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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3680 OF 2005

Vishnu (dead) by L.Rs.                      ...Appellant

versus

State of Maharashtra and others             ...Respondents

WITH

CIVIL APPEAL NO. 3681 of 2005

J U D G M E N T

G.S. SINGHVI, J.

1. Whether  Clause  30  of  B-1  Agreements  entered  into  

between the Government of Maharashtra and the appellant is in the nature of  

an arbitration clause is the question which arises  for consideration in this  

appeal filed against judgment dated 6.5.2004 of the learned Single Judge of  

the Bombay High Court, Aurangabad Bench.

2. The  tenders  submitted  by  the  appellant,  who  is  now  

represented  by  his  legal  representatives,  for  Tondapur  Medium Project,  

Jalgaon Medium Project Division, Jalgaon and Hatnoor Canal Division No.3,  

Chopda, District Jalgaon were accepted by the Competent Authority and five  

agreements were executed between the parties on 19.5.1983 and 5.10.1983  

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(hereinafter referred to as ‘B-1 Agreements’).

3. In January 1985, the appellant abandoned the works and  

submitted bills for the works already done.  He also claimed damages in lieu  

of the alleged loss suffered by him.

4. After four years, the appellant served notice under Section  

80 CPC and then filed Civil Suit  No.995/1989  before the trial Court  for  

declaring the recovery proceedings initiated by the defendants as illegal, null  

and void.

5. During the pendency of the suit,  the appellant filed an  

application under Section 21 of the Arbitration Act, 1940 (for short, ‘the 1940  

Act’)  and  prayed  that  the  matter  may  be  referred  to  an  Arbitrator  by  

appointing the Superintending Engineer or any other Arbitrator as the sole  

Arbitrator in terms of Clause 30 of B-1 Agreement. The same was dismissed  

by the trial Court vide order dated 29.7.1994 on the ground that both the  

parties had not given consent for making a reference to an Arbitrator.  

6. Soon thereafter,  the appellant filed an application under  

Order VI Rule 17 CPC for leave to amend the plaint and incorporate  an  

additional prayer for reference of the dispute to an Arbitrator.  The same was  

allowed by the trial Court vide order dated 27.9.1994.

7. The respondents challenged the aforesaid order in Civil  

Revision Application No.153/1995, which was partly allowed by the learned  

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Single Judge of the High Court and the order of the trial Court granting leave  

to the appellant to amend the prayer clause was set aside.

8. In the  meanwhile,  the  appellant  filed application dated  

3.2.1995 under Section 20 of the 1940 Act for settlement of accounts and  

prayed  that  respondent  Nos.3  and  4  may be  directed  to  file  Arbitration  

Agreement in terms of Clause 30 of B-1 Agreement executed between the  

parties and an Arbitrator may be appointed to decide all the disputes.  On  

17.6.1995,  the trial Court  directed  the parties  to  adduce  evidence on the  

nature of Clause 30 of B-1 Agreement.

9. After considering the evidence adduced by the parties and  

by placing reliance on some judgments of the High Courts,  the trial Court  

allowed the application and declared that Clause 30 of B-1 Agreement is an  

arbitration clause.  The trial Court also appointed Shri D.G. Marathe, Chief  

Engineer (PWD) as an Arbitrator and referred all the disputes to him.

10. Civil Revision Application No.447 of 1997 filed by the  

respondents against the order of the trial Court was allowed by the learned  

Single Judge of the Bombay High Court and it was held that Clause 30 of B-1  

Agreement  cannot  be  treated  as  an  arbitration clause.  In  support  of  this  

conclusion, the High Court relied upon the judgment of this Court in Civil  

Appeal No. 4700/1985 – State of Maharashtra v. M/s. Ranjeet Construction.

11. While  issuing  notice  of  the  special  leave  petition  on  

4.1.2005, this Court passed the following order:

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“The learned counsel for the petitioner places reliances on a  three  Judge Bench decision of this Court in Mallikarjun Vs.  Gulbarga  University 2004 (1) SCC, 372 wherein a similar clause, as arises for  consideration in the  present  case,  was  held to  be  an  arbitration  clause.

The abovesaid decision seems to be at divergence from the view  taken by a two Judge Bench decision in Bharat Bhushan Bansal  Vs.U.P. Small Industries Corporation Ltd., Kanpur 1999 (2) SCC,  166 wherein reliance has been placed on two judgments, of this  Court, each by three Judges, namely, State of Orissa Vs. Damodar  Das  1996  (2)  SCC,  216  and  State  of  U.P.  Vs.  Tipper  Chand  1980(2) SCC, 341.

Issue notice to the respondents and place for hearing before a three  Judge Bench.

Issue notice also on the prayer for grant of interim relief.”

12. By an  order  dated  11.07.2005,  the  three-Judge  Bench  

referred the matter to the Constitution Bench for resolving the conflicting  

opinions expressed by the co-ordinate Benches. However, vide order dated  

8.12.2010, the Constitution Bench declined to decide the matter and directed  

that the case be listed before the three Judge Bench.

13. Shri Rana Mukherjee,  learned counsel for the appellant  

argued that the impugned order is liable to be set  aside because the High  

Court’s interpretation of Clause 30 of B-1 Agreement is contrary to the law  

laid down in Mallikarjun v.  Gulbarga  University (2004)  1  SCC 372  and  

Punjab State v. Dina Nath (2007) 5 SCC 28.  Learned counsel emphasized  

that Clause 30 of B-1 Agreement makes the decision of the Superintending  

Engineer binding on all parties to the agreement and, therefore, the trial Court  

was right in treating the same as an arbitration clause.  Shri Mukherjee further  

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argued that in view of circulars dated 9.5.1977,  12.8.1982 and 21.5.1983  

issued by the State Government, Clause 30 of B-1 Agreements has to be  

treated as an arbitration clause and the respondents had no right to challenge  

the reference made by the trial Court and thereby question the wisdom of the  

State Government.

14. Shri Manish Pitale,  learned counsel for the respondents  

relied upon the judgments of this Court in State of U.P.  v. Tipper Chand  

(1980) 2 SCC 341, State of Orissa v. Damodar Das (1996) 2 SCC 216 and  

Bharat Bhushan Bansal v. U.P.  Small Industries Corporation Ltd.,  Kanpur  

(1999) 2 SCC 166 and argued that Clause 30 of B-1 Agreement cannot be  

construed  as  an  arbitration  clause  simply  because  the  decision  of  the  

Superintending  Engineer  is  made  binding on  all  parties  to  the  contract.  

Learned  counsel  submitted  that  the  judgment  in  Mallikarjun v.  Gulbarga  

University  (supra)  is  clearly  distinguishable  because  Clause  30  of  the  

Agreement,  which was  interpreted  in that  case  was  substantially different  

from  the  one  under  consideration.   Shri  Pitale  pointed  out  that  the  

Superintending Engineer of Gulbarga Circle was not directly involved in the  

execution  of  contract  between  the  University  and  the  appellant,  whereas  

Superintending Engineer, who has been named as the officer in Clause 30 of  

B-1 Agreement entered into between the appellant and the State Government  

is overall incharge of the work.

15. We have considered the respective arguments.  Clauses  

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29 and 30 of the B-1 Agreement entered into between the parties read as  

under:

“Clause 29.—All works to be executed under the contract shall be  executed  under  the  direction  and  subject  to  the  approval  in  all  respects of the Superintending Engineer of the Circle for the time  being, who shall be entitled to direct at what point or points and in  what manner they are  to  be commenced, and from time to time  carried on.

Clause 30 —Except where otherwise specified in the contract and  subject to the powers delegated to him by Government under the  Code rules then in force the decision of the Superintending Engineer  of  the  Circle  for  the  time being shall  be  final,  conclusive,  and  binding on all parties to the contract upon all questions, relating to  the  meaning  of  the  specifications,  designs,  drawings,  and  instructions,  hereinbefore  mentioned  and  as  to  the  quality  of  workmanship, or materials used on the work,  or as  to any other  question,  claim,  right,  matter,  or  thing  whatsoever,  if  any  way  arising, out of,  or relating to or the contracts  designs,  drawings,  specifications, estimates, instructions, orders, or these conditions 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 or abandonment thereof.”

16. Para 224 of the Maharashtra Public Works Manual,  as  

amended by Government C.M.  No.  CAT-1070/460 – DSK.2,  dt.9/5/1977,  

reads as under:

“Para 224 – Clause 30 of B-1 and B-2 Agreement forms lays down  that the decision of the Superintending Engineer in certain matters  relating to the contract would be final. The Superintending Engi- neer’s decision taken under this clause should be considered as that  taken as an Arbitrator and this should be considered as the decision  taken under the Arbitration Act. The decisions taken by the Super- intending Engineer under the other  clauses  should be considered  different from his decision taken under clause 30 of B-1 and B-2  tender agreement as an arbitrator.”

17. We shall first consider the question whether Clause 30 of  

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B-1 Agreement can be construed as an arbitration clause. A conjoint reading  

of Clauses 29 and 30 of B-1 Agreements entered into between the parties  

shows that the appellant had to execute all works subject to the approval in  

all  respects  of  Superintending  Engineer  of  the  Circle,  who  could  issue  

directions  from time  to  time  about  the  manner  in  which  work  was  to  

commence  and  execute.  By  virtue  of  Clause  30,  decision  of  the  

Superintending Engineer of the Circle was made final, conclusive and binding  

on all the parties in respect of all questions relating to the meaning of the  

specifications, designs, drawings, quality of workmanship or materials used  

on the work or any other question relating to claim, right, matter or things  

arising out of or  relating to the contract  designs,  drawings,  specifications,  

estimates,  instructions,  orders,  etc.  These  two  clauses  by  which  the  

Superintending  Engineer  was  given  over  all  supervisory  control  were  

incorporated  for  smooth  execution  of  the  works  in  accordance  with  the  

approved designs and specifications and also to ensure that quality of work is  

not compromised. The power conferred upon the Superintending Engineer of  

the Circle was in the nature of a departmental dispute resolution mechanism  

and was meant for expeditious sorting out of problems which could crop up  

during execution of the work. Since the Superintending Engineer was made  

overall in-charge of all  works  to  be  executed under the contract,  he was  

considered by the parties to be the best person who could provide immediate  

resolution of any controversy relating to specifications,  designs, drawings,  

quality of workmanship or material used, etc. It was felt that if all this was  

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left  to  be  decided  by  the  regular  civil  Courts,  the  object  of  expeditious  

execution of work of the project  would be frustrated.  This is the primary  

reason why the Superintending Engineer of the Circle was entrusted with the  

task of taking decision on various matters. However, there is nothing in the  

language of Clause 30 from which it can be inferred that the parties had  

agreed to confer the role of arbitrator upon the Superintending Engineer of the  

Circle.

18. In  Russell  on Arbitration,  21st Edn.,  the  distinction  

between an expert determination and arbitration has been spelt  out in the  

following words:

“Many cases have been fought over whether a contract’s chosen  form of dispute  resolution is  expert  determination or  arbitration.  This is a matter of construction of the contract, which involves an  objective enquiry into the intentions of the parties. First, there are  the express words of the disputes clause. If specific words such as  ‘arbitrator’, ‘arbitral tribunal’, ‘arbitration’ or the formula ‘as an ex- pert and not as an arbitrator’ are used to describe the manner in  which the dispute resolver is to act, they are likely to be persuasive  although not always conclusive…. Where there is no express word- ing, the court will refer to certain guidelines. Of these, the most im- portant used to be, whether there was an ‘issue’ between the parties  such as the value of an asset on which they had not taken defined  positions, in which case the procedure was held to be expert deter- mination; or a ‘formulated dispute’ between the parties where de- fined positions had been taken, in which case the procedure was  held to be an arbitration. This imprecise concept is still being relied  on. It is unsatisfactory because some parties to contract deliberately  choose expert determination for dispute resolution. The next guide- line is the judicial function of an arbitral tribunal as opposed to the  expertise of the expert; …. An arbitral tribunal arrives at its deci- sion on the evidence and submissions of the parties and must apply  the law or if the parties agree, on other consideration; an expert, un- less  it is agreed otherwise,  makes his own enquiries,  applies his  own expertise and decides on his own expert opinion....”

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19. A  clause  substantially  similar  to  Clause  30  of  B-1  

Agreement was interpreted by a three Judge Bench in State of U.P v. Tipper  

Chand (supra)  and it  was  held that  the  same cannot  be  construed  as  an  

arbitration clause.  Paragraphs 2 and 3 of the judgment which contain the  

reasons for the aforesaid conclusion are reproduced below:

“2. The suit out of which this appeal has arisen was filed by the re- spondent before us for recovery of Rs. 2000 on account of dues re- coverable from the Irrigation Department of the petitioner State for  work done by the plaintiff in pursuance of an agreement, clause 22  of which runs thus:

“Except where otherwise specified in the contract the deci- sion of the Superintending Engineer for the time being shall  be final, conclusive and binding on all parties to the contract  upon all questions relating to the meaning of the specifica- tions,  design,  drawing  and  instructions  hereinbefore  men- tioned.  The decision of such Engineer as  to  the quality of  workmanship, or materials used on the work,  or as  to any  other question, claim, right, matter or things whatsoever, in  any way arising out of or relating to the contract,  designs,  drawing  specifications,  estimates,  instructions,  orders,  or  these conditions, or otherwise concerning the works, or the  execution or failure to execute the same, whether arising dur- ing the progress of the work, or after the completion or aban- donment of the contract by the contractor, shall also be final,  conclusive and binding on the contractor.”

3. After perusing the contents of the said clause and hearing learned  Counsel for the parties we find ourselves in complete agreement  with the view taken by the High Court. Admittedly the clause does  not  contain any express  arbitration agreement.  Nor  can such an  agreement be spelled out from its terms by implication, there being  no mention in it of any dispute, much less of a reference thereof. On  the other hand, the purpose of the clause clearly appears to be to  vest the Superintending Engineer with supervision of the execution  of the work and administrative control over it from time to time.”

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20. In  State  of  Maharashtra  v.  M/s.  Ranjeet  Construction  

(supra),  the  two Judge  Bench of  this  Court  interpreted  Clause  30 of  the  

agreement entered into between the parties, which is almost identical to the  

clause  under  consideration,  relied  upon the  judgment in State  of  U.P.  v.  

Tipper Chand (supra)  and held that  Clause  30 cannot be  relied upon for  

seeking a reference to an Arbitrator of any dispute arising under the contract.  

21. In  State  of  Orissa  v.  Damodar  Das  (supra),  the  three  

Judge Bench interpreted Clause 21 of the contract entered into between the  

appellant and the respondent for construction of sump and pump chamber etc.  

for pipes W/S to Village Kentile. The respondent abandoned the work before  

completion of the project and accepted payment of the fourth running bill.  

Subsequently,  he  raised  dispute  and  sent  communication  to  the  Chief  

Engineer, Public Health, Orissa for making a reference to an Arbitrator.  The  

Subordinate  Judge,  Bhubaneswar  allowed  the  application  filed  by  the  

respondent under Section 8 of the 1940 Act and the order passed by him was  

upheld by the High Court. This Court referred to Clause 25 of the agreement,  

relied upon the judgment in State of U.P. v. Tipper Chand (supra) and held  

that the said clause cannot be interpreted as providing resolution of dispute by  

an Arbitrator. Paragraphs 9 and 10 of the judgment, which contain discussion  

on the subject, are extracted below:

“9. The  question,  therefore,  is  whether  there  is  any  arbitration  agreement for the resolution of the disputes. The agreement reads  thus:

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“25. Decision of Public Health Engineer to be final.— Except  where otherwise specified in this contract, the decision of the  Public Health Engineer for the time being shall be final, con- clusive and binding on all parties to the contract upon all ques- tions relating to the meaning of the specifications; drawings  and instructions hereinbefore mentioned and as to the quality  of workmanship or materials used on the work, or as to any  other question, claim, right, matter or thing, whatsoever in any  way arising out of, or relating to, the contract, drawings, speci- fications, estimates, instructions, orders or these conditions, 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  or  the  sooner  determination  thereof of the contract.”

10. Section 2(a) of the Act defines “arbitration agreement” to mean  “a written agreement to submit present or future differences to arbi- tration, whether an arbitrator is named therein or not”. Indisputably,  there is no recital in the above clause of the contract to refer any  dispute or difference present or future to arbitration. The learned  counsel  for  the respondent  sought to  contend from the marginal  note, viz., “the decision of Public Health Engineer to be final” and  any other the words “claim, right, matter or thing, whatsoever in  any way arising out of the contract, drawings, specifications, esti- mates,  instructions, orders or these conditions, or otherwise con- cerning the works or the execution or failure to execute the same,  whether arising during the progress of the work or after the comple- tion or the sooner determination thereof of the contract” and con- tended that this clause is wide enough to encompass within its am- bit, any disputes or differences arising in the aforesaid execution of  the contract or any question or claim or right arising under the con- tract  during the progress  of the work or  after the completion or  sooner  determination thereof for reference to  an arbitration.  The  High Court, therefore, was right in its conclusion that the aforesaid  clause gives right to arbitration to the respondent for resolution of  the dispute/claims raised by the respondent. In support thereof he  relied on  Ram Lal Jagan Nath v.  Punjab State through Collector  AIR 1966 Punj 436. It is further contended that for the decision of  the Public Health Engineer to be final, the contractor must be given  an opportunity to submit his case to be heard either in person or  through counsel and a decision thereon should be given. It envis- ages by implication existence of a dispute between the contractor  and the Department. In other words, the parties construed that the  Public  Health Engineer  should be  the  sole  arbitrator.  When the  claim was made in referring the dispute to him, it was not referred  to the court. The respondent is entitled to avail of the remedy under  

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Sections 8 and 20 of the Act. We find it difficult to give acceptance  to the contention. A reading of the above clause in the contract as a  conjoint whole, would give us an indication that during the progress  of the work or  after  the completion or  the sooner determination  thereof of the contract,  the Public Health Engineer has been em- powered to decide all questions relating to the meaning of the speci- fications, drawings, instructions hereinbefore mentioned and as to  the quality of workmanship or material used on the work or as to  any other question, claim, right, matter or thing whatsoever in any  way arising out of, or relating to, the contract drawings, specifica- tions, estimates,  instructions, orders or those conditions or other- wise concerning the works or the execution or failure to execute the  same has been entrusted to the Public Health Engineer and his deci- sion shall be final. In other words, he is nominated only to decide  the questions arising in the quality of the work or any other matters  enumerated hereinbefore and his decision shall be final and bind the  contractor. A clause in the contract cannot be split into two parts so  as to consider one part to give rise to difference or dispute and an- other part relating to execution of work, its workmanship etc. It is  settled now that a clause in the contract must be read as a whole. If  the construction suggested by the respondent is given effect then the  decision of the Public Health Engineer would become final and it is  not even necessary to have it made rule of the court under the Arbi- tration Act. It would be hazardous to the claim of a contractor to  give such instruction and give power to the Public Health Engineer  to make any dispute final and binding on the contractor. A careful  reading of the clause in the contract would give us an indication that  the Public Health Engineer is empowered to decide all the questions  enumerated therein other than any disputes or differences that have  arisen between the contractor and the Government. But for clause  25, there is no other contract to refer any dispute or difference to an  arbitrator named or otherwise.”

(emphasis supplied)

22. In K.K. Modi v. K.N. Modi (1998) 3 SCC 573, this Court  

interpreted Clause 9 of the Memorandum of Understanding signed by two  

groups of Modi family. Group ‘A’ consisted of Kedar Nath Modi (younger  

brother of Seth Gujjar Mal Modi and his three sons) and Group ‘B’ consisted  

of five sons of Seth Gujjar Mal Modi. To resolve the disputes and differences  

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between two groups,  the financial institutions, which had lent money, got  

involved. Ultimately, a Memorandum of Understanding was signed by the  

parties on 24.1.1989, Clause 9 of which reads as under:

“Implementation will be done in consultation with the financial in- stitutions. For all disputes,  clarifications etc.  in respect  of imple- mentation of this agreement, the same shall be referred to the Chair- man, IFCI or his nominees whose decisions will be final and bind- ing on both the groups.”

The  Chairman,  Industrial  Finance  Corporation  of  India  (IFCI)  formed  a  

committee  of  experts  to  assist  him  in  deciding  various  questions.  The  

committee of experts and the Chairman held discussion with both the groups.  

On 8.12.1995, the Chairman, IFCI gave his detailed report / decision. In his  

covering  letter,  the  Chairman  indicated  that  the  Memorandum  of  

Understanding had been substantially implemented during 1989 to 1995 and  

with his decisions on the disputes /  clarifications given by him, it will be  

possible to implement the remaining part. The report of the Chairman was  

neither filed in the competent Court as  an award nor any application was  

submitted for making the report a rule or decree of the Court. However, the  

Chairman  issued  series  of  directions  for  implementing  the  report.  On  

18.5.1996, the appellants filed a petition under Section 33 of the 1940 Act in  

the Delhi High Court challenging report dated 8.12.1995 by asserting that it  

was an award in arbitration proceedings. The opposite parties filed civil suit  

in the High Court to challenge the report of the Chairman.  

23. One  of  the  questions  formulated  by  this  Court  was  

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whether  Clause  9  of  the  Memorandum of  Understanding  constituted  an  

Arbitration  Agreement  and  whether  the  decision  of  the  Chairman,  IFCI  

constituted an award.  The two Judge Bench first  culled out the following  

attributes of an Arbitration Agreement:

“(1) The arbitration agreement must contemplate that the decision  of the tribunal will be binding on the parties to the agreement,

(2) that the jurisdiction of the tribunal to decide the rights of parties  must derive either from the consent of the parties or from an order  of the court or from a statute, the terms of which make it clear that  the process is to be an arbitration,

(3) the agreement must contemplate that substantive rights of parties  will be determined by the agreed tribunal,

(4) that the tribunal will determine the rights of the parties in an im- partial and judicial manner with the tribunal owing an equal obliga- tion of fairness towards both sides,

(5) that the agreement of the parties to refer their disputes to the de- cision of the tribunal must be intended to be enforceable in law and  lastly,

(6) the agreement must contemplate that the tribunal will make a de- cision upon a dispute which is already formulated at the time when  a reference is made to the tribunal.

The other factors which are relevant include, whether the agreement  contemplates that the tribunal will receive evidence from both sides  and hear their contentions or at least give the parties an opportunity  to put them forward; whether the wording of the agreement is con- sistent or inconsistent with the view that the process was intended  to be an arbitration, and whether the agreement requires the tribunal  to decide the dispute according to law.”

The Court then referred to several precedents including English cases and  

held:

“In the present case,  the Memorandum of Understanding records  the settlement of various disputes as between Group A and Group B  

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in  terms  of  the  Memorandum  of  Understanding.  It  essentially  records a settlement arrived at regarding disputes and differences  between the two groups which belong to the same family. In terms  of the settlement, the shares and assets of various companies are re- quired to be valued in the manner specified in the agreement. The  valuation is to be done by M/s S.B. Billimoria & Co. Three compa- nies which have to be divided between the two groups are to be di- vided in accordance  with a  scheme to  be  prepared  by Bansi  S.  Mehta & Co. In the implementation of the Memorandum of Under- standing which is to be done in consultation with the financial insti- tutions, any disputes or clarifications relating to implementation are  to be referred to the Chairman, IFCI or his nominees whose deci- sion will be final and binding. The purport of clause 9 is to prevent  any further disputes between Groups A and B. Because the agree- ment requires division of assets in agreed proportions after their val- uation by a named body and under a scheme of division by another  named body.  Clause 9 is intended to clear  any other difficulties  which may arise in the implementation of the agreement by leaving  it to the decision of the Chairman, IFCI. This clause does not con- template any judicial determination by the Chairman of the IFCI. He  is entitled to nominate another person for deciding any question. His  decision has been made final and binding. Thus, clause 9 is not in- tended to be for any different decision than what is already agreed  upon between the parties to the dispute. It is meant for a proper im- plementation of the settlement already arrived at. A judicial deter- mination, recording of evidence etc. are not contemplated. The deci- sion of the Chairman, IFCI is to be binding on the parties. More- over,  difficulties and disputes  in implementation may not be be- tween the parties to the Memorandum of Understanding. It is possi- ble that the valuers nominated in the Memorandum of Understand- ing or the firm entrusted with the responsibility of splitting some of  the companies may require some clarifications or may find difficul- ties in doing the work. They can also resort to clause 9. Looking to  the scheme of the Memorandum of Understanding and the purpose  behind clause 9, the learned Single Judge, in our view, has rightly  come to the conclusion that this was not an agreement to refer dis- putes to arbitration. It was meant to be an expert’s decision.  The  Chairman, IFCI has designated his decision as a decision. He has  consulted experts in connection with the valuation and division of  assets. He did not file his decision in court nor did any of the parties  request him to do so.”

(emphasis supplied)

24. In  Bharat  Bhushan  Bansal  v.  U.P.  Small  Industries  

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Corporation  Limited,  Kanpur  (1999)  2  SCC  166,  the  two  Judge  Bench  

interpreted Clauses  23 and 24 of the agreement entered into between the  

parties for execution of work of construction of a factory and allied buildings  

of the respondent at India Complex, Rai Bareli. Those clauses were as under:

“Decision of the Executive Engineer of the UPSIC to be final on cer- tain matters

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  hereinbefore  mentioned, and as to the quality of workmanship or materials used  on the work or as to any other question whatsoever in any way aris- ing out of or relating to the designs, drawings, specifications, esti- mates, 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 thereof or abandon- ment of the contract by the contractor shall be final and conclusive  and binding on the contractor.

Decision of the MD of the UPSIC on all other matters shall be final

24. Except as provided in clause 23 hereof, the decision of the Man- aging Director of the UPSIC 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 in respect of all other matters arising  out of this contract and not specifically mentioned herein.”

It was argued on behalf of the appellant that Clause 24 should be construed as  

an  arbitration clause  because  the  decision of  the  Managing Director  was  

binding on both the parties.  The two Judge Bench analysed Clauses 23 and  

24 of the agreement, referred to the judgment in  K.K. Modi v. K.N. Modi  

(supra), State of U.P. v. Tipper Chand (supra), State of Orissa v. Damodar  

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Das (supra) and observed:

“In the present case, the Managing Director is more in the category  of an expert who will decide claims, rights, or matters in any way  pertaining to the contract. The intention appears to be more to avoid  disputes than to decide formulated disputes in a quasi-judicial man- ner. In para 18.067 of Vol. 2 of Hudson on Building and Engineering  Contracts.  Illustration (8) deals with the case where, by the terms of  a contract, it was provided that the engineer   

“shall be the exclusive judge upon all matters relating to the  construction,  incidents,  and  the  consequences  of  these  presents, and of the tender, specifications, schedule and draw- ings of  the  contract,  and in regard  to  the  execution of  the  works or otherwise arising out of or in connection with the  contract, and also as regards all matters of account, including  the final balance payable to the contractor, and the certificate  of the engineer for the time being, given under his hand, shall  be binding  and conclusive on both parties.”

It was held that this clause was not an arbitration clause and that the  duties of the Engineer were administrative and not judicial.

Since clause 24 does not contemplate any arbitration, the application  of the appellant under Section 8 of the Arbitration Act, 1940 was  misconceived. The appeal is, therefore, dismissed though for reasons  somewhat different from the reasons given by the High Court. there  will, however, be no order as to costs.”

25. The aforesaid judgments fully support the view taken by  

us that Clause 30 of B-1 Agreement is not an arbitration clause.  

26. The issue deserves to be looked into from another angle.  

In terms of Clause 29 of B-1 Agreement, the Superintending Engineer of the  

Circle was invested with the authority to approve all works to be executed  

under  the  contract.  In  other  words,  the  Superintending Engineer  was  to  

supervise execution of all works.   The power conferred upon him to take  

decision on the matters enumerated in Clause 30 did not involve adjudication  

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of any dispute or lis between the State Government and the contractor.  It  

would have been extremely anomalous to appoint him as Arbitrator to decide  

any dispute or difference between the parties and pass an award.  How could  

he pass an award on any of the issues already decided by him under Clause  

30?  Suppose, he was to decline approval to the designs, drawings etc. or was  

to object to the quality of materials etc. and the contractor had a grievance  

against his decision, the task of deciding the dispute could not have been  

assigned to the Superintending Engineer.  He could not be expected to make  

adjudication with an un-biased mind. Even if he may not be actually biased,  

the contractor will always have a lurking apprehension that his decision will  

not be free from bias. Therefore, there is an inherent danger in treating the  

Superintending Engineer as  an  Arbitrator.  This  facet  of  the  problem was  

highlighted in the judgment of the two Judge Bench in Bihar State Mineral  

Development  Corporation  and  another  v.  Encon  Builders  (I)(P)  Limited  

(2003) 7 SCC 418.  In that case,  the agreement entered into between the  

parties contained a clause that any dispute arising out of the agreement shall  

be referred to the Managing Director of the Corporation and his decision shall  

be final and binding on both the parties. After noticing several precedents, the  

two Judge Bench observed:

“There cannot be any doubt whatsoever that an arbitration agree- ment must contain the broad consensus between the parties that the  disputes and differences should be referred to a domestic tribunal.  The said domestic tribunal must be an impartial one.  It is a well- settled principle of law that a person cannot be a judge of his own  cause. It is further well settled that justice should not only be done  but manifestly seen to be done.   

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Actual bias would lead to an automatic disqualification where the  decision-maker is shown to have an interest in the outcome of the  case. Actual bias denotes an arbitrator who allows a decision to be  influenced by partiality or prejudice and thereby deprives the liti- gant of the fundamental right to a fair trial by an impartial tribunal.

As the acts of bias on the part of the second appellant arose during  execution of the agreement, the question as to whether the respon- dent herein entered into the agreement with his eyes wide open or  not takes a back seat.  An order which lacks inherent jurisdiction  would be a nullity and, thus, the procedural law of waiver or estop- pel would have no application in such a situation.  

It will bear repetition to state that the action of the second appellant  itself was in question and, thus, indisputably, he could not have ad- judicated thereupon in terms of the principle that nobody can be a  judge of his own cause.”

27. We  may now notice  the judgments relied upon by the  

learned counsel for the appellant and find out whether the proposition laid  

down therein supports his argument that Clause 30 should be treated as an  

arbitration clause.  

28. The  facts  of  Mallikarjun  v.  Gulbarga  University  case  

(supra)  were  that  the  respondent-University  had  accepted  the  tender  

submitted  by  the  appellant  for  construction  of  an  indoor  stadium.  In  

pursuance of the work order issued by the competent authority, the appellant  

completed the construction. Thereafter, he invoked the arbitration clause for  

resolution of the disputes  which arose  from the execution of  the project.  

Superintending Engineer, PWD, Gulbarga Circle was entrusted with the task  

of deciding the disputes.  The parties filed their respective claims before the  

Superintending Engineer. He considered the same and passed an award. The  19

Page 20

appellant filed execution petition in the Court of Principal Civil Judge (Senior  

Division), Gulbarga. The respondent filed an objection petition under Section  

47 of the CPC. The Executing Court rejected the objection. The University  

challenged  the  decision  of  the  Executing  Court  and  pleaded  that  the  

agreement  on  the  basis  of  which  the  dispute  was  referred  to  the  

Superintending Engineer  was  not  an  arbitration  agreement  and,  as  such,  

award made by him cannot be treated as one made under the 1940 Act. The  

High Court accepted the plea of the University and set aside the order of the  

trial Court. Clause 30 of the agreement which came up for interpretation by  

this Court was as under:

“The decision of the Superintending Engineer of Gulbarga Circle  for the time being shall be final, conclusive and binding on all par- ties to the contract upon all questions relating to the meaning of the  specifications, designs, drawings and instructions hereinbefore men- tioned and as to the quality of workmanship or material used on the  work,  or  as  to  any other question,  claim, right,  matter,  or  thing  whatsoever, in any way arising out of or relating to the contract de- signs,  drawings,  specifications,  estimates,  instructions,  orders  or  those conditions, or otherwise concerning the works or the execu- tion  or  failure  to  execute  the  same,  whether  arising during the  progress  of  the  work,  or  after  the  completion  or  abandonment  thereof in case of dispute arising between the contractor and Gul- barga University.”   

After  analyzing the  aforesaid  clause  and  making a  reference  to  essential  

elements  of  arbitration  agreement  enumerated  in  Bihar  State  Mineral  

Development Corporation v. Encon Builders (I)(P) Limited (supra), the three  

Judge Bench held:

“Applying the aforesaid principle to the present case, clause 30 re- quires the Superintending Engineer, Gulbarga Circle, Gulbarga, to  

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give his decision on any dispute that may arise out of the contract.  Further, we also find that the agreement postulates present or future  differences in connection with some contemplated affairs inasmuch  as there also was an agreement between the parties to settle such  difference by a private tribunal, namely, the Superintending Engi- neer, Gulbarga Circle,  Gulbarga. It was also agreed between the  parties that they would be bound by the decision of the Tribunal.  The parties were also ad idem.

In the aforesaid view of the matter, it must be held that the agree- ment did contain an arbitration clause.”

The Bench distinguished the judgment in Bharat Bhushan Bansal’s case by  

making the following observations:

“A bare comparison of clause 30 of the contract agreement involved  in the present  matter  and clauses  23 and 24 involved in Bharat  Bhushan  Bansal  case  would  show  that  they  are  not  identical.  Whereas clause 30 of the agreement in question provides for resolu- tion of the dispute arising out of the contract  by persons named  therein; in terms of clause 24, there was no question of decision by  a named person in the dispute raised by the parties to the agree- ment. The matters which are specified under clauses 23 and 24 in  Bharat Bhushan Bansal case were necessarily not required to arise  out of the contract, but merely claims arising during performance of  the contract. Clause 30 of the agreement in the present case did pro- vide for resolution of the dispute arising out of the contract by the  Superintending Engineer, Gulbarga Circle, Gulbarga. For that rea- son, the case relied upon by the learned counsel for the respondent  is distinguishable.

Once clause 30 is constituted to be a valid arbitration agreement, it  would necessarily follow that the decision of the arbitrator named  therein would be rendered only upon allowing the parties to adduce  evidence in support of their respective claims and counter-claims as  also upon hearing the parties to the dispute. For the purpose of con- stituting the valid arbitration agreement, it is not necessary that the  conditions as regards adduction of evidence by the parties or giving  an opportunity of hearing to them must specifically be mentioned  therein. Such conditions, it is trite, are implicit in the decision-mak- ing process  in the  arbitration proceedings.  Compliance  with the  principles of natural justice inheres in an arbitration process. They,  irrespective of the fact as to whether recorded specifically in the ar- bitration agreement or not are required to be followed. Once the  

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principles of natural justice are not complied with, the award made  by the arbitrator would be rendered invalid. We, therefore, are of  the opinion that the arbitration clause does not necessitate spelling  out of a duty on the part of the arbitrator to hear both parties before  deciding the question before him. The expression “decision” sub- sumes adjudication of the dispute. Here in the instant case, it will  bear repetition to state, that the disputes between the parties arose  out of a contract and in relation to matters specified therein and,  thus, were required to be decided and such decisions are not only fi- nal and binding on the parties, but they are conclusive which clearly  spells out the finality of such decisions as also their binding nature.

A clause which is inserted in a contract agreement for the purpose  of prevention of dispute will not be an arbitration agreement. Such a  provision  has  been  made  in  the  agreement  itself  by  conferring  power upon the Engineer-in-Charge to take a decision thereupon in  relation to the matters envisaged under clauses 31 and 32 of the said  agreement. Clauses 31 and 32 of the said agreement provide for a  decision of the Engineer-in-Charge in relation to the matters speci- fied therein. The jurisdiction of the Engineer-in-Charge in relation to  such matters are limited and they cannot be equated with an arbitra- tion agreement. Despite such clauses meant for prevention of dis- pute arising out of a contract, significantly, clause 30 has been in- serted in the contract agreement by the parties.

The Superintending Engineer, Gulbarga Circle, Gulbarga, is an offi- cer  of the Public Works Department in the Government of Kar- nataka. He is not an officer of the University. He did not have any  authority or jurisdiction under the agreement or otherwise either to  supervise the construction works or issue any direction(s) upon the  contractor in relation to the contract job. He might be an ex officio  member  of  the  Building  Committee,  but  thereby  or  by  reason  thereof, he could not have been given nor in fact had been given an  authority to supervise the contract job or for that matter issue any  direction upon the contractor as regards performance of the con- tract.”

(emphasis supplied)

29. In  Punjab  State  v.  Dina  Nath  (supra),  the  two  Judge  

Bench was called upon to consider whether clause 4 of work order No.114  

dated 16.5.1985 constituted an arbitration agreement. The clause in question  

was as under:

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“Any dispute arising between the department and the contractor/so- ciety shall be referred to the Superintending Engineer, Anandpur  Sahib, Hydel Circle No.1, Chandigarh for orders and his decision  will be final and acceptable/binding on both the parties.”

After noticing the judgment in K.K. Modi v. K.N. Modi, the Court observed:

“Keeping the ingredients as indicated by this Court in K.K.Modi in  mind for holding a particular agreement as an arbitration agreement,  we now proceed to examine the aforesaid ingredients in the context  of the present case:

(a) Clause 4 of the Work Order categorically states that the deci- sion of the Superintending engineer shall be binding on the  parties.

(b) The jurisdiction of the Superintending Engineer to decide the  rights of the parties has also been derived from the consent of  the parties to the Work Order.

(c) The agreement contemplates that the Superintending Engineer  shall determine substantive rights of parties as the clause en- compasses all varieties of disputes that may arise between the  parties and does not restrict the jurisdiction of the Superin- tending Engineer to specific issues only.

(d) That the agreement of the parties to refer their disputes to the  decision of the Superintending Engineer is intended to be en- forceable in law as it is binding in nature.

The words “any dispute” appears in clause 4 of the Work Order.  Therefore, only on the basis of the materials produced by the parties  in support of their respective claims a decision can be arrived at in  resolving the dispute between the parties. The use of the words “any  dispute” in clause 4 of the Work order is wide enough to include all  disputes relating to the said Work Order. Therefore, when a party  raises a dispute for non-payment of money after completion of the  work, which is denied by the other party, such a dispute would come  within the meaning of “arbitration agreement” between the parties.  Clause 4 of the Work Order also clearly provides that any dispute  between the department and the contractor shall be referred to the  Superintending Engineer, Hydel Circle No.1, Chandigarh for orders.  The  word  “orders”  would  indicate  some  expression  of  opinion,  which is to be carried our, or enforced and which is a conclusion of a  body  (in  this  case   Superintending engineer,  Hydel  Circle  No.1,  

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Chandigarh). Then again the conclusion and decision of the Superin- tending Engineer will be final and binding on both the parties. This  being the position in the present case and in view of the fact that  clause 4 of the Work Order is not under challenge before us, the de- cision that would be arrived at by Superintending Engineer, Hydel  Circle No.1, Chandigarh must also be binding on the parties as a re- sult whereof clause 4 must be held to be a binding arbitration agree- ment.”

The Bench distinguished the judgment in State of Orissa v. Damodar Das  

(supra) by making the following observations:

“From a plain reading of this clause in Damodar Das it is evident  that the powers of the Public Health Engineer were essentially to su- pervise and inspect.  His powers were limited to the questions relat- ing to the meaning of the specifications, drawings and instructions,  quality of workmanship or materials used on the work or as to any  other question,  claim, right,  matter,  drawings,  specifications,  esti- mates, instructions, orders or these conditions or otherwise concern- ing the works or the execution or failure to execute the same.  How- ever, in the case before us, the Superintending Engineer was given  full power to resolve any dispute arising between the parties which  power in our view is wide enough to cover any nature of dispute  raised by the parties.  The clause in the instant case  categorically  mentions the word “dispute” which would be referred to him and  states “his decision would be final and acceptable/binding on both  the parties.”  

30. In our opinion, neither of the judgments relied upon by  

Shri Mukherjee help the cause of his client. In Mallikarjun’s case, this Court  

noted that Superintending Engineer, Gulbarga Circle, Gulbarga was not an  

officer of the University and he did not have any authority or jurisdiction  

either  to  supervise  the  construction  work  or  issue  any  direction  to  the  

contractor in relation to the project.   The Court also emphasized that the  

parties  had  agreed  that  any  dispute  arising  from the  contract  would  be  

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referred to the decision of the Superintending Engineer.  These factors are  

missing in the instant case.  Likewise, Clause 4 of the work order which came  

up  for  interpretation  in  Punjab  State  v.  Dina  Nath  (supra)  contemplated  

resolution by the Superintending Engineer of any dispute arising between the  

department and the contractor.  Therefore,  the relevant clause of the work  

order was rightly treated as an Arbitration Agreement.

31. In view of the above discussion, we hold that the High  

Court had rightly held that Clause 30 of B-I Agreement is not an Arbitration  

Agreement and the trial Court was not right in appointing the Chief Engineer  

as an Arbitrator.

32. Before concluding, we may observe that circulars issued  

by  the  State  Government may provide  useful guidance  to  the  authorities  

involved in the implementation of the project but the same are not conclusive  

of the correct interpretation of the relevant clauses of the agreement and, in  

any case, the Government’s interpretation is not binding on the Courts.

33. In the result, the appeals are dismissed.  

.........................................J. (G.S. SINGHVI)

.........................................J.        (V. GOPALA GOWDA)

.........................................

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J.  (C. NAGAPPAN)

New Delhi, October 4, 2013.

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