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Bharat Bhushan Bansal v. U.P Small Industries Corporation Ltd., Kanpur .
Factual and Procedural Background
The appellant entered into a construction contract with the respondent on 19-10-1973 for building a factory and allied structures at India Complex, Rae Bareli. Clauses 23 and 24 of the agreement declared that decisions of the respondent’s Executive Engineer and Managing Director would be “final, conclusive and binding” on specified matters.
Disputes later arose regarding payments and execution of the works. Invoking Section 8 of the Indian Arbitration Act, 1940, the appellant petitioned the Civil Judge, Kanpur to appoint an independent arbitrator in place of the Managing Director. The respondent denied the existence of any arbitration clause.
The trial court allowed the petition and appointed Shri D.D. Sharma, Executive Engineer, as arbitrator. On appeal, the High Court agreed that the contract contained an arbitration clause but held that none of the conditions of Section 8 were satisfied, thereby setting aside the appointment and dismissing the Section 8 application. The appellant then filed the present appeal before the Supreme Court.
Legal Issues Presented
- Whether clauses 23 and 24 of the contract constitute an arbitration agreement within the meaning of the Indian Arbitration Act, 1940.
- If not, whether the civil court possessed jurisdiction under Section 8 of the Act to appoint an arbitrator in place of the Managing Director.
Arguments of the Parties
Appellant's Arguments
- Clauses 23 and 24, by declaring decisions “final, conclusive and binding,” implied an agreement to refer disputes to the Managing Director, thus amounting to an arbitration clause.
- Because the Managing Director was an interested party, an independent arbitrator should be appointed under Section 8.
Respondent's Arguments
- The contract contained no arbitration clause; the clauses only provided for administrative or expert determination by company officials.
- Consequently, Section 8 of the Arbitration Act was inapplicable and the civil court lacked authority to appoint an arbitrator.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| K.K. Modi v. K.N. Modi (1998) 3 SCC 573 | Essential ingredients of an arbitration agreement: (i) parties intend the tribunal to determine substantive rights; (ii) tribunal must act judicially and impartially; (iii) agreement must be legally enforceable. | Used to illustrate that clauses 23 and 24 lack these essential elements, indicating expert determination rather than arbitration. |
| State of Orissa v. Damodar Das (1996) 2 SCC 216 | Similar “final and binding” clause held not to amount to arbitration. | Provided a direct precedent; the Court found the present clauses “very similar” and followed the same conclusion. |
| State of U.P. v. Tipper Chand (1980) 2 SCC 341 | “Final decision” clause interpreted as conferring administrative supervision, not arbitration. | Cited as foundational authority reinforcing that such clauses do not create an arbitration agreement. |
Court's Reasoning and Analysis
1. The Court examined clauses 23 and 24 and observed that they merely vest final decision-making power in specified company officials without obliging them to act judicially, record evidence, or hear both parties. Such wording signals an expert determination, not arbitration.
2. Referring to K.K. Modi, the Court reiterated that an arbitration agreement must contemplate impartial adjudication of parties’ substantive rights and be intended to be enforceable. Those elements are absent here.
3. The Court noted that virtually identical clauses had been construed in State of Orissa v. Damodar Das and State of U.P. v. Tipper Chand as non-arbitration provisions, underscoring a consistent judicial approach.
4. Treatise references (Hudson and S.K. Chawla) further distinguished between a “certifier” or “expert” and an arbitrator, emphasizing that a certifier’s function is administrative and preventive of disputes rather than adjudicatory.
5. Consequently, the Court held that clause 24 does not envisage arbitration; therefore, the appellant’s Section 8 application was misconceived. While the High Court had erred in assuming the presence of an arbitration clause, its ultimate dismissal of the application was correct, albeit for different reasons.
Holding and Implications
Appeal Dismissed. No order as to costs.
Direct Effect: The appellant cannot compel arbitration under clauses 23 or 24; any disputes must be resolved through the contractual mechanism of administrative decision or ordinary civil remedies.
Broader Implications: The judgment reaffirms the distinction between expert determination clauses and true arbitration agreements, reinforcing prior Supreme Court precedents without creating new legal doctrine.
Sujata V. Manohar, J.— The appellant had entered into a contract with the respondent under which the appellant had undertaken the work of construction of a factory and allied buildings of the respondent at India Complex, Rae Bareli. The agreement is dated 19-10-1973. Clauses 23 and 24 of the agreement are as follows:
“Decision of the Executive Engineer of the UPSIC to be final on certain matters
23. 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 or 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
24. 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 matters arising out of this contract and not specifically mentioned herein.”
2. There were disputes between the appellant and the respondent in connection with the payments to be made under the terms of the said contract and in connection with the work of the said contract. The appellant made an application under Section 8 of the Indian Arbitration Act, 1940 before the Civil Judge, Kanpur. He applied for the appointment of an independent arbitrator in the place of the Managing Director. The respondent denied that there was any arbitration clause in the said contract. The Court, however, allowed the petition of the appellant under Section 8 of the Arbitration Act and appointed one D.D Sharma, Executive Engineer, as arbitrator. In appeal, the High Court, while upholding the finding that there was an arbitration clause, held that the Court below had no jurisdiction under Section 8 to appoint another arbitrator in the place of the Managing Director since none of the clauses of Section 8 was attracted in the present case. The High Court, therefore, set aside the order of the Court below and dismissed the application of the appellant under Section 8. From this judgment, the appellant has filed the present appeal.
3. The first question that requires consideration is whether there is any clause in the contract which provides for arbitration between the parties. The relevant clauses are clauses 23 and 24. Under clause 23, the decision of the Executive Engineer is final, conclusive and binding on both the parties to the contract on all questions relating to the meaning, specifications, designs etc. and as to the quality of workmanship or material used or relating to any other question whatsoever in any way arising out of or relating to the designs, drawings, specifications etc. or otherwise concerning the execution or failure to execute the same. Under clause 24, except as provided in clause 23, the decision of the Managing Director of the respondent 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 and in respect of all other matters arising out of the contract and not specifically mentioned in the said clause. Therefore, in respect of certain claims, the decision of the Executive Engineer is final and binding on both the parties to the contract. While in respect of the remaining matters, the decision of the Managing Director of the respondent is final, conclusive and binding on both the parties to the contract. Clause 24 does not mention that any dispute can be referred to the arbitration of the Managing Director. Clause 24 also does not spell out any duty on the part of the Managing Director to record evidence or to hear both parties before deciding the questions before him. From the wording of clause 24, it is difficult to spell out any intention of the parties to leave any disputes to the adjudication of the Managing Director of the respondent as an arbitrator.
4. In the case of K.K Modi v. K.N Modi (1998) 3 SCC 573 a Bench of this Court (of which one of us was a Member) had the occasion to consider the essential ingredients of an arbitration clause. Among the ingredients which are described in the said judgment, two important ingredients are that the agreement between the parties must contemplate that substantive rights of parties will be determined by the agreed tribunal and 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 and also that the agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law. There is a difference between an expert determination and arbitration. S.K Chawla in Law of Arbitration and Conciliation at p. 164 states as follows:
“4. Arbitration agreement to be distinguished from agreement for decision by an engineer or expert.—Contracts may contain a clause that on certain questions the decision of an engineer, architect or another expert shall be final. The decision given in such cases by the engineer etc. is not an award. As pointed out by Bernstein, such a person is under no obligation, unless the contract otherwise provides, to receive evidence or submissions and is entitled to arrive at his decision solely upon the results of his own expertise and investigations. The procedure involved is not arbitration, and the Arbitration Act does not apply to it. The primary material on which such person acts is his own knowledge and experience, supplemented if he thinks fit by (i) his own investigations; and/or (ii) material (which need not conform to rules of ‘evidence’) put up before him by either party. An arbitrator on the other hand, acts primarily on material put before him by the parties. The determination by an engineer or an expert would involve a less thorough investigation. Only one mind will be brought to bear on the problem. There will be no discovery of documents, there will not normally be any oral ‘evidence’ or oral submissions.”
5. 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.
6. A clause very similar to the present clause was also held to be not an arbitration clause by this Court in the case of State of Orissa v. Damodar Das (1996) 2 SCC 216. The language of that clause was very similar to the present clause. Under the clause in question,
“except where otherwise specified in this contract, the decision of the Public Health Engineer for the time being, (was to) 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 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 … or otherwise concerning the works or the execution or failure to execute the same …”.
This Court held that this clause did not spell out any intention to refer any disputes and differences between the parties to arbitration.
7. The wording of the clause in the present case is very similar to the wording which was interpreted as not an arbitration clause in the above case. Both the above judgments of this Court have relied upon an earlier decision of this Court in the case of State of U.P v. Tipper Chand (1980) 2 SCC 341. The clause which was interpreted in the above case was also materially similar to the clause before us. Clause 22 of the contract in that case provided:
“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, … or otherwise concerning the works, or the execution or failure to execute the same, … shall also be final, conclusive and binding on the contractor.”
This Court held that the clause did not contain an arbitration agreement either expressly or by implication. The intention was to vest the Superintending Engineer with supervision and administrative control over the work.
8. In Hudson's Building and Engineering Contracts, 11th Edn., Vol. 1, in para 6.065, while making a distinction between a certifier and an arbitrator in a building contract, it has been emphasised that essentially the certifier in a construction contract will often be performing an administrative rather than a judicial function, and when doing so, there may often be no formulated dispute before him at all. He has been described as a “preventer of disputes” in contradistinction to an arbitrator whose function can only arise once a dispute is in existence. He is not under the same obligation to afford the parties or their representatives a full hearing and receive evidence from them. Thus each contractual provision may need to be carefully scrutinised to see into which category the person named falls.
9. In the present case, the Managing Director is more in the category of an expert who will decide claims, rights, or matters in any way pertaining to the contract. The intention appears to be more to avoid disputes than to decide formulated disputes in a quasi-judicial manner. In para 18.067 of Vol. 2 of Hudson on Building and Engineering Contracts, Illustration (8) deals with the case where, by the terms of a contract, it was provided that the engineer
“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 contractor, and the certificate of the engineer for the time being, given under his hand, shall be binding and conclusive on both parties”.
It was held that this clause was not an arbitration clause and that the duties of the Engineer were administrative and not judicial.
10. Since clause 24 does not contemplate any arbitration, the application of the appellant under Section 8 of the Arbitration Act, 1940 was misconceived. The appeal is, therefore, dismissed though for reasons somewhat different from the reasons given by the High Court. There will, however, be no order as to costs.
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