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Case Summary — S. Acharya, J. (Civil Revisions concerning arbitration under F-2 Agreements)

Factual and Procedural Background

Eight civil revision petitions, taken up together because the parties and the issues are substantially the same, arise from disputes between the State of Orissa (through the Executive Engineer, National High Way, Cuttack) and the contractor Gokul Chandra Kanungo.

The contractor was entrusted with different items of work in 1963–64 under F-2 Agreements. On the contractor's motion, the Chief Engineer appointed an arbitrator in 1965 under clause 23 of the agreements. Arbitration proceedings proceeded under different arbitrators; in 1977 the arbitrator appointed earlier was removed by the Court and Sri B.R. Rao (retired District Judge) was appointed as arbitrator. Arbitration proceedings are pending before him.

Before the arbitrator took up hearing of these eight cases, an application under section 33 of the Arbitration Act was filed on behalf of the State seeking a declaration that the F-2 Agreements are illegal, invalid and inoperative, that the arbitrator has no jurisdiction to decide the disputes and that clause 23 is not applicable to the claims preferred by the contractor.

On hearing the section 33 petitions, the Subordinate Judge, Bhubaneswar (the court below), held that disputes had arisen which were within the scope of arbitration, that issues as to whether claims fall under clause 11 or clause 23 were matters for the arbitrator to decide, and that the question of limitation was a mixed question of law and fact to be left to the arbitrator. The section 33 petitions were dismissed. These civil revisions challenge that outcome.

Legal Issues Presented

  1. Whether disputes relating to extra-contractual or additional items of work (purportedly governed by clause 11) fall within the jurisdiction of the arbitrator under the wide arbitration provision in clause 23 of the F-2 Agreement.
  2. Whether a reference to arbitration in these matters was validly made (including whether there was a joint reference or valid appointment of arbitrator under clause 23 and section 12 of the Arbitration Act).
  3. Whether the claims before the arbitrator are barred by limitation, and if so, whether that question should be decided at this stage or by the arbitrator.

Arguments of the Parties

State (Petitioner) — Primary Arguments

  • The contractor never made any claim before the relevant Executive Engineer, nor did the Executive Engineer refuse to investigate the claim; hence, there was no dispute capable of reference under the agreement.
  • The contractor admitted in his claim statement before the arbitrator that the claims are extra-contractual items; clause 23 excludes such disputes because their mode of settlement is otherwise provided for in clause 11, and therefore the arbitrator lacks jurisdiction over these claims.
  • There was no valid reference to arbitration because the parties did not jointly list their differences and refer them in an agreement of reference.
  • The reference to arbitration was made after the period of limitation, so the claims are time-barred and cannot be considered in arbitration.
  • Specifically urged that clause 11 makes the decision of the Superintending Engineer final for extra-contractual items and that the non-obstante language in clause 23 should not be construed to give jurisdiction to the arbitrator over such matters.

The opinion does not contain a detailed, separate account of the contractor's counter-arguments beyond factual particulars (e.g., that the contractor participated in arbitration proceedings, had claims before arbitrators, and filed statements of claim before the current arbitrator).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Heymen's case. 1942 A.C 356. That on a reference of disputes arising out of a contract the arbitrator may decide disputes regarding the construction of the contract itself. The court relied on this principle to support the proposition that the arbitrator can determine whether claims fall under clause 11 or clause 23 by construing the contract.
Willesford v. Watson. 19738 Ch. A.C 473. That a dispute as to the interpretation of the arbitration clause is one within the purview of the arbitrator. Used to support the conclusion that interpretation questions about clauses 11 and 23 are matters for the arbitrator.
A.G. Parija v. Secretary-in-charge of the General P.W.D. of Union of India. 36 1970 C.L.T 1089. Division Bench accepted the view that matters of construction and arbitration-clause interpretation fall to arbitrators. Cited as a binding/local authority reinforcing that similar contentions raised by the State should be left for arbitration.
Sushil Kashinath Dhonde v. Harilal Govindji Bhogani. 1969 3 SCC 223. The phrase "arising out of a contract" has the widest connotation and covers any matter arising out of the contract. Applied to interpret clause 23 broadly and to hold that many disputes concerning additional work may fall within arbitration.
Union of India v. Salrceen Timber and Construction Co. (India). A.I.R 1969 S.C 488491. Test: whether recourse to the contract is necessary for deciding the claim — if so, the matter is within the arbitration clause; arbitrators have jurisdiction. The court used this test to determine that the arbitrator could properly be called upon to decide disputes concerning additional work where resolution requires recourse to contract terms.
Wazir Chand Mahajan v. The Union of India. A.I.R 1967 S.C 990. After an agreement is filed in Court and the matter is referred to an arbitrator, it is for the arbitrator to decide, applying the Limitation Act, whether a claim is time-barred. Relied upon to hold that the question of limitation is for the arbitrator to decide and should not be adjudicated at this stage.
Messrs Hindusthan Steel Ltd. v. P. Bonor alias Pravash Chandra Banerjee. I.L.R 1973 Cutt. 1218. Local Division Bench view repelling a similar contention by the State about arbitrability of additional-work disputes. Cited as further supporting authority from this Court that the State's contentions should not be accepted.
Single Judge decision in C.R. No. 159/76 (disposed 15th February, 1977). Held to be to the same effect as the other Division Bench decisions repelling the State's contention. Used to show consistency in local jurisprudence supporting arbitrator jurisdiction in similar circumstances.

Court's Reasoning and Analysis

The court undertook a textual and purposive analysis of clauses 11 and 23 of the F-2 agreement and the factual matrix of the arbitration proceedings. Clause 11 addresses additional or extra-contractual items (additional work), provides certain procedures and rates for such work, and contains a sentence stating that "In the event of a dispute, the decision of the Superintending Engineer of the circle will be final." Clause 23 is a broad arbitration clause covering "all questions and disputes" arising out of or relating to the contract.

The court's step-by-step reasoning:

  • Clause 11, although providing that the Superintending Engineer's decision will be final in the event of a dispute under that clause, cannot be read so broadly as to preclude all forms of judicial or arbitral scrutiny — especially where the S.E.'s decision may disregard contractual rates, principles, or matters beyond the clause's intended scope.
  • The question whether a particular claim falls within clause 11 or clause 23 is fundamentally a question of contract interpretation and fact. Determination of that question will involve examining the agreement and factual foundations of the claim; such tasks fall within the competence of an arbitrator as established by precedent.
  • Given the wide terms of clause 23 ("all questions and disputes ... in any way arising out of or relating to the contract"), a narrow reading that excludes arbitrability of additional-work disputes merely because clause 11 contains a finality sentence would be inconsistent with the parties' clear and broad intention to refer disputes to arbitration.
  • The court relied on authority (Heymen's case; Willesford v. Watson; A.G. Parija; Sushil Kashinath Dhonde and Union of India v. Salrceen Timber) to conclude that arbitrators may decide questions of construction of the contract and interpretation of arbitration clauses, and that the phrase "arising out of a contract" should be given a wide meaning.
  • On the contention that there was no valid reference to arbitration or that reference was barred by limitation, the court held: (a) the Chief Engineer had previously appointed arbitrators under clause 23 and the court had appointed an arbitrator under section 12 of the Arbitration Act after revoking the prior appointment; the opposite party had filed statements of claim before the arbitrator and the petitioner was aware of them — supporting validity of reference; and (b) the question of limitation is a mixed question of law and fact and, consistent with Wazir Chand Mahajan, should be decided by the arbitrator applying the Limitation Act, not at this interlocutory stage.
  • The court observed there was nothing specific in clause 11 (or elsewhere in the agreement) that plainly ousted the arbitrator's jurisdiction over such extra-contractual items; the finality provision in clause 11 was "too narrow" to cut down the wide arbitration clause 23.

Based on the contractual construction, factual posture and cited authorities, the court found no merit in the State's contentions and upheld the lower court's decision to dismiss the section 33 petitions.

Holding and Implications

Holding: The civil revisions are DISMISSED. The Court found that the arbitrator has jurisdiction to decide the disputes between the parties, including questions whether particular claims fall under clause 11 or clause 23, and that the question of limitation is to be decided by the arbitrator.

Direct consequences for the parties:

  • The civil revisions brought by the State were dismissed with costs.
  • The petitioner (State) is to pay costs and a hearing fee of Rs. 50/- in each Civil Revision.
  • The arbitrator appointed in these cases is directed to proceed expeditiously to dispose of the pending arbitration proceedings in accordance with law within a very short time.

Broader implications: The court applied existing precedents to affirm that issues of contractual construction and arbitrability (including limitation questions) are generally for the arbitrator to decide. The opinion does not purport to create a new departure from settled law; instead it relies on and follows established authorities.

    State Of Orissa v. Sri G.C Kanungo Opp. Party.

    S. Acharya, J.:— The above 8 cases were taken up together as parties are the same and the points for consideration and decision in all these eases ate similar in nature.

    2. The contractor Gokul Chandra Kanungo, the opposite party in all these cases, was entrusted with different items of work by the Executive Engineer, National High Way, Cuttack in the year 1963-64 by the Orissa Public Works Department under F-2 Agreements for the said purpose. On the motion of the contractor the Chief Engineer in the year 1965 appointed an arbitrator as per clause 23 of the agreements to settle some disputes relating to claims in respect of these 8 and six other items of work. The arbitration continued in the hands of different arbitrators, and at the instance of the contractor the arbitrator appointed by the Chief Engineer was removed by the Court in 1977 and Sri B.R Rao, retired District Judge, was appointed as arbitrator to decide those disputes between the parties in all these cases, and the arbitration proceedings are now pending before him. Just before the filing of the section 33 petition by the State of Orissa, both the parties took part in the arbitration proceedings before the several arbitrators in all the cases, and in fact in the six other cases awards were filed by the arbitrator and those cases have already been closed. Before the arbitrator took up hearing of these 8 cases, an application under section 33 of the Arbitration Act was filed in these cases by the Executive Engineer, National High Way, Cuttack, on behalf of the State of Orissa, for declaration that the F-2 Agreements executed between the parties are illegal, invalid, and inoperative; the arbitrator has no jurisdiction to decide the disputes referred to him; clause 23 of the agreement is not applicable to the claims preferred by claimant before arbitrator.

    3. During the hearing of the miscellaneous cases arising out of the said section 33 petitions before the Subordinate Judge, Bhubaneswar, it was urged on behalf of the State, the petitioner in these cases, that (i) the contractor had never made any claim before the relevant Executive Engineer not the latter ever refused to investigate into the claim and hence there was no dispute for reference under the agreement; (ii) that the contractor had admitted in his claim statement filed before the arbitrator that the claims are extra contractual items, and the arbitration clause of the contract excluded from its purview such disputes, the mode of settlement of which was otherwise provided for in clause 11 of the contract, and so the alleged disputes did not come within the scope of clause 23, and hence the arbitrator had no jurisdiction to entertain such disputes; (iii) there was no reference of any dispute to arbitration by the parties as the parties did not jointly list their difference and referred the same in the agreement of reference and so there was no valid reference; (iv) the reference to arbitration was made after the period of limitation and so the claims were clearly barred by time and could not be considered in the arbitration proceedings.

    4. The Court below has arrived at the finding that disputes have arisen between the parties relating to the conditions of the contract, and the same come within the jurisdiction of the arbitration proceeding; the dispute arising between the parties as to whether the claims of the contractor were covered by clause 11 or not can be decided by the arbitrator by interpretation and closer scrutiny of the agreement and the arbitration clause contained therein disputes regarding the interpretation of the arbitration clause in the contract are within the purview of the arbitrator, and the question as to whether the stand taken by the petitioner in this respect was justified or not should be left for the ultimate decision of the arbitrator; reference for arbitration of disputes can be made by either of the parties jointly or separately after giving notice to the other the Chief Engineer as per clause 23 in the agreement had previously appointed arbitrators to settle these disputes, and now the Court has appointed the arbitrator for the self same purpose under section 12 of the Arbitration Act after revoking the authority of the previous arbitrator; the opposite party has filed statements of claim before the said arbitrator and the petitioner had notice of the same. On the above finding, the Court below holds that there has been a valid reference of the disputes to the arbitrator. With regard to the question of limitation of the Court holds that this question is a mixed question of law and fact, and so it should not be gone into at this stage and better it should be left to the arbitrator for adjudication. On the above findings the section 33 petitions have been dismissed.

    5. The learned counsel appearing for the State in all these cases has urged that the claims relating to the extra contractual items come under clause 11 of the F-2 agreement, and so the decision of the Superintending Engineer of the Circle in these matters is final as mentioned in that clause, and hence the arbitrator has no jurisdiction to decide the said claims under clause 23 of the agreement in view of the non-obstante clause “Except where otherwise provided” in that clause.

    6. Clause 11 and 23 are extracted below :—

    “Clause 11 :—

    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 to be necessary or advisable during the progress of the 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 alteration 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 his receipt of the order to carry out the work inform the Engineer-in-charge of 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 by notice in writing be at liberty to cancel his order to carry out such class of work and at range to carry it out in such manner as he may consider advisable, provided always that if the contractor shall commence work order of any expenditure in regard thereof before the rates shall have been determined as lastly hereinbefore mentioned, then and 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 rate 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 :” xxx.

    “Clause 23 :—

    Except where otherwise provided in the contract all questions and disputes relating to the meaning of the specifications, designs, drawings, and instructions hereinbefore mentioned and as to the quality of workmanship, or materials used on the work, or as to any other question, claim, right, matter, or thing whatsoever, in any way arising out of or relating to the contract, designs, drawings, 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 concerned Chief Engineer. If there be no such Superintending Engineer it should be referred to the sole arbitration of the 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 these contracts.”

    7. Clause 11 is a clause in the F. 2 agreement between the parties and it is in respect of extra contractual items, which are additional works, the contractor had done or was required or directed to do in connection with or is part of or for the purpose of performing the main work. In clause 11, it is specifically provided that the additional work as described therein “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 was specified in the tender for the said main work. “Clause 11 also provides for different rates for certain other items of additional work done by the contractor. In the last sentence of the said clause, it is, of course, mentioned that “In the event of a dispute a decision of the S.E (Superintending Engineer) of the circle will be final”. Merely because of that sentence it would be against all conons of law to hold that the contractor has to remain contended with and calmly accept whatever decision is given by the S.E in purported exercise of his authority under this clause, even though his decision is in complete disregard of the rates, principles and modes of assessment provided in that clause, and/or his decision is in respect of matters which do not come within the purview of this clause. To suggest that there can be no arbitration on such matters will be an unrealistic, and incongruous proposition, especially in view of the wide provision for arbitration in clause 23.

    8. In the present cases there is a dispute on the question as to whether the claim of the contractor is covered by clause 11 or not. The determination of that question would depend upon the determination of various facts and would require the interpretation and examination of the agreement itself. The question as to whether the Superintending Engineer's decision is final or not will involve interpretation, construction and assessment of the scope and ambit of clauses 11 and 23 and examination of the factual basis on which the said decision is given. In Heymen's case . 1942 A.C 356., it has been stated that on reference of disputes arising out of the contract the arbitrator may decide the disputes regarding the construction of the contract itself. In Willesford v. Watson . 19738 Ch. A.C 473., it has been held that a dispute as to the interpretation of the arbitration clause is one within the purview of the arbitrator. The Division Bench of this Court in A.G Parija v. Secy in charge of the General P.W.D of Union of India . 36 1970 C.L.T 1089. accepted the above views. In view of the above well settled position of law and the facts of the case it is wrong to say that the arbitrator has no jurisdiction to decide any dispute arising between the parties in respect of the additional work done by the contractor in connection with and as part of the main work.

    9. Moreover, the arbitration .clause in the agreement (clause 23) is in very wide terms. It, inter alia, includes “all questions and disputes relating to the meaning of the specifications xxxx or as to any other question, claim, right, matter, or thing whatsoever, in any way arising out of or relating to the contract xxx 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 “xx As the parties have agreed and intended to refer all such disputes, covering evidently a very wide range, to arbitration it would be wrong to pay, without anything specific in the agreement that because of the non-obstante clause in clause 23 and the last sentence in clause 11 the arbitrator cannot have any jurisdiction to decide any question whatsoever relating to or arising out of such additional work. To give such a construction would be fundamentally unjust, unrealistic and against the intention of the parties expressed and professed in so wide and broad terms as in clause 23.

    10. The State in opposing the arbitration in these cases taken recourse to clauses 11 and 23 of the contract. In the decision reported in Sushil Kashinath Dhonde v. Harilal Govindji Bhogani . 1969 3 SCC 223, the phrase ‘arising out of a contract’, as in clause 23, has been given the widest connotation, and it has been decided that it covers any matter arising out of the contract. In this connection the observation of the Supreme Court in Union of India v. Salrceen Timber and Construction Co. (India) . A.I.R 1969 S.C 488491., may be noted :—

    “xxx The test for determining the question is whether recourse to the contract by which both the parties are bound is necessary for the purpose of determining whether the claim of the respondent firm is justified or otherwise. If it is necessary to take recourse to the terms of the contract for the purpose of deciding the matter in dispute, it must be held that the matter is within the scope of the arbitration clause and the arbitrators have jurisdiction to decide this case, xxxx ”

    11. The Superintending Engineer in deciding matters coming under clause 11 of the Agreement cannot cover all matters, questions and disputes which arise out of the contract, as such matters have to be referred to arbitration as provided under clause 23 of the Agreement. In this view of the matter also the arbitrator has jurisdiction to decide matters regarding the additional work, as in deciding those matters, disputes and questions arising out of the contract may have to be considered and decided by the arbitrator.

    12. There is nothing specific in clause 11 or else where in the agreement barring the jurisdiction of the arbitrator in respect of such extra contractual items. The finality provision in clause 11 is too narrow to engulf within its scope all that is understood by the words “arising out of the contract” and other such clauses mentioned in clause 23 of the agreement. Clause 11 is not an arbitration clause nor does it provide any mode for the assessment of the S.E's decision referred to therein. A final decision is yet to be taken on the question whether the last sentence in clause 11 refers and applies to the entire clause or only to the items of work covered by the last portion of the pen-ultimate sentence beginning with the words “provided always”. Provision for payment of additional work is made in the contract itself. The additional work done by the contractor is part and parcel of the original work. The rates for assessment and payment of such additional work are mentioned in the different clauses of the contract. During the execution of the work the contractor must have been paid amounts on his running bills in respect of the original and/or additional work, and the arbitrator may be required to decide matters relating to that as that would be a matter arising out of the contract. The above features and factors impels one to reject the above contention of the State, more so when considered in the context of the professed intention expressed in so unequivocal and wide terms in clause 23. So without probing deep into the matter and without knowing all details about the scope and ambit of the claims, it cannot be said by one sweep of pen that the matters referred to the arbitrator are not within his jurisdiction.

    13. The Division Bench of this Court in A.G Parija v. Secretrry-in-charge of the General P.W.D of Union of India, repelled the similar contention raised on behalf of the State. The same view has also been taken by another Division Bench of this Court deciding the case reported in (Messrs) Hindusthan Steel Ltd. v. P. Bonor alias Pravash Chandra Banerjee . I.L.R 1973 Cutt. 1218.. The Single Judge decision in C.R No 159/76, disposed of on the 15th February, 1977, is also to the same effect.

    14. On the above considerations I do not find any merit in the above mentioned contention raised on behalf of the petitioner in these cases.

    15. The question of limitation is also a question which can be decided by the arbitrotor. In Wazir Chand Mahajan v. The Union of India . A.I.R 1967 S.C 990., it has been held that after the agreement is filed in Court and the matter is referred to the arbitrator, it is for the arbitrator to decide by the application of the law contained in the Limitation Act whether the claim is barred. The Division Bench of this Court deciding the case of A O Parija v. Secretary-in-charge of the General PWD of Union of India others, is also of the same view. The learned counsel appearing for the petitioner did not seriously agitate this question at the hearing of these Civil Revisions.

    16. No other point was urged on behalf of the State.

    17. On the above considerations I do not find any merit in these civil revisions and they are all dismissed with costs. Hearing fee of Rs. 50/- shall be paid by the petitioner in each of this Civil Revisions.

    18. As the arbitration proceedings are pending since long time, the arbitrator now appointed in these cases shall proceed expeditiously to dispose of the said proceedings in accordance with law within a very short time.

    Revisions dismissed.

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    Comments

    State Of Orissa v. Sri G.C Kanungo Opp. Party.
    (Aug 7, 1979)