The Allahabad High Court, while disposing an application, observed that a person or authority barred under Seventh Schedule of Arbitration and Conciliation Act 2013, can neither be appointed as Arbitrator nor nominate a person as arbitrator.
Chief Justice Rajesh Bindal passed this order while hearing an Arbitration & Conciliation Application U/s 11(4) filed by M.J.S Construction and others.
The prayer made in the application filed under Section 11(6) of the Arbitration and Conciliation Application Act, 1996 is for appointment of an Arbitrator for resolution of dispute between the parties.
The arguments, raised by the counsel for the applicant, are that upon participating in the tender, the applicant firm was issued a Work Order dated August 18, 2015 for construction of a 30 bedded hospital in Cantt General Hospital, Kanpur.
As per applicant-firm, when after completion of the work final bill amounting ₹3,17,98,239.70 was produced for payment, an amount of ₹53,60,466.51/- remained unpaid.
The applicant kept on requesting the respondents to release the balance payment, however, when for quite long time, the payment was not made despite repeated requests made by the applicant-firm, the applicant invoked arbitration clause as contained in Clause 25 of General Conditions of Contract for Central P.W.D Works, 2014 seeking appointment of an Arbitrator for resolution of dispute between the parties, for the purpose notice dated July 9, 2021 was issued.
However, respondents vide letter dated October 8, 2021 refused to appoint Arbitrator stating that there is no need for appointment of Arbitrator as Clause16 of the contract agreement dated December 26, 2014 excludes the dispute from the purview of arbitration and it shall be decided by the Board which shall be conclusive and binding on the contractor.
He further submitted that rejection of request of the applicant for appointment of Arbitrator placing reliance on Clause 16 of agreement is totally illegal as in terms of the Clause-16 of the agreement, the decision taken by the respondent is final and thus no remedy is left with the applicant. Any such condition would be in violation of Section 28 of the Contract Act, as the applicant cannot be made remediless for resolution of his grievance.
On the other hand, counsel for the respondent submitted that the entire amount due to the applicant has already been paid, hence there is no dispute pending for which Arbitrator need be appointed.
He further submitted that there was no sanction granted for the additional work allegedly executed by the applicant, hence, no payment could be made. Regarding application of Clause-16 of the agreement dated December 26, 2014, he submitted that 25 of General Conditions of Contract provides that the same shall be applicable except where otherwise provided in the contract. In the case in hand, Clause-16 of the agreement dated December 26, 2014 clearly provides that the decision on the issue by the Board/CEO will be final and thus no arbitrator can be appointed.
The Court noted that,
The fact that the aforesaid clause is applicable to the contract in question was not a matter of dispute as the same was neither denied by the respondent in reply to the notice issued by the applicant seeking appointment of Arbitrator referring to that clause nor even in the counter affidavit filed to the application. The only ground raised for rejection of the prayer of the applicant for appointment of arbitrator was Clause 16 of the agreement dated December 26, 2014 in terms whereof for specification and the quality of materials, the decision of the Board/CEO shall be final.
In the aforesaid case, the contract between the parties was executed in respect of the turn key solution of supply, installation and commissioning of Indian Mobile Communications System. Clause 16.2 of the contract provided that in case the delayed portion of the delivery materially hampers effective use of the system, liquidated damages shall be levied on the total value of the concerned package of the purchase order. It further provided that the quantum of liquidated damages assessed and levied by the purchaser shall be final and not challengeable by the supplier.
The Court opined that, Clause-16 of the agreement in question providing for decision of the Board/CEO on certain issues to be final is clearly violative of Section 28 of Contract Act. If that clause is taken out of the agreement executed between the parties, Clause-25 of General Conditions of Contract comes into picture.
In Clause 25 of General Conditions of Contract, a detailed procedure has been provided for resolution of dispute. Initially a request is to be made to the Superintending Engineer. On his failure to give a decision, an appeal is maintainable to the Chief Engineer whereafter the matter can be considered by the Dispute Redressal Committee. Any of the parties dissatisfied with the order of the Dispute Redressal Committee can give notice to the Chief Engineer for appointment of Arbitrator. The matter is required to be referred to the sole Arbitrator to be appointed by Chief Engineer.
However, in the case in hand, the applicant, in the notice dated July 9, 2021, while invoking the arbitration clause, has clearly stated therein absence of the aforesaid authorities and the Dispute Redressal Committee in the respondent-Department. This fact having not been controverted by the respondent, in my view, the applicant has rightly invoked the arbitration clause directly seeking appointment of Arbitrator for resolution of dispute between the parties.
“In the case in hand, Clause 25(ii) of the General Conditions of Contract providing for appointment of an Arbitrator Chief Engineer, CPWD, in charge of the work or if there be no Chief Engineer, the Additional Director General of the concerned region of CPWD or if there be no Additional Director General, the Director General of Works is clearly in the teeth of Section 12(5) of the Act, as the court clearly of the view that the above authorities, falling under category-1 of the Seventh Schedule of the Act and thereby being ineligible to be appointed as Arbitrator, are also ineligible to nominate an Arbitrator for resolution of dispute between the parties.
Therefore, in my considered view, Sub-clause (ii) of Clause 25 of General Conditions of Contract, to the extent it provides for appointment of an Arbitrator by the Chief Engineer, or Additional Director General or Director General is liable to be skipped. If the aforesaid provision, to the above extent, is taken out of the general conditions of contract, in my view, the Arbitrator for resolution of dispute between the parties needs to be appointed by the Court”, the Court observed while disposing an application.
“Accordingly, the Court appoints Justice Arun Tandon, a retired Judge of the Court as Arbitrator, subject to His Lordship’s consent in terms of provisions contained in Section 11(8) read with Section 12(1) of the Act by sending a request letter to him.
The matter is referred to the Arbitrator for resolution of the dispute between the parties. The Arbitrator shall be paid fees as per the schedule attached to the Act.
In case, the Arbitrator recuses, the matter shall be listed before the Court itself for further orders”, the order read.