Page 1

1

REPORTABLE              

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.534 OF 2007

M/s Harsha Constructions … Appellant  

Versus

Union of India & Ors.       … Respondents

J U D G M E N T

ANIL R. DAVE, J.

1. Aggrieved  by  the  judgment  dated  9th  

September, 2005 delivered by the High Court of  

Judicature, Andhra Pradesh at Hyderabad, in CMA  

No.476 of 2005, this appeal has been filed by M/s  

Harsha Constructions, a contractor, against Union

Page 2

2

of India and its authorities.  Hereinafter, the  

appellant has been described as a 'Contractor'.  

2. The  Union  of  India  had  entered  into  a  

contract for construction of a road bridge at a  

level crossing and in the said contract there was  

a clause with regard to arbitration.  The issue  

with which we are concerned in the instant case,  

in a nutshell, is as under:-

“When  in  a  contract  of  arbitration,  certain  disputes  are  expressly  “excepted”,  whether  the  Arbitrator  can  arbitrate  on  such  excepted  issues  and  what  are  the  consequences  if  the  Arbitrator decides such issues?”

3. For the purpose of considering the issue, in  

our opinion, certain clauses incorporated in the  

contract  are  relevant  and  those  clauses  are  

reproduced hereinbelow :-

“Clause 39. Any item of work carried out  by the Contractor on the instructions of  the  Engineer  which  is  not  included  in  the accepted schedule of rates shall be  executed at the rates set forth in the  “Schedule  of  Rates,  South  Central

Page 3

3

Railway”  modified  by  the  tender  percentage and where such items are not  contained  in  the  latter  at  the  rates  agreed upon between the Engineer and the  Contractor before the execution of such  items of work and the Contractor shall  be bound to notify the Engineer at least  seven days before the necessity arises  for the execution of such items of work  that the accepted schedule of rates does  not  include  a  rate  or  rates  for  the  extra work involved.     The rates payable for such items  shall be decided at the meeting to be  held  between  the  Engineer  and  the  contractor  in  as  short  a  period  as  possible after the need for the special  item has come to the notice.  In case  the  contractor  fails  to  attend  the  meeting after being notified to do so or  in  the  event  of  no  settlement  being  arrived at the Railway shall be entitled  to  execute  the  extra  works  by  other  means and the contractor shall have no  claim for loss or damage that may result  from such procedure.  Provided that if  the Contractor commences work or incurs  any expenditure in regard thereto before  the rates are determined and agreed upon  as lastly mentioned, then and in such a  case  the  Contractor  shall  only  be  entitled to be paid in respect of the  work carried out or expenditure incurred  by him prior to the date of the rates as  aforesaid  according  to  the  rates  as  shall  be  fixed  by  the  Engineer.  However,  if  the  contractor  is  not  satisfied  with  the  decision  of  the  Engineer in this respect he may appeal

Page 4

4

to the Chief Engineer within 30 days of  getting  the  decision  of  the  Engineer  supported by the analysis of the rates  claimed.  The  Chief  Engineer's  decision  after  hearing  both  the  parties  in  the  matter would be final and binding on the  contractor and the Railway.” “Clause-63.   All  disputes  and  differences  of  any  kind  whatsoever  arising out of or in connection with the  contract whether during the progress of  the  work  or  after  its  completion  and  whether  before  or  after  the  determination of the contract shall be  referred  by  the  Contractor  to  the  Railway and the Railway shall within a  reasonable  time  after  receipt  of  the  contractor's  presentation  make  and  notify decisions on all matters referred  to by the contractor in writing provided  that  matters  for  which  provision  has  been  made  in  Clause  18,  22(5),  39,  45(a),  55,  55-A(5),  61(2)  and  62(1) (xiii)(B)(e)(b)  of  the  General  Conditions of contract or in any Clause  of  the  Special  conditions  of  the  contract  shall  be  deemed  as  'Excepted  matters' and decisions thereon shall be  final  and  binding  on  the  contractor;  provided  further  that  excepted  matters  shall  stand  specifically  excluded  from  the  purview  of  the  arbitration  clause  and  shall  not  be  referred  to  arbitration.”

Page 5

5

4.   Upon perusal of Clause 63 of the aforestated  

contract, it is quite clear that the matters for  

which  provision  had  been  made  in  Clauses  18,  

22(5), 39, 45(a), 55, 55-A(5), 61(2) and 62(1)

(xiii)(B)(e)(b)  of  the  General  Conditions  of  

Contract  were  “excepted  matters”  and  they  were  

not to be referred to the arbitrator.  

5.   In the instant case, we are concerned with a  

dispute  which  had  arisen  with  regard  to  the  

amount payable to the contractor in relation to  

extra work done by the contractor.

6.   Upon perusal of Clause 39, we find that in  

the event of extra or additional work entrusted  

to the contractor, if rates at which the said  

work  was  to  be  done  was  not  specified  in  the  

contract, the amount payable for the additional  

work done was to be discussed by the contractor  

with  the  concerned  Engineer  and  ultimately  the  

rate was to be decided by the Engineer. If the

Page 6

6

rate fixed by the Engineer was not acceptable to  

the  contractor,  the  contractor  had  to  file  an  

appeal to the Chief Engineer within 30 days of  

getting  the  decision  of  the  Engineer  and  the  

Chief  Engineer’s  decision  about  the  amount  

payable was to be final.   

7.    It is not in dispute that some work, which  

was  not  covered  under  the  contract  had  been  

entrusted to the contractor and for determining  

the  amount  payable  for  the  said  work,  certain  

meetings had been held by the contractor and the  

concerned Engineer but they could not agree to  

any rate.  Ultimately, some amount was paid in  

respect of the additional work done, which was  

not  acceptable  to  the  contractor  but  the  

contractor accepted the same under protest.       

8.   In addition to the aforestated dispute with  

regard to determination of the rate at which the  

contractor was to be paid for the extra work done

Page 7

7

by it, there were some other disputes also and in  

order to resolve all those disputes, Respondent  

No.5, a former Judge of the High Court of Andhra  

Pradesh, had been appointed as an Arbitrator.

9.  The  learned  Arbitrator  decided  all  the  

disputes under his Award dated 21.9.2002 though  

the contractor had objected to arbitrability of  

the  disputes  which  were  not  referable  to  the  

Arbitrator  as  per  Clause  39  of  the  Contract.  

Being aggrieved by the Award, Union of India had  

preferred an appeal before the Chief Judge, City  

Civil Court, Hyderabad under Section 34 of the  

Arbitration  and  Conciliation  Act,  1996  

(hereinafter referred to as “the Act”) and the  

said appeal was allowed, whereby the Award was  

set aside.

10. Before the City Civil Court, in the appeal  

filed under Section 34 of the Act, the following  

two issues had been framed :-

Page 8

8

(a) Whether the dispute was in relation to  an  “excepted  matter”  and  was  not  arbitrable? (b)  Whether the claimant was entitled to  the amounts awarded by the Arbitrator?

11. The Court decided the appeal in favour of  

the respondent and against the contractor.  Being  

aggrieved by the order dated 8.4.2005 passed by  

the  XIVth  Additional  Chief  Judge,  City  Civil  

Court, Hyderabad, CMA No.476 of 2005 was filed by  

the contractor before the High Court and the High  

Court was pleased to dismiss the same by virtue  

of  the  impugned  judgment  and  therefore,  the  

contractor has filed this appeal.

12.  The  learned  counsel  appearing  for  the  

appellant-contractor had mainly submitted that as  

per Clause 39 of the contract, the Engineer of  

the  respondent  authorities  was  duty  bound  to  

decide the rate at which payment was to be made  

for  the  extra  work  done  by  the  contractor,  

through  negotiations  between  the  parties.   A

Page 9

9

final decision on the said subject was taken by  

the  respondent  authorities  without  the  

contractor's approval and therefore, there was a  

dispute  between  the  parties.  He  had  further  

submitted that no specific decision was taken by  

the Engineer and therefore, there was no question  

of filing any appeal before the Chief Engineer  

and  as  the  Chief  Engineer  did  not  take  any  

decision, the aforestated clauses, viz. Clauses  

39 and 64 would not apply because clause 64 would  

“except” a decision of the Chief Engineer, but as  

the Chief Engineer had not taken any decision,  

there was no question with regard to “referring  

to” clause 39.  He had, therefore, submitted that  

the Award in toto was correct and the High Court  

had wrongly upheld the dismissal of the Award by  

the trial Court.

13.   The  learned  counsel  had,  thereafter,  

referred to the judgments delivered by this Court  

in General Manager, Northern Railway and another

Page 10

10

v. Sarvesh Chopra  [(2002) 4 SCC 45] and  Madnani  

Construction Corporation (P) Limited v. Union of  

India & ors.[(2010) 1 SCC 549] to substantiate  

his case.   

14.   The  learned  counsel  had,  thereafter,  

submitted that the appeal deserved to be allowed  

and  the  judgment  delivered  by  the  High  Court  

confirming  the  order  passed  by  the  City  Civil  

Court deserved to be quashed and set aside.

15.    There was no representation on behalf of  

the  Union  of  India  and  therefore,  we  are  

constrained to consider the submissions made by  

learned counsel for the appellant only.

16.   Upon perusal of both the clauses included  

in  the  contract,  which  have  been  referred  to  

hereinabove,  it  is  crystal  clear  that  all  the  

disputes  were  not  arbitrable.   Some  of  the  

disputes which had been referred to in Clause 39  

were specifically not arbitrable and in relation

Page 11

11

to  the  said  disputes  the  contractor  had  to  

negotiate  with  the  concerned  Engineer  of  the  

respondent  and  if  the  contractor  was  not  

satisfied  with  the  rate  determined  by  the  

Engineer, it was open to the contractor to file  

an appeal against the decision of the Engineer  

before the Chief Engineer within 30 days from the  

date  of  communication  of  the  decision  to  the  

contractor.   

17.  In the instant case, there was no finality  

so far as the amount payable to the contractor in  

relation  to  the  extra  work  done  by  it  is  

concerned,  because  the  said  dispute  was  never  

decided by the Chief Engineer. In the aforestated  

circumstances,  when  the  disputes  had  been  

referred  to  the  Arbitrator,  the  disputes  which  

had been among “excepted matters” had also been  

referred to the learned Arbitrator.  

Page 12

12

18.  Upon perusal of the case papers we find that  

before  the  learned  Arbitrator,  the  contractor  

did object to the arbitrability of the disputes  

covered under Clause 39, but the Arbitrator had  

decided the said issues by holding that the same  

were not “excepted matters” but arbitrable.

19.  The question before this Court is whether  

the  Arbitrator  could  have  decided  the  issues  

which were not arbitrable.   

20.   Arbitration  arises  from  a  contract  and  

unless there is a specific written contract, a  

contract  with  regard  to  arbitration  cannot  be  

presumed.  Section  7(3)  of  the  Act  clearly  

specifies  that  the  contract  with  regard  to  

arbitration must be in writing.  Thus, so far as  

the  disputes  which  have  been  referred  to  in  

Clause 39 of the contract are concerned, it was  

not open to the Arbitrator to arbitrate upon the  

said  disputes  as  there  was  a  specific  clause

Page 13

13

whereby  the  said  disputes  had  been  “excepted”.  

Moreover,  when  the  law  specifically  makes  a  

provision with regard to formation of a contract  

in  a  particular  manner,  there  cannot  be  any  

presumption  with  regard  to  a  contract  if  the  

contract  is  not  entered  into  by  the  mode  

prescribed under the Act.    

21.  If a non-arbitrable dispute is referred to  

an Arbitrator and even if an issue is framed by  

the Arbitrator in relation to such a dispute, in  

our opinion, there cannot be a presumption or a  

conclusion  to  the  effect  that  the  parties  had  

agreed to refer the issue to the Arbitrator.  In  

the instant case, the respondent authorities had  

raised an objection relating to the arbitrability  

of  the  aforestated  issue  before  the  Arbitrator  

and yet the Arbitrator had rendered his decision  

on the said “excepted” dispute.  In our opinion,  

the Arbitrator could not have decided the said  

“excepted” dispute.   

Page 14

14

22.  We, therefore, hold that it was not open to  

the Arbitrator to decide the issues which were  

not  arbitrable  and  the  award,  so  far  as  it  

relates  to  disputes  regarding  non-arbitrable  

disputes  is  concerned,  is  bad  in  law  and  is  

hereby quashed.

23. We  also  take  note  of  the  fact  that  the  

contract had been entered into by the parties on  

24.4.1995  and  the  contractual  work  had  been  

finalised on 31.3.1997.  The Award was made on  

21.9.2002 and therefore, we uphold the portion of  

the award so far as it pertains to the disputes  

which were arbitrable, but so far as the portion  

of the arbitral award which determines the rate  

for  extra  work  done  by  the  contractor  is  

concerned, we quash and set aside the same.

24.   Needless to say that it would be open to  

the contractor to take appropriate legal action  

for recovery of payment for work done, which was

Page 15

15

not forming part of the contract because the said  

issue decided by the Arbitrator is now set aside.

25. For the reasons recorded hereinabove, the  

appeal  is  partly  allowed  with  no  order  as  to  

costs.

                      …………...........................J.            (ANIL R. DAVE)

   …..........................................J.                         (VIKRAMAJIT SEN)

New Delhi September 05, 2014.