ORDER

1. This appeal is filed against the order passed by the High Court in an application under Section 11(5) and (6) of the Arbitration and Conciliation Act, 1996 (for short the ‘Act’) directing that the matter be referred to arbitration by a former Judge of the Andhra Pradesh High Court. The respondent moved the aforesaid application on the basis that it is a partnership firm, carrying on business of civil works relating to irrigation structures. The Irrigation Department of Government of Andhra Pradesh had given the work to the appellant herein. Thus, the appellant was the main contractor and respondent was the sub-contractor working under the appellant.

2. The works involved earth work excavation and cohesive non-swelling soil filling in KC Canal including CC lining and structures form KMs 156.650 to KMs 170-00 of Package ICB-10’ in Kurnool District of Andhra Pradesh. The appellant identified the respondent as a suitable agency for execution of the work and entrusted the work to the respondent as a sub-contractor. After due negotiations, an agreement dated 29.1.2001 was entered into between the parties. The agreement inter alia provides various terms and conditions including the nature of work to be executed by the respondent, security deposits, penalties leviable, commission to which the appellant would be entitled to, method of payment for the work undertaken, taxes and Government levies. The agreement also contained an arbitration clause which reads as under:-

“All disputes relating to the original contract shall be properly referred and correspond by the work contractor. However, the settlement of disputes and consequential awards shall be to the account of principal contractor and work contractor. All disputes relating to the work contract under this agreement shall be mutually settled between the work contractor and the principal contractor. In case of any differences, the same will be decided by a sole arbitrator appointed by the principal contractor and work contractor.”

3. Clause 6 of the agreement provides that the measurements shall be taken for the work done once in a month. Payment shall be released as and when principal contractor received payment from the Department, duly deducting the commission and other recoveries as mentioned in Clause 6 above. Final payment shall be released after completion of the work satisfactorily. Clause 5 provided that the work contractor (sub-contractor) shall be paid the balance amount after deducting certain amounts from the gross amount of running account bills. Relevant part of clause 5 is as under:-

"The work contractor shall be paid the balance amount after deducting the following from the gross amount of running account bills.

(i) a. Earth work excavation in bed and slopes including sectioning and leveling @ 14% (Fourteen percent only) of Agreement rate.

b. Filling bed and slopes with CNS soils as directed and as per specifications @ 17% (Seventeen percent only) of Agreement rates.

(ii) Sales Tax/Turnover Tax

(iii) Income Tax in the running account bills.

(iv) Value of materials etc., if any, supplied by the department or by the principal contractor and hire charges of machinery given.

(v) Any other recoveries affected by the department in the account bills.

4. The agreement further provided that the final payment shall be released after completion of the work satisfactorily.

5. The respondent claims that it has executed the work to the satisfaction of the appellant and the State Government. The appellant having received all the amounts from the Government of Andhra Pradesh failed to make corresponding payments to the respondent after deducting commission as stipulated under the agreement. The respondent, therefore, approached and tried to persuade the appellant to make the payment of the outstanding amount after the completion of the entire work. However, the appellant failed to pay. Since the amounts were not paid by the appellant, the respondent served a Claim Notice on