Reportable IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4933 OF 2011 [Arising out of SLP [C] No.20318/2008]

State of Orissa & Ors. … Appellants

Vs.

Bhagyadhar Dash … Respondent

WITH

With CA No. 4935  of 2011 (@ SLP [C] No.23251/2008) With CA No. 4936 of 2011 (@ SLP [C] No.23252/2008) With CA No. 4934 of 2011 (@ SLP [C] No.23346/2008) With CA No. 4937 of 2011 (@ SLP [C] No.26639/2008) With CA No. 4939 of 2011 (@ SLP [C] No.27116/2008) With CA No. 4940 of 2011 (@ SLP [C] No.27386/2008) With CA No. 4941 of 2011 (@ SLP [C] No.27387/2008) With CA No. 4942 of 2011 (@ SLP [C] No.27388/2008) With CA No. 4943 of 2011 (@ SLP [C] No.7099/2009) With CA No. 4944 of 2011 (@ SLP [C] No.31702/2010) With CA No. 4945 of 2011 (@ SLP [C] No.32048/2010) With CA No. 4946 of 2011 (@ SLP [C] No.33798/2010)

J U D G M E N T

R.V.RAVEENDRAN, J.

Leave granted.  

2. These appeals by special leave are by the State of Orissa aggrieved by  

the  orders  of  the  Chief  Justice  of  Orissa  High  Court  allowing  the

applications filed under Section 11 of the Arbitration and Conciliation Act  

1996  (‘Act’  for  short)  filed  by  contractors  and  appointing  arbitrators  to  

decide  the  disputes  raised  by  them  against  the  State  Government.  The  

learned Chief Justice held that the last sentence of the proviso to clause 10 of  

the conditions of contract (forming part of the agreements between the state  

and the contractors) is an arbitration agreement. The appellants challenge the  

said orders on the ground that there is no arbitration agreement and therefore  

the applications under section 11 of the Act filed by the contractors ought to  

have  been  dismissed.  Therefore  the  short  question  that  arises  for  our  

consideration in these appeals is  whether the said clause is  an arbitration  

agreement.  

The essentials of an arbitration agreement

3.  In K K Modi vs. K N Modi [1998 (3) SCC 573] this court enumerated  

the following attributes of a valid 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,

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(4) that the tribunal will determine the rights of the parties in an impartial  and  judicial  manner,  with  the  tribunal  owing  an  equal  obligation  of  fairness towards both sides,

(5) that the agreement of the parties to refer their disputes to the decision  of the Tribunal must be intended to be enforceable in law, and lastly,

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

Following  K.K.  Modi and other  cases,  Bihar State  Mineral  Development   

Corporation v.  Encon Builders  (IP)  Ltd. -  2003 (7)  SCC 418, this  court  

listed the following as the essential elements of an arbitration agreement:

“(i) There must be a present or a future difference in connection with some  contemplated affair;

(ii) There must be the intention of the parties to settle such difference by a  private tribunal;

(iii) The parties must agree in writing to be bound by the decision of such  tribunal; and

(iv) The parties must be ad idem.”

4. In Jagdish Chander vs. Ram Chandra [2007 (5) SCC 719], this Court,  

after referring to the cases on the issue, set out the following principles in  

regard to what constitutes an arbitration agreement :

“(i) The intention of the parties to enter into an arbitration agreement shall  have to be gathered from the terms of the agreement. If the terms of the  agreement clearly indicate an intention on the part of the parties to the  agreement to refer their disputes to a private tribunal for adjudication and  an  willingness  to  be  bound  by  the  decision  of  such  tribunal  on  such  disputes, it is arbitration agreement. While there is no specific form of an  

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arbitration agreement, the words used should disclose a determination and  obligation to go to arbitration and not merely contemplate the possibility  of going for arbitration. Where there is merely a possibility of the parties  agreeing to arbitration in future, as contrasted from an obligation to refer  disputes to arbitration, there is no valid and binding arbitration agreement.

(ii) Even if the words 'arbitration' and 'arbitral tribunal (or arbitrator)' are  not used with reference to the process of settlement or with reference to  the private tribunal which has to adjudicate upon the disputes, in a clause  relating to settlement of disputes, it does not detract from the clause being  an  arbitration  agreement  if  it  has  the  attributes  or  elements  of  an  arbitration agreement. They are : (a) The agreement should be in writing.  (b) The parties should have agreed to refer any disputes (present or future)  between them to the decision of a private tribunal. (c) The private tribunal  should  be  empowered  to  adjudicate  upon  the  disputes  in  an  impartial  manner, giving due opportunity to the parties to put forth their case before  it.  (d)  The  parties  should  have agreed  that  the  decision of  the  Private  Tribunal in respect of the disputes will be binding on them.

(iii)  Where  the  clause  provides  that  in  the  event  of  disputes  arising  between the parties, the disputes shall be referred to Arbitration, it is an  arbitration agreement. Where there is a specific and direct expression of  intent to have the disputes settled by arbitration, it is not necessary to set  out  the  attributes  of  an arbitration  agreement  to  make it  an  arbitration  agreement.  But  where  the  clause  relating  to  settlement  of  disputes,  contains  words  which  specifically  excludes  any of  the  attributes  of  an  arbitration agreement or contains anything that detracts from an arbitration  agreement, it will not be an arbitration agreement. For example, where an  agreement requires or permits an authority to decide a claim or dispute  without hearing, or requires the authority to act in the interests of only one  of the parties, or provides that the decision of the Authority will not be  final and binding on the parties, or that if either party is not satisfied with  the decision of the Authority, he may file  a civil  suit  seeking relief,  it  cannot be termed as an arbitration agreement.

(iv) But mere use of the word 'arbitration' or 'arbitrator' in a clause will not  make it an arbitration agreement, if it requires or contemplates a further or  fresh consent of the parties for reference to arbitration. For example, use  of  words  such as  "parties  can,  if  they so desire,  refer  their  disputes  to  arbitration" or "in the event of any dispute, the parties may also agree to  refer the same to arbitration" or "if any disputes arise between the parties,  they  should  consider  settlement  by  arbitration"  in  a  clause  relating  to  settlement  of disputes,  indicate that  the clause is not intended to be an  arbitration agreement. Similarly, a clause which states that "if the parties  so decide, the disputes shall be referred to arbitration" or "any disputes  between parties, if they so agree, shall be referred to arbitration" is not an  arbitration agreement.  Such clauses merely indicate a desire or hope to  

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have  the  disputes  settled  by  arbitration,  or  a  tentative  arrangement  to  explore arbitration as a mode of settlement if and when a dispute arises.  Such clauses require the parties to arrive at a further agreement to go to  arbitration, as and when the disputes arise. Any agreement or clause in an  agreement  requiring  or  contemplating  a  further  consent  or  consensus  before a reference to arbitration, is not an arbitration agreement,  but an  agreement to enter into an arbitration agreement in future.”

5. The following passage from  Russell  on Arbitration (19th Edn. Page  

59) throws some light on this issue:

"If  it  appears  from the  terms  of  the  agreement  by  which  a  matter  is  submitted to a person's decision, that the intention of the parties was that  he should hold an enquiry in the nature of a judicial enquiry and hear the  respective cases of the parties and decide upon evidence laid before him,  then the case is one of an arbitration. The intention in such case is that  there shall be a judicial inquiry worked out in a judicial manner. On the  other hand, there are cases in which a person is appointed to ascertain  some matter for the purpose of preventing differences from arising, not of  setting them when they have arisen".

Cases  where  the  tests  were  applied  to  different  clauses  to  find  out  whether they could be termed as ‘arbitration agreement’

6. In K.K. Modi, the clause that arose for consideration was as under :

"9.  Implementation  will  be  done  in  consultation  with  the  financial  institutions.  For  all  disputes,  clarification  etc.,  in  respect  of  implementation  of  this  agreement,  the  same  shall  be  referred  to  the  Chairman, IFCI or his nominees whose decisions will be final and binding  on both the groups".

This Court held that the said clause was not an arbitration agreement on the  

following reasoning:

“Therefore our Courts have laid emphasis on (1) existence of disputes as   against  intention  to  avoid  future  dispute;  (2)  the tribunal  or  forum so   chosen  is  intended  to  act  judicially  after  taking  into  account  relevant   evidence before it and the submissions made by the parties before it; and   

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(3) the decision is intended to bind the parties. Nomenclature used by the   parties may not be conclusive.

The purport of Clause 9 is to prevent any further disputes between Groups  A and B.  Because  the  agreement  requires  division of  assets  in  agreed  proportions after their valuation 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   contemplate any judicial determination by the Chairman of the IFCI. . .   Thus, clause 9 is not intended to be for any different decision than what is  already agreed upon between the parties to the dispute.  It  is  meant for  proper  implementation  of  the  settlement  already  arrived  at.  A  judicial  determination, recording of evidence etc. are not contemplated…”

(emphasis supplied)

7. In State of Uttar Pradesh vs. Tipper Chand - 1980 (2) SCC 341, the  

following clause fell for consideration:

"Except  where  otherwise  specified  in  the  contract  the  decision  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  specifications,  design,  drawing  and  instructions  hereinbefore mentioned. 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  during the progress of the work, or after the completion or abandonment  of  the  contract  by  the  Contractor,  shall  also  be  final,  conclusive  and  binding on the Contractor".

The High Court held that the clause was not an arbitration agreement, as it  

merely conferred power on the Superintending Engineer to take a decision  

on his own and did not authorise parties to refer any matter to his decision.  

This  court  clarified  that  in  the  absence  of  a  provision  for  reference  of  

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disputes  between  parties  for  settlement,  clause  merely  stating  that  the  

“decision  of  the  Superintending  Engineer  shall  be  final”  was  not  an  

arbitration agreement. This Court clarified that an arbitration agreement can  

either be in express terms or can be inferred or spelt out from the terms of  

the clause; and that if the purpose of the clause is only to vest in the named  

Authority,  the  power  of  supervision  of  the  execution  of  the  work  and  

administrative  control  over  it  from time  to  time,  it  is  not  an  arbitration  

agreement. It also held that the clause did not contain any express arbitration  

agreement, nor spelt out by implication any arbitration agreement as it did  

not mention any dispute or reference of such dispute for decision.

8. In  State  of  Orissa  vs.  Damodar  Das [1996 (2)  SCC 216],  a  three  

Judge Bench of this  court  considered whether  the following clause is  an  

arbitration agreement:  

"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, conclusive and binding on all  parties to the contract upon all questions relating to the meaning of the  specifications; drawings and instructions hereinbefore mentioned and as to  the quality of workmanship or material use 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,  specifications,  estimates,  instructions, orders or these conditions, or otherwise concerning the works  or the execution of 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".

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Following  the  decision  in  Tipper  Chand, this  Court  held  that  the  said  

clause  did  not  amount  to  an  arbitration  agreement,  on  the  following  

reasoning:

"It would, thereby, be clear that this Court laid down as a rule that the  arbitration agreement must expressly or by implication be spelt out that  there is an agreement to refer any dispute or difference for an arbitration   and the clause in the contract must contain such an agreement. We are in   respectful agreement with the above ratio. It is obvious that for resolution  of any dispute or difference arising between two parties to a contract, the  agreement must provide expressly or by necessary implication, a reference  to an arbitrator named therein or otherwise of any dispute or difference  and in its absence it is difficult to spell out existence of such an agreement  for  reference  to  an  arbitration  to  resolve  the  dispute  or  difference  contracted between the parties.”

(emphasis supplied)

9. In  Bharat  Bhushan  Bansal  vs.  Uttar  Pradesh  Small  Industries   

Corporation Ltd., Kanpur [1999 (2) SCC 166], the following clauses fell for  

consideration of this Court:

"Decision  of  the  Executive  Engineer  of  the  UPSIC  to  be  final  on  certain matters

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 arising out of for relating to  the  designs,  drawings,  specifications,  estimates,  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 abandonment 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

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Except  as  provided in Clause 23 hereof,  the decision of the Managing  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  matter  arising  out  of  this  contract  and  not  specifically mentioned herein".

This  Court  held  that  the  said  clauses  did  not  amount  to  arbitration  

agreement on the following reasoning:

"In the present case, reading Clauses 23 and 24 together, it is quite clear  that in respect of questions arising from or relating to any claim or right,  matter or thing in any way connected with the contract, while the decision  of the Executive Engineer is made final and binding in respect of certain  types  of  claims or  questions,  the  decision of the Managing Director  is  made  final  and  binding  in  respect  of  the  remaining  claims.  Both  the  Executive  Engineer as  well  as  the Managing Director  are  expected to   determine the question or claim on the basis of their own investigations   and  material.  Neither  of  the  clauses  contemplates  a  full-fledged   arbitration covered by the Arbitration Act".

              (emphasis supplied)

This Court while noting the distinction between a 'Preventer of disputes'  

and an 'adjudicator of disputes', observed that the Managing Director under  

clause 24 of the agreement, was more in the category of an expert who will  

decide claims, rights, or matters in any way pertaining to the contract and  

the object of his decision is to avoid disputes and not decide disputes in a  

quasi-judicial manner. This court also referred to an illustration given in  

Hudson on 'Building and Engineering Contracts' (11th Edition, Volume II,  

para 18.067) stating that the following clause was not an arbitration clause  

and that the duties of the Engineer mentioned therein were administrative  

and not judicial:

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"(E)ngineer 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 drawings 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 contract, and the certificate of the engineer for  the time being, given under his hand, shall be binding and conclusive on  both parties".

10. We may next refer to the three decisions of this Court relied on by the  

respondents,  where  on  interpretation,  clauses  though  not  described  as  

‘arbitration  clauses’,  were  held to  be arbitration  clauses,  by applying the  

tests as to what constitute an arbitration agreement. In Rukmanibai Gupta v.   

Collector, Jabalpur - 1980 (4) SCC 566, this Court considered whether the  

following clause amounted to an arbitration agreement :

"15. Whenever any doubt, difference or dispute shall hereafter arise  touching  the  construction  of  these  presents  or  anything  herein  contained or any matter or things connected with the said lands or  the working or non-working thereof or the amount or payment of any  rent  or  royalty  reserved or  made payable  hereunder the matter  in  difference shall  be decided by the lessor  whose decision shall  be  final".

This  Court  held  that  Arbitration  agreement  is  not  required  to  be  in  any  

particular  form. What is required to be ascertained is whether the parties  

have agreed that if disputes arise between them in respect of the subject-

matter of contract such dispute shall  be referred to arbitration; and if the  

answer was in the affirmative, then such an arrangement would spell out an  

arbitration  agreement.  Applying  the  said  test,  this  court  held  that  the  

aforesaid clause is an arbitration agreement, as it (a) made a provision for  

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referring  any  doubt,  difference  or  dispute  to  a  specified  authority  for  

decision and (b) it made the “decision” of such authority final. While we  

respectfully  agree  with  the  principle  stated,  we  have  our  doubts  as  to  

whether  the  clause  considered  would  be  an  arbitration  agreement  if  the  

principles  mentioned  in  the  said  decision  and the  tests  mentioned in  the  

subsequent decision of a larger bench in Damodar Das are applied. Be that  

as it  may. In fact  the larger bench in  Damodar Das clearly held that the  

decision in  Rukmanibai Gupta was decided on the special wording of the  

clause  considered  therein.  “The  ratio  in  Rukmanibai  Gupta  vs.  Collector  

does not assist the respondent. From the language therein this court inferred,  

by implication, existence of a dispute or difference for arbitration.”  

11. In Encon Builders (supra), this court proceeded on the assumption that  

the  following clause  was an  arbitration  agreement,  as  that  issue was not  

disputed:

“In case of any dispute arising out of the agreement the matter shall be  referred  to  the  Managing  Director,  Bihar  State  Mineral  Development  Corporation Limited, Ranchi, whose decision shall be final and binding.”

The  clause  specifically  provided  for  ‘disputes  being  referred  to  the  

Managing Director’ and made the said authority’s decision not only final,  

but also binding on the parties. Therefore it can be said that it answers the  

tests of an arbitration agreement. The issue considered therein was whether  

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the  High  Court  committed  an  error  in  refusing  to  refer  the  dispute  to  

arbitration, even after finding the clause to be an arbitration agreement, by  

presuming bias in view of the fact that the named arbitrator was an employee  

of  one  of  the  parties  to  the  dispute.  This  Court  held  that  disputes  were  

arbitrable in terms of the said clause. Be that as it may. A similar clause was  

also considered in Punjab State Vs. Dina Nath [2007 (5) SCC 28] and held  

to be arbitration agreement.

12. In Mallikarjun v. Gulbarga University – 2004 (1) SCC 372, this court  

held the following clause was a valid arbitration agreement :

"The decision of the Superintending Engineer of the Gulbarga 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 herein before 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, designs, drawings, specifications, estimates,  instructions, orders or those conditions, or otherwise concerning the works  of the execution, 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. Gulbarga University."

This court after referring to the essentials of an arbitration agreement laid  

down  in  Encon  Builders held  that  the  above  clause  is  an  arbitration  

agreement as it answered the test of reference of dispute for decision and  

made the decision of the authority final and binding. This court held :

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“Applying the aforesaid principle to the present case, Clause 30 requires  that the Superintending Engineer, Gulbarga Circle, Gulbarga, to 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 also there was an  agreement  between  the  parties  to  settle  such  difference  by  a  private  tribunal, namely, the Superintending Engineer, 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.”

The clause for consideration in this case

13. Clause  10  of  the  Conditions  of  Contract  which  is  the  subject  of  

controversy reads thus:

“Clause  10: The  Engineer-in-Charge  shall  have  power  to  make  any  alterations in or additions to the original specifications, drawings, designs  and instructions that may appear to him necessary and advisable during  the progress of work, and the contractor shall be bound to carry out the  work in accordance with any instructions which may be given to him in  writing signed by the Engineer-in-Charge and such alterations shall  not  invalidate the contract, and any additional work which the contractor may  be directed to do in the manner above specified as part of the work shall  be carried out by the contractor on the same conditions in all respects on  which  he  agreed  to  do  the  main  work,  and  at  the  same  rates  as  are  specified in the tender for the main work. The time for the completion of  the work shall be extended in the proportion that the additional work bears  to the original contract work and the certificate of the Engineer-in-Charge  shall  be  conclusive  as  to  such  proportion.  And  if  the  additional  work  includes any class of work for which no rate is specified in this contract,  then such class of work shall  be carried out at  the rates entered in the  sanctioned schedule of rates of the locality during the period when the  work is being carried on and if such last mentioned class of work is not  entered in the schedule of rates of the district  then the contractor shall  within seven days of the date of the rate which it is his intention to charge  for such class of work, and if the Engineer-in-Charge does not agree to  this rate he shall be noticed in writing be at liberty to cancel his order to  carry out such class of work and arrange to carry it out in such manner as  he may consider advisable.

No  deviations  from  the  specifications  stipulated  in  the  contract  nor  additional items of work shall ordinarily be carried out by the contractor,  

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nor shall any altered, additional or substituted work be carried out by him,  unless the rates of the substituted, altered or additional items have been  approved and fixed in writing by the Engineer-in-Charge, the contractor  shall be bound to submit his claim for any additional work done during  any month on or before the 15th days of the following month accompanied  by  a   copy  of  the  order  in  writing  of  the  Engineer-in-Charge  for  the  additional  work  and  that  the  contractor  shall  not  be  entitled  of  any  payment in respect of such additional work if he fails to submit his claim  within the aforesaid period.  

Provided always that if the contractor shall commence work or incur any  expenditure in respect thereof before the rates shall have been determined  as lastly hereinbefore mentioned, in such case he 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 determination of the rates as aforesaid according to  such rate or rates as shall be fixed by the Engineer-in-Charge. In the event   of a dispute, the decision of the Superintending Engineer of the Circle will   be final.”

(emphasis supplied)

14. A reading of the said clause shows that it is a clause relating to power  

of the Engineer-in-Chief to make additions and alterations in the drawings  

and specifications and execution of non-tendered additional items of work  

(that  is  items  of  work  which  are  not  found  in  the  bill  of  quantities  or  

schedule of work). It provides for the following:  

a) that the Engineer-in-charge could make additions and alterations in  

the drawings/specifications; and that such alterations and additions  

will  not invalidate the contract,  but will entitle the contractor to  

extension of time for completion of work proportionately;  

b) that if the additional work be executed is an item for which the rate  

is not specified in the contract (or in the schedule of rates for the  

district), the contractor shall specify the rate and the Engineer-in-

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charge may either accept the rate or cancel the order to execute that  

particular work;  

c) that  if  the contractor  commences the work with reference to an  

item for  which  there  is  no  rate  in  the  contract  and there  is  no  

agreement in regard to the rate for execution of such work, he shall  

be paid at the rates fixed by the Engineer-in -Charge; and  

d) that  if  the contractor  disputes the rate  fixed by the Engineer-in-

Charge, the decision of the Superintending Engineer in regard to  

rate for such non-scheduled item shall be final.  

15. We may next  examine  whether  the  last  sentence  of  the  proviso to  

clause 10 could be considered to be an arbitration agreement. It  does not  

refer to arbitration as the mode of settlement of disputes. It does not provide  

for reference of disputes between the parties to arbitration. It does not make  

the decision of the Superintending Engineer binding on either party. It does  

not  provide  or  refer  to  any  procedure  which  would  show  that  the  

Superintending  Engineer  is  to  act  judicially  after  considering  the  

submissions of both parties.  It does not disclose any intention to make the  

Superintending Engineer an arbitrator in respect of disputes that may arise  

between the Engineer-in-Charge and the contractor.  It  does not  make the  

decision of the Superintending Engineer final on any dispute, other than the  

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claim for increase in rates for non-tendered items. It operates in a limited  

sphere, that is, where in regard to a non-tendered additional work executed  

by  the  contractor,  if  the  contractor  is  not  satisfied  with  the  unilateral  

determination of  the  rate  therefor  by  the  Engineer-in-Charge  the  rate  for  

such work will be finally determined by the Superintending Engineer. It is a  

provision made with the intention to avoid future disputes regarding rates for  

non-tendered item. It is not a provision for reference of future disputes or  

settlement of future disputes. The decision of superintending Engineer is not  

a  judicial  determination,  but  decision  of  one  party  which  is  open  to  

challenge by the other party in a court of law. The said clause can by no  

stretch of imagination be considered to be an arbitration agreement. The said  

clause is not, and was never intended to be, a provision relating to settlement  

of disputes.

16. That clause 10 was never intended to be an arbitration agreement is  

evident from the contract itself. It is relevant to note the Standard Conditions  

of  Contract  of  the state government,  as  originally  formulated consisted a  

provision (Clause 23) relating to settlement of disputes by arbitration, which  

is extracted below :

“Except  where  otherwise  provided  in  the  contract,  all  questions  and  disputes relating to the meaning of the specifications, designs, drawings  

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and  instructions  herein  before  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,  designs,  drawing,  specifications,  estimates,  instructions, orders or these conditions, or otherwise concerning the work,  or the execution, or failure to execute the same, whether arising during the  progress of the work or after the completion or abandonment thereof shall   be referred to the sole arbitration of  a Superintending Engineer of the  State Public Works Department unconnected with the work at any stage  nominated  by  the  Chief  Engineer  concerned.  If  there  be  no  such  Superintending Engineer, it should be refereed to the sole arbitration of  Chief Engineer concerned. It will be no objection to any such appointment  that the arbitrator so appointed is a government servant. The award of the  arbitrator  so  appointed  shall  be  final,  conclusive  and  binding  on  all   parties to this Contract.”

The said clause was deleted by the State  Government from the Standard  

Conditions  of  Contract  by  official  Memorandum  dated  24.12.1981.  

Contracts entered by the State Government thereafter did not have the said  

arbitration  clause,  though  the  other  Conditions  of  Contract  remained  the  

same.  The  contracts  in  all  these  cases  are  of  a  period  subsequent  to  

24.12.1981 and the Conditions of Contract forming part of these contracts  

do  not  contain  the  arbitration  clause.  When  the  State  Government  has  

consciously and intentionally deleted the provision for arbitration from its  

contracts, it will be a travesty of justice to read another clause in the contract  

providing  for  execution  of  non-tendered  items  and  the  method  of  

determination of the rates therefor, as a provision for arbitration.  

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17. In fact, in Executive Engineer RCO vs. Suresh Chandra Panda [1999  

(9) SCC 92], this Court considered the effect of the said clause relating to  

execution of  non-tendered items, vis-à-vis clause 23 in a pre-1981 contract.  

This court held that the said clause (then numbered as clause 11, numbered  

as clause 10 in subsequent contracts) was a provision which excluded the  

issue relating to finality of rates,  from the scope of arbitration agreement  

contained in clause 23 on the following reasoning :   

“Under Clause 11 of the contract, there is an elaborate provision dealing  with  the  power  of  the  Engineer-in  Charge  to  make  any  alterations  or  additions to the original specifications, drawings, designs and instructions.  It,  inter alia, provides that if for such alterations or additions no rate is  specified in the contract, then the rates which are entered in the sanctioned  schedule of rates of the locality during the period when the work is being  carried out, would be paid. However, if this class of work, not provided  for in the sanctioned schedule of rates then the contractor has the right, in  the manner specified in that clause, to inform the Engineer-in-Charge of  the rate at which he intends to carry out that work. If the Engineer-in- Charge does not agree to this rate he is given the liberty to cancel his order  and arrange to carry out such class of work in such manner as he may  consider  advisable.  The  clause  further  provides  that  if  the  contractor  commences such additional work or incurs any expenditure in respect of it  before the rate are determined as specified in that clause, then the rate or  rates shall be as fixed by the Engineer-in-Charge. In the event of a dispute,  the decision of the Superintendent  Engineer of the circle will  be final.  Under Clause 23, except as otherwise provided in the contract, all disputes  are  arbitrable  as  set  out  in  that  clause.  The finality  of  rates,  therefore,  under Clause 11 is a provision to the contrary in the contract  which is  excluded from Clause 23.”

Thus, even when the Standard Conditions of Contract contained a provision  

for arbitration (vide clause 23), clause 10 was considered to be a provision  

dealing  with  a  matter  excepted  from arbitration.  Be  that  as  it  may.  The  

proviso to clause 10, which provides that the decision of the Superintending  

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Engineer is  ‘final’,  merely  discloses an intention to exclude the rates for  

extra  items  decided  by  the  Superintending  Engineer  from  the  scope  of  

arbitration, as an excepted matter, when there was an arbitration agreement  

(clause  23)  in  the  contract.  When the arbitration  agreement  was  deleted,  

provision  dealing  with  non-tendered  items  can  not  be  described  as  an  

arbitration agreement. Be that as it may.

18. We therefore  allow these appeals,  set  aside the orders  of the High  

Court appointing the arbitrator and dismiss the applications for appointment  

of arbitrator.

…………………………….J. (R V Raveendran)

New Delhi; ……………………………J. July 4, 2011. (A K Patnaik)    

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