SOLARIS CHEM TECH INDUSTRIES LTDversusASSISTANT EXECUTIVE ENGINEER KARNATAKA URBAN WATER SUPPLY AND DRAINAGE BOARD & ANR.

                  [2023] 15 S.C.R. 463 : 2023 INSC 916



                             CASE DETAILS

             SOLARIS CHEM TECH INDUSTRIES LTD
                                      v.
  ASSISTANT EXECUTIVE ENGINEER KARNATAKA URBAN
      WATER SUPPLY AND DRAINAGE BOARD & ANR.
                      (Civil Appeal No. 6609 of 2023)
                            OCTOBER 10, 2023
          [DR. DHANANJAYA Y. CHANDRACHUD, CJI,
           J.B. PARDIWALA AND MANOJ MISRA, JJ.]
                              HEADNOTES
      Issue for consideration: Whether the High Court was justified in
dismissing the Writ Petition and the Writ Appeal on the strength of Clause
11 of the agreements between the parties; and whether there was a valid
arbitration agreement between the parties, justifying the referral to the Chief
Engineer under Clause 11.
      Arbitration and Conciliation Act, 1996 – ss. 7(1), 2(b) – Valid
arbitration agreement – On facts, in terms of Clause 11 of the
agreements, any dispute that would arise between the parties would be
resolved firstly by mutual discussion and on a failure of the process, by
referring the matter to the Chief Engineer whose decision would be final
and binding – Writ petition challenging the notice demanding arrears
of tariff for the supply of water – Single Judge declined to entertain the
petition and relegated the petitioner to the contractual remedy in terms
of the agreement – Division Bench upheld the same – Correctness:
      Held: Clause 11 does not constitute an arbitration agreement – Clause
11.2 of the agreement does not constitute the Chief Engineer as an arbitral
tribunal – Agreements do not postulate that the Chief Engineer would
adjudicate upon the disputes between the parties nor is there any provision
to the effect that the Chief Engineer would resolve the dispute after letting in
evidence or allowing the parties an opportunity of presenting their respective
cases before them – Forum comprising the Chief Engineer lacks the trappings
of an arbitral forum – Chief Engineer is an employee of the Board – Though
                                     463
464          SUPREME COURT REPORTS                          [2023] 15 S.C.R.


the Single Judge was of the view that Clause 4 of the agreement empowered
the Board to revise its rates, nonetheless, without dealing with the power
and the manner of its exercise any further, the High Court relegated the
appellant to the remedy under Clause 11 before the Chief Engineer – High
Court ought not to have relegated the parties to the Chief Engineer on the
strength of Clause 11 – It would have been appropriate if the High Court
had finally determined the challenge addressed by the appellant in the writ
proceedings u/Art. 226 of the Constitution – Division Bench exclusively
relied on the provisions of Clause 11 while coming to the conclusion that the
dispute between the parties fell within the ambit of the clause – Provision for
settlement of disputes contained in Clause 11 does not constitute the Chief
Engineer as an arbitral tribunal since he cannot be regarded as an impartial
officer nor do the provisions of Clause 11 incorporate the trappings of an
arbitral tribunal – Both the judgment of the Single Judge and the Division
Bench set aside. [Paras 16-18, 22-26]
      Arbitration – Valid arbitration agreement – Conditions to be
satisfied – Stated. [Para 19]

       LIST OF CITATIONS AND OTHER REFERENCES

     Jagdish Chander v. Ramesh Chander (2007) 5 SCC 719 : [2007] 5
SCR 720; Jaipur Jila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales
and Suppliers 2021 SCC OnLine SC 730; Voestalpine Schienen GMBH v.
Delhi Metro Rail Corporation Limited (2017) 4 SCC 665 : [2017] 1 SCR
798; Ellora Paper Mills Ltd. v. State of M.P (2022) 3 SCC 1 – referred to.
       OTHER CASE DETAILS INCLUDING IMPUGNED
              ORDER AND APPEARANCES

      CIVIL APPELLATE JURISDICTION: Civil Appeal No. 6609 of 2023.
    From the Judgment and Order dated 18.06.2018 of the High Court of
Karnataka Circuit Bench at Dharwad in WA No. 100073 of 2018.
      Appearances:
      Dalip Kumar Malhotra, Adv. for the Appellant.
    Darpan KM, Ms. Amrita Sharma, Ms. Rashi Bansal, Rajat Jonathan
Shaw, Advs. for the Respondents.
   SOLARIS CHEM TECH INDUSTRIES LTD v. ASSISTANT 465
EXECUTIVE ENGINEER KARNATAKA URBAN WATER SUPPLY
              AND DRAINAGE BOARD

       JUDGMENT / ORDER OF THE SUPREME COURT

                                 ORDER
     1. Leave granted.
      2. This appeal arises from a judgment dated 18 June 2018 of a Division
Bench of the High Court of Karnataka at the Dharwad Bench. The Division
Bench has dismissed a Writ Appeal and thereby affirmed the correctness
of an order dated 27 February 2018 of a Single Judge dismissing the writ
petition filed by the appellant.
     3. The appellant set up a factory in 1975 for the manufacture of Caustic
Soda at Village Binaga in North Kanara District, Mysore. On 5 July 1971,
an agreement was entered into between the Government of Mysore and
the appellant for the continuous supply of water at concessional rates for
the operation of the factory. The agreement was valid for a period of 20
years from the commencement of production. On 3 April 1987, the State
Government constituted the Karnataka Urban Water Supply and Drainage
Board1 in accordance with the Karnataka Urban Water Supply and Drainage
Board Act, 1973. The Board was supplying water to the appellant for
industrial use as well as for non-domestic use.
      4. It appears that the original agreements were replaced by subsequent
agreements dealing with the supply of water for industrial and non-domestic
use. The last of the agreements, relevant to the present dispute, was entered
into on 11 November 2011 for the supply of water to be charged for non-
domestic use and industrial use respectively. These agreements were
effective from 27 October 2011 until 26 October 2014. In terms of the
agreements, the tariff for the supply of water for industrial use was fixed at
Rs 18.40 per kL and Rs 9.20 per kL for non-domestic use. Between 6 June
2014 and 16 September 2014, water bills were raised on the appellant based
on the tariff fixed in the agreements dated 11 November 2011.
      5. On 18 July 2014, a demand notice was received by the appellant
from the Assistant Executive Engineer by which new water rates were sought
to be implemented and the appellant was called upon to pay the differential


1   “The Board”.
466          SUPREME COURT REPORTS                        [2023] 15 S.C.R.


amount with effect from 20 July 2011 till 30 June 2014. The relevant part
of the communication is extracted below:
      “…the Board is supplying bulk water to your Industry & Quarters at
      Binaga, Karwar @ Rs.18.40/KL & Rs.9.20/KL respectively vide rate
      approved under ref (1). In the Government order under ref (2) the
      water rates are revised as under :
         Slabs                 Industrial Rates      Non-domestic Rates
        0-8 KL                 @ Rs.28.00/- KL         @ Rs.14.00/KL
        8-15 KL                @ Rs.36.00/ KL          @ Rs. 18.00/KL
       15 - 25 KL              @ Rs.44.00/ KL          @ Rs.22.00/ KL
      Above 25 KL               @ Rs.52.00/KL          @ Rs.26.00/KL
      During the audit of this Sub-Division, the Board’s Resident Audit
      Officer have raised an audit para for non-revision of water rate &
      instructed to implement the new water rates & collect the difference
      amount from all the consumers from the date of G.O. Accordingly the
      2Nos. difference bills for the period from 20-07-2011 to 30-06-2014
      including arrears for your industrial & Non-domestic supply total
      amounting to Rs.8,22,62,337.00 are submitted for making payment.”
       6. The appellant responded to the demand on 5 August 2014 and
expressed readiness to enter into negotiations with the Karnataka Urban
Water Supply and Drainage Board. On 22 September 2014, another notice
was issued stating that the Board operates on a no-profit-no-loss basis, and
is liable to pay dues to HESCOM2. The notice stated that the Board’s failure
to pay HESCOM its dues would impact upon electricity and water supply.
Citing losses caused to the Board, and the audit officers’ objections against
the non-revision of water bills under government orders, the notice requested
payment of arrears, in accordance with the revised rates.
      7. On 15 October 2014, the appellant requested the respondent to
withdraw the notice demanding arrears. In a Writ Petition under Article 226
of the Constitution of India before the High Court, the appellant challenged
the notices dated 18 July 2014 and 22 September 2014.



2       Hubli Electricity Supply Company Limited.
   SOLARIS CHEM TECH INDUSTRIES LTD v. ASSISTANT 467
EXECUTIVE ENGINEER KARNATAKA URBAN WATER SUPPLY
              AND DRAINAGE BOARD

      8. The appellant argued that i) the impugned notices were contrary
to clause 4 of the agreements between the parties; ii) the 20 July 2011
Notification, being prior in time to the agreements, was inapplicable and
could not be relied on in order to enhance the water tariff; and iii) the
enhancement of charges was against the principles of natural justice since
the respondent had acted suo motu, without hearing the appellant.
      9. The Writ Petition was dismissed by the Single Judge primarily on
the ground that Clause 11 of the agreements stipulated that any dispute
that would arise between the parties would be resolved firstly by mutual
discussion and on a failure of the process, by referring the matter to the Chief
Engineer, the second respondent, whose decision would be final and binding.
The Single Judge also observed that in terms of clause 4 of the agreements,
the Board was entitled to increase the rates. However, in view of the dispute
resolution mechanism provided in Clause 11, the Single Judge declined to
entertain the petition and relegated the petitioner to the contractual remedy
in terms of the agreement.
      10. The Division Bench, in a Writ Appeal, has confirmed the judgment
of the Single Judge. The Division Bench adverted to the language of Clause
11 of the agreement (“all disputes and differences that may arise”) and
rejected the appellant’s argument that the “demand” made by way of the
impugned notices was beyond the purview of “disputes” under Clause 11.
Hence, the Division Bench held that the dispute arising out of the impugned
notices was covered by the scope of the agreement, and no interference
under Article 226 of the Constitution of India was warranted.
     11. Following the issuance of notice in these proceedings under Article
136 of the Constitution, the respondent has entered appearance and has filed
a counter affidavit.
      12. We have heard Mr Dalip Kumar Malhotra, counsel appearing on
behalf of the appellant, and Ms Amrita Sharma, counsel appearing on behalf
of the respondents.
      13. The appellant argues that the Division Bench has misconstrued the
issue while declining to interfere. It is argued that the principal ground of
challenge is the Board’s non-compliance with the statutory procedure under
the Karnataka Urban Water Supply and Sewerage Boards Act in issuing the
468           SUPREME COURT REPORTS                         [2023] 15 S.C.R.


impugned notices. According to the appellant, the High Court ought to have
dealt with the Board’s authority to i) increase the tariffs over and above the
agreed rates, ii) do so on the basis of a Government Notification that pre-
dated the agreement, iii) act in violation of the agreements and the statute
which is the source of its power. It has been submitted that the dispute was
in rem and not in personam and that the jurisdiction of the High Court was
validly invoked. It has been argued that by relegating the parties to Clause
11 of the agreements, the Court erroneously refused interference.
      14. The issue that arises for our consideration is whether the High
Court was justified in dismissing the Writ Petition and the Writ Appeal on
the strength of Clause 11 of the agreements between the parties. We must
examine whether there was a valid arbitration agreement between the parties,
justifying the referral to the Chief Engineer under Clause 11.
     15. While dismissing the Writ Petition, the Single Judge of the High
Court relied on Clause 11 of the agreements. Clause 11 reads as follows:
      “CLAUSE:11 SETTLEMENT OF DISPUTES
      11.1 All disputes or differences that may arise between the parties
      hereto pertaining to the meaning of any provision or in connection
      with the agreement shall be resolved by mutual discussions.
      11.2 In case the mutual discussions falls then all such disputes which
      have arisen between the Board and the consumer hereto pertaining to
      the meaning of my provisions in the agreement, shall be resolved by
      referring the matter in writing to the Chief Engineer (North), K.U.W.S.
      & D Board, Dharwad, whose decision will be final and binding on the
      consumer and the Board.”
       16. Clause 11 is titled, “Settlement of Disputes”. Clause 11.1 stipulates
that all disputes or differences that may arise between the parties pertaining
to the meaning of any provision in the agreement or in connection with it,
would be resolved by mutual discussion. However, if mutual discussions
fail, Clause 11.2 postulates that all such disputes which have arisen between
the Board and the consumer pertaining to the meaning of the provisions
of the agreements would be resolved by referring the matter to the Chief
Engineer whose decision would be final and binding.
   SOLARIS CHEM TECH INDUSTRIES LTD v. ASSISTANT 469
EXECUTIVE ENGINEER KARNATAKA URBAN WATER SUPPLY
              AND DRAINAGE BOARD

     17. Bearing in mind the provisions of the Arbitration and Conciliation
Act 19963, we are of the view that Clause 11 does not constitute an arbitration
agreement. The expression “arbitration agreement” is defined by Section 2(b)
to mean an agreement referred to in Section 7. Section 7 is extracted below:
     “7. Arbitration agreement.—(1) In this Part, “arbitration
         agreement” means an agreement by the parties to submit to
         arbitration all or certain disputes which have arisen or which
         may arise between them in respect of a defined legal relationship,
         whether contractual or not.
     (2)   An arbitration agreement may be in the form of an arbitration
           clause in a contract or in the form of a separate agreement.
     (3)   An arbitration agreement shall be in writing.
     (4)   An arbitration agreement is in writing if it is contained in—
           (a) a document signed by the parties;
           (b) an exchange of letters, telex, telegrams or other means of
           telecommunication including communication through electronic
           means which provide a record of the agreement; or
           (c) an exchange of statements of claim and defence in which the
           existence of the agreement is alleged by one party and not denied
           by the other.
     (5)   The reference in a contract to a document containing an arbitration
           clause constitutes an arbitration agreement if the contract is in
           writing and the reference is such as to make that arbitration clause
           part of the contract.”
      18. Sub-section (1) of Section 7 indicates that an arbitration agreement
is an agreement by parties to submit to arbitration “all or certain disputes
which have arisen or which may arise between them in respect of a defined
legal relationship, whether contractual or not”. It is well settled that in
determining whether there is an arbitration agreement, the terms of the
contract between the parties must be read as a whole. The 1996 Act does


3   “The 1996 Act”/ “The Act”
470             SUPREME COURT REPORTS                     [2023] 15 S.C.R.


not prescribe a certain form of an arbitration agreement. The use or the
absence of the word ‘arbitration’ is not conclusive and the intention of
the parties to resolve the disputes through arbitration should be clear
from the terms of the clause. In Jagdish Chander vs Ramesh Chander,
the Court summarised the relevant factors for determining whether an
agreement is an arbitration agreement within the meaning of S. 7 of the
1996 Act. The Court held4:
       “(ii) Even if the words “arbitration” and “Arbitral Tribunal (or
       arbitrator)” are not used with reference to the process of settlement
       or with reference to the private tribunal which has to adjudicate
       upon the disputes, in a clause relating to settlement of disputes, it
       does not detract from the clause being an arbitration agreement if
       it has the attributes or elements of an arbitration agreement. They
       are: (a) The agreement should be in writing. (b) The parties should
       have agreed to refer any disputes (present or future) between them to
       the decision of a private tribunal. (c) The private tribunal should
       be empowered to adjudicate upon the disputes in an impartial
       manner, giving due opportunity to the parties to put forth their
       case before it. (d)The parties should have agreed that the decision
       of the private tribunal in respect of the disputes will be binding on
       them.” (emphasis added).
     19. The following conditions must be satisfied by a valid arbitration
agreement:
       (i)   The agreement must be in writing, as stipulated by sub-section
             (3) of Section 7;
       (ii) Parties should have agreed to refer any disputes, present or
            future, between them to an arbitral tribunal;
       (iii) The arbitral tribunal should be empowered to adjudicate upon
             the disputes in an impartial manner giving due opportunity to
             the parties; and




4     (2007) 5 SCC 719, 724.
   SOLARIS CHEM TECH INDUSTRIES LTD v. ASSISTANT 471
EXECUTIVE ENGINEER KARNATAKA URBAN WATER SUPPLY
              AND DRAINAGE BOARD

     (iv) The parties should have agreed that the decision of the tribunal
          would be binding between them.
      20. In the present case, Clause 11.2 of the agreement does not
constitute the Chief Engineer as an arbitral tribunal. A similar clause
was considered by this Court in Jaipur Jila Dugdh Utpadak Sahkari
Sangh Limited vs Ajay Sales and Suppliers. 5 A distributorship
agreement between the parties contained an arbitration clause in clause
13, stipulating that all disputes arising out of or in any way touching
or concerning the agreement, whatsoever shall be referred to the sole
Arbitrator, the Chairman, Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd.
and his decision shall be final and binding upon the parties. Accordingly,
the respondent in the case approached the Chairman and while the dispute
was pending before the Chairman, the respondent made an application
for appointment of an arbitrator and an arbitrator came to be appointed
by the High Court. Aggrieved by this, the appellant moved this Court.
Section 12(5) of the Arbitration Act, which was introduced in the year
2015 by way of an amendment indicates that notwithstanding any prior
agreement to the contrary, certain persons whose relationships with the
parties fall under the Seventh Schedule of the Act, are ineligible to be
appointed as an arbitrator. The issue was whether this disqualification
applied to arbitration agreements executed prior to the amendment which
came into effect on 23 October 2015. Dismissing the appeal, the Court
answered the question in the affirmative. Reiterating the observations in
Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited6,
the Court held that the object and purpose of Section 12(5) of the Act
is to ensure the “neutrality of arbitrators”. The non-obstante clause
makes the application of this provision to pre-amendment agreements
abundantly clear.
      21. The Court noted that the effect of Section 12(5) of the Act is
that the party cannot insist on the appointment of an arbitrator in terms
of such an agreement. Reading Section 12(5) with the Seventh Schedule
of the Act, it was held that the Chairman in that case, was disqualified



5   2021 SCC OnLine SC 730, para 10.
6   (2017) 4 SCC 665.
472            SUPREME COURT REPORTS                       [2023] 15 S.C.R.


and that the High Court was justified in appointing an arbitrator other
than the Chairman.
       “Disqualification/ineligible under Sub-section (5) of Section 12
       read with Seventh Schedule to the Act is to be read as a whole
       and considering the object and purpose for which Sub-section
       (5) of Section 12 read with Seventh Schedule to the Act came
       to be inserted. Sub-section (5) of Section 12 read with Seventh
       Schedule has been inserted bearing in mind the ‘impartiality and
       independence’ of the arbitrators. It has been inserted with the
       purpose of ‘neutrality of arbitrators’. Independence and impartiality
       of the arbitrators are the hallmarks of any arbitration proceedings as
       observed in the case of Voestalpine Schienen (Supra). Rule against
       bias is one of the fundamental principles of natural justice which
       apply to all judicial proceedings and quasi-judicial proceedings
       and it is for this reason that despite the contractually agreed upon,
       the persons mentioned in Sub-section (5) of Section 12 read with
       Seventh Schedule to the Act would render himself ineligible to
       conduct the arbitration.”7
     22 . In the present case, the agreements do not postulate that the
Chief Engineer would adjudicate upon the disputes between the parties
nor is there any provision to the effect that the Chief Engineer would
resolve the dispute after letting in evidence or allowing the parties an
opportunity of presenting their respective cases before them. The forum
comprising the Chief Engineer lacks the trappings of an arbitral forum.
More importantly, the Chief Engineer is an employee of the Board. In
view of the decision in Jaipur Jila Dugdh Utpadak Sahkari Sangh
Limited (supra), which has been upheld in Ellora Paper Mills Ltd. v.
State of M.P,8 arbitration proceedings must account for the rule against
bias and due process. Clause (1) of the Seventh Schedule of the Act
disqualifies an employee of one of the parties from being appointed as
an arbitrator. This prohibition applies notwithstanding an agreement to
the contrary. Read conjointly with the requirements of a valid arbitration



7     2021 SCC OnLine SC 730, para 17.
8     (2022) 3 SCC 1.
   SOLARIS CHEM TECH INDUSTRIES LTD v. ASSISTANT 473
EXECUTIVE ENGINEER KARNATAKA URBAN WATER SUPPLY
              AND DRAINAGE BOARD

agreement stipulated in Jagdish Chander (supra), Section 12 (5) of the
Act and the Seventh Schedule would indicate that such a person cannot
be considered fit to resolve the dispute between the parties independently
and without bias.
     23. Though the Single Judge was of the view that Clause 4 of the
agreement empowered the Board to revise its rates, nonetheless, without
dealing with the power and the manner of its exercise any further, the
High Court relegated the appellant to the remedy under Clause 11 before
the Chief Engineer.
      24. Once we have come to the conclusion that the provisions of
Clause 11 do not constitute an arbitration agreement, the corollary is
that the High Court ought not to have relegated the parties to the Chief
Engineer on the strength of Clause 11. It would have been appropriate
if the High Court had finally determined the challenge addressed by the
appellant in the writ proceedings under Article 226 of the Constitution.
Though the Single Judge has adverted to Clause 4, evidently there is no
final determination in that regard.
      25. The judgment of the Division Bench has exclusively relied
on the provisions of Clause 11 while coming to the conclusion that
the dispute between the parties fell within the ambit of the clause. The
fundamental aspect of the matter, however, is that the provision for
settlement of disputes which is contained in Clause 11 does not constitute
the Chief Engineer as an arbitral tribunal since he cannot be regarded as
an impartial officer nor do the provisions of Clause 11 incorporate the
trappings of an arbitral tribunal.
     26. For the above reasons, we allow the appeal and set aside
both, the judgment of the Single Judge dated 27 February 2018 and the
judgment of the Division Bench dated 18 June 2018. The Writ Petition,
being Writ Petition No 111298/2014 (GM-RES), shall stand restored to
the file of the Single Judge of the High Court of Karnataka at Dharwad
Bench for decision afresh.
     27. We clarify that we have not expressed any view on the merits of
the case which is sought to be set up by the appellant in the Writ Petition
or on the defence which has been urged on behalf of the respondents.
474           SUPREME COURT REPORTS                      [2023] 15 S.C.R.


     28. The Court has been apprised of the fact that in the meantime,
the appellant, which has been taken over by the Aditya Birla Group, has
continued to pay the revised water rates and has cleared the arrears while
reserving its rights to avail of the remedies. The appellant shall continue
to pay the rates as fixed by the Board from time to time subject to such
final orders as may be passed by the High Court in the Writ Petition
which is restored to the file of the High Court.
      29. The Appeal is accordingly disposed of.
      30. Pending applications, if any, stand disposed of.


Headnotes prepared by:                                    Appeal disposed of.
Nidhi Jain.