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             [REPORTABLE]

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.7586 OF 2009

M/s. Larsen & Toubro Ltd.     ….Appellant(s)

Vs.

M/s.Mohan Lal Harbans Lal Bhayana     ….Respondent(s)

J U D G M E N T

A.K.SIKRI,J.

1. On  an  application  preferred  by  the  respondent  herein

under  Section 11(6)  of  the Arbitration and Conciliation Act,

1996 (hereinafter referred to as the Act), the High Court has

appointed/nominated an Arbitrator on behalf of the appellant

herein on the ground that in spite of notice by the respondent

in  this  behalf,  the  appellant  had  failed  to  nominate  its

Arbitrator in terms of Clause 25 of the Agreement entered into

between  the  parties.  Since  the  respondent  had  already

nominated its Arbitrator, further direction is given that the two

Arbitrators (one nominated by respondent and one appointed

by the Court for the appellant),  shall  appoint an Umpire in

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consonance with the said Clause 25. This order is impugned

by the appellant primarily on the ground that Clause 25 was

modified  by  three  supplementary  agreements  whereby  the

entire edifice of the said arbitration clause stood adhered and

on a conjoint reading of original Clause 25 with modification

effected  by  the  supplementary  agreements,  there  was  no

question  of  arbitration  between  the  appellant  and  the

respondent at this stage. To appreciate this contention,  one

will have to traverse through the relevant clauses of the main

contract  as  well  as  supplementary  agreements.  Thus,  we

would like to state along with the events, as they occurred, in

chorology. In fact, as we proceed to unfurl the events with our

comments thereon, there and then we shall be getting answer

as well to the issue involved.  

2. An agreement dated 29.2.1988 was entered into between

the Standing Conference of  Public  Enterprises (SCOPE) and

the  appellant  namely  Larsen  &  Toubro  (L&T  Ltd.).  This

agreement was for construction of Twin Tower Office Complex

at Laxmi Nagar District Centre, Delhi which was awarded by

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the SCOPE to the appellant. Original contract value for this

work was stipulated at Rs.27.48 Crores. Works comprised of

the  Civil  Works  and  also  subsidiary  works,  that  could  be

ordered  from  time  to  time  by  SCOPE/Architect.  This

agreement  also  permitted  the  appellant  to  sub-contract.

Accordingly,  the  appellant  entered into  an agreement  dated

3.3.1988 with the respondent. While retaining the civil works

with  itself,  the  appellant  awarded finishing  works including

brickworks, wood works, flooring, furnishing, aluminum works

and other miscellaneous works including waterproofing etc. to

the respondent. It was a pass through contract on a back to

back basis. The value of sub contract was stated as Rs.12.08

crores. Clause 2 of this agreement dated 3.3.1988 pertains to

the payments which were to be made by the appellant to the

respondent. As can be seen from the reading of this Clause, as

reproduced  below,  amount  under  this  sub  contract  was

payable to the respondent by the appellant only on receipt of

corresponding receipts from SCOPE:

“Clause 2 – L&T shall pay “MHB” the said contract amount or such other sum as shall become payable

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only as and when the said payments are received by “L&T” from SCOPE at the time and in the manner hereinafter specified in the terms and conditions of this Contract.”

3. Another important stipulation in this sub contract was

Clause  6,  as  per  which the respondent  was to  perform the

work awarded to it to the satisfaction of SCOPE, namely the

Principal. It reads as under:

“Clause  6  –  All  obligations  in  respect  of  ancillary works undertaken by MHB shall  be performed by MHB itself and will not jeopardize the interest and contract of L&T with SCOPE. Satisfaction of SCOPE, their representatives and Architects shall form the basis of this agreement.”

4. Clause 25 of the agreement between the appellant and

the  respondent  provides  for  arbitration  for  settlement  of

disputes. Relevant part of this Clause reads as under:

“Clause 25 – Except where otherwise provided in the contract,  all  questions,  disputes,  certificates excluding  “excepted  matters”  relating  to  this contract  shall  be  referred  to  a  Sole  Arbitrator  in case claims are upto and including Rs.10 lakhs to be appointed by the General  Manager (Civil),  L&T and  for  claiming  over  Rs.10  lakhs  by  panel  of  3 Arbitrators of who one will be appointed by General Manager  (Civil),  L&T  the  other  by  BHR  and  an

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umpire  appointed  in  advance  jointly  by  the  two Arbitrators….”

……No award of  the arbitration/umpire shall be  binding  on  L&T  unless  MHB  had  furnished complete opportunity to L&T to file a similar claim on  SCOPE  and  only  upon  L&T  receiving  any payment from SCOPE under the award which L&T may get in its favour on the subject matter of work.”

5. The position which prevailed up to this stage was that for

the works undertaken by the respondent, it could receive the

payments only when such payments were made by SCOPE to

the appellant. Further, all questions and disputes between the

appellant  and the  respondent  were  to  be  referred to  a  sole

arbitrator where the claim was up to Rs.10 lakhs and three

arbitrators for claims beyond 10 lakhs. The arbitrator(s) was

not supposed to deal with “excepted matters”, so stated in the

certificates.  However,  even  if  the  award  of  the

arbitrator/umpire was in favour of the respondent, respondent

could not receive payment under the said award unless such a

payment was received by the appellant from SCOPE under the

award.  In  that  event,  the  respondent  was  to  provide  an

opportunity to the appellant to raise those claims with SCOPE.

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On  receiving  the  payments  from  SCOPE  either  under  the

arbitration  award  between  SCOPE  and  the  appellant  or

otherwise, the appellant was supposed to honour the award

passed in favour  of  the  respondent.  In  essence,  the  parties

understood that  as  the  Principal/Employer  was SCOPE, for

whom  the  work  was  to  be  performed  by  virtue  of  main

agreement dated 29.2.1988 entered into between parties and

the sub contract between the appellant and respondent was

on back to back basis, any work done by the respondent was

for the benefit of SCOPE and ultimately liability for honoring

the  claims of  the  respondents  was  that  of  SCOPE and  the

appellant  was not  supposed to make any payment  from its

coffers.

6. The  parties  even  acted  on  the  basis  of  aforesaid

understanding  initially.  There  were  certain  claims  of  the

respondent and the appellant in turn raised those claims with

SCOPE. A settlement was reached between the appellant and

SCOPE with  respect  to  those  claims whereby  the  appellant

was given a sum of Rs.2.15 crores by SCOPE. The appellant

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and  the  respondent  entered  into  an  agreement  dated

31.1.1990 for apportioning the aforesaid amount, whereby a

sum of RS.77.40 lacs was paid to the respondent towards full

and final settlement of claims/ price escalation on works due

to hindrance caused in execution of work and to complete the

balance  work.  At  the  same  time,  another  important

understanding was also  reached between the  parties.  While

making  this  apportionment,  the  modalities  of  settling  the

disputes  between  the  parties  through  arbitrator  also

underwent a significant change. This is clear from Clause (viii)

of the first supplementary agreement which reads as under:

“The  Agreement  provides  that  all  disputes between  the  parties  shall  be  settled  through arbitration.  It  is  now  expressly  agreed  that  any dispute or difference which MHB might have with L&T under  the  agreement  or  SCOPE might  have with  L&T under  the main contract  between then relating to the part of work that is to be executed by MHB, shall be deemed disputes jointly between MHB and L&T and SCOPE under the main contract and L&T will refer all such disputes to SCOPE for settlement by negotiation. If SCOPE does not settle the  same by  negotiation,  then L&T will  refer  the said disputes for arbitration with SCOPE a/on with any  other  disputes  which  L&T  might  have  with SCOPE in terms of the arbitration clause provided in the main contract. MHB shall in such an event,

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help prepare claims and statement of case relating to their scope of work and render all assistance and cooperation  as  may  be  required  in  successfully pursuing  arbitration.  MHB  shall  bear proportionately cost of arbitration relating to their scope of work. The award of the arbitration on all such matters in dispute claims and counter claims relating  to  the  MHB’s  scope  of  works  shall  be binding  on  both  MHB  and  L&T  and  all  such disputes between MHB and L&T shall be deemed to have  been  settled  accordingly  and  shall  not  be referable  to  arbitration  again  between  MHB  and L&T under the agreement.”

7. This clause acknowledges the fact that for the work done

by the respondent under the sub contract, there could be two

kinds of  situations.  There could be a  situation where there

would be disputes and differences between the appellant and

the respondent for  the works done by the respondent.  This

could be regarding the workmanship or the amounts payable

for the work done etc. There could also be a situation where

SCOPE is  not  satisfied with the workmanship or may raise

dispute about the quantum of bills etc. resulting into denial of

payment  or  short  payment  to  the  appellant  for  the  work

undertaken by the respondent  under the sub contract.  The

Clause  (viii)  in  the  first  supplementary  agreement  provided

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that such disputes will be deemed to have been raised jointly

between the respondent  and appellant  on the one side and

SCOPE on the other side. For this reason, this Clause further

provided that appellant was to refer such disputes to SCOPE

for settlement by negotiation failing which arbitration (as per

mechanism provided in the Clause between the appellant and

SCOPE). In order to lodge these claims suitably and properly,

the  respondent  was  supposed  to  assist  and  cooperate  the

appellant.  Such an assistance  was  expected in  successfully

pursuing arbitration as well. Reason for such a collaborative

effort, with synergy between the two parties synergize, was too

obvious. Since the respondent has undertaken the work, its

inputs could immensely help the appellant in prosecuting the

claims efficaciously and potently. Further, by participating the

respondent  would  have  satisfaction  that  its  interest  is

appropriately  taken care of.   It  was even supposed to  bear

proportionate cost of arbitration. It was, thus, clear intention

that the claims of the respondent were to be taken up by the

appellant  and raise  with  SCOPE and in  the  event   SCOPE

disputing those claims, get those claims adjudicated through

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arbitration. In that sense, both the appellant and respondent

were  on  one  side  as  co-claimants.  However,  since  the

respondent  is  not  a  party  to  the  main  agreement  dated

29.9.1988 which is  entered into  between the  appellant  and

SCOPE, the respondent was supposed to give the assistance

and cooperate in the manner provided in this Clause. It is for

this reason that this Clause unambiguously further provided

that  in  view  of  the  arbitration  between  the  appellant  and

SCOPE, pertaining  to  the claims of  the respondent  as well,

even if the disputes between the appellant and the respondent

were deemed to have been settled and were not referable to

arbitration again between these two parties.

8. On  reading  Clause  25  in  the  original  agreement

pertaining to the process of arbitration along with the modified

mechanism agreed to between the parties in the aforesaid first

supplementary agreement, the parties for making the change

is clearly discernable.  As per the original clause, the disputes

between the appellant and the respondent were to be referred

to the arbitral  tribunal.  After  the rendition of  award by the

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arbitral tribunal, money was still not payable under the award

to the respondent. Instead, in order to recover those moneys

from SCOPE, it was for the appellant to file a similar claim on

SCOPE and on receiving the payment from SCOPE under the

award, the appellant was to give the money to the respondent

as per the award between the appellant and the respondent. It

amounted  to  indulging  in  double  exercise,  viz.  (1)  an

arbitration between the parties herein and thereafter another

arbitration relating  to  subject  matter  between the  appellant

and SCOPE. (2) In order to rationalize and eliminate the dual

exercise,  the  parties  agreed  that  instead  of  resorting  to

arbitration between themselves, both would join together and

prefer  those  claims  with  SCOPE.  This  modified  process  of

arbitration,  as  envisaged  in  the  first  supplementary

agreement,  was  much  more  rationale  which  appealed  to

reason.

9. The next event which took place cemented the aforesaid

mechanism between the  parties.  It  appears  that  there were

further  claims of  the  respondent  which  were  raised  by  the

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appellant with SCOPE. SCOPE agreed to make payments and

to apportion those payments between the appellant and the

respondent,  these  two  parties  entered  into  another

supplementary agreement dated 8.12.1993. The recital to this

agreement  is  of  paramount  importance  for  our  purposes.  It

records:

“L&T has, therefore, invoked the arbitration clause under L&T’s contract with SCOPE and referred all the  claims  including  those  relating  to  MHB  on 29.5.1992 to arbitration, which is now pending.”

10. The parties acted as per modified understanding. It was

further agreed whatever claims are received by the appellant

from the SCOPE, they shall be shared between the appellant

and  respondent  in  the  ratio  of  67:33.  The  understanding

between  the  parties  that  for  any  claims  of  the  respondent,

both the parties were to join together and raise claims against

SCOPE  was  reinforced  by  Clause  6  in  the  said  agreement

which again provided an underlined message that in so far as

the appellant  and the respondent  are  concerned,  they shall

not  resort  to  any  arbitration  between  themselves  on  this

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account.  For  better  appreciation,  we  reproduce  Clause  6

herein below, of the second supplementary agreement, dated

8.12.1993:

”That L&T and MHB shall not undertake any other arbitration as between them in respect of the claims  referred  to  pending  arbitration,  except  to share the proceeds or liabilities as stated above by way of accord and satisfaction.”

11. In  the  aforesaid  arbitration,  two  Member  Arbitral

Tribunal  awarded  a  sum  of  Rs.15.02  crores  approximately

(which  was  subsequently  reduced  to  Rs.13.23  crores  by

mutual  negotiation)  and  as  per  the  second  supplementary

agreement,  that  amount  was  shared  between  the  appellant

and the respondent whereby appellant paid a sum of Rs.4.58

crores to the respondent. So much so, when the amount of

Rs.15.02 crores, as awarded by the Arbitral Tribunal against

SCOPE and in favour of the appellant was reduced to 13.23

crores, this arrangement was endoresed by the respondent as

well  by  entering  into  third  supplementary  agreement  dated

6.2.1995. The significance of this agreement, for the purpose

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of present case, is Clauses 5 and 16 thereof.  Therefore, we

reproduce hereinunder both these Clauses:

“Clause 5 – Any claim arising after the date covered by the said award, shall as far as possible settled mutually  by  negotiation.  It  is  mutually  agreed by the  parties  that  any  such  disputes,  shall  be identified but shall not be referred to arbitration on the owner (SCOPE herein)  until  the completion of the  project.  This  would  facilitate  concentration  of the  concerted  efforts  of  the  parties  for  timely completion of the project. The reference of disputes, if any, to arbitration after completion of the project shall  be  in  accordance  with  the  terms  of  first supplementary  agreement  dated  31.01.1990.  Any further  arbitration  if  referred  to  the  owner  after completion of  the  work,  the  Award  arising  out  of this arbitration shall be share in promotion of the claims referred to the works of each of the parties herein.

Clause 16 – The parties further agrees amend and modify  clause  25  of  the  General  Conditions  of Contract  dated  3.3.1988  which  deals  with settlement of Disputes by Arbitration to the limited extent  that  in the  event  of  any fresh reference of disputes to arbitration, the Arbitrator or arbitrators as the case may be shall be bound to give speaking award. This Clause 25 is subject to the terms of the first  supplementary  agreement  dated  31.01.1990 which modified the agreement dated 03.03.1988.”

12. Following aspects emerge from the reading of these two

Clauses:

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(a)  The  parties  herein  agreed  to  settle  the

claims between themselves through negotiations, in

the first instance.

(b)  Even  if  there  were  disputes  between  the

appellant and the respondent they were only to be

identified  but  could  not  be  referred to  arbitration

with SCOPE until completion of the project.

(c) Even on the completion of the project, the

mechanism of  raising the disputes had to remain

the  same  as  was  agreed  to  earlier  in  the  first

supplementary  agreement  dated  31.1.1990  viz.

appellant  had  to  raise  the  claims with  SCOPE in

cooperation with the respondent and there was not

to be any inter-se arbitration between these parties.

(d)  Clause  25  as  contained  in  the  original

agreement  dated  3.3.1988  between  the  appellant

and  the  respondent  pertaining  to  the  arbitration

was  specifically  made  subject  to  the  logistic

provided  in  the  first  supplementary  agreement

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dated  31.1.1990  making  it  abundantly  clear  that

Clause  25  stood  modified  by  the  supplementary

agreement.

13. Some further claims, out of the aforesaid contract arose

and  the  appellant  submitted  those  claims  to  SCOPE  in

October, 2000 which were up to date in November 2000. These

were made jointly by these parties on SCOPE in August 2001.

They were  up dated  again  in  December  2002 and January

2003 in concert with each other.

14. Now the stage came which led to present proceedings.

While the things stood at the aforesaid level, the respondent

decided to close the contract sometime in the year 2002. We

are not required to go into the nitty gritty of this event viz. as

to  whether  the  respondent  abandoned  the  site  or  it  had

completed the project. Suffice it is to note that the respondent

raised many claims with the appellant and also served legal

notice  dated  31.1.2004  in  this  behalf.  It  nominated  its

arbitrator  and  called  upon  the  respondent  to  appoint  its

arbitrator  for  settling  the  disputes  between  them.  The

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appellant replied by denying the contents of the legal notice.

This denial of the appellant prompted the respondent to file

the application under Section 11 of the Act seeking a direction

to  the  appellant  to  appoint  its  arbitrator.  The  exact  prayer

made in this application was as under:

“(a)  Appoint  an  Arbitrator  on  behalf  of  the Respondent  in  terms  of  Clause  25  of  the Contract Agreement dated 3rd of  March 1988 between  the  parties  as  modified  by Supplementary Agreement dated 31st January 1990 and 6th February 1995.

(b) Direct  the  Arbitrators  appointed  by  the applicant  and  that  appoint  on  behalf  of  the respondent to appoint an umpire in terms of Clause 25 of the Contract Agreement dated 3rd March, 1988.”

15. It is in this application, as mentioned above, impugned

orders are passed by the High Court holding that Clause 25

still survived and the arbitral tribunal can be constituted for

adjudication  of  the  disputes  between the  appellant  and the

respondent. The High Court has further held that though the

respondent had nominated its arbitrator, since the appellant

had failed to do so in spite of notice, the appellant lost its right

to nominate its own arbitrator. For this reason, it is the High

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Court which has appointed/nominated an arbitrator for  the

appellant  with  direction  that  two  arbitrators  may  appoint

presiding arbitrator.

16. While  narrating  the  aforesaid  events,  we  have  also

commented  on  the  effects  of  the  three  supplementary

agreements and impact thereof on Clause 25. It is too obvious,

from the reading of the relevant clause in the supplementary

agreements,  that  there could not  have been any arbitration

between the appellant and respondent, at this stage. Clause

25 of the original agreement has undergone material change.

The modalities of raising arbitration are completely novated.

As per the modified understanding between the parties, which

is so eloquently recorded in writing, in the first instance, the

claims of the respondent are to be taken up by the appellant

with SCOPE. For pressing those claims and in order to ensure

their proper adjudication, the respondent is supposed to assist

and cooperate with the appellant in pursuing the arbitration.

In that sense, at this stage, the appellant and respondent are

on one side who have to put up a joint fight with SCOPE. It is

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only after the award is rendered in the arbitration between the

appellant  and  SCOPE  and  something  remains,  which  may

qualify  as  a  dispute  between  the  appellant  and  the

respondent,  that  there  can  be  an  arbitration  in  respect  of

those disputes between these two parties. We are, therefore, of

the opinion that the High Court is not correct in holding that

Clause 25 of the original agreement in unamended form holds

the field. In fact, even the respondent knew fully well that said

clause  had  been  drastically  altered  by  supplementary

agreements. It is for this reason that in the prayer (a) of the

application  under  Section  11  of  the  Act  filed  by  the

respondent,  it  has  itself  acknowledged  this  change  by

mentioning that arbitrator be appointed in terms of Clause 25

of the contract agreement dated 3rd March 1988 “as modified

by supplementary agreements dated 31st January 1990 and

6th February  1995”.  What,  however,  is  lost  sight  of  by  the

respondent in the process, is that the modification in Clause

25  did  not  permit  the  respondent  to  move  this  kind  of

application for appointment of arbitrator between the parties,

at that stage.

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17. Fully realizing the sequittor of the modified clause, Ms.

Priya Kumar, learned Advocate appearing for the respondent

tried to paint a different story alleging non-cooperation of the

appellant. She was vociferous in her submission in depicting

blameworthy conduct of the appellant in not raising the claims

preferred by the respondent, with SCOPE and submitted that

such  a  conduct  of  the  appellant  was  reprehensible  which

could not make the respondent wait for indefinite period. She

highlighted the fact that though the works were completed in

the  year  2002,  when  even  the  constructed  complex  was

inaugurated and the respondent had preferred the claims with

the  appellant  with  request  to  take  up  those  claims  with

SCOPE way back in October, 2002. But nothing has moved

forward. She further submitted that till date even the arbitral

tribunal has not been constituted and the respondent can not

be made to suffer by waiting endlessly.  

18. This argument may be convincing in so far as equities

are  concerned.  However,  merely  thereby  the  legal  position

which is contractually defined between the parties by way of

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written agreements does not alter.  It  would be necessary to

record  here  that  when  the  High  Court  had  passed  the

impugned orders, the claim had not been made with SCOPE.

That may be one of the reasons for the High Court to pass the

impugned order.  However,  the  said  position  has  undergone

substantial  change  thereafter.  Even  after  the  filing  of  the

Special Leave Petition against the impugned order and grant of

leave in the matter, in November 2009, there have been joint

meetings of the appellant and the respondent with the officials

of  SCOPE.  Few  such  meetings  took  place  in  April  2012.

Pursuant  to  those  meetings,  SCOPE  had  called  upon  the

appellant to complete the residual work rectification so that

SCOPE was in a position to settle the final bills, Thereafter in

June  2012,  after  detailed  discussion  on  various  issues

concerning the project, SCOPE asked the appellant to submit

revised final bill. Accordingly, bill dated 16th June, 2012 was

prepared  by  the  appellant  in  consultation  with  the

representatives of the respondent and submitted to SCOPE.

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19. After the submission of the revised final bill, SCOPE has

been  in  the  process  of  scrutinizing  the  same including  the

claims.  In  this  regard,  several  round of  meetings  held  with

SCOPE. Many of these meetings with SCOPE which were held

after the submission of the revised final bill were attended by

the representative of the respondent along with the appellant.

In December 2013, again SCOPE called upon the appellant to

hold a meeting to discuss on the pending issues.

Meanwhile  the  appellant  L&T  has  been  continuing  to

extend the Bank Guarantee which was submitted to SCOPE.

20. In such a scenario, when the final bill is almost at the

stage of finalization the only aspect that can be taken care of

at this stage is to hasten the process of arbitration, in case

after the passing of the final bill by SCOPE, some claims of the

respondent still survive.

21. Accordingly while allowing this appeal and setting aside

the order of the High Court, we would like to give the following

directions, in order to balance the equities:

(1)  It  shall  be ensured by the appellant  that final  bill  is  settled  by  SCOPE within  two  months

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from the date of receiving the copy of this order. For this  purpose,  this  order  shall  be  brought  to  the notice of SCOPE as well so that SCOPE acts swiftly for settling the bill.

(2)  In  case  there  are  certain  claims  of  the respondent which are not agreed to  while passing the  final  bill  and  disputes  remain,  those  will  be taken up by the appellant with SCOPE immediately thereafter  by  invoking  arbitration  between  the appellant  and  SCOPE  as  per  the  arbitration agreement  between  the  appellant  and  SCOPE.  In raising  such  disputes  the  appellant  and  the respondent  shall  act  in  unison  as  per  the understanding  arrived  at  between  them  vide supplementary  agreements.  In  that  event,  arbitral tribunal  shall  be  constituted  within  2  months thereof.

(3) In case the appellant is satisfied with the final bill and chooses not to raise the claims with SCOPE but the respondent feels that their claims are legitimate then it  would be treated as dispute between the appellant and the respondent. In that event, arbitral tribunal shall be constituted as per Clause 25 of the agreement dated 3.3.1998 between the parties within a period of  two months of  that event.

(4) In either of the aforesaid arbitrations, the arbitral tribunal shall endeavour to render its award within six months from the date of the constitution of the arbitral tribunal.

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22. The appeal is allowed and disposed of in the aforesaid

terms.

  …………………………………….J.

(Surinder Singh Nijjar)

……………………………………..J.     (A.K.Sikri)

 New Delhi, Dt. February 25, 2014