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K. Sasidharan v. Kerala State Film Development Corporation .
Factual and Procedural Background
The appellant entered into a contract on 27 January 1982 with the respondent to construct a theatre. The work was completed and handed over in May 1985. During execution, disputes arose concerning certain items of work. Invoking Section 20 of the Arbitration Act, 1940, the appellant filed O.S. No. 20 / 1986 before the Subordinate Judge, Trivandrum, seeking reference of the dispute to arbitration.
The respondent objected, asserting that no arbitration agreement existed under the contract. By order dated 5 June 1986, the Subordinate Judge held that clause 73 of the Madras Detailed Standard Specifications (MDSS) supplied an arbitration clause and, on 2 July 1986, appointed a retired District Judge as arbitrator. The respondent appealed. On 15 December 1986, a Division Bench of the Kerala High Court reversed the trial court, finding clause 73 inapplicable and holding that no arbitrable agreement existed. The present appeal to the Supreme Court was filed by special leave to challenge that decision.
Legal Issues Presented
- Whether clause 12 of the General Conditions of Contract, by referring to the MDSS, incorporated clause 73 of the MDSS so as to create an arbitration agreement between the parties.
- If no arbitration agreement existed, whether the civil court could exercise its power under Section 20 of the Arbitration Act, 1940 to appoint an arbitrator.
Arguments of the Parties
Appellant's Arguments
- Clause 12 of the General Conditions states that all items of work “shall be carried out as per Madras Detailed Standard Specifications and its addenda volume,” thereby incorporating the entirety of the MDSS—including clause 73, which contains an arbitration clause.
- Because clause 73 is thus incorporated, the dispute is arbitrable and the trial court correctly appointed an arbitrator.
- The Kerala High Court erred in holding that clause 73 was inapplicable.
Respondent's Arguments
- The contract contains no clause providing for arbitration; clause 73 of the MDSS was never incorporated.
- Accordingly, there is no “arbitrable agreement,” and the civil court lacked jurisdiction under Section 20 of the Arbitration Act to appoint an arbitrator.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Supreme Court noted that although Article 60 of the contract originally provided an arbitration clause, that article was “admittedly excluded” when the parties executed the agreement. Article 2(f) further stipulated that the contract terms could not be altered by any oral agreement. The Court examined clause 12 and found that its reference to the MDSS was limited to technical specifications governing execution of work—rates, quantities, drawings, and related matters—rather than dispute-resolution mechanisms.
Emphasising the separability of arbitration clauses from the substantive obligations of a contract, the Court held that an arbitration agreement must be expressly and specifically adopted. Because the parties had consciously deleted the arbitration clause from their contract, they had “by necessary implication” excluded clause 73 of the MDSS. Importing that clause by interpretation would conflict with the parties’ express intentions and the written terms they agreed upon.
Consequently, there was no arbitration agreement in existence, and the civil court lacked authority under Section 20 of the Arbitration Act to compel arbitration or appoint an arbitrator.
Holding and Implications
APPEAL DISMISSED. The Court affirmed the Kerala High Court’s decision that no arbitrable agreement existed between the parties and, therefore, the trial court’s reference to arbitration was without jurisdiction. The immediate consequence is that the dispute cannot proceed to arbitration under Section 20 of the Arbitration Act, 1940; the parties must resolve their differences in another forum. The judgment turns on the specific contractual documents and sets no new precedent beyond reinforcing the principle that an arbitration clause must be expressly incorporated.
Order
1. Leave granted. Heard both the counsel.
2. The appellant had on 27-1-1982 entered into a contract with the respondent to construct a theatre. He completed the work and handed over the same to the respondent in May 1985. During the execution of the contract a dispute had arisen on certain items of the work which was sought to be decided by arbitration. The appellant, therefore, filed OS No. 20 of 1986 in the Court of Subordinate Judge, Trivandrum under Section 20 of the Arbitration Act, 1940, for short ‘the Act’ for reference to an Arbitrator. The respondent contended that there is no arbitrable agreement under the contract. Overruling the objection, the Subordinate Judge by his order dated 5-6-1986 held that clause 73 of the Madras Detailed Standard Specifications for short ‘MDSS’ would apply to the dispute which contains an arbitrable clause and, therefore, by order dated 2-7-1986 appointed a retired District Judge as an Arbitrator. On appeal by the respondent in MFA No. 460 of 1986, by order dated 15-12-1986, the Division Bench of the Kerala High Court held that clause 73 of MDSS is inapplicable. There is no arbitrable agreement for reference to the Arbitrator. Thus, this appeal by special leave.
3. Shri E.M.S Anam, learned counsel for the appellant, placing reliance on clause 12 of the “General Condition of the Contract” contended that all items of work referred to therein would include MDSS in the addenda volume. Clause 73 of the arbitrable agreement therein gets attracted to the dispute. Therefore, the trial court was right in its conclusion that the dispute is arbitrable under clause 73. The High Court was not right in its contra conclusion.
4. Having given our anxious consideration, we find that the contention raised by the appellant is not tenable. Admittedly, the contract contains Article 60 which provides
“arbitration of any dispute or difference between the parties to the contract either during the progress or after completion of the works or the interpretation of the contract or as any matter or thing arising thereunder except as to the matters left to the sole discretion of the Corporation Engineer under the clauses of the contract.”
While entering into the contract this clause was admittedly excluded. In Article 2 of the “General Conditions of the Contract” clause (b) provides that:
“the Original Agreement, with its accompanying Schedules forms part of the Contract Documents and shall be kept by the Corporation but the Contractor shall be supplied with a copy of the agreement and copies of Tender Notification, General Conditions of the Contract, Specifications, Drawings and relevant schedules all duly attested by the Contractor and the Managing Director”.
Clause (f) postulates that “the terms of the Contract cannot be added to, varied or reduced by any oral agreement previous or subsequent to its signature”.
5. Clause 12 relied upon by Shri Anam, the relevant part reads thus:
“And item of work shall be carried out as per Madras Detailed Standard Specifications and its addenda volume and shall be deemed to have been included here.”
What clause 12 postulates is that the general conditions regarding the execution of the work will be as carried on in accordance with the conditions etc. contained in MDSS and addenda. General Conditions of the Contract provided the accepted rates, units, tentative quantities etc. which were given in the Schedule A and the time schedules for the work was given in Schedule B. The list and details regarding supply of drawings were given in Schedule C. The short description given in the Schedule A for different items were only the general specifications. Thereafter, the above 12th clause has been added, namely,
“All items of work shall be carried out as per Madras Detailed Standard Specifications and its addenda volume and shall be deemed to have been included here.”
The arbitration agreement is collateral to the substantial stipulation of the contract. It is merely procedural and ancillary to the contract and it is a mode of settling the disputes, though the agreement to do so is itself subject to the discretion of the court. Arbitration is distinguishable from other clauses in the contract. The other clauses set out the obligations which the parties have undertaken towards each other binding them, but the arbitration clause does not impose on one of the parties an obligation towards the other. It embodies an agreement of both parties with consensus ad idem that if any dispute arises with regard to the obligations undertaken therein which one party has undertaken towards the other, such a dispute shall be settled by a tribunal of their own constitution. Therefore, arbitration clause in a contract, stands apart from rest of the contract, it must be construed according to its language and in the light of the circumstances in which it was made. Russel on Arbitration, 19th Edn., p. 27 states that:
“A court cannot make a contract between the parties. In general its power would appear to end with interpretation. It applies equally to the establishment of an arbitration agreement.”
6. The appellant and the respondent having specifically excluded the arbitration clause in the contract, by necessary implication they excluded clause 73 in MDSS. If it were to be contra it must expressly and specifically be incorporated in the contract which admittedly was not done. When the parties to the agreement, in terms of the documents, have not incorporated the arbitration agreement in clause 73 of MDSS, it cannot, by implication, be imported by interpretation that the terms of clause 73 including arbitration clause therein stands attracted. By necessary implication, it conflicts with the expressly agreed terms of the contract. Thereby, it is manifest that what the terms in the MDSS, referred to in clause 12 is only of the terms referable to the execution of the work, etc. and not one concerned with an agreement to refer any dispute arising between the parties to an arbitration, at a later point of time, or during the course of the execution of the work or after the completion thereof of any dispute arising between the parties in relation to the contract.
7. Therefore, the High Court is right in its conclusion that there is no arbitrable agreement for reference to the Arbitrator. The civil court in the circumstances cannot exercise its power under Section 20 of the Act to appoint an arbitrator and refer the dispute for arbitration.
8. The appeal is accordingly dismissed. No costs.
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