What constitutes a valid arbitration agreement?

Facts: Appellant, a wholly owned company of Government of Karnataka and Respondent company entered into an Agreement for establishing 2x8 MVA, 66/11 sub-stations at Tavarekere in Davanagere District, on partial turnkey basis. Certain disputes arose between the parties and the Respondent raised claims before the engineer as per clause 48 of the general conditions of the Agreement. Since the engineer was unable to resolve dispute within 30 days as provide for in clause 48, the Respondent filed application under Section 11(5) ad (6) of the Arbitration and Conciliation Act, 1996 before the High Court of Karnataka for appointment of an arbitrator. The Appellants resisted the application on the ground that clause 48 does not provide for arbitration and the same could not be construed as the arbitration clause. Clause 48 reads as follows:-

“48.0 Settlement of disputes:

48.1 Any dispute(s) or difference(s) arising out of or in connection with the Contract shall, to the extent possible, be settled amicable between the parties.

48.2 If any dispute or difference of any kind whatsoever shall arise between the owner and the Contractor, arising out of the Contract for the Performance of the Works whether during the progress of the Works or after its completion or whether before or after the termination, abandonment or breach of the contract, it shall, in the first place, be referred to and settled by the Engineer, who, within a period of thirty (30) days after being requested by either party to do so, shall give written notice of his decision to the owner and the contractor.

48.3 Save as hereinafter provided, such decision in respect of every matter so referred shall be final and binding upon the parties until the completion of the works and shall forthwith be given effect to by the contractor who shall proceed with the works with all the due diligence.

48.4 During settlement of disputes and Court proceedings, both parties shall be obliged to carry out their respective obligations under the contract.”

The single judge interpreted clauses 48 and 4.1 of the Agreement to hold that plain reading of clause indicate that it partakes the character of an arbitration clause and accordingly appointed a sole arbitrator to adjudicate the matter in dispute.

The Appellant challenged the said judgment of the Karnataka High Court before the Supreme Court.

Issue: Whether clause 48 read with clause 4.1 constitutes a valid arbitration agreement?

Appellant’s Contentions: The Appellant contended that firstly there is absence of an express intention, in clause 48, to refer the matter to an arbitrator, and secondly there is a specific clause, i.e. clause 4 in the Agreement which stipulates that all the references and disputes arising out of the agreement or touching the subject-matter of the agreement shall be decided by a competent court at Bangalore. The Appellant also placed reliance on the decisions in M.K. Shah Engineers & Contractors v State of M.P.2, Wellington Associates Ltd. v Kirit Mehta3 and Jagdish Chander v Ramesh Chander and others4

Respondent’s contentions: The Respondent contended that clause 48 clearly highlights that the intention of the parties is to refer the dispute to arbitration and clause 4 only determines the place of territorial jurisdiction and has nothing to do with any stipulation for arbitration. The Respondent placed reliance on the following decisions: Smt. Rukmanibai Gupta v Collector Jabalpur & others5 and Punjab State and others v Dina Nath6

Decision: The Supreme Court first analyzed Section 7 of the Act and held that Section 7 requires the parties to have an intention, expressing the consensual acceptance to refer the dispute to an arbitrator. The Court then went on to discuss the various authorities relied upon by both the parties.In Rukmanibai Gupta the court while interpreting the clause in question7, relied upon Russell on Arbitration8, which provides that “If it appears from the terms of the agreement by which a matter is submitted to a person’s decision that the intention of the parties was that he should hold an inquiry in the nature of a judicial inquiry and hear the respective cases of the parties and decide upon evidence laid before him, then the case is one of an arbitration”.

The Court then refereed to Chief Conservator of Forest v Rattan Singh9, wherein it was held that, a clause providing for reference of dispute to the lessor and the decision of the lessor to be final, could be construed as an arbitration agreement. The Court then went on to refer a three-judge Bench decision in State of U.P. v Tipper Chand10, where the Court while interpreting the clause11 under consideration had held that since there was no mention of any dispute and since the clause appeared to vest only the power of supervision of execution of work and administrative control, thus it could not be held to be an arbitration clause.

The Court then considered the clauses in Dewan Chand v State of Jammu and Kashmir12 and Ram Lal v Punjab State13, wherein the clauses14 were interpreted to constitute arbitration clause, as the clauses contained words “any dispute between the contractor and the Department” and reference to Superintending Engineer respectively.

The Court next considered the clause15 in State of Orissa and another etc v Sri Damodar Das16 and relying upon the principles in Tipper Chand held that the said clause constituted an arbitration agreement. In the case of Bihar State Mineral Development Corporation and another v Encon Buiders (I) (P) Ltd17 the court laid down that an arbitration clause should have the following:- 1) There must be a present or a future difference in connection with some contemplated affair; 2) There must be the intention of the parties to settle such difference by a private tribunal; 3) The parties must agree in writing to be bound by the decision of such tribunal; 4) The parties must be ad idem. The Court further held that the term “arbitration” is not required to be specifically mentioned in the agreement but an intention of the parties to resolve the dispute through arbitration should be inferable.

The Court then considered the clause in the instant case and held that though it provides for the parties to amicably settle any disputes or differences arising in connection with the contract, also provides that the dispute is to be referred to and settled by the engineer and also a stipulation that his decision in respect of every matter so referred to shall be final and binding upon the parties until the completion of works. However, the clause nowhere provides that the engineer is required to act judicially as an adjudicator by following the principles of natural justice ad also the decision of the engineer is only binding until the completion of the works. The Court held that the said clause has been engrafted to avoid delay and stoppage of work and for the purpose of smooth carrying on of the works. The emphasis is on the performance of the contract and the language of the clause does not spell out the intention of the parties to get the disputes adjudicated through arbitration. The Court further held that reading of clause 4.1 along with clause 48 clearly shows that the intention of the parties was to resolve the disputes and differences by the competent civil court and clause 48 clearly cannot be regarded as an arbitration clause.