UNION OF INDIA versus PARMAR CONSTRUCTION COMPANY

[2019] 5 S.C.R. 1009

UNION OF INDIA

PARMAR CONSTRUCTION COMPANY

(Civil Appeal No. 3303 of 2019)

MARCH 29, 2019

[A. M. KHANWILKAR AND AJAY RASTOGI, JJ.]

Arbitration and Conciliation Act, 1996: s. 11(6) – Workcontract – Dispute between the parties – In view of arbitration clausein the agreement, notice sent by respondent contractor to appellantto appoint an arbitrator invoking clause of the contract to resolvethe dispute of payment of outstanding dues – Rejected by theappellants submitting that “No Due Certificate” was signed andthat entails no dispute to be sent to arbitration – Subsequently,application u/s. 11(6) by the respondent before the High Court forappointment of independent arbitrator – High Court appointed aretired judge of the High Court as an independent Arbitrator – Onappeal, held: Emphasis should be on the agreed terms and to firstresort to the procedure as prescribed and open for the parties tothe agreement to settle differences/disputes arising under the termsof the contract through appointment of designated arbitrator –Independence and impartiality of the arbitrator has never beendoubted but where it is in doubt or where the arbitral tribunalappointed in terms of the arbitration agreement has not functioned,or has failed to conclude the proceedings or to pass an awardwithout assigning any reason, it becomes necessary to make freshappointment – On facts, notice sent by respondent much prior toenforcement of the Amendment Act, 2015, thus, the provisions ofthe Act of 2015 not applicable – High Court was not justified inappointing an independent arbitrator without resorting to theprocedure for appointment of an arbitrator prescribed under theclause of the contract under the inbuilt mechanism as agreed by theparties – Orders passed by the High Court quashed and set aside –Appellants directed to appoint the arbitrator in terms of theagreement – Arbitration and Conciliation(Amendment Act), 2015.

ADisposing of the appeals, the CourtHELD: 1.1 As per clause 43(2) of the Contract, thecontractor signs “No claim” certificate in favour of the railwayin the prescribed format after the work is finally measured upand the contractor shall be debarred from disputing theBcorrectness of the items covered under the “No Claim” certificateor demanding clearance to arbitration in respect thereof. Eachof the respondent has to attach no claim certificate with final billsin the prescribed format to be furnished in advance before thefinal bills are being examined and measured by the railwayauthorities. Although it has been seriously disputed by theCappellants but that is the reason for which even after furnishingno claim certificate with the final bills being raised, it came to bequestioned by the respondent(contractor) by filing an applicationto refer the matter to arbitration invoking clause 64(3) of theconditions of contract as agreed by the parties. Under clause 64(1),Dif there is any dispute or difference between the parties hithertoas to the construction or operation of the contract, or therespective rights and liabilities of the parties on any matter inquestion or any other ancillary disputes arising from the terms ofthe contract or if the railway establishment fails to take decisionwithin the stipulated period and the dispute could not be amicablyEsettled, such dispute or difference is to be referred to arbitrationand who shall arbitrate such disputes/differences between theparties, the General Manager may nominate the officer bydesignation as referred to under clause 64(3)(a)(i) and a(ii)respectively with further procedure being prescribed for the soleFarbitrator or the Arbitral Tribunal to adjudicate the disputes/differences arising under the terms of contract between theparties. [Paras 20, 21][1025-G-H; 1026-A-E]1.2 The conjoint reading of Section 21 read with Section 26leaves no manner of doubt that the provisions of the AmendmentGAct, 2015 shall not apply to such of the arbitral proceedings whichhas commenced in terms of the provisions of Section 21 of thePrincipal Act unless the parties otherwise agree. The AmendmentAct, 2015 which came into force, i.e. on 23.10.2015, shall notapply to the arbitral proceedings which has commenced in

accordance with the provisions of Section 21 of the Principal Act,1996 before the coming into force of Amendment Act, 2015,unless the parties otherwise agree. [Paras 25, 26][1027-E;1029-C-D]

1.3 In the instant case, the request was made and receivedby the appellants in the concerned appeal much before theAmendment Act, 2015 came into force. Whether the applicationwas pending for appointment of an arbitrator or in the case ofrejection because of no claim as in the instant case forappointment of an arbitrator including change/substitution ofarbitrator, would not be of any legal effect for invoking theprovisions of Amendment Act, 2015, in terms of Section 21 ofthe principal Act, 1996. The applications/requests made by therespondent contractors deserves to be examined in accordancewith the principal Act, 1996 without taking resort to theAmendment Act, 2015 which came into force from 23[rd] October,2015. [Para 27][1029-D-F]

1.4 There cannot be rule of absolute kind and each casehas to be looked into on its own facts and circumstances. At thesame time, this Court cannot be oblivious of the ground realitiesthat where petty/small contractor has made investments fromhis available resources in executing the works contract and billshave been raised for the escalation cost incurred by him and therailway establishments/appellants without any justification reducesthe claim unilaterally and take defence of the no claim certificatebeing furnished which as alleged by the respondents to befurnished at the time of furnishing the final bills in the prescribedformat. [Para 33][1033-C-E]

1.5 The respondents are the contractors and attached withthe railway establishment in the instant batch of appeals areclaiming either refund of security deposits/bank guarantee, whichhas been forfeited or the escalation cost has been reduced fromfinal invoices unilaterally without tendering any justification. It ismanifest from the pleadings on record that the respondentcontractors who entered into contract for construction works withthe railway establishment cannot afford to take any displeasurefrom the employer, the amount under the bills for various reasons

Awhich may include discharge of his liability towards the bank,financial institutions and other persons, indeed the railwayestablishment has upper hand. rebutable presumption couldbe drawn that when no claim has been furnished in the prescribedformat at the time of final bills being raised with unilateraldeductions made even that acceptable amount will not be released,Bunless no claim certificate is being attached to the final bills. Thearbitral dispute subsists and the contract has not been dischargedas being claimed by the appellants employer(s) and all thecontentions in this regard are open to be examined in the arbitralproceedings.[Para 35][1037-D-G; 1038-A-B]C1.6 Clause (c) of sub-section (6) of Section 11 relates tofailure to perform any function entrusted to person including aninstitution and also failure to act under the procedure agreedupon by the parties. In other words, clause(a) refers to the partyfailing to act as required under that procedure; clause(b) refersDto the agreement where the parties fails to reach to an agreementexpected of them under that procedure and clause (c ) relates toa person which may not be party to the agreement but has givenhis consent to the agreement and what further transpires is thatbefore any other alternative is resorted to, agreed procedurehas to be given its precedence and the terms of the agreementEhas to be given its due effect as agreed by the parties to theextent possible. The corrective measures have to be taken firstand the Court is the last resort. By appointing an arbitrator interms of sub-section (8) of Section 11 of Act, 1996, due regardhas to be given to the qualification required for the arbitrator byFthe agreement of the parties and also the other considerationssuch as to secure an independent and impartial arbitrator. Tofulfil the object with terms and conditions which are cumulativein nature, it is advisable for the Court to ensure that the remedyprovided as agreed between the parties in terms of the contractis first exhausted. [Para 38][1039-A-E]G

1.7 It is the duty of the Court to act on the agreed termsand to first resort to the procedure as prescribed and open forthe parties to the agreement to settle differences/disputes arisingunder the terms of the contract through appointment of

designated arbitrator although the name in the arbitrationagreement is not mandatory or must but emphasis should alwaysbe on the terms of the arbitration agreement to be adhered to orgiven effect as closely as possible. [Para 41][1043-D-E]

1.8 Independence and impartiality of the arbitrator has neverbeen doubted but where the impartiality of the arbitrator in termsof the arbitration agreement is in doubt or where the ArbitralTribunal appointed in terms of the arbitration agreement has notfunctioned, or has failed to conclude the proceedings or to passan award without assigning any reason and it became necessaryto make fresh appointment, Chief Justice or his designate inthe given circumstances after assigning cogent reasons inappropriate cases may resort to an alternative arrangement togive effect to the appointment of independent arbitrator underSection 11(6) of the Act. [Para 43][1044-B-D]

1.9 The High Court was not justified in appointing anindependent arbitrator without resorting to the procedure forappointment of an arbitrator which has been prescribed underclause 64(3) of the contract under the inbuilt mechanism as agreedby the parties. The orders passed by the High Court are quashedand set aside. The appellants are directed to appoint the arbitratorin terms of clause 64(3) of the agreement within the stipulatedperiod. [Paras 44, 45][1045-B-C]

M/s. Aravali Power Company Private Limited Vs. EraInfrastructure Engineering Limited (2017) 15 SCC 32;S.P. Singla Constructions Pvt. Ltd. v. State of HimachalPradesh and Others 2018(15) SCALE 421; Union ofIndia and Others v. Master Construction Company(2011) 12 SCC 349 : [2011] 5 SCR 853; New IndiaAssurance Company Limited v. Genus PowerInfrastructure Ltd. (2015) 2 SCC 424 : [2014] 12 SCR360 ; ONGC Mangalore Petrochemicals Limited v. ANSConstructions Limited and Anr.(2018) 3 SCC 373 :[2018] 2 SCR 598; Union of India & Another v. M.P.Gupta (2004) 1) SCC 504; Union of India & Anotherv. V. S. Engineering(P) Ltd. (2006) 13 SCC 240 : [2006]

[2019] 5 S.C.R.

A9 Suppl. SCR 125; Northern Railway Administration,Ministry of Railway, New Delhi v. Patel EngineeringCo. Limited (2008) 10 SCC 240 : [2008] 12 SCR 216;Union of India v. Singh Builders Syndicate(2009) 4SCC 523: [2009] 3 SCR 563; National InsuranceCompany Limited v. Boghara Polyfab Private LimitedB(2009) 1 SCC 267: [2008] 13 SCR 638; DatarSwitchgears Ltd. v. Tata Finance Ltd. and Another(2000) 8 SCC 151; Punj Lloyd Ltd. v. Petronet MHBLtd. (2006) 2 SCC 638; Union of India v. Bharat BatteryManufacturing Co. (P) Ltd. (2007) 7 SCC 684 : [2007]C8 SCR 993; North Eastern Railway and Others v. TrippleEngineering Works (2014) 9 SCC 288 : [2014] 6 SCR1143; Union of India and Others v. Uttar Pradesh StateBridge Corporation Limited (2015) 2 SCC 52; Unionof India v. Kishorilal Gupta & Bros. AIR 1959 SC1362 : [1960] SCR 493; P.K. Ramaiah & Co. v.DChairman and Managing Director, National ThermalPower Corpn. (1994) 3 Suppl. SCC 126; State ofMaharashtra v. Nav Bharat Builders (1994) 3 Suppl.SCC 83; Nathani Steels Limited v. AssociatedConstructions (1995) 3 Suppl. SCC 324; DamodarEValley Corporation v. KK Kar(1974) 1 SCC 141 :[1974] 2 SCR 240; Bharat Heavy Electricals LimitedRanipur v. Amarnath Bhan Prakash (1982) 1 SCC 625;Union of India and Anr. v. L.K. Ahuja and Co. (1988) 3SCC 76 : [1988] 3 SCR 402 ; Jayesh Engineering Worksv. New India Assurance Co. Ltd. (2000) 10 SCC 178 ;FChairman and MD, NTPC Ltd. v. Reshmi ConstructionsBuilders & Contractors (2004) 2 SCC 663 : [2004] 1SCR 62 – referred to.

Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No.3303 of

From the Judgment and Order dated 14.07.2017 of the High Courtof Rajasthan, Jaipur Bench in S.B.Civil Miscellaneous Application(Arbitration) No. 14 of 2015

With

Civil Appeal Nos. 3304, 3305, 3306, 3307, 3308, 3309, 3310, 3311,3312, 3313, 3319, 3314, 3315, 3316, 3317 and 3318 of 2019.

AK. M. Natarajan, ASG, Ashok K. Srivastava, R. Balasubramanian,Ms. Shradha Deshmukh, Raj Bahadur, Kisan Bhardwaz, Mrs. AnilKatiyar, Sameer Jain, Abhinav Shrivastava, Suvigya Awasthy, KaranValecha, Rahul Gupta, Ms. Sana Kamra, Vishwa Pal Singh, Surjeet Singh,Ronak, Manendra Pal Gupta, S. K. Bhattacharya, L. K. Paonam,Mrs. Tomthinnganbi Koijam, Niraj Bobby Paonam, Nitin Kumar Thakur,BMiss Geetanjali Mohan, E. C. Vidya Sagar, Subash Chandra Sagar, Advs.for the appearing parties.

The Judgment of the Court was delivered by

RASTOGI, J. 1. Leave granted.

2. The question that arises for consideration in the batch of appealsby special leave is as to whether (1) the High Court was justified ininvoking amended provision which has been introduced by Arbitrationand Conciliation(Amendment Act), 2015 with effect from 23[rd] October,2015(hereinafter being referred to as “Amendment Act, 2015”); (2)Dwhether the arbitration agreement stands discharged on acceptance ofthe amount and signing no claim/discharge certificate and (3) whether itwas permissible for the High Court under Section 11(6) of the Arbitrationand Conciliation Act, 1996(prior to the Amendment Act, 2015) to appointthird party or an independent Arbitrator when the parties have mutuallyagreed for the procedure vis-à-vis the authority to appoint the designatedEarbitrator. The High Court has passed separate orders in exercise of itspowers under Section 11(6) of the Act, 1996 in appointing an independentarbitrator without adhering to the mutually agreed procedure under theagreement executed between the parties. Since the batch of appealsinvolve common questions of law and facts with the consent of parties,Fare disposed off by the present judgment.

3. The facts have been noticed from civil appeal arising out ofSLP(Civil) no. 2166 of 2018.

4. The work for construction of office accommodation for officerand rest house was allotted to the respondent contractor, at DungarpurGin the State of Rajasthan on 21[st] December, 2011. As alleged, theextension was granted by the appellants to complete the work by31[st] March, 2013. The measurement was accepted by the respondentunder protest and when appellants officials failed to clear 7[th] final billuntil the respondent put line over “under protest” and signed no claim

certificate. The total value of the work executed was of Rs. 58.60 lakhsagainst which Rs. 55.54 lakhs was paid and escalation cost was notadded with interest @ 18% over delay payment. Demand notice wassent to the appellants to appoint an arbitrator invoking Clause 64(3) ofthe GCC to resolve the disputes/differences on 23[rd] December, 2013.When the appellants failed to appoint the arbitrator in terms of Clause64(3), application came to be filed under Section 11(6) of the Act, 1996before the Chief Justice/his Designate for appointment of an independentarbitrator who after hearing the parties under the impugned judgmentallowed the application of the respondent and appointed retired judgeof the High Court as an independent arbitrator to arbitrate the proceedings.

5. In the instant batch of appeals, one fact is common that theorders were placed for various nature of construction works for itsexecution and the agreement executed between the parties includes aseparate chapter for settlement of disputes leaving any dispute ordifference between the parties to be resolved through the process ofarbitration by appointing an arbitrator invoking clause 64(3) of the contract.

As per terms of the agreement, date of completion of the project wasdelayed as alleged due to breach of obligations by the appellants and thescheduled date of completion had to be extended. Meanwhile, due torise in the prices of raw material, the project was impossible to becompleted by the respondent contractors and hence correspondencewas made to either pay the escalated price or in the absence, therespondents would not be in position to conclude the contract. It wasalleged that the appellants accepted the terms and conditions for escalatedprices and asked the respondents to complete the work and handoverthe project.

6. But when the respondents raised the final bills in the pre-determined format (which also included the no dues certificate) on thenewly agreed prices, dispute has arisen in context of payment of escalatedprices or withholding of security deposits, taking note of the existence ofarbitration clause in the agreement the respondents sent notice to appointan arbitrator as per clause 64(3) of GCC to resolve the dispute of paymentof outstanding dues which was declined by the appellants by sending thereply that “No Due Certificate” was signed and that entails no dispute tobe sent to arbitration. Since the appellants failed to appoint the arbitratorin accordance with the arbitration clause in the agreement, each of the

Arespondent filed application under Section 11(6) of the Act before theHigh Court for appointment of an independent arbitrator and the primaryobjection of the appellants before the High Court was that on furnishingthe no claim certificate by the contractor, no dispute subsists which is tobe sent to the arbitrator and further the claims which has been submittedwere beyond time as prescribed in the agreement and thus falls underBthe ‘excepted matter’ in the agreement.

7. After the matter being heard, the application for appointmentof arbitrator under Section 11(6) of the Act, 1996 came to be decided bythe High Court of Rajasthan by separate order(s) keeping in view theindependence and neutrality of arbitrator as envisaged under SectionC12(5) of the Amendment Act, 2015. The High Court further observedthat the amended provisions of Act, 2015 shall apply to the pendingproceedings and mere furnishing of no claim certificate would not takeaway the right of the parties and it is open for adjudication before thearbitrator and appointed retired Judge of the High Court as anDindependent sole arbitrator under the impugned judgment in exercise ofpower under Section 11(6) of the Act, 1996. Indisputedly, the requestfor the dispute to be referred to arbitration in the instant batch of appealswas received by the appellants much before the Amendment Act, 2015came into force (i.e. 23[rd] October, 2015).

E8. Mr. K.M. Natarajan, learned Additional Solicitor Generalappearing for the appellants submits that Section 12 including sub-sections(1) and (5) as also Fifth and Seventh Schedule, has come into force bythe Amendment Act, 2015 w.e.f. 23[rd] October, 2015 and indisputedly, inthe instant batch of appeals, request to refer to the arbitration was receivedby the appellants much prior to the Amendment Act, 2015. In view ofFSection 21 read with Section 26 of the Amendment Act, 2015 where therequest has been sent to refer the dispute to arbitration and received bythe other side before the amendment Act, 2015 has come into force, theproceedings will commence in accordance with the pre-amendedprovisions of the Act, 1996 and in the given circumstances, apparentGerror has been committed by invoking Section 12(5) of the AmendmentAct, 2015 for appointment of an independent arbitrator without resortingto the clause 64(3) of GCC as agreed by the parties and in support ofsubmission, learned counsel has placed reliance on the decision of thisCourt in the case of M/s. Aravali Power Company Private Limited

Vs. Era Infrastructure Engineering Limited 2017(15) SCC 32 andS.P. Singla Constructions Pvt. Ltd.Vs. State of Himachal Pradeshand Others2018(15) Scale 421.

9. Learned counsel further submits that once the no claimcertificate has been signed by each of the respondent and after settlementof the final bills, no arbitral dispute subsists and the contract standsdischarged and they cannot be permitted to urge that they gave the noclaim certificate under any kind of financial duress/undue influence andeven in support thereof, no prima facie evidence has been placed onrecord. In the given circumstances, the appointment of an independentarbitrator by the High Court under Section 11(6) of the Act, 1996 is notsustainable and in support of submission, learned counsel has placedreliance on the decisions of this Court in Union of India and OthersVs. Master Construction Company2011(12) SCC 349; New IndiaAssurance Company LimitedVs. Genus Power Infrastructure Ltd.2015(2) SCC 424; ONGC Mangalore Petrochemicals LimitedVs.ANS Constructions Limited and Anr.2018(3) SCC 373.10. Learned counsel further submits that none of the respondentshad made any allegation of bias to the arbitrator who was likely to beappointed by the railways in terms of the agreement. The said issuewould have cropped up only when the appointment of arbitrator wasmade by the railways. It was required in the first instance to make everypossible attempt to respect the agreement agreed upon by the parties inappointing an arbitrator to settle the disputes/differences and only whenthere are allegations of bias or malafide, or the appointed arbitrator hasmiserably failed to discharge its obligation in submitting the award, theCourt is required to examine those aspects and to record finding as towhether there is any requirement in default to appoint an independentarbitrator invoking Section 11(6) of the Act, 1996 and in support ofsubmission, learned counsel has placed reliance on the decision of thisCourt in Union of India & AnotherVs. M.P. Gupta2004(10) SCC504,Union of India & Another Vs. V.S. Engineering(P) Ltd.2006(13)SCC 240, Northern Railway Administration, Ministry of Railway,New DelhiVs. Patel Engineering Co. Limited2008(10) SCC 240,Union of IndiaVs. Singh Builders Syndicate2009(4) SCC 523.

11. Learned counsel further submits that as indicated in clause64(7) of the GCC, all statutory modifications thereof will be binding to

Athe arbitration proceedings and after promulgation of the Arbitration andConciliation (Amendment) Act, 2015, clause 64(7) stood amended tofulfil the mandate of Amendment Act, 2015 and it was clarified that allstatutory modifications thereof shall apply to the appointment of arbitratorand arbitration proceedings and the respondents being signatory to theagreement have accepted the enforceability of aforesaid clause 64(7)Band, therefore, are bound by any modification made in GCC evensubsequently and placed reliance on the judgment of this Court in S.P.Singla Constructions Pvt. Ltd’s case(supra).

12. Per contra, Mr. Sameer Jain, learned counsel for therespondents submits that respondents are the registered contractorsCundertaking various nature of works contracts with the railwayestablishment and are not in bargaining position and it is groundreality that final bills are not being released without no claim certificatebeing furnished in advance by them. In all the cases, unilateral deductionshave been made from the final bills furnished by each of the respondentDand they are very small and petty contractors and the payments are notreleased unless the no claim certificate is being furnished, it is nothingmore than financial duress and undue influence by the authorities andis open for the arbitrator to adjudicate by examining the bills which wasfurnished for payment.

E13. Learned counsel further submits that the effect of no claimcertificate has been examined by this Court in National InsuranceCompany LimitedVs. Boghara Polyfab Private Limited 2009(1) SCC267 and there are series of decisions of this Court where no claimcertificate in itself has never been considered to be the basis to non-suitthe request made in appointing an arbitrator to independently examineFthe dispute arising under the terms of the agreement.

14. Learned counsel further submits that once the appellants havefailed to appoint an arbitrator under the terms of agreement before theapplication under Section 11(6) being filed before the Court, the authorityforfeits its right of appointing an arbitrator and it is for the Chief Justice/Ghis designate to appoint an independent arbitrator under Section 11(6) ofthe Act, 1996 as held by this Court inDatar Switchgears Ltd.Vs. TataFinance Ltd. and Another 2000(8) SCC 151 followed in Punj LloydLtd.Vs. Petronet MHB Ltd.2006(2) SCC 638 and later in Union ofIndiaVs. Bharat Battery Manufacturing Co. (P) Ltd.2007(7) SCC

684 that once the party fails to appoint an arbitrator until filing of anapplication under Section 11(6) of the Act, the opposite party would loseits right of appointment of arbitrator(s) as per the terms of the contract.

15. Learned counsel further submits that while dealing with Section11(6), the Chief Justice/his designate can even overlook the qualificationof the arbitrator under the agreement but arbitration agreement in theinstant case does not contain any specific qualification of the arbitratorunder Clause 64(3) of the GCC and since the appellants failed to appointan arbitrator until the application was filed, Section 11(6) empowers theCourt to deviate from the agreed terms if required by appointing anindependent arbitrator and by virtue of operation of Section 12(5) of theAmendment Act, 2015, the employee of the railway establishment becameineligible to be appointed as arbitrator. In the given circumstances, theauthority is vested with the Chief Justice or his designate to appoint anindependent arbitrator under Section 11(6) of the Act and the same hasbeen held by this Court in North Eastern Railway and OthersVs.Tripple Engineering Works2014(9) SCC 288 and Union of Indiaand OthersVs. Uttar Pradesh State Bridge Corporation Limited2015(2) SCC 52.

16. Learned counsel further submits that the primary object byintroducing the remedy to measure arbitration is to have fair, speedyand inexpensive trial by the Arbitral Tribunal. Unnecessary delay orexpense would frustrate the very purpose of arbitration and it holds outthat arbitrator should always be impartial and neutrality of the arbitratoris of utmost importance and that has been noticed by the Parliament inamending Section 12(5) of the Act, 1996 which came into force on 23[rd]October, 2015 and when the matters have been taken up for hearing bythe High Court after the amendment has come into force, the effect ofthe amended provisions would certainly be taken note of and in the givencircumstances, if an independent arbitrator has been appointed which isindisputedly an impartial and neutral person fulfilling the mandate of theobject of the proceedings of arbitration, the amended provision has beenrightly invoked by the High Court in the appointment of an independentarbitrator invoking Section 11(6) of the Act, 1996.

17. We have heard learned counsel for the parties and with theirassistance perused the material on record.

A18. The facts which manifest from the batch of appeals are thatthe respondents are the registered contractors with the railwayestablishment and undertaking work contracts (construction) of variouskinds. They raised demand for escalation cost and the interest accruedthereon because the date of the completion of the project was delayedas alleged due to breach of obligations by the appellants and the scheduledBdate of completion had to be extended. In the interregnum period, therewas rise in the prices of the raw material and the project becameimpossible to be completed by the respondent contractors. Hence, arequest was made to the appellants to either pay the enhanced escalationprice otherwise the respondent contractors would not be in position toCconclude the contract and on the acceptance for payment of the escalationcosts, respondent contractor completed the work and delivered the projectand raised final bills in the prescribed pre-determined format (whichalso included no dues certificate). Since the dispute has arisen in thecontext of the payment of the escalated cost, as demanded by respondentcontractors, and their being clause of arbitration in the agreement,Deach of the respondent contractors sent notice for arbitration invokingclause 64(3) of GCC, which in majority of the cases declined by theappellants stating that no dues certificate has been furnished and thatentailed no subsisting dispute and that was the reason due to which eachof the respondent contractor had approached the High Court by filing anEapplication under Section 11(6) of the Act, 1996. It is also not in disputethat the request for referring the dispute to arbitration was received bythe appellants much prior to the enforcement of the Amendment Act,2015 which came into force, w.e.f. 23[rd] October, 2015.

19. To proceed with the matter further, it will be apposite to takeFnote of the relevant clauses of the agreement with which we are presentlyconcerned: -

“CLAIMS 43.(1) Monthly Statement Of Claims : The Contractorshall prepare and furnish to the Engineer once in every month anaccount giving full and detailed particulars of all claims for anyGadditional expenses to which the Contractor may consider himselfentitled to and of all extra or additional works ordered by theEngineer which he has executed during the preceding month andno claim for payment for and such work will be considered whichhas not been included in such particulars.

43.(2) Signing Of “No Claim” Certificate : The Contractor shallnot be entitled to make any claim whatsoever against the Railwayunder or by virtue of or arising out of this contract, nor shall theRailway entertain or consider any such claim, if made by theContractor, after he shall have signed “No Claim” Certificate infavour of the Railway in such form as shall be required by theRailway after the works are finally measured up. The Contactorshall be debarred from disputing the correctness of the itemscovered by “No Claim” Certificate or demanding clearance toarbitration in respect thereof.

64.(1) Demand for Arbitration:

64.(1) (i) In the event of any dispute or difference between theparties hereto as to the construction or operation of this contract,or the respective rights and liabilities of the parties on any matterin question, dispute or difference on any account or as to thewithholding by the Railway of any certificate to which the contractormay claim to be entitled to, or if the Railway fails to make adecision within 120 days, then and in any such case, but except inany of the “excepted matters” referred to in Clause 63 of theseConditions, the contractor, after 120 days but within 180 days ofhis presenting his final claim on disputed matters shall demand inwriting that the dispute or difference be referred to arbitration.64.(1) (ii) The demand for arbitration shall specify the matterswhich are in question, or subject of the dispute or difference asalso the amount of claim item-wise. Only such dispute(s)ordifference(s) in respect of which the demand has been made,together with counter claims or set off, given by the Railway,shall be referred to arbitration and other matters shall not beincluded in the reference.

64.(1) (iii) (a) The Arbitration proceedings shall be assumed tohave commenced from the day, written and valid demand forarbitration is received by the Railway. (b) The claimant shall submithis claim stating the facts supporting the claims alongwith all therelevant documents and the relief or remedy sought against eachclaim within period of 30 days from the date of appointment ofthe Arbitral Tribunal. (c) The Railway shall submit its defence

statement and counter claim(s), if any, within period of 60 daysof receipt of copy of claims from Tribunal thereafter, unlessotherwise extension has been granted by Tribunal. (d) Place ofArbitration : The place of arbitration would be within thegeographical limits of the Division of the Railway where the causeof action arose or the Headquarters of the concerned Railway orany other place with the written consent of both the parties.

64.(1) (iv) No new claim shall be added during proceedings byeither party. However, party may amend or supplement theoriginal claim or defence thereof during the course of arbitrationproceedings subject to acceptance by Tribunal having due regardto the delay in making it.

64.(1) (v) If the contractor(s) does/do not prefer his/their specificand final claims in writing, within period of 90 days of receivingthe intimation from the Railways that the final bill is ready forpayment, he/they will be deemed to have waived his/their claim(s)and the Railway shall be discharged and released of all liabilitiesunder the contract in respect of these claims.

64.(2) Obligation During Pendency Of Arbitration : Work underthe contract shall, unless otherwise directed by the Engineer,continue during the arbitration proceedings, and no payment dueor payable by the Railway shall be withheld on account of suchproceedings, provided, however, it shall be open for ArbitralTribunal to consider and decide whether or not such work shouldcontinue during arbitration proceedings.

64.(3) Appointment of Arbitrator :

64.(3) (a)(i) In cases where the total value of all claims in questionadded together does not exceed Rs. 25,00,000 (Rupees twentyfive lakh only), the Arbitral Tribunal shall consist of Sole Arbitratorwho shall be Gazetted Officer of Railway not below JA Grade,nominated by the General Manager. The sole arbitrator shall beappointed within 60 days from the day when written and validdemand for arbitration is received by GM. {Authority : RailwayBoard’s letter no. 2012/CE-I/CT/ARB./24, Dated 22.10./05.11.2013}64.(3) (a)(ii) In cases not covered by the Clause 64(3)(a)(i), theArbitral Tribunal shall consist of Panel of three Gazetted RailwayOfficers not below JA Grade or 2 Railway Gazetted Officers notbelow JA Grade and retired Railway Officer, retired not belowthe rank of SAG Officer, as the arbitrators. For this purpose, theRailway will send panel of more than 3 names of GazettedRailway Officers of one or more departments of the Railwaywhich may also include the name(s) of retired Railway Officer(s)empanelled to work as Railway Arbitrator to the contractor within60 days from the day when written and valid demand forarbitration is received by the GM. Contractor will be asked tosuggest to General Manager at least 2 names out of the panel forappointment as contractor’s nominee within 30 days from the dateof dispatch of the request by Railway. The General Manager shallappoint at least one out of them as the contractor’s nominee andwill, also simultaneously appoint the balance number of arbitratorseither from the panel or from outside the panel, duly indicating the‘presiding arbitrator’ from amongst the 3 arbitrators so appointed.GM shall complete this exercise of appointing the Arbitral Tribunalwithin 30 days from the receipt of the names of contractor’snominees. While nominating the arbitrators, it will be necessaryto ensure that one of them is from the Accounts Department. Anofficer of Selection Grade of the Accounts Department shall beconsidered of equal status to the officers in SA grade of otherdepartments of the Railway for the purpose of appointment ofarbitrator.

64.(7) Subject to the provisions of the aforesaid Arbitration andConciliation Act, 1996 and the rules thereunder and any statutorymodifications thereof shall apply to the arbitration proceedingsunder this Clause.

20. As per clause 43(2), the contractor signs “No claim”certificate in favour of the railway in the prescribed format after thework is finally measured up and the contractor shall be debarred fromdisputing the correctness of the items covered under the “No Claim”certificate or demanding clearance to arbitration in respect thereof.Each of the respondent has to attach no claim certificate with final bills

ABCDE

Ain the prescribed format to be furnished in advance before the final billsare being examined and measured by the railway authorities. Althoughit has been seriously disputed by the appellants but that is the reason forwhich even after furnishing no claim certificate with the final bills beingraised, it came to be questioned by the respondent(contractor) by filingan application to refer the matter to arbitration invoking clause 64(3) ofBthe conditions of contract as agreed by the parties.

21. Under clause 64(1), if there is any dispute or differencebetween the parties hitherto as to the construction or operation of thecontract, or the respective rights and liabilities of the parties on anymatter in question or any other ancillary disputes arising from the termsCof the contract or if the railway establishment fails to take decisionwithin the stipulated period and the dispute could not be amicably settled,such dispute or difference is to be referred to arbitration and who shallarbitrate such disputes/differences between the parties, the GeneralManager may nominate the officer by designation as referred to underDclause 64(3)(a)(i) and a(ii) respectively with further procedure beingprescribed for the sole arbitrator or the Arbitral Tribunal to adjudicatethe disputes/differences arising under the terms of contract between theparties.22. It is also not disputed that when the request of the respondentEcontractors was rejected by the appellants on the premise of the noclaim certificate being furnished, arbitral dispute does not survive whichis to be sent to arbitration, each of the respondent contractor approachedthe High Court by filing an application under Section 11(6) of the Act forappointment of an arbitrator for settling their disputes/differences arisingfrom the terms of contract as agreed between the parties.F

23. It is to be noticed that the cost of escalation which was raisedby each of the respondent contractor with final bills were appended withthe no claim certificate in the prescribed pre-determined format andeach of the claim of the respondent contractor for making referenceto the Arbitrator for settling the disputes/differences arising from theGterms of the contract, as agreed between the parties was turned downby the appellants because of furnishing no claim certificate.

24. As on 1[st] January, 2016, the Amendment Act, 2015 was gazettedand according to Section 1(2) of the Amendment Act, 2015, it deemed to

have come into force on 23[rd] October 2015. Section 21 of the Act, 1996clearly envisage that unless otherwise agreed by the parties, the arbitralproceedings in respect of dispute shall commence from the date onwhich request for that dispute to be referred to arbitration is receivedby the respondent and the plain reading of Section 26 of AmendmentAct, 2015 is self-explicit, leaves no room for interpretation. Section 21& 26 of the Act, 1996/Amendment Act, 2015 relevant for the purpose isextracted hereunder: -

“21. Commencement of arbitral proceedings. —Unlessotherwise agreed by the parties, the arbitral proceedings in respectof particular dispute commence on the date on which requestfor that dispute to be referred to arbitration is received by therespondent.

26. Act not to apply to pending arbitral proceedings –Nothing contained in this Act shall apply to the arbitral proceedingscommenced, in accordance with the provisions of Section 21 ofthe principal Act, before the commencement of this Act unlessthe parties otherwise agree but this Act shall apply in relation toarbitral proceedings commenced on or after the date ofcommencement of this Act.”

25. The conjoint reading of Section 21 read with Section 26 leavesno manner of doubt that the provisions of the Amendment Act, 2015shall not apply to such of the arbitral proceedings which has commencedin terms of the provisions of Section 21 of the Principal Act unless theparties otherwise agree. The effect of Section 21 read with Section 26of Amendment Act, 2015 has been examined by this Court in AravaliPower Company Private LimitedVs. Era Infra Engineering Limited(supra) and taking note of Section 26 of the Amendment Act, 2015 laiddown the broad principles as under:-

“22. The principles which emerge from the decisions referred toabove are:

22.1. In cases governed by 1996 Act as it stood before theAmendment Act came into force:

22.1.1. The fact that the named arbitrator is an employee of oneof the parties is not ipso facto ground to raise presumption ofbias or partiality or lack of independence on his part. There can

however be justifiable apprehension about the independence orimpartiality of an employee arbitrator, if such person was thecontrolling or dealing authority in regard to the subject contract orif he is direct subordinate to the officer whose decision is thesubject-matter of the dispute.

22.1.2. Unless the cause of action for invoking jurisdiction underClauses (a), (b) or (c) of sub-section (6) of Section 11 of the 1996Act arises, there is no question of the Chief Justice or his designateexercising power under sub-section (6) of Section 11.

22.1.3. The Chief Justice or his designate while exercising powerunder sub-section (6) of Section 11 shall endeavour to give effectto the appointment procedure prescribed in the arbitration clause.

22.1.4. While exercising such power under sub-section (6) ofSection 11, if circumstances exist, giving rise to justifiable doubtsas to the independence and impartiality of the person nominated,or if other circumstances warrant appointment of an independentarbitrator by ignoring the procedure prescribed, the Chief Justiceor his designate may, for reasons to be recorded ignore thedesignated arbitrator and appoint someone else.

22.2. In cases governed by 1996 Act after the Amendment Acthas come into force: If the arbitration clause finds foul with theamended provisions, the appointment of the arbitrator even ifapparently in conformity with the arbitration clause in theagreement, would be illegal and thus the court would be within itspowers to appoint such arbitrator(s) as may be permissible.”

which has been further considered in S.P. Singla ConstructionsPvt. Ltd. case(supra).

“16. Considering the facts and circumstances of the present case,we are not inclined to go into the merits of this contention of theappellant nor examine the correctness or otherwise of the aboveview taken by the Delhi High Court in Ratna Infrastructure Projectscase; suffice it to note that as per Section 26 of the Arbitrationand Conciliation (Amendment) Act, 2015 the provisions of theAmended Act, 2015 shall not apply to the arbitral proceedingscommenced in accordance with the provisions of Section 21 of

the Principal Act before the commencement of the AmendmentAct unless the parties otherwise agree. In the facts andcircumstances of the present case, the proviso in clause (65) ofthe general conditions of the contract cannot be taken to be theagreement between the parties so as to apply the provisions ofthe amended Act. As per Section 26 of the Act, the provisions ofthe Amendment Act, 2015 shall apply in relation to arbitralproceedings commenced on or after the date of commencementof the Amendment Act, 2015(w.e.f. 23.10.2015). In the presentcase, arbitration proceedings commenced way back in 2013, muchprior to coming into force of the amended Act and, therefore,provisions of the Amended Act cannot be invoked.”

26. We are also of the view that the Amendment Act, 2015 whichcame into force, i.e. on 23[rd] October, 2015, shall not apply to the arbitralproceedings which has commenced in accordance with the provisionsof Section 21 of the Principal Act, 1996 before the coming into force ofAmendment Act, 2015, unless the parties otherwise agree.

27. In the instant case, the request was made and received by theappellants in the concerned appeal much before the Amendment Act,2015 came into force. Whether the application was pending forappointment of an arbitrator or in the case of rejection because of noclaim as in the instant case for appointment of an arbitrator includingchange/substitution of arbitrator, would not be of any legal effect forinvoking the provisions of Amendment Act, 2015, in terms of Section 21of the principal Act, 1996. In our considered view, the applications/requests made by the respondent contractors deserves to be examinedin accordance with the principal Act, 1996 without taking resort to theAmendment Act, 2015 which came into force from 23[rd] October, 2015.28. The thrust of the learned counsel for the appellants thatsubmission of no claim certificate furnished by each of the respondent/contractor takes away the right for settlement of dispute/difference arisingin terms of the agreement to be examined by the arbitrator invokingClause 64(3) of the conditions of the contract. The controversy presentedbefore us is that whether after furnishing of no claim certificate and thereceipt of payment of final bills as submitted by the contractor, still anyarbitral dispute subsists between the parties or the contract standsdischarged.

A29. Before we take note of the factual aspect of the present matters,it will be appropriate to carefully consider the plenitude of decisions ofthis Court referred to by learned counsel for the parties and to summarise(first category) Union of IndiaVs. Kishorilal Gupta & Bros.AIR1959 SC 1362; P.K. Ramaiah & Co.Vs. Chairman and ManagingDirector, National Thermal Power Corpn.1994 Supp(3) SCCB126;State of MaharashtraVs. Nav Bharat Builders1994 Supp(3)SCC 83; Nathani Steels LimitedVs. Associated Constructions 1995Supp(3) SCC 324……(second category) Damodar Valley CorporationVs. KK Kar1974(1) SCC 141; Bharat Heavy Electricals LimitedRanipurVs. Amarnath Bhan Prakash1982(1) SCC 625;Union ofCIndia and Anr.Vs. L.K. Ahuja and Co.1988(3) SCC 76; JayeshEngineering WorksVs. New India Assurance Co. Ltd. 2000(10) SCC178; Chairman and MD, NTPC Ltd.Vs. Reshmi ConstructionsBuilders & Contractors2004(2) SCC 663.

30. The aforesaid cases fall under two categories, the one categoryDwhere the Court after considering the facts found that there was fulland final settlement resulting in accord and satisfaction and there wasno substance in the allegations of coercion/undue influence. In the secondcategory of cases, the Court found some substance in the contention ofthe claimants that “no-dues/no claims certificate or discharge vouchers”were insisted and taken (either on printed format or otherwise) as aEcondition precedent for release of the admitted dues and consequentlythis Court held that the disputes are arbitrable. It took note of the principlesearlier examined and summarised in National Insurance CompanyLimitedVs. Boghara Polyfab Private Limited case (supra) asunder: -F“44. None of the three cases relied on by the appellant lay downa proposition that mere execution of full and final settlementreceipt or discharge voucher is bar to arbitration, even whenthe validity thereof is challenged by the claimant on the ground offraud, coercion or undue influence. Nor do they lay down aGproposition that even if the discharge of contract is not genuine orlegal, the claims cannot be referred to arbitration. In all the threecases, the Court examined the facts and satisfied itself that therewas accord and satisfaction or complete discharge of the contractand that there was no evidence to support the allegation of coercion/undue influence.”H

31. Further, taking note of the jurisdiction of the Chief Justice/ hisDesignate in the proceedings under Section 11(6) of Act 1996, this Courtculled out the legal proposition in paragraph 51 as follows:-

“51. The Chief Justice/his designate exercising jurisdiction underSection 11 of the Act will consider whether there was really accordand satisfaction or discharge of contract by performance. If theanswer is in the affirmative, he will refuse to refer the dispute toarbitration. On the other hand, if the Chief Justice/his designatecomes to the conclusion that the full and final settlement receiptor discharge voucher was the result of any fraud/coercion/undueinfluence, he will have to hold that there was no discharge of thecontract and consequently, refer the dispute to arbitration.Alternatively, where the Chief Justice/his designate is satisfiedprima facie that the discharge voucher was not issued voluntarilyand the claimant was under some compulsion or coercion, andthat the matter deserved detailed consideration, he may insteadof deciding the issue himself, refer the matter to the ArbitralTribunal with specific direction that the said question should bedecided in the first instance.”

32. It further laid down the illustrations as to when claims arearbitrable and when they are not. This may be illustrative (not exhaustive)but beneficial for the authorities in taking decision as to whether in agiven situation where no claim/discharge voucher has been furnishedwhat will be its legal effect and still there is any arbitral dispute subsiststo be examined by the arbitrator in the given facts and circumstancesand held in para 52 of National Insurance Company LimitedVs.Boghara Polyfab Private Limited(supra) as follows:-

“52. Some illustrations (not exhaustive) as to when claims arearbitrable and when they are not, when discharge of contract byaccord and satisfaction are disputed, to round up the discussionon this subject are:

(i) claim is referred to conciliation or pre-litigation Lok Adalat.The parties negotiate and arrive at settlement. The terms ofsettlement are drawn up and signed by both the parties and at-tested by the conciliator or the members of the Lok Adalat. Aftersettlement by way of accord and satisfaction, there can be noreference to arbitration.

(ii) claimant makes several claims. The admitted or undisputedclaims are paid. Thereafter negotiations are held for settlementof the disputed claims resulting in an agreement in writing settlingall the pending claims and disputes. On such settlement, the amountagreed is paid and the contractor also issues discharge voucher/no-claim certificate/full and final receipt. After the contract isdischarged by such accord and satisfaction, neither the contractnor any dispute survives for consideration. There cannot be anyreference of any dispute to arbitration thereafter.

(iii) contractor executes the work and claims payment of sayrupees ten lakhs as due in terms of the contract. The employeradmits the claim only for rupees six lakhs and informs thecontractor either in writing or orally that unless the contractorgives discharge voucher in the prescribed formatacknowledging receipt of rupees six lakhs in full and finalsatisfaction of the contract, payment of the admitted amount willnot be released. The contractor who is hard-pressed for fundsand keen to get the admitted amount released, signs on the dottedline either in printed form or otherwise, stating that the amountis received in full and final settlement. In such case, thedischarge is under economic duress on account of coercionemployed by the employer. Obviously, the discharge voucher cannot

be considered to be voluntary or as having resulted in dischargeof the contract by accord and satisfaction. It will not be bar toarbitration.

(iv) An insured makes claim for loss suffered. The claim isneither admitted nor rejected. But the insured is informed duringdiscussions that unless the claimant gives full and final voucherfor specified amount (far lesser than the amount claimed by theinsured), the entire claim will be rejected. Being in financialdifficulties, the claimant agrees to the demand and issues anundated discharge voucher in full and final settlement. Only afew days thereafter, the admitted amount mentioned in the voucheris paid. The accord and satisfaction in such case is notvoluntary but under duress, compulsion and coercion. Thecoercion is subtle, but very much real. The “accord” is not byfree consent. The arbitration agreement can thus be invoked torefer the disputes to arbitration.

(v) claimant makes claim for huge sum, by way ofdamages. The respondent disputes the claim. The claimant whois keen to have settlement and avoid litigation, voluntarilyreduces the claim and requests for settlement. The respondentagrees and settles the claim and obtains full and final dischargevoucher. Here even if the claimant might have agreed forsettlement due to financial compulsions and commercial pressureor economic duress, the decision was his free choice. There wasno threat, coercion or compulsion by the respondent. Therefore,the accord and satisfaction is binding and valid and there cannotbe any subsequent claim or reference to arbitration.”

33. It is true that there cannot be rule of absolute kind and eachcase has to be looked into on its own facts and circumstances. At thesame time, we cannot be oblivious of the ground realities that where apetty/small contractor has made investments from his available resourcesin executing the works contract and bills have been raised for theescalation cost incurred by him and the railway establishments/appellantswithout any justification reduces the claim unilaterally and take defenceof the no claim certificate being furnished which as alleged by therespondents to be furnished at the time of furnishing the final bills in theprescribed format.

34. The nature of work under contract of the respondentcontractors and the claim of the contractors which is the dispute in briefto be adjudicated by the arbitrator is submitted as follows:-

S.NoSLP NoName of ContractorNature of Work under Claim of ContractorContract 1. 6312/2018 Parmar Construction Construction, Rs 1,07,98,765/- (Final Bill) + Company Strengthening and Interest and Arbitration Cost. rebuilding of major bridges between Nadbhai-Idgah (Agra) Total Cost of Contract Rs 3,30,71,724/- 2. 2166/2018 S.K. Construction Construction of Office Rs 2.96 Lacs (Deficit amount) Accomodation for + Rs 2.65 Lacs (Escalation officers and rest house at cost) + Rs 2.39 Lacs Dungarpur. (Commercial Interest @ 18% Total Cost of Contract Rs p.a.) 43,76,112/-. Total value of Work done Total Rs 8 Lacswas Rs 58.50 Lacs.Rs 55.54Lacs were paid.

[2019] 5 S.C.R.

3.7937/2018Anil Trading Augmentation of the Rs. 2,15,000/-(Non Company capacity of Diesel Shed, availability of Drawing) + Rs Bhagat-ki-kothi, Jodhpur. 1,50,000/- (Non availability of Contract Price Rs clear site) + Rs 1,14,099 B2,42,85,808.84/- (interest on delay of Final bill payment) + Rs 12,15,000/- (Bank Guarantee) + Rs 12,14,290/- (Security Deposit with interest) + Rs 1,00,000/- (Arbitration Cost) CTotal Rs 30,08,389/- 4. 6034/2018 Rajendra Prasad Construction addition Rs 1.5 Lacs (deducted along Bansal and alteration and raising with interest of 18% p.a.) + Rs of existing platform 7.9 Lacs (expenses incurred on surfacing RRI Building, office staff and labour office) S&T Structures and + Rs 1.2Lacs (delayed release dismantling of various of security amount & Final Dstructures at Bharatpur-bill) + Rs 2Lacs (Loss of Agra Fort Station Yard. Profit) Total Cost of Contract Rs 87,85,292/- Total Rs 12,60,000/-3 Supplementary contracts of the value of rs 24,62,511.52/-, Rs 3.5 ELacs & Rs 26,12,977,14/- 5. 6316/2018 Maya Construction Construction of Rs 38,27,196/- (Final bill Pvt Ltd Ratangarh Bye Pass. amount) + Rs 17,78,231/- Total Cost of Contract Rs (PVC Final bill amount) + Rs 8,29,25,822.68/- 50,63,738/- (Security deposit F& EMD) Total Rs 1,06,69,165/- 6. 8597/2018 Bharat Spun Pipes Construction of Road Rs 1,88,709/- (charged under & Construction Over Bridges across head Cess) + Rs 8,36,386/- Company Railway track in Dausa (Final PVC Bill) Yard. GTotal Cost of Contract Rs Total Rs 10,25,095/-3,81,90,423.68/-

7. 8596/2018 Harsha Constructions Construction of new Major Rs 1,30,960/- (Payment withheld for Bridge no 178 (on expansion joints) + Rs 1 Lacs Banas River) (Refund of penalty from bill no Total Cost of Contract Rs XXV) + 36 Lacs (refund of cost of 10,51,42,109/- PSC box girder) + Rs 3,19,573/- (Loss due to delay in making final Bpayment) + Rs 76,15,206/- (Incresed cost of material) Total Rs 1,17,65,739/- 8. 8019/2018 Bharat Spun Pipes & Construction of road over Rs 6,18,302/- (charged under head Construction Company bridges across railway track Cess) + Rs 10,30,081/- (Final PVC Total cost of Contract Rs Bill) C6,31,07,472.50/- Total Rs 16,48,383/- 9. 8021/2018 SB-SHC-MCDPL (JV) Construction of Major Bridges Rs 27,93,752/- (amount deducted including earth work. which was previously paid on Total Cost of Contract Rs account of overlapping under 10[th]15,92,08,761.97/- running bill) + Rs 1,66,785/- (work done outside the scope of work order) D+ 7,98,214/- (deduction of 1% Cess) + Rs 5,78,144/- (Interest on delayed payment) + Rs 28,085 (Cost of computer stolen) + Rs 24,87,864/- (Cost of expansion joint) + Rs 1,81,003/- (Price variation) + Rs 60,390/- (Welding and bolting) ETotal Rs 70,94,237/- 10. 7720/2018 Bharat Spun Pipes & Construction of road over Rs 44,514/- (charged under head Construction Company bridges across railway track Cess) + Rs 7,80,547 (Final PVC Bill) Total cost of Contract Rs 2,98,59,531/- Total Rs 8,25,061/- 11.8598/2018Rajendra Prasad BansalConstruction of misc., AEN Rs 8.8 Lacs (loss of Profit) + Rs 5 FOffice, Signalling structure, Lacs (loss due to bad debts) & some platform surfacing, temporary other grounds like price variation, site offices, addition and non payment of final bill and security alteration of existing structure, deposit for 1.5 yrs & interest on dismantling and rebuilding amount of final bill various structures between Idgah-Agra Fort Station Yard. Total Rs 13.8 Lacs/- Total Cost of Contract Rs G1,40,43,594/- [exact amount not ascertainable from documents on record]

[2019] 5 S.C.R.

A12. Diary No Bharat Spun Pipes & Construction of road over Rs 4,78,780/- (charged under head 8885/2018 Construction Company bridges across railway track Cess) + Rs 23,07,563/- (Final PVC Total cost of Contract Bill) along with price variation and Rs 5,47,26,451.47/- interest Total Rs 27,86,343/- B13. 9514/2018 B.M. Construction Construction of major bridge Rs 7,21,733/- (for adding 10% more Company between Kanauta- Jaipur cement) + Rs 6,23,923/- + Rs stations. 7,55,734/- (Extra work) + Rs Total Cost of Contract 11,07,561/ -(Price variation of Steel Rs 8,46,08,660/- purchased) + 4Lacs (using pressure rings) + 4,53,304/- (Labour Cess deducted), Rs 1.25Lacs (deduction from bills) + Rs 3,47,880/- (interest Con delayed paymet) + Rs 1.28 Lacs (Deducted as penalty) + Rs 19,01,537 (on a/c of PVC) + Rs 60 Lacs (20 Lacs each for business losses, mental agonies and social humiliation) along with interest Total Rs 1,93,34,667/-D14. 9559/2018 Balaji Builders & Construction of 72 Units Type-Rs 1,32,71,424/- (Final PVC Bill) + Developers II, 108 Units Type-III, 36 Rs 50Lacs (Price variation of steel Units Type-IV in multi-storied bars) tower and health units, shopping complex and other Total Rs 1,82,71,424/-ancillary works near Getore EJagatpur Railway Station. Total Cost of Contract Rs 28,28,20,028/- 15. 22263/2018 B.M. Construction Construction of major bridge Rs 39,05,010/- (for vacant labour Company between Jatwara- Kanauta charges of 9 months) + Rs stations. 19,46,970/- (delay in providing Total Cost of Contract drawing) + Rs 13,66,488/-(Price Rs 10,4484,441/- variation of Steel purchased) + FRs 3,91,534.88/- (using pressure rings) + 1,32,655/- (Labour Cess deducted), Rs 1,30,771/- (deduction from bills) + Rs 50,000/- (Deducted from 21 running bills) + Rs 11,91,127/- (interest on delayed payment) + Rs 56,40,327/- (Security Amount) + Rs 1,38,000/- (deducted as penalty) + Rs 76,39,600/- G(PVC Bill) + Rs 60 Lacs (20 Lacs each for business losses, mental agonies and social humiliation) along with interest Total Rs 2,85,32,482/-

16.11417/2018Kewai Constructions Construction of Minor Rs 16,74,748/- (security Co (JV) Bridge between Dausa – Deposit) + Rs 47,66,869/- Lalsot (Payment of Bill) + Total Cost of Contract Rs 31,33,116/- (Cost of Rs 5,98,22,476/- material left at site) + Rs 10 Lacs (PSC Slab Advances) + Rs 13.85 Lacs (Idle Labour Charge) + Rs 50,000/- (Cost of Arbitration) Total Rs. 1,20,09,733/- 17. 11862/2018 Harinarayan Construction of Staircase Rs 4,82,283.26/- (Final PVC Khandelwal for fire exit, drilling tube Bill) well, underground water tank, and other miscellaneous works Total Cost of Contract Rs 1,56,63,006.87/-35. The respondents are the contractors and attached with therailway establishment in the instant batch of appeals are claiming eitherrefund of security deposits/bank guarantee, which has been forfeited orthe escalation cost has been reduced from final invoices unilaterallywithout tendering any justification. It is manifest from the pleadings onrecord that the respondent contractors who entered into contract forconstruction works with the railway establishment cannot afford to takeany displeasure from the employer, the amount under the bills for variousreasons which may include discharge of his liability towards the bank,financial institutions and other persons, indeed the railway establishmenthas upper hand. rebutable presumption could be drawn that when ano claim has been furnished in the prescribed format at the time of finalbills being raised with unilateral deductions made even that acceptableamount will not be released, unless no claim certificate is being attachedto the final bills. On the stated facts, para 52(iii) referred to by thisCourt in National Insurance Company LimitedVs. Boghara PolyfabPrivate Limited(supra) indeed covers the cases of the presentcontractors with whom no option has been left and being in financialduress to accept the amount tendered in reference to the final billsfurnished and from the discharge voucher which has been taken to be adefence by the appellants prima facie cannot be said to be voluntary and

ABC

DEF

Ahas resulted in the discharge of the contract by accord and satisfactionas claimed by the appellants. In our considered view, the arbitral disputesubsists and the contract has not been discharged as being claimed bythe appellants employer(s) and all the contentions in this regard are opento be examined in the arbitral proceedings.

B36. Learned counsel for the appellants has referred to the judgmentsin Union of India and OthersVs. Master ConstructionCompany(supra);New India Assurance Company LimitedVs. GenusPower Infrastructure Limited (supra); ONGC MangalorePetrochemicals LimitedVs. ANS Constructions Limited andAnr.(supra). In all the cases referred, this Court has taken note of theCjudgment in National Insurance Company LimitedVs. BogharaPolyfab Private Limited(supra) on which detailed discussion hasbeen made and taking note of the pleadings of the case on hand, thisCourt arrived at conclusion that prima facie there is an evidence onrecord to justify that no claim certificate or letter of subrogation wasDvoluntary and free from coercion/undue influence and accordingly heldthat there is no live claim subsists, which is arbitrable after the dischargeof the contract by accord and satisfaction.

37. The further submission made by the appellants that the HighCourt has committed error in appointing an independent arbitrator withoutEresorting to the arbitrator which has been assigned to arbitrate the disputeas referred to under clause 64(3) of the contract. To examine the issueany further, it may be relevant to take note of three clauses in sub-section 6 of Section 11 of Act, 1996(pre-amended Act, 2015) which is asunder:-

F“(6) Where, under an appointment procedure agreed upon by theparties,—

(a) party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reach anagreement expected of them under that procedure; or

G(c) person, including an institution, fails to perform any functionentrusted to him or it under that procedure,

party may request the Chief Justice or any person or institutiondesignated by him to take the necessary measure, unless the

agreement on the appointment procedure provides other meansfor securing the appointment.

38. Clause (c) of sub-section (6) of Section 11 relates to failure toperform any function entrusted to person including an institution andalso failure to act under the procedure agreed upon by the parties. Inother words, clause(a) refers to the party failing to act as required underthat procedure; clause(b) refers to the agreement where the partiesfails to reach to an agreement expected of them under that procedureand clause (c ) relates to person which may not be party to theagreement but has given his consent to the agreement and what furthertranspires is that before any other alternative is resorted to, agreedprocedure has to be given its precedence and the terms of the agreementhas to be given its due effect as agreed by the parties to the extentpossible. The corrective measures have to be taken first and the Courtis the last resort. It is also to be noticed that by appointing an arbitratorin terms of sub-section (8) of Section 11 of Act, 1996, due regard has tobe given to the qualification required for the arbitrator by the agreementof the parties and also the other considerations such as to secure anindependent and impartial arbitrator. To fulfil the object with terms andconditions which are cumulative in nature, it is advisable for the Court toensure that the remedy provided as agreed between the parties in termsof the contract is first exhausted.

39. It has been considered by three Judges’ Bench of this Courtin Union of India & AnotherVs. M.P. Gupta(supra). Taking note ofclause 64 of the agreement for arbitration, the Court held that in view ofexpress provision contained in terms of the agreement in appointment oftwo gazetted railway officers, the High Court was not justified inappointment of retired Judge as the sole arbitrator. It held as under:-

“3. The relevant part of clause 64 runs as under:

“64. Demand for arbitration.—***

(3)(a)(ii) Two arbitrators who shall be gazetted railway officersof equal status to be appointed in the manner laid in clause 64(3)(b)for all claims of Rs 5,00,000 (Rupees five lakhs) and above, andfor all claims irrespective of the amount or value of such claims ifthe issues involved are of complicated nature. The GeneralManager shall be the sole judge to decide whether the issues

involved are of complicated nature or not. In the event of thetwo arbitrators being undecided in their opinions, the matter underdispute will be referred to an umpire to be appointed in the mannerlaid down in sub-clause (3)(b) for his decision.

(3)(a)(iii) It is term of this contract that no person other than agazetted railway officer should act as an arbitrator/umpire and iffor any reason, that is not possible, the matter is not to be referredto arbitration at all.”

4. In view of the express provision contained therein that twogazetted railway officers shall be appointed as arbitrators, JusticeP.K. Bahri could not be appointed by the High Court as the solearbitrator. On this short ground alone, the judgment and orderunder challenge to the extent it appoints Justice P.K. Bahri assole arbitrator is set aside. Within 30 days from today, the appellantsherein shall appoint two gazetted railway officers as arbitrators.The two newly appointed arbitrators shall enter into referencewithin period of another one month and thereafter the arbitratorsshall make their award within period of three months.”

40. It was further considered by this Court in Union of Indiaand AnotherVs. V.S. Engineering(P) Ltd. (supra) as under:-

“3. The learned Additional Solicitor General appearing for theappellants Union of India has pointed out that as per clauses 63and 64 of the General Conditions of Contract, this Court in nouncertain terms has held that the Arbitral Tribunal has to beconstituted as per the General Conditions of Contract, the HighCourt should not interfere under Section 11 of the Act and theHigh Court should accept the Arbitral Tribunal appointed by theGeneral Manager, Railways. In this connection, the learned ASGinvited our attention to decision of this Court directly bearing onthe subject in Union of India v. M.P. Gupta [(2004) 10 SCC504] wherein similar question with regard to appointment of theArbitral Tribunal for the Railways with reference to clause 64 ofthe General Conditions of Contract came up before this Courtand this Court held that where two gazetted railway officers areappointed as the Arbitral Tribunal, the High Court should notappoint retired Judge of the High Court as sole arbitrator and

the appointment of sole arbitrator was set aside. The conditionsof clauses 63 and 64 of the General Conditions of Contract arealmost analogous to the one we have in our hand. In that casealso relying on clause 64 of the contract three-Judge Benchpresided over by the Chief Justice of India observed as follows:(SCC p. 505, para 4)

“4. In view of the express provision contained therein that twogazetted railway officers shall be appointed as arbitrators,Justice P.K. Bahri could not be appointed by the High Court asthe sole arbitrator. On this short ground alone, the judgmentand order under challenge to the extent it appoints Justice P.K.Bahri as sole arbitrator is set aside. Within 30 days from today,the appellants herein shall appoint two gazetted railway officersas arbitrators. The two newly appointed arbitrators shall enterinto reference within period of another one month andthereafter the arbitrators shall make their award within periodof three months.”

and further reiterated by this Court in Northern RailwayAdministration, Ministry of Railway, New Delhi Vs. Patel

Engineering Company Limited(supra) as follows:-

“5. It is pointed out that there are three clauses in sub-section (6)of Section 11. Clause (c) relates to failure to perform functionentrusted to person including an institution and also failure to actunder the procedure agreed upon by the parties. In other words,clause (a) refers to parties to the agreement. Clause (c) relates toa person who may not be party to the agreement but has givenconsent to the agreement. It is also pointed out that there is astatutory mandate to take necessary measures, unless theagreement on the appointment procedure provided other meansfor securing the appointment. It is, therefore, submitted that beforethe alternative is resorted to, agreed procedure has to be exhausted.The agreement has to be given effect and the contract has to beadhered to as closely as possible. Corrective measures have tobe taken first and the Court is the last resort.

6. It is also pointed out that while appointing an arbitrator in termsof sub-section (8) of Section 11, the Court has to give due regard

to any qualification required for the arbitrator by the agreementof the parties and other considerations as are likely to secure theappointment of an independent and impartial arbitrator. It is pointedout that both these conditions are cumulative in nature. Therefore,the Court should not directly make an appointment. It has to ensurefirst that the provided remedy is exhausted and the Court mayask to do what has not been done.

12. bare reading of the scheme of Section 11 shows that theemphasis is on the terms of the agreement being adhered to and/or given effect as closely as possible. In other words, the Courtmay ask to do what has not been done. The Court must firstensure that the remedies provided for are exhausted. It is true ascontended by Mr. Desai, that it is not mandatory for the ChiefJustice or any person or institution designated by him to appointthe named arbitrator or arbitrators. But at the same time, dueregard has to be given to the qualifications required by theagreement and other considerations.”

and further, in Union of IndiaVs. Singh BuildersSyndicate(supra) it was held as under:-

“11. The question that arises for consideration in this appeal byspecial leave is whether the appointment of retired Judge of theHigh Court as sole arbitrator should be set aside and an ArbitralTribunal should again be constituted in the manner provided interms of Clause 64.

12. Dealing with matter arising from the old Act (the ArbitrationAct, 1940), this Court, in Union of India v. M.P. Gupta [(2004)10 SCC 504] held that appointment of retired Judge as solearbitrator contrary to Clause 64 (which requiring serving gazettedrailway officers being appointed) was impermissible.

13. The position after the new Act came into force, is different,as explained by this Court in Northern Railway Admn., Ministryof Railway v. Patel Engg. Co. Ltd.[(2008) 10 SCC 240]. ThisCourt held that the appointment of arbitrator(s) named in thearbitration agreement is not mandatory or must, but the emphasisshould be on the terms of the arbitration

agreement being adhered to and/or given effect, as closely aspossible.

14. It was further held in Northern Railway case [(2008) 10SCC 240] that the Chief Justice or his designate should first ensurethat the remedies provided under the arbitration agreement areexhausted, but at the same time also ensure that the twinrequirements of sub-section (8) of Section 11 of the Act are keptin view. This would mean that invariably the court should firstappoint the arbitrators in the manner provided for in the arbitrationagreement. But where the independence and impartiality of thearbitrator(s) appointed/nominated in terms of the arbitrationagreement is in doubt, or where the Arbitral Tribunal appointed inthe manner provided in the arbitration agreement has not functionedand it becomes necessary to make fresh appointment, the ChiefJustice or his designate is not powerless to make appropriatealternative arrangements to give effect to the provision forarbitration.”

41. This Court has put emphasis to act on the agreed terms and tofirst resort to the procedure as prescribed and open for the parties to theagreement to settle differences/disputes arising under the terms of thecontract through appointment of designated arbitrator although thename in the arbitration agreement is not mandatory or must but emphasisshould always be on the terms of the arbitration agreement to be adheredto or given effect as closely as possible.

42. The judgments inDatar Switchgears Ltd. case(supra); PunjLloyd case(supra) and Union of IndiaVs. Bharat BatteryManufacturing Co. (P) Ltd. case(supra) on which reliance has beenplaced by the learned counsel for the respondents/contractors may notbe of assistance for the reason that the question for consideration beforethis Court was that if one party demands the opposite party to appoint anarbitrator and the other party fails to appoint an arbitrator within 30 dayswhat will be its legal consequence and it was held in the cases(supra)that if one party demands the opposite party to appoint an arbitrator andif the opposite party has failed to make an appointment within 30 days,the right to make appointment is not forfeited but continues, but anappointment has to be made before the former makes an application

Aunder Section 11 seeking appointment of an arbitrator. In the instantcases, the question for consideration is as to whether the Chief Justiceor his Designate in exercise of power under Section 11(6) of the Actshould directly make an appointment of an independent arbitrator without,in the first instance, resorting to ensure that the remedies provided underthe arbitration agreement are exhausted.

43. In the present batch of appeals, independence and impartialityof the arbitrator has never been doubted but where the impartiality ofthe arbitrator in terms of the arbitration agreement is in doubt or wherethe Arbitral Tribunal appointed in terms of the arbitration agreement hasnot functioned, or has failed to conclude the proceedings or to pass anCaward without assigning any reason and it became necessary to make afresh appointment, Chief Justice or his designate in the givencircumstances after assigning cogent reasons in appropriate cases mayresort to an alternative arrangement to give effect to the appointment ofindependent arbitrator under Section 11(6) of the Act. InNorth EasternDRailway and OthersVs. Tripple Engineering Works(supra), thoughthe panel of arbitrators as per clause 64(3)(a)(ii) and (iii) of the generalconditions of contract under GCC was appointed in the year 1996 butfor two decades, the arbitrator failed to pass the award and no explanationcame forward. In the given situation, this Court observed that general

conditions of the contract do not prescribe any specific qualification ofEthe arbitrators to be appointed under the agreement except that theyshould be railway officers further held that even if the arbitrationagreement was to specifically provide for any particular qualification(s)of an arbitrator the same would not denude the power of the Courtacting under Section 11(6) to depart therefrom and accordingly, confirmedFthe appointment of an independent arbitrator appointed by the High Courtin exercise of Section 11(6) of the Act, 1996. Almost the same situationwas examined by this Court in Union of India and OthersVs. UttarPradesh State Bridge Corporation Ltd.(supra) and after placingreliance on North Eastern Railway and OthersVs. TrippleEngineering works(supra) held that since Arbitral Tribunal has failedGto perform and to conclude the proceedings, appointed an independentarbitrator in exercise of power under Section 11(6) of the Act, 1996. Inthe given circumstances, it was the duty of the High Court to first resortto the mechanism in appointment of an arbitrator as per the terms ofcontract as agreed by the parties and the default procedure was openedHto be resorted to if the arbitrator appointed in terms of the agreementfailed to discharge its obligations or to arbitrate the dispute which wasnot the case set up by either of the parties.

44. To conclude, in our considered view, the High Court was notjustified in appointing an independent arbitrator without resorting to theprocedure for appointment of an arbitrator which has been prescribedunder clause 64(3) of the contract under the inbuilt mechanism as agreedby the parties.

45. Consequently, the orders passed by the High Court are quashedand set aside. The appellants are directed to appoint the arbitrator interms of clause 64(3) of the agreement within period of one monthfrom today under intimation to each of the respondents/contractors andsince sufficient time has been consumed, at the first stage itself, in theappointment of an arbitrator and majority of the respondents being thepetty contractors, the statement of claim be furnished by each of therespondents within four weeks thereafter and the arbitrator may decidethe claim after affording opportunity of hearing to the parties expeditiouslywithout being influenced/inhibited by the observations made independentlyin accordance with law.

46. The batch of appeals are accordingly disposed of on the termsindicated. No costs.

47. Pending application(s), if any, stand disposed of.

Nidhi Jain

Appeals disposed of.