A clause giving supervisory power to third party with respect to disputes not amounts to Arbitration Agreement

Innovators Facade Systems Ltd Vs Larsen & Toubro Limited (Madras High Court)

Conclusion: Where the parties have agreed to give only supervisory powers to a third party with respect to the disputes arising between them, and a clause which does not disclose the intention of the parties to give any adjudicatory powers to the third party, does not qualify as an ‘arbitration agreement’, as defined under Section 2(1)(b) read with Section 7 of Arbitration and Conciliation Act, 1996.

Held: Assessee-company contended that clause 38 was an arbitration agreement between the parties, whereas the respondent took a bipolar opposite stand and contended that the clause 38 did not constitute a arbitration agreement within the meaning of A and C Act. Therefore, when a arbitration agreement between two contracting parties was in the form of a clause in a contract, the question as to whether the given clause would qualify as an arbitration agreement could some times become a conundrum of sorts. It was held that  a Arbitral Tribunal is a creature of contract and it is not a creature of statute. In this regard, the intention of parties gains immense significance. It is virtually sacrosanct and non-negotiable. It follows that neither can a party be compelled to enter into a contract nor can the court rewrite a contract. Court could not bring into existence an arbitration agreement which was otherwise not in existence between parties much less in a petition under section 11 of A and C Act where the legal / statutory perimeter within which it should perambulate and scope was very limited as already alluded to elsewhere supra in this order. As this Court had come to the conclusion that the clause in the primary contract on which captioned Arb.OP was predicated did not qualify as an arbitration agreement, it follows as a sequitur that the legal drill of examination of existence of arbitration agreement was not answered in the affirmative. This Court came to a conclusion that an arbitration agreement did not exist in the case on hand.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

This order will now dispose of the captioned matter. This order has to be read in conjunction with and in continuation of proceedings made by this Court in the first listing of captioned matter on 21.06.2022. A scanned reproduction of this 21.06.2022 proceedings is as follows:

Captioned ‘Arbitration Original Petition’ [hereinafter ‘Arb OP’ for the sake of convenience and clarity] has been presented in this Court on 20.04.2022 with a prayer for appointment of a sole Arbitrator under Section 11 of ‘The Arbitration and Conciliation Act, 1996 (Act 26 of 1996)’ [hereinafter ‘A and C Act’ for the sake of brevity, convenience and clarity].

2. Mr.AR M.Arunachalam, learned counsel for petitioner who is before this Court submits that the captioned Arb OP is predicated on clause 38 of a ‘Letter of Intent’ [‘LOP] dated 20.04.2012 inter alia for supply, installation, testing and handing over of Skylight works for a Mall. This LOI serves as primary contract between the parties is learned counsel’s say. Clause 38 of primary contract serves as an arbitration agreement between the parties being Arbitration Agreement within the meaning of Section 2(1)(b) read with Section 7 of A and C Act is learned counsel’s further say.

3. Aforementioned clause 38 of primary contract reads as follows:

’38. Arbitration

Any dispute not settled as per clause No.37 and the difference of opinion still persisting, then the decision of the Project Manager L & T Ltd., will be final and binding on both the parties.’

4. Learned counsel submits that clause 38 provides for arbitration by an employee of the respondent-Company and therefore, the petitioner caused a notice dated 03.12.2021 seeking consent for appointment of an independent sole Arbitrator as according to the petitioner monies due for work done i.e., outstanding dues is the arbitrable dispute that has arisen between the parties qua primary contract. The respondent has sent a reply to the trigger notice being reply dated 03.12.2021. Adverting to the reply, learned counsel submits that this is a terse reply disputing the outstanding dues but there is no mention about the petitioner’s request for appointment of an independent sole Arbitrator. This has necessitated the presentation of the captioned Arb OP is learned counsel’s further say. Learned counsel submits that the trigger notice halo) be issued as according to the petitioner arbitration clause is inter alia hit by S.No.12 of THE SEVENTH SCHEDULE of A and C Act.

5. Prima facie case for issue of notice has been made out.

6. Issue notice to respondent.

7. Ms. Preeti Mohan, learned counsel with address for service at No.5, IInd Floor, R.K.Salai, Mylapore, Chennai-600 004 who is present in Court submits that she has instructions to accept notice on behalf of lone respondent and learned counsel submits that Vakalatnama will be duly filed along with her co-counsel by Friday i.e., by 24.06.2022.

8. Registry to show the name of counsel for respondent in the next listing, if Vakalatnama is in order.

9. Learned counsel for respondent to get instructions regarding the existence of Arbitration Agreement and plea for appointment of an independent sole Arbitrator by next listing.

10. List on 28.06.2022.

2. The aforementioned proceedings made in the first listing will now form an integral part and parcel of this order. This also means that short forms and abbreviations used in the earlier proceedings will continue to be used in the instant order also for the sake of convenience and clarity. Thereafter, there were two listings of captioned matter on 28.06.2022 and 12.07.2022 but proceedings made in these two listings are not imperative for appreciating this order as these proceedings only capture the trajectory the matter has taken before this Court. Thereafter, there were two more listings on 02.08.2022 and 16.08.2022. Proceedings made in these two listings are necessary for better appreciation of this order, therefore the same are reproduced infra and these two proceedings read as follows :

Proceedings dated 02.08.2022 :

‘Read this in conjunction with and in continuation of earlier proceedings made in the previous listings on 21.06.2022, 28.06.2022 and 12.07.2022.

2. The aforementioned three proceedings capture the crux and gravamen of the captioned Arb.OP as well as the trajectory the matter has taken thus far.

3. Today, Ms.Arati Agarwal, learned counsel representing Mr.AR.M.Arunachalam, counsel on record for sole petitioner-Company and Ms.Preeti Mohan along with Ms.R.S.Pornima for the lone respondent are before this Court.

4. Learned counsel for petitioner is ready to advance arguments but learned counsel for respondent requests for a short accommodation citing some difficulty at her end.

5. Be that as it may, notwithstanding the request for adjournment, a broad thumbnail sketch of the bone of contention as it emerges in a short hearing is captured infra.

6. Learned counsel for respondent submits that she is resisting the prayer in the captioned Arb.OP on three grounds and they (broadly stated) are as follows:

a) Clauses 37 and 38 of the ‘Letter of Intent’ [LOI] dated 20.04.2012 on which captioned Arb.OP is predicated do not qualify as an ‘arbitration agreement’ within the meaning of Section 2(1)(b) read with Section 7 of A and C Act;

b) The lis is ex facie barred by limitation;

c) There have been subsequent payments and this is a case where accord and satisfaction aspect may have to be gone into.

7. Learned counsel for petitioner points out that the first argument of learned counsel for respondent is predicated on K.K.Modi principle i.e., ratio laid down by Hon’ble Supreme Court in K.K.Modi V. K.N.Modi reported in AIR 1998 SC 1297. Learned counsel for respondent submits that Clauses 37 and 38 of LOI dated 20.04.2012 will qualify as an arbitration agreement in the light of principle laid down by Hon’ble Supreme Court in Mallikarjun Vs. Gulbarga University reported in 2003 [1] TMI 623. This Mallikarjun case law refers to Bihar State Mineral Development Corporation and another Vs.Encon Builders (I) (P) Ltd., reported in AIR 2003 SC 3688. Though there is no reference to K.K.Modi principle in Mallikarjun case law, there is reference to K.K.Modi principle in Encon case law.

8. As regards ex facie barred by limitation plea, accord and satisfaction, learned counsel for petitioner points out that there are no pleadings and such material being placed before a Section 11 Court would tantamount to arbitration and it would be ideal to best leave it to the AT.

9. The above submissions and counter submissions have been captured only for ease of recap in the ensuing listing/s and it is made clear that this Court has not expressed any view in these proceedings at this juncture.

10. Owing to the request for adjournment made by learned counsel for respondent, this matter will stand over by a fortnight. List on 16.08.2022.’

Proceedings dated 16.08.2022 :

‘Matter mentioned at quarter past two.

2. Ms. Arati Agarwal, learned counsel representing the counsel on record for petitioner and Ms.Preeti Mohan, learned counsel on either side are before this Court.

3. Adverting to earlier proceedings dated 02.08.2022, learned counsel for respondent submits that a Memo dated 12.08.2022 has since been filed. It is also submitted that this Memo means that only the question as to whether the clause in primary contract will qualify as an arbitration agreement needs to be argued. These proceedings are made for narrowing down the issue/bone of contention and no view is expressed at this stage.

4. Re-notified.

5. List on 25.08.2022.’

3 Today in the hearing, Ms.Arati Agarwal, learned counsel representing / along with Mr.AR.M.Arunachalam, counsel on record for sole petitioner company and Ms.Preeti Mohan along with Ms.R.S.Pornima, counsel on record for lone respondent company are before this Court.

4 As would be evident from the earlier proceedings, the case on hand is a legal drill under section 11 of A and C Act. There are four facets to a legal drill under section 11. One facet is statutory and the other three facets are by way of judicial pronouncements.

5 The statutory facet is ingrained in Sub section (6-A) of Section 11 of A and C Act which reads as follows:

‘(6-A) The Supreme Court or, as the case may be, the High Court,  while considering any application under sub-section (4) or sub­section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the  existence of an arbitration agreement.’

(Underlining made by this Court for supplying emphasis and for ease of reference)

6 A legal drill under section 11 of A and C Act should perambulate within the statutory perimeter sketched by aforementioned sub-section (6-A). Aforementioned sub-section (6-A) came up for consideration before Hon’ble Supreme Court in oft quoted Mayavati Trading case law (Mayavati Trading Private Ltd. v. Pradyuat Deb Burman reported in (2019) 8 SCC 714). Relevant paragraph in Mayavati Trading case law is paragraph 10 and the same reads as follows:

‘10. This being the position, it is clear that the law prior to the 2015 Amendment that has been laid down by this Court, which would have included going into whether accord and satisfaction has taken place, has now been legislatively overruled. This being the position, it is difficult to agree with the reasoning contained in the aforesaid judgments, as Section 11(6-A) is confined to the examination of the existence of an arbitration agreement and is to  be understood in the narrow sense as has been laid down in the judgment in Duro Felguera SA.’

(underlining made by this Court to supply emphasis and highlight)

7 Paragraph 10 of Mayavati Trading case law takes us to Duro
Felguera case law, i.e., Duro Felguera, S.A. Vs. Gangavaram Port Limited reported in (2017) 9 SCC 729. Relevant paragraphs in Duro Felguera case law are paragraphs 47 and 59 and the same read as follows:

‘47. What is the effect of the change introduced by the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter referred to as “the 2015 Amendment”) with particular reference to Section 11(6) and the newly added Section 11(6-A) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the 1996 Act”) is the crucial question arising for consideration in this case.

…….

59. The scope of the power under Section 11(6) of the 1996 Act was considerably wide in view of the decisions in SBP and Co. and Boghara Polyfab. This position continued till the amendment brought about in 2015. After the amendment, all that the Courts need to see is whether an arbitration agreement exists – nothing more, nothing less. The legislative policy and purpose is essentially to minimize the Courts intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11(6-A) ought to be respected.’

8 The other three facets of a section 11 legal drill are N.N.Global principle, Nortel principle and NCC principle. N.N.Global principle is ratio vide N.N. Global Mercantile Private Limited Vs. Indo Unique Flame Limited and others reported in 2021 SCC Online SC 13 : (2021) 4 SCC 379 and it pertains to cases where the arbitration agreement is in the form of a clause in a contract which is insufficiently stamped, unstamped or unregistered when it is compulsorily registrable. Nortel principle is ratio vide Bharat Sanchar Nigam Limited and another Vs. Nortel Networks India Private Limited reported in (2021) 5 SCC 738 and it turns on a plea of lis being ex facie barred by limitation. NCC principle is vide Indian Oil Corporation Limited Vs. NCC Limited reported in 2022 SCC OnLine SC 896 which provides the possibility of going into issues such as ‘accord and as opposed to debatable, disputable and statable cases.

9  Adverting to aforementioned 02.08.2022 proceedings which narrows down the bone of contention, learned counsel for respondent Ms.Preeti Mohan submitted that the bone of contention is further narrowed down as it is not necessary to go into the ‘accord and satisfaction’ issue, i.e., subsequent payments aspect of the matter which was predicated on NCC principle. As would be evident from 16.8.2022 proceedings, vide a memo dated 12.08.2022, the plea of lis being ex facie barred by limitation (Nortel principle) has also been given up {not pressed in captioned section 11 petition} by the respondent. To be noted, N.N.Global principle does not come into play in the case on hand as it is nobody’s case that arbitration clause is contained in a contract that is insufficiently stamped / unstamped or not registered though compulsorily registrable. This means that the lone bone of contention now is regarding existence of arbitration agreement and this court has to now embark upon the exercise qua examination of existence of arbitration agreement. This Court is conscious of the obtaining legal position that sub-section (6-A) does not talk about ‘valid’ arbitration agreement unlike whether a ‘valid’ arbitration agreement exists.

10 Be that as it may, aforementioned clause 38 of the primary contract which serves as arbitration clause / arbitration agreement between the parties may have to be set out along with clause 37 of the primary contract. Clauses 37 and 38 of primary contract read as follows:

‘37.SETTLEMENT OF DISPUTES

All disputes or difference of opinions, on account of interpretation of clauses, technical specifications etc., shall be resolved through direct and mutual discussions at site level.

38.ARBITRATION

Any dispute not settled as per clause No.37 and the difference of opinion still persisting, then the decision of the Project Manager, L&T LTD. will be final and binding on both the parties.’

11 Learned counsel for petitioner contends that aforementioned clause 38 is an arbitration agreement between the parties, whereas learned counsel for respondent takes a bipolar opposite stand and contends that aforementioned clauses do not constitute a arbitration agreement within the meaning of A and C Act. This is the lone bone of contention if one may say Interestingly and intriguingly though the term ‘arbitration agreement’ has been defined vide section 2(1)(b) {read with section 7} in A and C Act, a careful perusal of these two provisions bring to light that the determinants or ingredients necessary in a clause or a agreement to qualify as arbitration agreement have not been set out in these provisions. These provisions talk more about the manner and mode in which an arbitration agreement can be brought into existence. Therefore, when a arbitration agreement between two contracting parties is in the form of a clause in a contract, the question as to whether the given clause would qualify as an arbitration agreement can some times become a conundrum of sorts. This has become one such case owing to the diametrically opposite stands the contracting parties have taken.

12 Learned counsel on both sides pressed into service several case laws to support their stated positions. After hearing out learned counsel on both sides, this Court notices that there are at least 9 case laws of Hon’ble Supreme Court starting from Tipper Chand in 1980 to Mahanadi Coalfields rendered by Hon’ble Supreme Court in July 2022. Of these nine case laws, three case laws are prior to 22.08.1996 when the present A and C Act kicked in. However, one lead case law is K.K.Modi, which was rendered on 04.02.1998, it arose under 1940 Act but it has been reiterated by Hon’ble Supreme Court in a long line of authorities under 1996 A and C Act (obtaining now) including recently rendered Mahanadi Coalfields judgment dated 25.07.2022. Therefore, conscious of the caution required in applying the case laws rendered under 1940 Act to matters arising out of A and C Act (1996 Act), this court deems it appropriate to apply K.K.Modi principle. This court also deems it appropriate to make a survey of these case laws and give it in the form of a tabulation and the same is as follows:

In addition to aforementioned Hon’ble Supreme Court judgments, one judgment rendered by a Hon’ble Single Judge of Delhi High Court and one order penned by me were pressed into service and they are as follows:

Aforementioned clause in S.M.R.Nagarajan case which is in Tamil when loosely translated reads as follows:

‘All expenses pertaining to this lay out is to be borne by the party of the first part. Before the layout under this Memorandum of Understanding is completed, if there is any difference of opinion or if there is any breach of the covenants of the Memorandum of Understanding, the same shall be amicably settled jointly by Prem Kumar, son of the party of the first part and any other person of his/her choice to be nominated by the party of the second part.’

13 In the case on hand, learned counsel for petitioner contended that the term ‘reference’ need not necessarily be mentioned in a clause for that clause to qualify as a arbitration clause. Learned counsel also submitted that in Tipper Chand and Damodar Das, it was held that relevant clauses were not arbitration clauses. K.K.Modi case was considered and it was noticed that expressions ‘dispute’ / ‘difference’ are absent. As regards Mahanadi Coalfields, it was contended that the use of the term ‘settlement’ in clause 15.2 is of relevance. It was also contended that clauses 37 and 38 supra have to be read disjunctively.

14 Learned counsel for respondent contended that deployment of the term ‘arbitration’ by itself does not make the clause a arbitration agreement and for this purpose, strong reliance was placed on Foomill case, wherein Avant Garde case {Avant Garde Clean Room & Engg. Solutions Pvt. Ltd. Vs. Ind Swift Limited reported in (2014) 210 DLT 714} rendered by Delhi High Court was relied on and to be noted Avant Garde in turn reiterates Jagdish Chander.

15 This Court having set out all the essential features of this case, after careful consideration of all the dynamics and dimensions of the case on hand comes to a conclusion that the aforementioned clause 38 cannot be held to be a arbitration agreement. The reasons are set out infra. In other words, discussion and dispositive reasoning qua this conclusion is as follows:

(a) Arbitral Tribunal is a creature of contract. Absent consensus, much less consensus ad idem, there is no contract and absent contract, there can be no Arbitral Tribunal. In the case on hand, contracting parties have written clause 38 and have executed the primary contract but the contracting parties have understood the same very differently. As already alluded to supra, the perceptions are bipolar opposites. In any event, this Court is embarking upon the exercise of examining the bipolar opposite perceptions in its endeavour to clinch the matter with clarity and specificity.

(b) A careful perusal of clauses 37 and 38 make it clear that the same cannot be read disjunctively. The reason is clause 38 clearly says that it kicks in only when a dispute does not get settled in accordance with clause 37. To put it differently, clauses 37 and 38 are not just dovetailed but they are inextricably intertwined and interwoven. A careful perusal of clause 37 makes it clear that parties have agreed to give supervisory power to the Project Manager of the respondent at the site level. Therefore, the expression ‘interpretation of clauses’ has to be read in conjunction with the expression ‘technical specification’ thereunder. If it is not possible to have difference of opinion regarding technical specification resolved at site level, it has to be escalated to Project Manager level, i.e., Project Manager of the respondent and the decision of Project Manager shall be binding on both parties. Therefore, the parties did not intend to give any adjudicatory power to Project Manager.

(c) Arbitration is one of the ‘Alternate Dispute Resolution’ (ADR) mechanisms. The essential feature of arbitration (for an illustration, in contra-distinction to mediation which is another ADR mechanism) is the adjudicatory process. There is nothing to demonstrate that contracting parties intended to put in place a adjudicatory mechanism much less by private tribunal. In the case on hand, the dispute pertains to alleged unpaid bills for the work done and therefore, in this view of the matter also, it is clear that it is far from resolution of difference of opinion qua technical specification at site level.

(d) In the considered view of this Court, Mahanadi Coalfields decision rendered by Hon’ble Supreme Court on 25.07.2022 is both elucidative and instructive. In Mahanadi Coalfields, Hon’ble Supreme Court has made it clear that a clause in the contract / agreement (in that case) is a dispute resolution mechanism at the company level rather than a arbitration agreement. Relying on Jagdish Chander, Hon’ble Supreme Court made it clear that the clause does not provide for a reference of disputes between the parties to arbitration and it does not disclose any intention of either party to make the Engineer-in-charge (Project Manager in this case) a Arbitrator in respect of disputes that may arise between parties.

(e) In paragraph 9 of Mahanadi Coalfields, Hon’ble Supreme Court has referred to Jagdish Chander, K.K.Modi, Encon Builders, Damodar Das, reiterated the view in Jagdish Chander that while there is no specific form of an arbitration agreement, the words used should disclose a determination and obligation to go for arbitration and not merely contemplate the possibility of going for arbitration. It was reiterated that there should be a obligation to refer disputes to arbitration and absent such obligation to refer, there shall be no valid and binding arbitration agreement is the sequitur.

(f) As already alluded to supra, a Arbitral Tribunal is a creature of contract and it is not a creature of statute. In this regard, the intention of parties gains immense significance. It is virtually sacrosanct and non-negotiable. It follows that neither can a party be compelled to enter into a contract nor can the court rewrite a contract. Court cannot bring into existence an arbitration agreement which is otherwise not in existence between parties much less in a petition under section 11 of A and C Act where the legal / statutory perimeter within which it should perambulate and scope is very limited as already alluded to elsewhere supra in this order. As already delineated supra, Hon’ble Supreme Court has repeatedly reiterated K.K.Modi case rendered under 1940 Act (including Mahanadi Coalfields) and qua obtaining 1996 A and C Act and therefore, it is safely relied on. However, this court deems it appropriate to make it clear that there is no equivalent of section 7 under the old Act but the principle governing what is arbitration agreement is governed by section 2(a) of old Act. It has now been amplified vide section 2(1)(b) read with section 7. To be noted, section 2(a) of 1940 Act reads as follows:

‘(a) “arbitration agreement” means a written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not;’

(g) Another reason for this court to safely rely on K.K.Modi principle is Jagdish Chander has now been reiterated in Mahanadi Coalfields.

(h) Elements of an arbitration agreement are that it should be in writing; parties should have agreed to refer disputes (present or future) to the decision of private tribunal; private tribunal should be empowered to adjudicate upon disputes in an impartial manner and parties should have agreed that the decision of the private tribunal is binding. Where there is specific and direct expression of such intention, it is not necessary to set out the attributes in arbitration agreement to make it one but where the clause relating to settlement of disputes is couched in a language which excludes these attributes, it clearly detracts from an arbitration agreement.

(i) Paragraph 17 of K.Modi case law brings to light six determinants which have been adumbrated therein. Paragraph 17 of K.K.Modi reads as follows:

’17. Among the attributes which must be present for an agreement to be considered as an arbitration agreement are: (1) The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the

(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 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.’

This Court has no hesitation in coming to the conclusion that none of the aforementioned determinants are present in the case on hand.

(j) This Court also is conscious of Vidya Drolia principle being Vidya Drolia and others v. Durga Trading Corporation reported in (2021) 2 SCC 1 (when in doubt, do refer). It is made clear that in the case on hand,there is no doubt that clauses do not qualify as arbitration clause. Therefore, that does not come into play.

(k) The argument predicated on Broadband and Perkins principles being ratios of Hon’ble Supreme Court in Bharat Broadband Network Limited Vs. United Telecoms Limited reported in (2019) 5 SCC 755 and Perkins Eastman Architects DPC and another Vs. HSCC (India) Ltd., reported in 2019 SCC Online SC 1517 do not arise for consideration as this Court has come to the conclusion that the clause in hand is not an arbitration agreement. Therefore, it is not necessary to dilate on the same and burden this order with those aspects of the matter.

16 As this Court has come to the conclusion that the clause in the primary contract on which captioned Arb.OP is predicated does not qualify as an arbitration agreement, it follows as a sequitur that the legal drill of examination of existence of arbitration agreement is not answered in the affirmative. To put it differently, this Court comes to a conclusion that an arbitration agreement does not exist in the case on hand and therefore, the respondent.

17 Before writing the concluding part of this order, this Court deems it appropriate to make it clear that all remedies that may be available to the petitioner in law to seek redressal qua disputes that have been projected in the case on hand (said to be arising from primary contract) are preserved and it is well open to the petitioner to pursue such remedy in public fora and / or any other fora, if so advised and if so desired.

18 Captioned Arb.OP fails and the same is dismissed. There shall be no order as to costs.