Supreme Court of India
STATE OF ORISSA & ORS.versusBHAGYADHAR DASH
- Citation
- 2011 INSC 449
- Decided
- 4 July 2011
- Disposal
- Appeal(s) allowed
- Bench
- R V RAVEENDRAN
Holding
The proviso to Clause 10 is not an arbitration agreement; it merely provides an administrative method for rate determination and does not bind the parties to arbitration.
Summary
The State of Orissa entered into construction contracts that contained Clause 10, which dealt with additions, alterations and the execution of non‑tendered items of work, and provided that any dispute over the rate for such work would be finally decided by the Superintending Engineer. Contractors, dissatisfied with the Engineer‑in‑Charge’s rate determination, filed applications under Section 11 of the Arbitration and Conciliation Act, 1996, seeking arbitration; the Orissa High Court held that the last sentence of the proviso to Clause 10 was an arbitration agreement and appointed arbitrators. On appeal, the Supreme Court examined whether the clause truly manifested an intention to refer disputes to arbitration and whether the Superintending Engineer’s decision was binding in the sense required by an arbitration agreement. The Court found that the clause merely provided an administrative mechanism for rate fixation, did not refer disputes to a private tribunal, and did not make the Engineer’s decision binding as an arbitral award; moreover, the original arbitration clause (Clause 23) had been deleted from contracts after 24‑12‑1981, precluding any implication that Clause 10 was an arbitration provision. Relying on earlier precedents defining the essentials of an arbitration agreement, the Court concluded that Clause 10’s proviso is not an arbitration agreement. Consequently, the appeals were allowed, the High Court’s appointment of arbitrators was set aside, and the applications for arbitration were dismissed.
Issues considered
- The last sentence of the proviso to Clause 10 of the contract is an arbitration agreement within the meaning of the Arbitration and Conciliation Act, 1996.
- Whether the decision of the Superintending Engineer is binding and constitutes a reference to arbitration.
- Effect of the deletion of the original arbitration clause (Clause 23) on the interpretation of Clause 10.
Legislation cited
- Arbitration and Conciliation Act, 1996s. 11, s. 2
Subjects
arbitration agreementcontract clause interpretationSection 11Superintending Engineernon‑tendered workArbitration and Conciliation Actbinding decision
Judgment
[2011) 8 S.C.R. 967
STATE OF ORISSA & ORS. A
v.
BHAGYADHAR DASH
(Civil Appeal No. 4933 of 2011)
. JULY 04, 2011
B
[R.V. RAVEENDRAN AND A.K. PATNAIK, JJ.]
Arbitration and Conciliation Act, 1996 - s.11 - Clause
10 of the conditions of contract (forming part of the
agreements between the State and the contractors) related to C
power of the Engineer-in-Chief to make adciitions and
alterations in the drawings and specifications and execution
of non-tendered additional items of work - The last sentence
of the proviso to cfause 10 provided that where in regard to a
non-tendered additional work executed by the contractor, if the D
contractor was not satisfied with the unilateral determination.
of the rate therefor by the Engineer-in-Charge the rate for such
work will be finally determined by the Superintending Engineer
- Disputes raised by contractors against the State
Government - Applications filed by contractors u/s. 11 - _Chief E
Justice of High Court held that the last sentence of the proviso
to the said clause 10 was an arbitration agreement and
appointed arbitrators to decide the disputes - On appeal,
held: The last sentence of the proviso to clause 10 did not
make the decision of the Superintending Engineer binding on F
either party - The decision of Superintending Engineer was·
not a judicial determination, but decision of one party which
was open to challenge by the other party in a court of law -
That clause 10 was never intended to be an arbitration
agreement is evident from the contract itself - The Standard
Conditions of Contract of the state government, as originally G
formulated consisted of a provision (Clause 23) relating to
settlement of disputes by arbitration- The.said clause was
deleted by the State Government fr.om the Standard
967 H
968 SUPREME COURT REPORTS [2011] 8 S.C.R.
A Conditions of Contract by official Memorandum dated
24.12.1981 - Contracts entered by the State Government
subsequent to 24.12.1981, as in the instant cases, did not
have the saic! arbitration clause, though the other Conditions
of Contract remained the same - When the State
B Government consciously and intentionally deleted the
provision for arbitration from its contracts, it will be a travesty
of justice to read another clause in the contract providing for
execution of non-tendered items and the method of
determination of the rates therefor, as a provision for
c arbitration - Orders of the High Court appointing the arbitrator
set aside and applications for appointment of arbitrator
dismissed.
Clause 10 of the conditions of contract (forming part
of the agreements between the State and the contractors)
D related to power of the Engineer-in-Chief to make
additions and alterations in the drawings ~nd
specifications and execution of non-tendered additional
items of work. The last sentence oi the proviso to clause
10 provided that where in regard to a non-tendered
E additional work executed by the contractor, if the
contractor was not satisfied with the unilateral
determination of the rate therefor by the Engineer-in-
Charge the rate for such work will be finally determined
by the Superintending Engineer. The Chief Justice of
F Orissa High Court held that the last sentence of the
proviso to clause 10 was an arbitration agreement and
allowed the applications filed by the contractors under
Section 11 of the Arbitration and Conciliation Act 1996
and appointed arbitrators to decide the disputes raised
G by them against the State Government.
The appellants challenged the said orders on the
ground that there was no arbitration agreement and
therefore the applications under section 11 of the Act filed
by the contractors ought to have been dismissed.
H
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH 969
The question· that therefore arose for consideration A
in the present appeal was whether the said clause 10 of
the conditions of contract was an arbitration agreement.
Allowing the appeals, the Court
HELD:1.1. The clause for consideration in the instant B
case i.e. Clause 10 of the Conditions of Contract provides
for the following: a) that the Engineer-in-charge could
make additions and alterations in the drawings/
specifications; and that such alterations and additions
will not invalidate the contract, but will entitle the C
contractor to extension of time for completion of work
proportionately; b) that if the additional work be executed
is an item for which the rate is not specified in the
contract (or in the schedule of rates for the district), the
contractor shall specify the rate and the Engineer-in- D
charge may either accept the rate or cancel the order to
execute that particular work; and c) that if the contractor
commences the work with reference to an item for which
there is no rate in the contract and there is no agreement
in regard to the rate for execution of such work, he shaU E
be paid at the rates fixed by the Engineer-in -Charge; and
d) that if the contractor disputes the rate fixed by the
Engineer-in-Charge, the decision of the Superintending
Engineer in regard to rate for such non-scheduled item
shall be final. [Para 14) [987-A-F] F
1.2. The last sentence of the proviso to clause 10
does not refer to arbitration as the mode of settlement of
disputes. It does not provide for reference of disputes
between the parties to arbitration. It does not make the
decision of the Superintending Engineer binding on G
·either party. It does not provide or refer to any procedure
which would show that the Superintending Engineer is
to act judicially after considering the submissions of both
parties. It does not disclose any intention to make the
H
970 SUPREME COURT REPORTS [2011] 8 S.C.R.
A Superintending Engineer an arbitrator in respect of
disputes that tnay arise between the Engineer-in-Charge
and the contractor: It does not make the decision of the
Superintending Engineer final on any dispute, other than
the claim for increase in rates for non-tendered items. It
B operates in a limited sphere, that is, where in regard to a
non-tendered additional work executed by the contractor,
if the contractor is not satisfied with the unilateral
determination of the rate therefor by the Engineer-in-
Charge the rate for such work will be finally determined
c by the Superintending Engineer. It is a provision made
with the intention to avoid future disputes regarding rates
for non-tendered item. It is not a provision for reference
of future disputes or settlement of future disputes. The
decision of superintending Engineer is not a judicial
0 determination, but decision of one party which is open
to challenge by the other party in a court of law. The said
clause can by no stretch of imagination be considered
·to. be an arbitration agreement. The said clause is not,
and was never intended to be, a provision relating to
E settlement of disputes. [Para 15] [987-G-H; 988-A-E]
1.3. That clause 10 was never intended to be an
arbitration agreement is evident from the contract itself.
The Standard Conditions of Contract of the state
government, as originally formulated consisted of a
F provision (Clause 23) relating to settlement of disputes,
by arbitration. The said clause was deleted by the State
Government from the Standard Conditions of Contract by
official Memorandum dated 24.12.1981. Contracts entered
by the State Government thereafter did not have the said
G arbitration clause, though the other Conditions of
Contract remained the same. The contracts in all these
cases are of a period subsequent to 24.12.1981 and the
Conditions of Contract forming part of these contracts do
not contain the arbitration clause. When the State
H Government has consciously and intentionally deleted
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH 971
he provision for arbitration from its contracts, it will be a A
ravesty of justice to read another clause in the contract
Jroviding for execution of non-tendered items and the
nethod of determination of the rates therefor, as a
.>rovision for arbitration. In Executive Engineer RCO vs.
Suresh Chandra Panda, this Court considered the effect 8
of the said clause relating to execution of non-tendered
items, vis-a-vis clause 23 in a pre-1981 contract. This
.:ourt held that the said clause (then numbered as clause
11, numbered as clause 10 in subsequent contracts) was
a provision which excluded the issue relating to finality C
of rates, from the scope of arbitration agreement
contained in clause 23. Thus, even when the Standard
Conditions of Contract contained a provision for
arbitration (vide clause 23), clause 10 was considered to
be a provision dealing with a matter excepted from
arbitration. The proviso to clause 10, which provides that D
the decision of the Superintending Engineer is 'final',
merely discloses an intention to exclude the rates for
extra items decided by the Superintending Engineer from
the scope of arbitration, as an excepted matter, when
there was an arbitration agreement (clause 23) in the E
contract. When the arbitration agreement was deleted,
provision dealing with non-tendered items cannot be
described as an arbitration agreement. [Paras 16, 17]
[988-F; 989-D-H; 990-G-H; 991-A]
F
1.4. The orders of the High Court appointing the
arbitrator are therefore set aside and the applications for
appointment of arbitrator are dismissed. [Para 18] [991-
B]
K K Modi vs.KN Modi 1998 (3) sec 573: 1998 (1).SCR G
601; Bihar State Mineral Development Corporation v. Encon
Builders (IP) Ltd.- 2003 (7) sec 418: 2003 (2) Suppl. SCR
812; Jagdish Chander vs. Ram Chandra 2007 (5) SCC 719:
2007 (5) SCR 720; State of Uttar Pradesh vs. Tipper Chand
H
972 .SUPREME COURT REPORTS [2011) 8 S.C.R.
~ 1980 (2) SCC 341; State of Orissa vs. Damodar Das 1996
(2) SCC 216: 1995 (6) Suppl. SCR 800 and Bharat Bhushan
Bansal vs. Uttar Pradesh Small Industries Corporation Ltd.,
Kanpur 1999 (2) SCC 166: 1999 (1) SCR 181; Rukmanibai
Gupta v. Collector, Jabalpur 1980 (4) SCC 566; Punjab State
8 v. Dina Nath 2001 (5) sec 28: 2001 (6 ) SCR 536;
Mallikarjun v. Gulbarga University 2004 (1) SCC 372: 2003
(5) Suppl. SCR 272 and Executive Engineer RCO vs. Suresh
Chandra Panda 1999 (9) SCC 92 - referred to.
Hudson on 'Building and Engineering Contracts' 11th
C Edition, Volume II and Russell on Arbitration 19th Edn. -
referred to.
Case Law Reference:
1998 (1) SCR 601 referred to Para 3
D
2003 (2) Suppl. SCR 812 referred to Paras 3, 11
2007 (5) SCR 720 referred to Para 4
1980 (2) sec 341 referred to Para 7
E 1995 (6) Suppl. SCR 800 referred to Para 8
1999 (1) SCR 181 referred to Para 9
1980 (4) sec 566 referred to Para 10
F 2007 (6 ) SCR 536 referred to Para 11
2003 (5) Suppl. SCR 272 referred to Para 12
1999 (9) sec s2 referred to Para 17
G CIVIL APPELLATE JURISDICTION : Civil Appeal No.
4933 of 2011.
From the Judgment & Order dated 15.02.2008 of the High
Court of Orissa at Cuttack in Arbitration Application No. 36 of
2005.
Ji._
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH 973
WITH A
':-.A. Nos. 4935, 4936, 4934, 4937, 4939, 4940, 4941. 4942,
4943, 4944, 4945, 4946 of 2011.
S.B. Upadhyay, Shibashish Misra, R.C. Kohli, Ashok
Kumar Singh, Sapam Biswajit Meitei, Surender Dutt Sharma, 8
Param Kr. Mishra, Pawan Kishore Singh, Rana S. Biswas,
Mattugupta Mishra, Amitab Narendra, Sunil .Sharma, Anurag
Sharma, K.N. Tripathy, Manoj K. Das, Nikilesh Ramachandran,
M.R. Mishra, Rutwik Panda for the appearing parties.
The Judgment of the Court was delivered by
c
R.V.RAVEENDRAN, J. 1. Leave granted. ·
2. These appeals by special leave are by the State of
Orissa aggrieved by the orders of the Chief Justice of Orissa D
High Court allowing the applications filed under Section 11 of
the Arbitration and Conciliation Act 1996 ('Act' for short) filed
by contractors and appointing arbitrators to decide the disputes
raised by them against the State Government. The learned
Chief Justice held that the last sentence of the proviso to clause E
10 of the conditions of contract (forming part of the agreements
between the state and the contractors) is an arbitration
agreement. The appellants challenge the said orders on the
ground that there is no arbitration agreement and therefore the
applications under section 11 of the Act filed by the contractors F
ought to have been dismissed. Therefore the short question that
arises for our consideration in these appeals is whether the said
clause .is an arbitration agreement.
The essentials of an arbitration agreement
G
3. In K K Modi vs. KN Modi [1998 (3) SCC 573] this court
enumerated the following attributes of a valid arbitration
agreement:
"(1) The arbitration agreement must contemplate that the H
974 SUPREME COURT REPORTS [2011) 8 S.C.R.
A decision of the Tribunal will be binding on the parties to
the _agreement,
(2) that the jurisdiction of the Tribunal to decide the rights
of parties must derive either from the consent of the parties
or from an order of the Court or from a statute, the terms
B
of which make it clear that the process is to be an
arbitration, ·
(3) the agreement must contemplate that substantive rights
of parties will be determined by the agreed tribunal,
c
(4) that the tribunal will determine the rights of the parties
in an impartial and judicial manner, with the tribunal owing
an equal obligation of fairness towards both sides,
(5) that the agreement of the parties to refer their disputes
D to the decision of the Tribunal must be intended to be
enforceable in law, and lastly,
(6) the agreement must contemplate that the tribunal will·
make a decision upon a dispute which is already
E formulated at the time when a reference is made to the
Tribunal."
Following K.K. Modi and other cases, Bihar State Mineral
Development Corporation v. Encon Builders (IP) Ltd. - 2003
F (7) sec 418, this court listed the following as the essential
elements of an arbitration agreement:
"(i) There must be a present or a future difference in
connection with some contemplated affair;
G (ii) There must be the intention of the parties to settle such
difference by a private tribunal;
(iii) The parties must agree in writing to be bound by the
decision of such tribunal; and
H (iv) The parties must be ad idem."
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH 975
[R.V. RAVEENDRAN, J.]
4. In Jagdish Chander vs. Ram Chandra [2007 (5) SCC A
719), this Court, after referring to the cases on the issue, set
out the following principles in regard to what constitutes an
arbitration agreement :
"(i) The intention of the parties to enter into an arbitration 8
agreement shall have to be gathered from the terms of the
agreement. If the terms of the agreement clearly indicate
an intention on the part of the parties to the agreement to
refer their disputes to a private tribunal for adjudication and
an willingness to be bound by the decision of such tribunal C
on such disputes, it is arbitration agreement. While there
is no specific form of an arbitration agreement, the words
used should disclose a determination and obligation to go
to arbitration and not merely contemplate the possibility of
going for arbitration. Where there is merely a possibility
of the parties agreeing to arbitration in future, as contrasted D
frQm an obligation to refer disputes to arbitration, there is
no valid and binding arbitration agreement. ·
(ii) Even if the words 'arbitration' and 'arbitral tribunal (or
arbitrator)' are not used with reference to the process of E
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 F
: (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 G
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.
{iii) Where the clause provides that in the event of disputes
arising between the parties, the disputes shall be referred H
976 SUPREME COURT REPORTS (2011) 8 S.C.R.
A to Arbitration, it is an arbitration agreement. Where there
is a specific and direct expression of intent to have the
disputes settled by arbitration, it is not necessary to set
out the attributes of an arbitration agreement to make it
an arbitration agreement. But where the clause relating to
B settlement of disputes, contains words which specifically
excludes any of the attributes of an arbitration agreement
or contains anything that detracts from an arbitration
agreement, it will not be an arbitration agreement. For
example, where an agreement requires or permits an
c authority to decide a claim or dispute without hearing, or
requires the authority to act in the interests of only one of
the parties, or provides that the decision of the Authority
will not be final and binding on the parties, or that if either
party is not satisfied with the decision of the Authority, he
may file a civil suit seeking relief, it cannot be termed as
D
an arbitration agreement.
(iv) But mere use of the word 'arbitration' or 'arbitrator' in
a clause will not make it an arbitration agreement, if it
requires or contemplates a further or fresh consent of the
E parties for reference to arbitration. For example, use of
words such as "parties can, if they so desire, refer their
disputes to arbitration" or "in the event of any dispute, the
parties may also agree to refer the same to arbitration" or
"if any disputes arise between the parties, they should
F consider settlement by arbitration" in a clause relating to
settlement of disputes, indicate that the clause is not
intended to be an arbitration agreement. Similarly, a clause
which states that "ifthe parties so decide, the disputes
shall be referred to arbitration" or "any disputes between
G parties, if they so agree, shall be referred to arbitration"
is not an arbitration agreement. Such clauses merely
indicate a desire or hope to have the disputes settled by
arbitration, or a tentative arrangement to explore
arbitration as a mode of settlement if and when a dispute
arises. Such clauses require the parties to arrive at a
H
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH ·977
[R.V. RAVEENDRAN, J.]
further agreement to go to arbitration, as and when the A
disputes arise. Any agreement or clause in an agreement
requiring or.contemplating a further consent or consensus.
before a reference to arbitration, is not an arbitration
agreement, but an agreement to enter into an arbitration
agreement in future." B
5. The following passage from Russell on Arbitration (19th
Edn. Page 59) throws some light on this issue:
"If it appears from the terms of the agreement by which a
matter is submitted to a person's decision, that the intention C
of the parties was that he should hold an enquiry in the
nature of a judicial enquiry and hear the respective cases
of the parties and decide upon evidence laid before him,
then the case is one of an arbitration. The intention in such
case is that there shall be a judicial inquiry worked out in D
a judicial manner. On the other hand, there are cases in
which a person is appointed to ascertain some matter for
the purpose of preventing differences from arising, not of
setting them when they have arisen".
E
Cases whel'e the tests were applied to different clauses
to find out whether they could be termed as 'arbitration
agreement'
6. In K.K. Modi, the clause that arose for consideration was
as under: F
"9. Implementation will be done in consultation with the
financial institutions. For all disputes, clarification etc., in
respect of implementation of this agreement, the same shall
be referred to the Chairman, IFCI or his nominees whose G
decisions will be final and binding on both the groups".
This Court held tha.t the said clause was not an arbitration
agreement on the following reasoning:
"Therefore our Courts have laid emphasis on (1) existence H
978 SUPREME COURT REPORTS [2011] 8 S.C.R.
of disputes as against intention to avoid future dispute; (2)
the tribunal or forum so chosen is intended to act judicially
after taking into account relevant evidence before it and
the submissions made·by the parties before it; and (3) the
decision is intended to bind the parties. Nomenclature
B used by the parties may not be conclusive.
The purport of Clause 9 is to prevent any further disputes
between Groups A and B. Because the agreement
requires division of assets in agreed proportions after their
valuation by a named body and under a scheme of division
c by another named body. Clause 9 is intended to clear any
other difficulties which may arise in the implementation of
the agreement by leaving it to the decision of the Chairman,
IFCI. This clause does not contemplate any judicial
determination by the Chairman of the IFCI . .. Thus,
D clause 9 is not intended to be for any different decision
than what is already agreed upon between the parties to
the dispute. It is meant for proper implementation of the
settlement already arrived at. A judicial determination,
recording of evidence etc. are not contemplated .. ."
E
(emphasis supplied)
7.ln State of Uttar Pradesh vs. Tipper Chand - 1980 (2)
sec 341, the following clause fell for consideration:
F "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 the meaning of the
specifications, design, drawing and instructions
G hereinbefore mentioned. The decision of such Engineer as
to the quality of workmanship, or materials used on the
work, or as to any other question, claim, right, matter or
things whatsoever, in any way arising out of or relating to
the contract, designs, drawing specifications, estimates,
H instructions, orders, or these conditions, or otherwise
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH 979
[R.V. RAVEENDRAN, J.]
concerning the works, or the execution or failure to execute A
the same, whether arising during the progress of the work,
or after the completion or abandonment of the contract by
the Contractor, shall also be final, conclusive and binding
on the Contractor".
B
The High Court held that the clause was not an arbitration
agreement, as it merely conferred power on the Superintending
Engineer to take a decision on his own and did not authorise
parties to refer any matter to his decision. This court clarified
that in the absence of a provision for reference of disputes C
between parties for settlement, clause merely stating that the
"decision of the Superintending Engineer shall be final" was not
an arbitration agreement. This Court clarified that an arbitration
agreement can either be in express terms or can be inferred
or spelt out from the terms of the clause; and that if the purpose
of the clause is only to vest in the named Authority, the power D
of supervision of the execution of the work and administrative
control over it from time to time, it is not an arbitration
agreement. It also held that the clause did not contain any
express arbitration agreement, nor spelt out by implication any
~rbitration agreement as it did not mention any dispute or E
~reference of such dispute for decision.
8. In State of Orissa vs. Damodar Das [1996 (2) SCC
216], a three Judge Bench of this court considered whether the
following clause is an arbitration agreement: F
"25. Decision of Public Health Engineer to be final.-
Except where otherwise specified in this contract, the
decision of the public Health Engineer for the time being
shall be final, conclusive and binding on all parties to the
contract upon all questions relating to the meaning of the G
specifications; drawings and instructions hereinbefore
mentioned and as to the quality of workmanship or material
use on the work, or as to any other question, claim, right,
matter or thing, whatsoever in any way arising out of, or
relating to, the contract, drawings, specifications, H
980 SUPREME COURT REPORTS [2011) 8 S.C.R.
A· estimates, instructions, orders or these conditions, or
otherwise concerning the works or the execution of failure ~
to execute the same, whether arising during the progress
of the work or after the completion or the sooner
determination thereof of the contract".
B
Following the decision in Tipper Chand, this Court held that the
said clause did not amount to an arbitration agreement, on the
following reasoning:
"It would, thereby, be clear that this Court laid down as a
C rule that the arbitration agreement must expressly or by
implication be spelt out that there is an agreement to refer
any dispute or difference for an arbitration and the clause
in the contract must contain such an agreement. We are
in respectful agreement with the above ratio. It is obvious
D that for resolution of any dispute or difference arising
between two parties to a contract, the agreement must
provide expressly or by necessary implication, a reference
· to an arbitrator riamed therein or otherwise of any dispute
or difference and in its absence it is difficult to spell out
E existence of such an agreement for reference to an
arbitration to resolve the dispute or difference contracted
between the parties."
(emphasis supplied)
F 9. In Bharat Bhushan Bansal vs. Uttar Pradesh Small
Industries Corporation Ltd., Kanpur (1999 (2) SCC 166), the
following clauses fell for consideration of this Court:
"Decision of the Executive Engineer of the UPSIC to
G be final on certain matters
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,
H drawings and instructions hereinbefore mentioned, and as
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH 981
[R.V. RAVEENDRAN, J.]
to the quality of workmanship or materials used on the A
work or as to any other question whatsoever in any way
arising out of for relating to the designs, drawings,
specifications, estimates, instructions, orders or otherwise
concerning the works or the execution or failure to execute
the same whether arising during the progress of the work, B
or after the completion thereof or abandonment of the
contract by the Contractor shall be final and conclusive and
binding on the Contractor.
Decision of the MD of the UPSIC on all other matters
shall be final C
Except as provided in Clause 23 hereof, the decision of
the Managing Director of the UPSIC shall be final,
conclusive and binding on both the parties to the contract
upon all questions relating to any claim, right, matter or thing D
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 all other matter arising out
of this contract and not specifically mentioned herein".
· This Court held that the said clauses did not amount to E
arbitration agreement on the following reasoning:
"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
F
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 is made final and binding in respect of
the remaining claims. Both the Executive Engineer as well G
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 fu/1-
fledged arbitration covered by the Arbitration Act".
{emphasis supplied) ~
982 SUPREME COURT REPORTS (2011) 8 S.C.R.
This Court while noting the distinction between a 'P.reventer of
disputes' and an 'adjudicator of disputes', observed that the
Managing Director under clause 24 of the agreement, was more
in the category of an expert who will decide claims, rights, or
matters in any way pertaining to the contract and the object of
B his decision is to avoid disputes and not decide disputes in a
quasi-judicial manner. This court also referred to an illustration
given in Hudson on 'Building and Engineering Contracts' (11th
Edition, Volume II, para 18.067) stating that the following clause
was not an arbitration clause and that the duties of the Engineer
c mentioned therein were administrative and not judicial:
"(E)ngineer shall be the exclusive judge upon all matters
relating to the construction, incidents and the
consequences of these presents, and of the tender
specifications, schedule and drawings of the Contract, and
D 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 contract, and the certificate of the engineer
for the time being, given under his hand, shall be binding
E and conclusive on both parties".
10. We may next refer to the three decisions of this Court
relied on by the respondents, where on interpretation, cl~u..ises
though not described as 'arbitration clauses', were held to be
F arbitration clauses, by applying the tests as to what constitute
an arbitration agreement. In Rukmanibai Gupta v. Collector,
Jabalpur - 1980 (4) SCC 566, this Court considered whether
the following clause amounted to an arbitration agreement :
"15. Whenever any doubt, difference or dispute shall
G hereafter arise touching the construction of these presents
or anything herein contained or any matter or things
connected with the said lands or the working or non-
working thereof or the amount or payment of any rent or
. royalty reserved or made payable hereunder the matter in
H
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH 983
[RV. RAVEENDRAN, J.]
difference shall be decided by the lessor whose decision A
shall be final".
This Court held that Arbitration agreement is not required to be
in any particular form. What is required to be ascertained is
whether the parties have agreed that if disputes arise between 8
them in respect of the subject-matter of contract such dispute
shall be referred to arbitration; and if the answer was in the
affirmative, then such an arrangement would spell out an
arbitration agreement. Applying the said test, this court held
that the aforesaid clause is an arbitration agreement, as it (a) C
made a provision for referring any doubt, difference or dispute
to a specified authority for decision and (b) it made the
"decision" of such authority final. While we respectfully agree
with the principle stated, we have our doubts as to whether the
clause considered would be an arbitration agreement if the
principles mentioned in the said decision and the tests D
. mentioned in the subsequent decision of a larger bench in
Damodar Das are applied. Be that as it may. In fact the larger
bench in Damodar Das clearly held that the decision in
Rukmanibai Gupta was decided on the special wording of the
clause considered therein. "The ratio in Rukmanibai Gupta vs. E
Collector does not assist the respondent. From the language
therein this court inferred, by implication, existence of a dispute
or difference for arbitration."
11. In Encon Builders (supra), this court proceeded on the F
assumption that the following clause was an arbitration
agreement, as that issue was not disputed:
"In case of any dispute arising out of the agreement the
matter shall be referred to the Managing Director, Bihar
State Mineral Development Corporation Limited, Ranchi, G
whose decision shall be final and binding."
The clause specifically provided for 'disputes being referred to
the Managing Director' and made the said authority's decision
not only final, but also binding on the parties. Therefore it can 1-1
984 SUPREME COURT REPORTS [2011] 8 S.C.R.
A be said that it answers the tests of an arbitration agreement.
The issue considered .therein was whether the High Court
committed an error in refusing to refer the dispute to arbitration,
even after finding the clause to be an arbitration agreement,
by presuming bias in view of the fact that the named arbitrator
B was an employee of one of the parties to the dispute. This Court
held that disputes were arbitrable in terms of the said clause.
Be that as it may. A similar clause was also considered in
Punjab State Vs. Dina Nath [2007 (5) SCC 28] and held to
be arbitration agreement.
c 12. In Mallikarjun v. Gulbarga University - 2004 (1) SCC
372, this court held the following clause was a valid arbitration
agreement:
"The decision of the Superintending Engineer of the
D Gulbarga Circle for the time being shall be final,
conclusive, and binding on all parties to the contract upon
all questions relating to the meaning of the specifications,
designs, drawings and instructions herein before
mentioned and as to the quality of workmanship or material
E used on the work, or as to any other question, claim, right,
matter, or thing whatsoever, in any way arising out of, or
relating to the contract, designs, drawings, specifications,
estimates, instructions, orders or those conditions, or
otherwise concerning the works of the execution, or failure
F to execute the same, whether arising during the progress
of the work, or after the completion or abandonment
thereof in case of dispute arising between the contractor
and. Gulbarga University."
This court after referring to the essentials of an arbitration
G agreement laid down in Encon Builders held that the above
clause is an arbitration agreement as it answered the test of
reference of dispute for decision and made the decision of the
authority final and binding. This court held :
H "Applying the aforesaid principle to the present case,
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH 985
(R.V. RAVEENDRAN, J.]
Clause 30 requires that the Superintending Engineer, A
Gulbarga Circle, Gulbarga, to give his decision on any
dispute that may arise out of the contract. Further we also
find that the agreement postulates present or future
differences in connection with some contemplated affairs
inasmuch as also there was an agreement between the B
parties to settle such difference by a private tribunal,
namely, the Superintending Engineer, Gulbarga Circle,
Gulbarga. It was also agreed between the parties that they
would be bound by the decision of the tribunal. The parties
were also ad idem." c
The clause for consideration in this case
13. Clause 10 of the Conditions of Contract which is the
subject of controversy reads thus:
D
"Clause 10: The Engineer-in-Charge shall have power to
make any alterations in or additions to the original
specifications, drawings, designs and instructions that may
appear to him necessary and advisable during the
progress of work, and the contractor shall be bound to E
carry out the work in accordance with any instructions
, which may be given to him in writing signed by the
Engineer-in-Charge and such alterations shall not
invalidate the contract, and any additional work which the
contractor may be directed to do in the manner above
specified as part of the work shall be carried out by the
F
contractor on the same conditions in all respects on which
he agreed to do the main work, and at the same rates as
are specified in the tender for the main work. The time for
the completion of the work shall be extended in the
proportion that the additional work bears to the original G
contract work and the certificate of the Engineer-in-Charge
shall be conclusive as to such proportion. And if the
additional work includes any class of work for which no
rate is specified in this contract, then such class of work
H
986 SUPREME COURT REPORTS [2011) 8 S.C.R.
A shall be carried out at the rates entered in the sanctioned
schedule of rates of the locality during the period when the
work is being carried on and if such last mentioned class
of work is not entered in the schedule of rates of the district
then the co~tractor shall within seven days of the date of
B the rate which it is his intention to charge for such class of
work, and if the Engineer-in-Charge does not agree to this
rate he shall be noticed in writing be at liberty to cancel
his order to carry out such class of work and arrange to
carry it out in such manner as he may consider advisable.
c No deviations from the specifications stipulated in the
contract nor additional items of work shall ordinarily be
carried out by the contractor, nor shall any altered,
additional or substituted work be carried out by him, unless
the rates of the substituted, altered or additional items
D have been approved and fix~d in writing by the Engineer-
in-Charge, the contractor shall be bound to submit his claim
for any additional work done during any month on or before
the 15th days of the following month accompanied by a
copy of the order in writing of the Engineer-in-Charge for
E the additional work and that the contractor shall not be
entitled of any payment in respect of such additional work
if he fails to submit his claim within the aforesaid period.
Provided always that if the contractor shall commence work
F or incur any expenditure in respect thereof before the r~tes
shall have been determined as lastly hereinbefore
mentioned, in such case he shall only be entitled to be paid
in respect of the work carried out or expenditure incurred
by him prior to the date of the determination of the rates
as aforesaid according to such rate or rates as shall be
G
fixed by the Engineer-in-Charge. In the event of a dispute,
the decision of the Superintending Engineer of the Circle
will be final. n
(emphasis supplied)
H
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH 987
[R.V. RAVEENDRAN, J.]
14. A reading of the said clause shows that it is a clause A
relating to power of the Engineer-in-Chief to make additions
and alterations in the drawings and specifications and execution
of non-tendered additional items of work (that is items of work
which are not found in the bill of quantities or schedule of work).
It provides for the following: B
(a) that the Engineer-in-charge could make additions
and alterations in the drawings/specifications; and
that such alterations and additions will not invaliqate
the contract, but will entitle the contractor to C
extension of time for completion of work
proportionately;
(b) that if the additional work be executed is an item
for which the rate is not specified in the contract (or
in the schedule of rates for the district), the D
contractor shall specify the rate and the Engineer-
in-charge may either accept the rate or cancel the
order to execute that particular work;
(c) that if the contractor commences the work with E
reference to an item for which there is no rate in the
contract and there is no agreement in regard to the
rate for execution of such work, he shall be paid at
the rates fixed by the Engineer-in -Charge; and
(d) that if the contractor disputes the rate fixed by the F
Engineer-in-Charge, the decision of the
Superintending Engineer in regard to rate for such
non-scheduled item shall be final.
15. We may next examine whether the last sentence of the· c:
proviso to clause 10 could be considered to be an arbitration
agreement. It does not refer to arbitration as the mode of
settlement of disputes. It does not provide for reference of
. disputes between the parties to arbitration. It does not make
the decision of the Superintending Engineer binding on either I-{
988 SUPREME COURT REPORTS [2011] 8 S.C.R.
A party. It does not provide or refer to any procedure which would
show that the Superintending Engineer is to act judicially after
considering the submissions of both parties. It does not
disclose any intention to make the Superintending Engineer an
arbitrator in respect of disputes that may arise between the
B Engineer-in-Charge and the contractor. It does not make the
decision of the Superintending Engineer final on any dispute,
other than the claim for increase in rates for non-tendered items.
It operates in a limited sphere, that is, where in regard to a non-
tendered additional work executed by the contractor, if the
c contractor is not satisfied with the unilateral determination of
the rate therefor by the Engineer-in-Charge the rate for such
work will be finally determined by the Superintending Engineer.
It is a provision made with the intention to avoid future disputes
regarding rates for non-tendered item. It is not a provision for
0 reference of future disputes or settlement of future disputes.
The decision of superintending Engineer is not a judicial
determination, but decision of one party which is open to
challenge by the other party in a court of law. The said clause
can by no stretch of imagination be considered to be an
arbitration agreement. The said clause is not, and was never
E intended to be, a provision relating to settlement of disputes.
16. That clause 10 was never intended to be an arbitration
agreement is evident from the contract itself. It is relevant to
note the Standard Conditi9ns of Contract of the state
F government, as originally formulated consisted a provision
(Clause 23) relating to settlement of disputes by arbitration,
which is extracted below :
"Except where otherwise provided in the contract, all
questions and disputes relating to the meaning of the
G
specifications, designs, 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,
claim, right, matter or thing whatsoever, in any way arising
out of or relating to the contract, designs, drawing,
H
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH 989
[R.V. RAVEENDRAN, J.]
specifications, estimates, instructions, orders or these A
conditions, or otherwise concerning the work, or the
execution, or failure to execute the same, whether arising
during the progress of the work or after the completion or
abandonment thereof shall be referred to the sole
arbitration of a Superintending Engineer of the State B
Public Works Department unconnected with the work at
any stage nominated by the Chief Engineer concerned~ If
there be no such Superintending Engineer, it should be
refereed to the sole arbitration of Chief Engineer
concerned. It will be no objection to any such appointment c
that the arbitrator so appointed is a government servant.
The award of the arbitrator so appointed shall be final,
conclusive and binding on all parties to this Contract."
The said clause was deleted by the State Government from the
Standard Conditions of Contract by official Memorandum dated D
24.12.1981. Contracts entered by the State Government
thereafter did not have -the said arbitration clause, though the
other Conditions of Contract remained the same. The contracts
in all these cases are of a period subsequent to 24.12.1981
and the Conditions of Contract forming part of these contracts E
do not contain the arbitration clause. When the State
Government has consciously and intentionally deleted the
provision for arbitration from its contracts, it will be a travesty
of justice to read another clause in the contract providing for
axecution of non-tendered items and the method of F
determination of the rates therefor, as a provision for arbitration.
17. In fact, in Executive Engineer RCO vs. Suresh
Chandra Panda [1999 (9) SCC 92], this Court considered the
effect of the said clause relating to execution of non-tendered C:
items, vis-a-vis clause 23 in a pre-1981 contract. This court held
that the said clause (then numbered as clause 11, numbered_
as clause 10 in subsequent contracts) was a provision which
excluded the issue relating to finality of rates, from the scope
of arbitration agreement contained in clause 23 on the following
990 SUPREME COURT REPORTS [2011) 8 S.C.R.
~ reasoning :
"Under Clause 11 of the contract, there is an elaborate
provjsion dealing with the power of the Engineer-in Charge
to make any alterations or additions to the original
specifications, drawings, designs and instructions. It, inter
B
alia, provides that if for such alterations or additions no rate
is specified in the contract, then the rates which are
entered in the sanctioned schedule of rates of the locality
during the period when the work is being carried out, would
be paid. However, if this class of work, not provided for in
c the sanctioned schedule of rates then the contractor has
the right, in the manner specified i~ that dause, to inform
the Engineer-in-Charge of the rate at which he intends to
carry out that work. If the Engineer-in-Charge does not
agree to this rate he is given the liberty to cancel his order
D and arrange to carry out such class of work in such manner
as he may consider advisable. The clause further provides
that if the contractor commences such additional work or
incurs any expenditure in respect of it before the rate are
determined as specified in that clause, then the rate or
E rates shall be as fixed by the Engineer-in-Charge. In the
event of a dispute, the decision of the Superintendent
Engineer of the circle will be final. Under Clause 23, except
as otherwise provided in the contract, all disputes are
arbitrable as set out in that clause. The finality of rates,
F therefore, under Clause 11 is a provision to the contrary
in the contract which is excluded from Clause 23."
Thus, even when the Standard Conditions of Contract contained
a provision for arbitration (vide clause 23), clause 10 was
considered to be a provision dealing with .a matter excepted
G from arbitration. Be that as it may. The proviso to clause 10,
which provides that the decision of the Superintending Engineer
is 'final', merely discloses an intention to exclude the rates for
extra items decided by the Superintending Engineer from the
scope of arbitration, as an excepted matter, when there was
H
STATE OF ORISSA & ORS. v. BHAGYADHAR DASH 991
[R.V. RAVEENDRAN, J.]
;m arbitration agreement (clause 23) in the contract. When the A
lrbitration agreement was deleted, provision dealing with non-
(endered items can not be described as an arbitration
agreement. Be that as it may.
18. We therefore allow these appeals, set aside the orders 8
of the High Court appointing the arbitrator and dismiss the
applications for appointment of arbitrator.
8.8.B. Appeals allowed.
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