GENERAL MANAGER NORTHERN RAILWAYS AND ANR. v. SARVESH CHOPRA

Citation: [2002] 2 S.C.R. 156

Court: Supreme Court of India

Bench: R.C. LAHOTI, BRIJESH KUMAR

Judgment text

GENERAL MANAGER NORTHERN RAILWAYS AND ANR. v. SARVESH CHOPRA MARCH I, 2002 [R. C. LAHOTI AND BRIJESH KUMAR, JJ. ] Arbitration: Arbitration Act, 1940-Section 20-Excepted matters-Criteria of- Reference ofexcepted matters to arbitration-Held, the function ofreference ofmatters to arbitration by Court is not a mechanical administrative function but a judicial function-Jn house remedy for settlement ofa matter is not a prerequisite for treating the matter to be an excepted matter-On facts, the claims are excepted matters and hence cannot be referred for arbitration- Contract Act, 1872-Sections 55 and 56. Respondent was granted a construction contract by appellant- >-- _ Railways. The contract is subject to the General Conditions and Special Conditions ofthe contract of Railways.

Due to certain disputes, the respondent filed a petition before High Court under Section 20 of the Arbitration Act, ; 1940 praying for filing of the arbitration agreement in the Court and for reference of the six claims set out in the application to arbitration for settlement The Single Judge directed only the first two claims for arbitration and treated the remaining four claims as 'excepted matters' being within clause 63 of the General Conditions of the contract and thereby not arbitrable. In appeal by the respondent, Division Bench of the High Court held that the four claims are not 'excepted matters' and hence directed for arbitration. In appeal to the Court, the appellant contended that the four claims are covered by different clauses ofthe Special Conditions of the Contract and hence not arbitration as per clause 63 of the General Conditions of the contract.

The respondent contended that a matter cannot be treated as an \ 'excepted matter' if it is merely covered by any of the clauses in the Special Conditions of the contract and no in-house remedy is provided by way of decision of an authority of the Railways; and that on filing a petition under GENERAL MANAGER NORTHERN RAILWAYS v. SARVESH CHOPRA l57 Section 20 of the Act, the Court should order the arbitration agreement to be filed and make an order of reference to the arbitrator and it is for the arbitrator to adjudicate whether a claim is entertainable or awardable being an 'excepted matter'. Allowing the appeal, the Court HELD: 1. 1.

While dealing with a petition under Section 20 of the Arbitration Act, 1940, the Court has to examine: (i) whether there is an arbitration agreement between the parties, (ii) whether the difference which has arisen is one to which the arbitration agreement applies, and (iii) whether there is a cause, shown to be sufficient to decline an order of reference to the arbitrator. The reference to an arbitration on a petition filed under section 20 is not a function to be discharged mechanically or ministerially by the Court. It is a consequence ofjudicial determination, the Court having applied its mind to the requirements of Section 20 and formed an opinion, that the difference sought to be referred to arbitral adjudication is one to which the arbitration agreement applies. [163-F-G[ '°"· 1. 2. The Court will look at the nature of the claim as preferred and decide whether it falls within the category of 'excepted matters'.

Ifthe claim preferred would be a difference to which the arbitration agreement does not apply, then the Court shall not refer the same to the arbitrator. On the pleading, 'the applicant may succeed in making out a case for reference, still the arbitration may, on the material produced before him, arrive at a finding that the claim was covered by 'excepted matters'. The claim shall have to be disallowed. If the arbitrator allows a claim covered by an excepted matter, the award would not be legal merely because the claim was referred by the Court to arbitration. The award would be liable to be set aside on the ground of error apparent on the face ofthe award or as vitiated by legal misconduct of the arbitrator. [166-G-H) Food Corporation ofIndia v. Sreekanth Transport, (1999] 4 SCC 491; Union ofIndia v. Popular Builders, Calcutta. (2000] 8 SCC 1; Steel Authority of India Ltd v. J. C. Budharaja, Government and Mining Contractor, (1999] 8 SCC 122; Ch Ramlinga Reddy v.

Superintending Engineer and Anr. , (1994) 5 Scale 12; Mis A/opi Parshad v. Union ofIndia, (1960] 2 SCR 793; Mis Prabartak Commercial Corporation Ltd v. The ChiefAdministrator Dandakaranya Project and Anr. • (1991) 1 SCC 498 and Continental Construction Co. Ltd v. State of Madhya Pradesh, [1998) 3 sec 82, referred to. State ofA. P. v. Mis Associated Engineering Enterprises, Hyderabad, AIR (1990) A. P. 294, approved. Hudson's Building and Engineering Contracts 11th Edition; Chitty on Contracts 28th Edition, 1999 and Russel on Arbitration 21st Edition, 1997, referred fo. · 1. 3. Ifit is a matter excepted from the arbitration agreement, the Court shall be justified in withholding the reference. To be an 'excepted matter' it is not necessary that a departmental or 'in-house' remedy (or settlement of claim must be provided by the contract Merely for the absence of provision .. for in-house settlement of the claim, the claim does not cease to be an excepted ~matter.

An issue of arbitrability of claim is available for determination at all the three stages-while making reference to arbitration, in the course ofarbitral proceedings and whit~ inaking the award a rule of the Court [167-D] 1. 4. The statement of claims, as set out in the petition under section 20 of the Act, does not even primafacie suggest why such claims are to be taken out of the category of 'excepted matters' and referred to arbitration. It would be an exercise in futility to refer for adjudication by the arbitrator a claim though not arbitrable, and thereafter set aside the award if the arbitrator ,Jo-chooses to allow such Claim. The High Court was not right in directing the said claims to be referred to arbitration. [167-F) ' 2. 1. A decision of this Court. is an authority for the proposition which it reach ofthe cc. mtract ("a breach going to the root ofthe contract") depriving the innocent party of tpe benefit of the contract ("damages for loss of the whole transaction").

'' If, instead ofavoiding the contract, the contractor accepts the belated performance of reciprocal obligation on the. part of the _employer, the innocent party, i. e. the contractor, canμot claim compensation for any loss occasioned by the non-performance of the reciprocal promise by the employer at the time agreed, "unless, at the time of such acceptance, he gives notice to the promisor of his intention to do so". Thus, it appears that under the Indian law, in spite of there being a contract between the parties whereunder the contractor has undertaken not to make any claim for delay in performance of the contract occasioned by an act of the employer, still a . claim would be entertainable in one of the following situations: (i) if the contractor repudiates the contract exer<:ising his right to do so under Section 5.

5 of the Contract Act; (ii) the employer gives an extension of time either by , entering fato supplemental agteement or by making it clear that escalation of rates or compemation for delay would be permissible, (iii) if the contractor makes it clear that escalation of rates or compensation for delay shall have to be made by the employer and the employer accepts performance by the contractor in. spite of delay and such notice by the contractor putting the employer on terms. Thus, ifmay be open to prefer aclaim touching an apparently excepted matter subject to a clear case having been made out for excepting or excluding the claim from within the four corners of "excepted matters". While dealing with a petition under Section 20 of the Arbitration Act, the Court will look at the nature of the claim as preferred and decide whether it falls within the category of"excepted matters".

Ifso, the claim preferred would be adifference to which the arbitration agreement does not apply, and therefore, the Court shall not tefer the same to the arbitrator. On the pleading, . the applicant may succeed in making out a case for reference, still the arbitrator may, on the material produced before him, arrive at a finding that the claim was covered · by "excepted matters". The claim shall have to be disallowed. Ifthe arbitrator allows a claim covered by an excepted matter, the award would not be legal merely because the claim was referred by the Court to arbitration. The award GENERAL MANAGER NORTHERN RAILWAYS v. SARVESH CHOPRA [R. C. LAHOTI, J. ) 167 · would be liable to be set aside on the ground of error apparent on the face of the award or as vitiated by legal misconduct of the . arbitrator. Russell on Arbitration (Twenty-First Edition, 1997) states vide para 1. 027 (at p. 15) "Arbitrability.

The issue of arbitrability can arise at three stages in an arbitration; first, on an application to stay the arbitration, when the opposing • party claims that the tribunal lacks the authority to determine a dispute because it is not arbitrable, second, in the course of the arbitral proceedings on the hearing of an objection that the tribunal lacks substantive jurisdiction and third, on an application to challenge the award or to oppose its enforcement. The New York Convention, for example, refers to non-arbitrability as a ground for a court refusing to recognize and enforce an award. " To sum up, our conclusion are: (i) while deciding a petition under Section 20 ofthe Arbitration Act, 1940, the Court is obliged to examine whether a difference which is sought to be referred to arbitration is one to which the arbitration agreement applies.

If it is a matter excepted from the arbitration agreement, the Court shall be justified in withholding the reference, (ii) to be an excepted matter . _it is not necessary that a departmental or 'in-house' remedy for settlement of claim must be provided by the contract Merely for the absence of provision for in-house settlement ofthe claim, the claim does not cease to be an excepted· matter, (iii) an issue as to arbitrability of claim is available for determination at all the three stages - while making reference to arbitration, in the course of arbitral proceedings and while making the award a rule of the Court. In the case before us, the claims in question as preferred are clearly covered by "excepted matters". The statement of claims, as set out in the petition under Section 20 of the Arbitration Act, does not even prima facie suggest why such claims are to be taken out of the category of "excepted matters" and referred to arbitration.

It would be an exercise in futility to refer for adjudication by the arbitrator a claim though not arbitrable, and thereafter, set aside the award if the arbitrator chooses to allow such claim. The High Court was, in our opinion, not right in directing the said four claims to be referred to arbitration. After the hearing was concluded the learned counsel for the respondent cited a few decisions by making a mention, wherein the view taken is. that 'interpretation of contract' is a matter for arbitrator to decide and the Court .. cannot substitute its own decision in place of the decision of the arbitrator. We do not think that the cited cases have any relevance for deciding the question arising for consideration in this appeal. None of the cases is an authority for the proposition that the question whether a claim is an 'excepted .

·, matter' or not must be left to be decided by the arbitrator only and not adjudicated upqn by the Court while disposing of a petition under Section 20 of the Arbitration Act, 1940. We cannot subscribe to the view that interpretation of arbitration clause itself can be or should be left to be determined by arbitrator and such determination cannot be done by Court at any stage. .. For the foregoing reasons we are of the opinion that the view of the 'excepted matters' taken by the Division Bench of the High Court cannot be sustained. The appeal is allowed, the impugned decision of the Division Bench of the High Court is set aside and that of the learned Single Judge is restored.. No order as to the costs. ·B. S. Appeal allowed.