1. Construction contract dispute — Application under Section 8, Arbitration Act, 1940 for appointment of arbitrator — Challenge to the nature of the dispute resolution clause. (Para 1 , 2 )
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1990 Supreme(SC) 31
SUPREME COURT OF INDIA
R.C.Lahoti : Sujata V.Manohar
Bharat Bhushan Bansal
Versus
U.P.Small Industries Corporation Limited, Kanpur
Case No. : 1940 of 1984
Date of Decision : 1/21/90
Advocates Appeared: Mohan K.K.
Advocates:
K.K.Mohan
K.K.Mohan
A contractual clause making an official's decision final and binding is an expert determination, not an arbitration agreement, if it lacks the intent for impartial, quasi-judicial adjudication and does not require the decision-maker to hear parties or record evidence.
Headnote:(A) Arbitration Act, 1940 - Section 8 - Construction contract - Clauses providing that decisions of the Executive Engineer and Managing Director shall be final, conclusive and binding - Whether such clauses constitute an arbitration agreement - Essential ingredients of an arbitration clause include that substantive rights of parties will be determined by the agreed tribunal in an impartial and judicial manner, with an equal obligation of fairness towards both sides, and that the agreement must be intended to be enforceable in law (Para 4) - Distinction between expert determination and arbitration - Expert determination involves an administrative function where the decision-maker is not obligated to receive evidence or submissions and relies on own expertise and investigations, whereas an arbitrator acts primarily on material put before them by the parties (Para 4) - A certifier in a construction contract often performs an administrative rather than a judicial function and acts as a "preventer of disputes" rather than an adjudicator of formulated disputes (Para 8).
Facts of the case:
A contractor entered into an agreement for the construction of factory and allied buildings. The contract contained clauses stating that the decisions of the Executive Engineer and the Managing Director would be final, conclusive and binding on all questions relating to specifications, designs, claims, and other matters arising out of the contract. Following disputes regarding payments and work, the contractor applied under Section 8 of the Arbitration Act, 1940, for the appointment of an independent arbitrator. The trial court allowed the petition, but the High Court set aside the order, holding that the court had no jurisdiction to appoint another arbitrator in place of the Managing Director.
Findings of Court:
The clauses in the contract did not contemplate a full-fledged arbitration covered by the Arbitration Act. The roles of the Executive Engineer and the Managing Director were those of experts or certifiers performing administrative functions to avoid disputes rather than deciding formulated disputes in a quasi-judicial manner.
Issues: Whether the contractual provisions making the decisions of the Executive Engineer and Managing Director final and binding constitute an arbitration agreement.
Ratio Decidendi: A clause that vests an official with the power to make final and binding decisions for the purpose of supervision and administrative control, without requiring the official to record evidence, hear both parties, or act in a quasi-judicial manner, does not constitute an arbitration agreement. Such provisions are for expert determination and do not attract the provisions of the Arbitration Act.
Result: Appeal dismissed.
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2. Appellant contended the contract contained an arbitration clause; Respondent denied the existence of any arbitration agreement. (Para 2 )
3. The court distinguished between expert determination and arbitration, noting that administrative decisions by officials based on their own investigations do not constitute a judicial arbitration process. (Para 3 , 4 , 5 , 8 , 9 )
4. A clause vesting final decision-making power in an official for administrative or expert determination, without requiring a judicial process, does not constitute an arbitration agreement. (Para 4 , 5 , 7 , 9 )
5. Appeal dismissed; application under Section 8 of the Arbitration Act, 1940 held to be misconceived. (Para 10 )
6. What is the legal distinction between an arbitration agreement and an agreement for expert determination?
Arbitration requires a tribunal to determine substantive rights in an impartial, judicial manner based on material provided by parties. Expert determination allows a person to decide based on their own expertise and investigations without an obligation to receive evidence or submissions. (Para 4 )
7. What are the essential ingredients required for a clause to be considered an arbitration agreement?
The agreement must contemplate that substantive rights will be determined by an agreed tribunal in an impartial and judicial manner, with an equal obligation of fairness to both sides, and the agreement must be intended to be enforceable in law. (Para 4 )
8. Does a clause making the decision of a Managing Director or Engineer final and binding necessarily constitute an arbitration agreement?
No. If the intention is to vest the official with supervision and administrative control to avoid disputes rather than to decide formulated disputes in a quasi-judicial manner, the function is administrative and not an arbitration agreement. (Para 7 , 8 , 9 )
JUDGMENT
S. V. Manohar. J.
(1) THE appellant had entered into a contract with the respondent under which the appellant had undertaken the work of construction of factory and allied buildings of the respondent at India complex, Rae Bareilly. The agreement is dated 19.10.1973. Clauses 23 and 24 of the agreement are as follows: "Decision of the Executive Engineer of the UPSIC to be final on certain matters:
CLAUSE 23: 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, 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 whatsoever in any way arising out of or 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, or after the completion there of or abandonment of the contract by the contractor shall be final and conclusive and binding on the contractor.
Decision of the M.D. of the U.P.S.I.C. on all other matters shall be final:
CLAUSE-24: Except as provided in Clause 23 hereof the decision of the Managing Director of the U.P.S.I.C. shall be final, conclusive and binding on both the parties to the contract upon all questions relating to any claim, right, matter or thing in any way arising out of or relating to the contract or these conditions or concerning abandonment of the contract by the contractor and inrespect of all other matter arising out of this contract and not specifically mentioned herein."
(2) THERE were disputes between.the appellant and the respondent in connection with the payments to be made under the terms of the said contract and in* connection with the work of the said contract. The appellant made an application under S. 8 of the Indian arbitration Act, 1940 before the Civil Judge, Kanpur. He applied for the appointment of an independent arbitrator in the place of the Managing Director. The respondent denied that there was any arbitration clause in the said contract. The court, however, allowed the. petition of the appellant under S. 8 of the arbitration Act and appointed one D.D.Sharma, Executive Engineer, as arbitrator. In appeal, the High court, while upholding the finding that there was an arbitration clause, held that the court below had no jurisdiction under S. 8 to appoint another arbitrator in the place of Managing Director since none of the clauses of S. 8 was attracted in the present case. The High court, therefore, set aside the order of the court below and dismissed the application of the appellant under S. 8. From this judgment the appellant has filed the present appeal.
(3) THE first question that requires consideration is whether there is any clause in the contract which provides for arbitration between the parties. The relevant clauses are Clauses 23 and 24. Under Clause 23, the decision of the Executive Engineer is final, conclusive and binding on both the parties to the contract on all questions relating to the meaning, specifications, designs etc. and as to the quality of workmanship or material used or relating to any other question whatsoever in any way arising out of or relating to the designs, drawings, specifications etc. or otherwise concerning the execution or failure to execute the same. Under Clause 24, except as provided in Clause 23, the decision of the Managing Director of the respondent shall be final, conclusive and binding on both the parties to the contract upon all questions relating to any claim, right, matter or thing in any way arising out of or relating to the contract and in respect of all other matters arising out of the contract and not specifically mentioned, in the said clause. Therefore, in respect of certain claims the dec
