. It is significant
    that neither P.K. Ramaiah nor Nathani Steels disagreed
    with the decision in Damodar Valley Corporation but only
    distinguished it on the ground that there was no full and
     final discharge voucher showing accord and satisfaction           G
     in that case."

     17. In our opinion, since there is no acceptance of the full
and final settlement by the Respondent which has been relied

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A upon by the appellant, the issue clearly had to be left to the
  Arbitrator to be adjudicated.

        18. In view of the above, we find no merit in the appeal
    and the same is accordingly dismissed.

B        19. Before we part with this matter, we would request the
    learned Arbitrator to conclude the Arbitration Proceedings as
    expeditiously as possible since the matter was referred long
    back as this would be in the interest of justice.
    Bibhuti Bhushan Bose                          Appeal dismssed.