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REPORTABLE

IN THE SUPREME COURT OF INDIA   CIVIL APPELLATE JURISDICTION

 CIVIL APPEAL NO.1854 OF 2007

M/s. Gayatri Project Ltd.                      ….Appellant(s)

 Versus

M/s. Sai Krishna Construction                         .… Respondent(s)

O R D E R

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  

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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. 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  

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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.”   

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.  

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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.  

The agreement further provided that the final payment  

shall be released after completion of the work satisfactorily.

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 6.5.2004 demanding the payment of  

Rs.1,01,27,776/-. On 17.8.2004, the Appellant sent a reply to  

the aforesaid notice not only disputing the various claims but  

also raising a counter claim in the amount of Rs.32,12,950/-.  

The appellant claimed that the accounts had been reconciled.  

The parties had signed a full and final settlement document on  

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6.6.2003,  under  which  the  respondent  acknowledged  the  

receipt of certain amounts. The balance of Rs.17,32,843/- was  

to be paid in two or three instalments before 30.6.2003. After  

receiving  the  entire  payment,  the  respondent  was  falsely  

claiming further amounts with mala fide intentions. On receipt  

of  the  reply  with  the  counter-claim,  the  respondent  sent  a  

further  reply  reiterating  its  claim  and  also  disputing  the  

counter claim of the appellant as being frivolous and false. The  

respondent in the aforesaid reply also stated that unless the  

entire  claim is  satisfied,  it  will  seek  the  remedy by  way  of  

arbitration.  In  spite  of  the  above,  the  appellant  still  made  

efforts  to  settle  the  entire  dispute  but  without  any  useful  

results.  

Instead of accepting the full and final settlement dated  

6.6.2003, the respondent, in fact, raised a further claim for the  

amount of Rs.25,50,048/- towards the value of HSD oil supply  

and exemption of excise duties and sales tax which had been  

availed by the appellant. A claim in this regard was sent to the  

appellant on 30-5-2006. According to the respondent, the total  

claim finally comes to Rs.1,26,77,824/- with interest accrued  

thereon at 18% per annum from 6-5-2004.  The appellant on  

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24.6.2004 denied the aforesaid claim. The dispute not having  

been resolved,  the respondent served a legal  notice  on the  

appellant  dated  19.6.2006.  The  appellant  again  denied  the  

claim. The respondent thereafter moved the application under  

Section 11(5) and (6) of the Arbitration Act. The appellant filed  

a reply to the application disputing and denying the claims of  

the  appellant.  The  appellant  stated  that  the  application  for  

appointment  of  Arbitrator  is  liable  to  be  dismissed.  It  was  

pleaded that Agreement dated, 29.1.2001 which contains the  

arbitration clause has been superseded by the full  and final  

settlement agreement dated 6.6.2003. It was further the case  

of the appellant that the respondent having received the entire  

amount in terms of the "full and final settlement"        dated 6-

6-2003 is estopped from filing the application under Section 11  

(5) and (6) of the Arbitration Act.   According to the Appellant,  

since the entire dispute had been settled, no reference could  

be made to arbitration. The appellant had also pleaded that  

the  respondent  had  failed  to  disclose  that  the  parties  had  

entered into a full and final settlement on 6-6-2003. The plea  

was also raised to the effect that invocation of the arbitration  

on 9-6-2006 is time barred as the cause of action for filing the  

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application  arose  on  6-6-2003  when  the  "full  and  final  

settlement" was entered into between the parties.  

It  was  also  the  case  of  the  appellant  that  the  works  

executed by the respondent not being of the required standard  

and  specifications,  were  rejected  by  the  Government.  

Consequently,  the  appellant  had  to  rectify  the  defects  and  

incur extra expenses. These were liable to the deducted from  

the amount claimed by the respondent. It is also the claim of  

the appellant that since the works had not been satisfactorily  

completed,  the  agreement  itself  was  terminated  on  16-11-

2001.  The  appellant  had  also  pleaded  that  pursuant  to  the  

Settlement  dated  6-6-2003,  the  respondent  had  received  a  

sum of   Rs.16 lakhs. Therefore, there is no arbitrable dispute  

which can be referred to arbitration. It is also the case of the  

appellant that he has actually suffered a loss as it has incurred  

an expenditure of Rs.32,13,950/- in rectification of the works  

which were unsatisfactorily performed by the respondent. The  

appellant  also  claims  that  in  order  to  maintain  cordial  

relations, it had entered into a "full and final settlement" with  

the respondent with regard to the entire claims of  the sub-

contractor.  

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Upon examination  of  the  entire  factual  as  well  as  the  

legal  position,  the  High  Court  has  allowed  the  application  

under Section 11 (5) and (6) of the Act. This Appeal has been  

filed against the aforesaid Judgment of the High Court.

We have heard learned Counsel for the parties.

Mr. Arun Kathpalia, learned Advocate appearing for the  

appellant relied heavily on the "full and final settlement" and  

submitted  that  the  settlement  has  been  duly  signed  by  a  

representative of  the respondent.  Therefore,  the respondent  

cannot now be permitted to submit that there was no "full and  

final  settlement".  He further  submitted that  once there was  

"full and final settlement", no arbitrable dispute remains which  

could have been referred to the Arbitrator. To make good his  

submissions, Mr. Kathpalia submitted that the respondent had  

been negligent in the performance of the works which were  

entrusted to the sub-contractor. This had ultimately led to the  

termination  of  the  Agreement  on  16-11-2001.  In  fact,  the  

appellant had incurred huge amount of expenses in rectifying  

the  defects  in  the  works  executed  by  the  respondent.  Mr.  

Kathpalia  relied  on  clauses  5  and  6  of  the  Agreement  and  

submitted that the appellant was entitled to be compensated  

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for the rectification work which had to be performed to the  

satisfaction  of  the  Andhra  Pradesh  Government.  Learned  

counsel also submitted that the respondent would be entitled  

to the final payment only upon satisfactory completion of the  

work entrusted to the sub-contractor.   In order to settle the  

dispute  between  the  parties  and  to  maintain  a  cordial  

relationship,  the  parties  have  entered  into  a  voluntary  

settlement    on 6-6-2003 which is evidenced by the signatures  

appended on the same by the Manager of the respondent sub-

contractor. In such circumstances, learned counsel submitted  

that there was no arbitrable dispute which could have been  

left to the Arbitrator and, therefore, the judgment of the High  

Court allowing the application under Section 11 (5) and (6) of  

the Act is  erroneous.  He further  submitted that in case the  

respondent  intend  to  challenge  the  validity  of  the  binding  

nature  of  the  settlement,  the  dispute  cannot  be  left  to  the  

Arbitrator. The settlement would form an independent contract  

which can only be nullified in appropriate proceedings being  

taken by the respondent.  

In support of the submissions, the learned counsel relied  

on Nathani Steels Ltd. vs. Associated Constructions  1  .  Mr.  11995 Supp (3) SCC 324  

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Kathpalia relied on the observations made in paragraph 3 of  

the judgment. The learned Counsel submits that the judgment  

of the High Court is erroneous and has to be set aside.  

On  the  other  hand,  Mr.  K.  Swami,  learned  counsel  

appearing for the respondent submits that there is no "full and  

final  settlement"  of  the  amounts  which  were  due  to  the  

respondent  from the  appellant.  He further  submits  that  the  

respondent had executed all the works which were entrusted  

to his client to the full satisfaction of the appellant. The claim  

and counter claim now made by the appellant is totally false  

and without any basis. The respondent is disputing each and  

every claim made by the appellant. Learned counsel further  

submitted  that  the  alleged  settlement  dated  6-6-2003  is  a  

unilateral  document.  There  is  no  agreement  between  the  

parties  for  a  final  settlement.  The  document  has been only  

received and the Manager has signed only to indicate that the  

letter  has  been  received.  There  have  been  no  negotiations  

between the parties prior to the issuance of letter dated 6-6-

2003.  He  submits  that  the  judgment  relied  upon  by  Mr.  

Kathpalia is  not applicable in the facts  of  this  case. In fact,  

according  to  him,  the  matter  is  squarely  covered  by  the  

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judgment  of  this  Court  in  National  Insurance  Company  

Limited vs. Boghara  Polyfab  Private  Limited2.  Learned  

counsel  has  relied  on  paragraphs  33,  34  and  35  of  the  

judgment. It is pointed out that in paragraph 33, this Court has  

considered  the  ratio  of  the  judgment  in  Nathani  Steels  

(supra)  and  distinguished  the  same.  Relying  upon  the  

aforesaid  judgment,  the  learned  counsel  submits  that  the  

appeal deserves to be dismissed.

Learned counsel further submitted that the receipt of a  

sum of Rs.16 lakhs subsequent to the letter dated 6-6-2003  

does  not  signify  the  acceptance  by  the  respondent  of  the  

aforesaid letter as a "full and final settlement". According to  

the learned counsel, in fact, the claim of the respondent was  

for  over  Rs.10,00,000/-  and,  therefore,  the  amounts  which  

were received by the respondent were only in part payment of  

the amount due.  

We  have  considered  the  submissions  made  by  the  

learned Counsel for the parties.  

In our opinion, the question as to whether letter dated 6-

6-2003 would  constitute  a  "full  and  final  settlement"  would  

2 (2009) 1 SCC 267

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have to be determined on proper appreciation of the evidence  

led  by  the  parties.  It  is,  in  our  opinion,  open  to  two  

interpretations. Which of the two interpretations is ultimately  

accepted will have to be decided by the appropriate forum. We  

are also not inclined to accept the submissions of Mr. Kathpalia  

that if the alleged settlement is to be doubted, it cannot be  

doubted before the Arbitrator. It must be remembered that the  

appellant  is  relying  on  the  alleged  settlement  by  way  of  

defence. The respondent has not accepted the same. Nor has  

the  respondent  denied  the  execution  of  the  document.  The  

respondent  has  also  not  claimed  that  the  full  and  final  

settlement was signed under coercion, undue influence, fraud,  

misrepresentation or mistake. Furthermore, the appellant had  

not made a claim on the basis of the settlement. It would have  

been different, if the appellant had made a claim on the basis  

of settlement which was denied by the respondent by one or  

more  of  the  defences,  as  noticed  above.  In  such  

circumstances,  following  the  judgment  in  Nathani's  case  

(supra), it would have to be held that the settlement can only  

be challenged in "proper proceedings". But these observations  

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would be applicable only if there was a clear cut acceptance  

by the parties that there was a "full and final settlement".  

In fact, the matter would be squarely covered against the  

appellant by the ratio of the judgment in National Insurance  

Company Limited (supra) wherein this Court has considered  

the cases which were earlier considered in  Nathani's Steel  

(supra) and observed as follows:-  

"33. Nathani Steels related to a dispute on account  of non-completion of the contract. The Court found  that the said dispute was settled by and between  the parties as per deed dated 20.12.1980 signed by  both  parties.  The  deed  referred  to  the  prior  discussions  between the parties  and recorded the  amicable settlement of the disputes and differences  between the parties in the presence of the Architect  on the terms and conditions set out in clauses 1 to 8  thereof.  In  view  of  it,  the  Court  rejected  the  contention of the contractor that the settlement was  liable to be set aside on the ground of mistake. A  three-Judge Bench of this Court,  after referring to  the  decisions  in  P.K.  Ramaiah  and  Nay  Bharat  Builders, held thus: (SCC p.326, para 3)  

“3……..  that  once  the  parties  have  arrived  at  a  settlement  in  respect  of  any  dispute  or  difference  arising  under  a  contract  and  that  dispute  or  the  difference  is  amicable  settled  by  way  of  a  final  settlement  by  and  between  the  parties,  unless  that  settlement is set aside in proper proceedings, it cannot  lie in the mouth of one of the parties to the settlement  to spurn it on the ground that it was a mistake and  proceed  to  invoke  the  Arbitration  clause.  If  this  is  permitted the sanctity of contract, the settlement also  being a contract, would be wholly lost and it would be  open  to  one  party  to  take  the  benefit  under  the  settlement  and  then  to  question  the  same  on  the  ground of mistake without having the settlement set  

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aside.  In  the  circumstances,  we  think  that  in  the  instant case since the dispute or difference was finally  settled  and  payments  were  made  as  per  the  settlement,  it  was  not  open  to  the  respondent  unilaterally  to  treat  the  settlement  as  non  est  and  proceed to invoke the Arbitration clause."  

34. What requires to be noticed is that in Nav Bharat  Builders and Nathani Steels, this Court on examination  of facts, was satisfied that there were negotiations and  voluntary settlement of all pending disputes, and the  contract was discharged by accord and satisfaction. In  P.K. Ramaiah, the Court was satisfied that there was a  voluntary  acceptance  of  the  measurements  and  full  and final payment of the amount found due, resulting  in  discharge  of  the contract,  leaving  no outstanding  claim or pending dispute. In those circumstances, this  Court  held  that  after  such  voluntary  accord  and  satisfaction or discharge of the contract,  there could  be no arbitrable disputes.  

36. In Damodar Valley Corporation, the question that  arose for consideration of this Court was as follows:  (SCC p. 144 para 4)  

''where one of the parties refers a dispute or  disputes  to  arbitration  and  the  other  party  takes a plea that there was a final settlement  of  all  claims,  is  the  Court,  on  an application  under Sections 9(b) and 33 of the Act, entitled  to  enquire  into  the  truth  and  validity  of  the  averment as to whether there was or was not a  final settlement on the ground that if that was  proved  it  would  bar  a  reference  to  the  arbitration inasmuch as the arbitration clause  itself would perish."

In that case the question arose with reference  to a claim by the supplier. The purchaser required  the supplier to furnish a full and final receipt. But  the  supplier  did  not  give  such  a  receipt.  Even  though  there  was  no  discharge  voucher,  the  purchaser contended that the payments made by it  were in full  and final  settlement  of  the bills.  This  Court  rejected  that  contention  and  held  that  the  question whether there has been a settlement of all  

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the claims arising  in  connection with  the contract  also postulates the existence of the contract which  would  mean  that  the  arbitration  clause  operates.  This Court held that the question whether there has  been a full and final settlement of a claim under the  contract  is  itself  a  dispute  arising  'upon'  or  in  relation to' or 'in connection with' the contract; and  where there is an arbitration clause in a contract,  notwithstanding the plea that there was a full and  final  settlement between the parties,  that dispute  can be referred to arbitration. It was also observed  that mere claim of accord and satisfaction may not  put an end to the arbitration clause. It is significant  that  neither  P.K.  Ramaiah  nor  Nathani  Steels  disagreed  with  the  decision  in  Damodar  Valley  Corporation but only distinguished it on the ground  that there was no full  and final discharge voucher  showing accord and satisfaction in that case."  In our opinion, since there is no acceptance of the full  

and final settlement by the Respondent which has been relied  

upon by the appellant, the issue clearly had to be left to the  

Arbitrator to be adjudicated.  

In view of the above, we find no merit in the appeal and  

the same is accordingly dismissed.  

Before we part with this matter, we would request the  

learned Arbitrator to conclude the Arbitration Proceedings as  

expeditiously as possible since the matter was referred long  

back as this would be in the interest of justice.  

                 ..….…. …………………………..J.

(SURINDER SINGH NIJJAR)  

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…...…………………………………J (RANJANA PRAKASH  

DESAI)  

NEW DELHI, NOVEMBER 28, 2013.

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