HONBLE SRI JUSTICE R. SUBHASH REDDY AND HONBLE SRI JUSTICE A. SHANKAR
CIVIL REVISION PETITION No.1394 OF 2015
17-08-2015
M/s Lakshmi Sai Constructions Company & another.. Petitioners
M/s IJM Corporation, Berhard.. Respondent
Counsel for the Petitioners:Sri S. Rajan,
Counsel for Respondent:Sri N.V. Sumanth
M/s Indus Law Firm.
<GIST:
>HEAD NOTE:
? CASES REFERRED:
1. 2009 (3) Arb. L.R. 1 (SC)
HONBLE SRI JUSTICE R. SUBHASH REDDY
AND
HONBLE SRI JUSTICE A. SHANKAR NARAYANA
CIVIL REVISION PETITION No.1394 OF 2015
ORDER:(Per Honble Sri Justice A. Shankar Narayana)
Assailing the order, dated 13-02-2015, in I.A. No.660 of 2014
in O.S. No.1265 of 2013, passed by the learned III Additional District
Judge, Ranga Reddy District at L.B. Nagar, the instant appeal is
preferred by the revision petitioners.
2. By the aforesaid order, the Court below dismissed I.A.
No.660 of 2014 filed by the revision petitioners herein in O.S.
No.1265 of 2013 under Section 8 of the Arbitration and Conciliation
Act, 1996 (for brevity the Act, 1996) refusing to refer the dispute to
the arbitration.
3. The respondent herein is the plaintiff M/s IJM
Corporation, Berhadin O.S. No.1265 of 2013, while the revision
petitioners herein are the defendants M/s Lakshmi Sai Construction
Company, Hyderabad and its proprietor Gunturu Venkata Bhaskara
Raju.
4. The respondent instituted the above suit for recovery of
Rs.94,22,889/- from the revision petitioners consisting of
Rs.79,85,499/- towards excess payment made to the defendants and
Rs.14,37,390/- towards interest calculated at 24% per annum from 19-
12-2012 to 19-09-2013 concerning the sub-contracts given to the
revision petitioners.
5. The relevant facts, for adjudication of the instant revision,
are as under:
i) The respondent has been engaged in the business of
infrastructure and property development. National Highways
Authority of India (hereinafter referred to as NHAI) had awarded
contract relating to Rehabilitation and Up-gradation to Four Laning of
Jhansi Lakhnadon Section from Km 132 - 187.8 (up to start of Sagar
Bypass) on National Highway - 26 in the State of Madhya Pradesh,
under contract package ADB-II/C-4 by entering into contract
agreement on 19-04-2006.
a) Clause 4.1 of the General Conditions of Contract empowers
the respondent herein to sub-contract any portion of the awarded
works. The revision petitioners approached the respondent expressing
its incling in executing the said work. After due deliberations and
negotiations, the respondent agreed to sub-contract certain portions of
the work, i.e., awarding three separate contracts to construct Culverts,
Bridges and Underpasses from chainage 132.28 to 160, package I
including construction of Open Cross-Drains. The respondent herein
elaborated the details in Table -A incorporated in paragraph No.4of
the plaint. To resolve site related issues, an amendment was
introduced to the Letter of Award (for brevity LOA) relating to the
first two items, being construction of bridges and underpasses and for
construction of culverts, which details have been mentioned in Table
B in paragraph No.5 of the plaint. Further amendment was made
pursuant to the instructions/requirements of NHAI to the LOAs, dated
02-11-2007, which details have been mentioned in Table - C in
paragraph No.6 of the plaint pertaining to construction of bridges,
underpasses and culverts covered by LOAs. Certain other details have
been mentioned in Table - D pertaining to supply of material, such
as cement, reinforcement steel etc.
b) The respondent herein has also referred to relevant clauses,
which are clause - 2 relating to scope of subcontract work; clause - 5
relating to construction of culverts covered by LOAs. Finally, the
respondent incorporated the material supplied by it to the revision
petitioners as per the sub-contract agreement in table - G, the cost of
which is also shown. Likewise, certain other details have been
mentioned in Table -H showing various amounts relating to the
material supplied by the respondent towards other recoveries. The
respondent then incorporated the materials procured by the revision
petitioners and the amounts reimbursed by it in Table - I. The gist
of the entire transactions and the payments details between the parties
have been shown in Table - J and, thus, claimed the aforesaid
amount from the revision petitioners.
ii) Since it appears at that stage there was no necessity for the
respondent to refer to the dispute resolution mechanism between
them, the relevant clauses touching the sub-contract agreement were
not projected in the plaint. Only, when the revision petitioners made
their appearance and filed I.A. No.660 of 2014, the respondent has
come up with pertinent clauses touching the dispute resolution
mechanism between them.
iii) The revision petitioners admit accepting and execution of
sub-contracts relating to the works entrusted to it by the respondent
covered by LOAs.1, 2 and 3. But, according to it, the suit is liable to
be dismissed in limini, as there has been a valid and subsisting
arbitration agreement between them which applies to the subject
matter of the present suit and the respondent has given a go-by to it
and instituted the instant suit.
a) According to the revision petitioners, when certain disputes
have arisen, both the parties had personal discussions in the office of
the respondent at Kuala Lumpur on 27-09-2012 to settle the claims
refused by the respondent and, therefore, addressed a detailed letter,
dated 18-10-2012, enlisting all their pending claims with the
respondent under the subject sub-contracts and requested for early
settlement. The respondent, asked through its letter dated31-10-2012,
requiring the revision petitioners to submit certain documents, which
were duly furnished through their letter, dated 07-11-2012.
Subsequently, as per the desire of the respondent expressed through
the letter, dated 23-11-2012, requiring the presence of the revision
petitioners on 27-11-2012 for valuation of the work, the officials of
the respondent and the revision petitioners sat in a meeting and the
officials of the respondent required the revision petitioners to sign on
a set of papers agreeing to the quantities and the rates indicated
therein promising to settle their claims as notified on 18-10-2012.
The Officials of the revision petitioners signed therein without
prejudice to their claim. It is, according to the revision petitioners,
that later, the respondent strangely has come up with the theory of
excess payments said to have made to it to a tune of Rs.79,85,499/-.
b) It is also according to the revision petitioners that they have
addressed a letter of final claim, dated 24-06-2013, reiterating earlier
claims referred to in the letter, dated 18-10-2012, and thereby
contends that in their letters, dated 18-10-2012 and 24-06-2013, they
asserted that there has been an arbitration agreement in the subject
sub-contracts which were not denied by the respondent.
c) The revision petitioner also state that as per clause 6 of the
LOA, dated 02-11-2007, the terms and conditions of the main contract
of the respondent with NHAI, will apply even to the sub-contracts in
so far as they are applicable. The revision petitioners further state that
clause 17 of the subject sub-contracts also deals with a dispute
resolution mechanism, to resolve the dispute and differences sought to
be referred to the heads of the contracting parties for mutual
settlement. The revision petitioners even state that clause 67.3 of the
Conditions of Particular Application (for brevity COPA) as
contained in the main agreement deals with amicable settlement, and
clause 67.4 thereof provides for arbitration contemplating that the
disputes on which there is no mutual settlement shall be settled by
arbitration of three arbitrators, one each to be appointed by each of the
contracted parties and the third, presiding arbitrator to be appointed by
the two arbitrators.
d) It is the case of the revision petitioners that in terms of
clause 67.4 of COPA read with Clauses 6 and 17 of the sub- contracts,
it has invoked the arbitration vide their letter, dated 05-04-2014 and
appointed a former Judge of this Court as their nominee-arbitrator and
called upon the respondent to appoint their nominee - arbitrator.
Thus, according to the revision petitioners, a conjoint reading of
clauses 6 and 17 of the subject LOA, dated 02-11-2007 read with
clause 17 thereof and sub-clauses 67.3 and 67.4 of the main
agreement would explicitly reveal that there is a binding arbitration
agreement between the parties, and more so, the conduct of the
respondent in not denying when the existence of the said arbitration
agreement was asserted by them in their letters dated 18-10-2012 and
24-06-2013. Therefore, a request was made to refer the respondent to
arbitration for its suit claim under Section 8 of the Act, 1996.
iv) Respondent- Plaintiff has strongly resisted the request.
Having referred to the details relating to the sub-contracts and the
relevant clauses touching the terms and conditions of the sub-
contracts between the parties, which, we have afore-referred to in
brief, comes up with the stand that clause 17 of the contract/work
orders/LOAs entered into between them provide that any dispute or
differences which shall arise either during the progress or on the
completion of the sub-contract work shall be referred to the respective
Chief Executive Officer/Managing Director of the parties to the
contract/work orders/LOAs to mutually agree and resolve the dispute
or differences, and except the said clause, there is no other clause
which deals with resolution of dispute that would arise between the
parties.
a) It is according to the respondent, as per the said dispute
resolution mechanism, its C.E.O. and, the C.E.O. of the revision
petitioners met on 27-09-2012 in Malaysia and discussed the issue at
length, but the same proved abortive and, thereafter, it has got issued
demand notice to the revision petitioners on
19-12-2012 demanding to pay Rs.79,85,449/- which was not obliged
by the revision petitioners. Having left with no other option except to
seek redressal, the instant suit was instituted.
b) Touching invocation of arbitration clause, it is according to
the respondent that the reliance placed by the revision petitioners on
clause 6 of the contract/work order is totally misconceived, in view of
the fact that clause 6 refers to full knowledge of the terms and
conditions stipulated in the main contract and they shall apply to the
present contract/work orders in so far as it is applicable indicating that
it relates to quality and quantity of the work to be executed and that
cannot be stretched beyond the same. It is also according to the
respondent that the emphasis laid on clause 67 of the main contract by
the revision petitioners is totally misconceived for the reason that the
said mechanism is exclusive to NHAI and cannot be substituted
anywhere else. The respondent has extracted sub-clause 67.1 dealing
with disputes adjudication board; sub-clause 67.2 dealing with
procedure for obtaining the boards decision; sub-clause 67.3 dealing
with amicable settlement; sub-clause 67.4 dealing with arbitration;
sub-clause 67.5 dealing with failure to comply with the boards
decision; and sub-clause 67.6 which provides expiry of the boards
appointment and contends that alternative dispute resolution
mechanism provided in clause 67 is exclusive to NHAI and cannot be
relied on by the revision petitioners, more particularly, when it is not
a signatory to the said contract, and even if it is to be accepted that
clause 67 of the main contract can be operated upon by the revision
petitioners, still, the same cannot be done in a piecemeal manner and
has to be operated in its entirety, and unless sub-clauses 1 to 3 of
clause 67 are invoked or exhausted, sub-clause 67.4 cannot be
operated upon as the same is not independent of sub-clauses 1 to 3 of
clause 67 and, therefore, reliance on clause 67.4 is misconceived.
c) Concerning the notice, dated 05-04-2014, got issued by the
revision petitioners seeking to invoke the arbitration clause and to
appoint an arbitrator, the respondent states that it has given reply
dated 25-04-2014, emphasizing the absence of arbitration agreement
between them as contemplated under the Act, 1996 and, as such, the
question of appointing arbitrator for adjudication/ resolving the
purported dispute cannot be countenanced. Therefore, it sought to
reject the request.
6. The Court below observing that sub-contract agreement
between the respondent and the revision petitioners does not contain
an arbitration clause and placing reliance on the decision relied on by
both parties in M.R. Engineers & Contractors Pvt. Ltd., v. Som
Datt Builders Ltd. , holding that the main agreement between the
respondent and NHAI is not applicable to the sub-contract agreement
between the parties herein and does not bind them, rejected the
request and dismissed the application.
7. It is the aforesaid order which drove the defendants -
revision petitioners to approach this Court requesting to set aside the
order under challenge contending that in the process of settlement of
dispute amicably, which ultimately proved abortive, the respondent
herein has not denied when the revision petitioners notified reference
to arbitration through its letter, dated 18-10-2012 and reiterated in the
letter, dated 24-06-2013, for resolving the dispute in terms of the
contract conditions, which, inter alia, includes the arbitration
agreement.
i) It is also stated that clause 6 of the LOAs in question, since
provides that the terms and conditions of the parent contract shall
apply to the revision petitioners in so far as it is applicable, the
arbitration clause as contained in sub clause 67.4 shall also apply to
the disputes arising out of the subject matter of the LOAs, which the
Court below has, somehow, side-lined.
ii) It is also stated that the Honble Supreme Court in M.R.
Engineers Case (Supra), held that where contract refers to
a document and it has been agreed that the contract is governed by the
provisions of the said document, then the terms and conditions of the
said document in entirety will get bodily lifted and incorporated into
the contract and, therefore, the order under challenge suffers from the
vice of non-application of mind and liable to be set aside.
iii) It is stated that the Court below, somehow, went wrong in
applying the last paragraph of the judgment in M.R. Engineers Case
(Supra), in as much as it has failed to apply the well-settled legal
principle that a judgment is only an authority for what it decides and
not what can be logically deduced there from.
iv) Lastly, it is stated that while the main agreement
contemplates resolution of disputes by Dispute Board, the terms of the
Letter of Award provides for a separate mechanism through mutual
discussions, but that itself would not make the arbitration agreement
in sub-clause 67.4 inapplicable between the parties herein, especially
when clause 6 of the LOAs uses the expression in so far as
applicable which the Court below has completely overlooked. Thus,
the revision petitioners sought to set aside the impugned order.
8. Heard Sri S. Rajan, learned counsel for the revision
petitioners, and Sri N.V. Sumanth of M/s Indus Law Firm, learned
counsel for the respondent.
9. Learned counsel for the revision petitioners would submit
that sub-clause 67.4 of the General Conditions of Contract (for brevity
GCC) entered into between the respondent and NHAI gets
incorporated in the contract between the parties herein in view of sub-
clause 6 of the LOA and, hence, the same constitutes an arbitration
agreement as defined under section 7 of the Act, 1996 and, therefore,
rejection of request by the Court below amounts to improper exercise
of jurisdiction requiring the revision of the order under challenge.
i) He would further submit that non-denial by the respondent
herein when the petitioner asserts arbitration agreement through its
letters, dated 18-10-2012 and 24-06-2013, would suffice to cull out
acceptance of arbitration agreement between the parties by virtue of
the main contract between the principal employer and the respondent.
ii) He would further submit that the law laid down by the
Honble Supreme Court in M.R. Engineers Case (Supra) that where a
contract refers to a document and it has been agreed that the contract
is governed by the provisions of the said document, then the terms and
conditions of the said document in its entirety will get bodily lifted
and incorporated into the contract and, therefore, the order under
challenge is unsustainable. Hence, requests to set aside the order
under challenge and refer the respondent to arbitration for the suit
claim.
10. Learned counsel for the respondent would submit that
clause 6 of the LOAs, since refers to the full knowledge of the terms
and conditions stipulated in the main contract, they shall apply to the
sub-contract in so far as it is applicable indicating that the terms
stipulated in the main contract between the principal employer and the
contractor in so far as it relates to quality and quantity of the work to
be executed and cannot be stretched beyond the same.
i) He would further submit that the dispute resolution
mechanism contained in clause 67 of the main contract is exclusive to
NHAI and cannot be a substitute any-where else. He would further
submit that mere non-denial of reference to arbitration alleged to have
made in the letters, dated 18-10-2012 and 24-06-2013, cannot be
brought within the purview of clause 7 (4) (c) of the Act, 1996, since
there has been an independent contract in existence between the
revision petitioners and the respondent herein.
ii) He would further submit that the fact-situation occurring in
the instant case, and the fact-situation occurring in M.R. Engineers
Case (Supra), are identical and, therefore, the law laid down therein
would not render any assistance to the revision petitioners.
11. In the light of the pleas put-forth by the respective parties
and the arguments advanced by their respective counsel, the question
that arises for consideration is:
Whether the provision of arbitration contained in
the main agreement between the respondent and the
NHAI, was incorporated by reference in the sub-
contract agreement between the respondent and the
revision petitioners?
12. For proper appreciation of matter in controversy between
the parties, it would be apt to refer to the relevant clauses of Section 7
of the Act, 1996, which read thus:
7. Arbitration Agreement:
(1) In this Part, arbitration agreement means
an agreement by the parties to submit to arbitration
all or certain disputes which have arisen or which
may arise between them in respect of a defined legal
relationship, whether contractual or not.
(2) xxxx
(3) xxxx
(4) An arbitration agreement is in writing if it is
contained in,-
(a) xxxx
(b) xxxx
(c) an exchange of statements of claim and defence
in which the existence of the agreement is alleged by
one party and not denied by the other.
(5) The reference in a contract to a document
containing an arbitration clause constitutes an
arbitration agreement if the contract is in writing and
the reference is such as to make that arbitration
clause part of the contract.
13. To examine whether the sub-contract agreement between
the parties herein can be brought within the ambit of sub-section 5 of
section 7 of the Act, 1996, it is indispensable to refer to clauses 6 and
17 of the sub-contract and sub-clauses 67.1 to 67.4 of the main
contract between the principal employer and the contractor.
All the three LOAs are replica to one another, by which, the
respondent entrusted the work to the revision petitioners for
execution. Clause 6, on which the revision petitioners mainly
resting, deals with main contract between the parties. It reads thus:
6. Main Contract
You are deemed to have full knowledge of the
terms and conditions stipulated in the Main Contract
between the Employer and us and such terms and
conditions shall apply to you in so far as it is
applicable.
Clause 17 thereof which deals with Dispute Resolution, is thus:
17. Dispute Resolution
If any dispute or difference shall arise between you
and us, either during the progress or after the
completion or abandonment of the Subcontract
Works, then either party may forthwith give to the
other party a notice in writing of such dispute or
difference and such dispute or difference shall be
referred to the respective chief executive officer /
managing director of the parties for them to mutually
agree and resolve the dispute or difference.
Sub-clause 67.1 of GCC deals with disputes adjudication board and
relevant sub-clauses are thus:
Sub-clause 67.1: Disputes Adjudication Board
Delete the text of Clause 67 and substitute with the
following:
If a dispute of any kind whatsoever arises between
the Employer and the Contractor in connection with
or arising out of the contract or the execution of the
Works, including any dispute as to any opinion,
instruction, determination, certificate or valuation of
the Engineer, the dispute shall initially be referred in
writing to the Disputes Adjudication Board (the
Board) for its decision. Such reference shall state
that it is made under this Sub-clause, unless the
member or members of the Board have been
previously mutually agreed upon by the parties and
named in the Contract, the parties shall within 90
days of the Commencement Date, jointly ensure the
appointment of the Board. The Board shall comprise
suitably qualified persons as members, the number of
members being one or three, as stated in the
Appendix to Bid. If the Board is to comprise three
members, each party shall nominate one member for
the approval of the other party and the parties shall
mutually agree upon and appoint the third member
(who shall act as Chairman).
The terms of appointment of the Board shall:
a) x xxx
b) x xxx
c) x xxx
d) x xxx
67.2 x xxx
67.3 Amicable Settlement
Where notice of dissatisfaction has been given under
Sub-clause 67.2, the parties shall attempt to settle
such dispute amicably before the commencement of
arbitration. Provided that unless the parties agree
otherwise, arbitration may be commenced on or after
the fifty-sixth day after the day on which notice of
dissatisfaction was given, even if no attempt at
amicable settlement has been made.
Sub-clause 67.4 deals with Arbitration, which is thus:
Sub-clause 67.4: Arbitration
Any dispute in respect of which:
(a) the decision, if any, of the Board has not become
final and binding pursuant to Sub-Clause 67.2, and
(b) Amicable settlement has not been reached:
shall be finally settled as set forth below:
(i) (1) In the case of dispute arising between
the Employer and a domestic Contractor or
between the Employer and a foreign
Contractor who opts for the application of the
Indian Arbitration and Conciliation Act,
1996 related to any matter arising out of or
connected with this Contract, such dispute
shall be referred to the Arbitral Tribunal
consisting of 3 (three) arbitrators, one each to
be appointed by the Employer and
Contractor, the third arbitrator shall be
chosen by the two arbitrators so appointed by
the parties and shall act as Presiding
Arbitrator. In case of failure of the two
arbitrators, appointed by the parties to reach
upon a consensus within a period of 30 days
from the appointment of the arbitrators
subsequently appointed then upon the request
of either or both parties, the Presiding
arbitrator shall be appointed by the President,
Indian Road Congress. The Indian
Arbitration and Conciliation Act, 1996 the
rules there under and any statutory
modification of re-enactment thereof, shall
apply to these arbitration proceedings.
14. Now, turning to the submissions of the learned counsel for
the revision petitioners that the conjoint reading of clauses 6 and 17 of
the LOAs read with clause 17 and sub-clauses 67.3 and 67.4 of the
main agreement would indicate in definite terms that there is
a binding arbitration agreement between the parties, and that the law
laid down by the Honble Supreme Court in M.R. Engineers Case
(Supra), that where a contract refers to a document and it has been
agreed that the contract is governed by the provisions of the said
document, the terms and conditions thereof in entirety will get bodily
lifted and incorporated into the contract, in our considered view, it is
difficult to agree with the said submission, for the reasons hereinafter
we indicate.
15. What was agreed between the parties herein under clause
6 of the contract is that the revision petitioners deemed to have full
knowledge of the terms and conditions stipulated in the main contract
between the employer and the contractor - respondent and, such terms
and conditions shall apply to the revision petitioners in so far as it is
applicable. In the case of M.R. Engineers (Supra), somewhat, similar
terms were mentioned in the sub-contract stating that the said sub-
contract would be carried out on the terms and conditions as
applicable to main contract, unless otherwise mentioned in the work
order letter. The learned counsel for the revision petitioners relying
on sub-section 5 of Section 7 of the Act, 1996, drawn our attention to
the observations of the Honble Supreme Court contained in
paragraph No.9 in M.R. Engineers Case (Supra), to fortify his
submission that sub-clause 67.4 contained in the main agreement
between the employer and the respondent herein binds the parties
herein and with such intention, clause 6 of the sub-contract has been
incorporated. The learned counsel for the respondent, on the other
hand, placed reliance on the observations of the Honble Supreme
Court contained in paragraph Nos.8, 13 and 16 of the very same
decision. We have extracted sub-section 5 of section 7 of the Act,
1996, in the above. The observations of the Honble Supreme Court
in M.R. Engineers Case (Supra) contained in paragraph No.9 are
thus:
9. If a contract refers to a document and provides
that the said document shall form part and parcel of
the contract, or that all terms and conditions of the
said document shall be read or treated as a part of the
contract, or that the contract will be governed by the
provisions of the said document, or that the terms and
conditions of the said document shall be incorporated
into the contract, the terms and conditions of the
document in entirety will get bodily lifted and
incorporated into the contract. When there is such
incorporation of the terms and conditions of a
document, every term of such document (except to
the extent it is inconsistent with any specific
provision in the contract) will apply to the contract.
If the document so incorporated contains a provision
for settlement of disputes by arbitration, the said
arbitration clause also will apply to the contract.
The Honble Supreme Court while explaining the difference between
the reference to another document in a contract and incorporation of
another document in a contract by reference held in paragraph No.8
thus:
8. There is a difference between reference to
another document in a contract and incorporation of
another document in a contract, by reference. In the
first case, the parties intend to adopt only specific
portions or part of the referred document for the
purposes of the contract. In the second case, the
parties intend to incorporate the referred document in
entirety, into the contract. Therefore, when there is a
reference to a document in a contract, the court has to
consider whether the reference to the document is
with the intention of incorporating the contents of
that document in entirety into the contract, or with the
intention of adopting or borrowing specific portions
of the said document for application to the contract.
We will give a few instances of incorporation and
mere reference to explain the position (illustrative
and not exhaustive).
The scope and intent of sub-section 5 of Section 7 of the Act, 1996
was summarized by the Honble Supreme Court in sub-paragraph
Nos.(iv) and (v) of paragraph No.13. We are inclined to extract sub
paragraph Nos.(iv) and (v) of paragraph No.13, which are thus:
(iv) Where the contract provides that the standard
form of terms and conditions of an independent trade
or professional institution (as for example the
standard terms and conditions of a trade association
or architects association) will bind them or apply to
the contract, such standard form of terms and
conditions including any provision for arbitration in
such standard terms and conditions, shall be deemed
to be incorporated by reference. Sometimes the
contract may also say that the parties are familiar
with those terms and conditions or that the parties
have read and understood the said terms and
conditions.
(v) Where the contract between the parties stipulates
that the conditions of contract of one of the parties to
the contract shall form a part of their contract (as for
example the general conditions of contract of the
government where government is a party), the
arbitration clause forming part of such general
conditions of contract will apply to the contract
between the parties.
While culling out the intention of the parties from the use of the words
this sub-contract shall be carried out on the terms and conditions as
applicable to main contract in relation to sub-contract therein, the
Honble Supreme Court in paragraph no.15 held that the work order
therein would indicate the intention that only the terms and conditions
in the main contract relating to the execution of the work were
adopted as a part of sub-contract between respondent and appellant,
and not the parts of the main contract which did not relate to
execution of the work. The Honble Supreme Court held in paragraph
No.16 relied on by the learned counsel for the respondent thus:
16. Even assuming that the arbitration clause from
the main contract had been incorporated into the sub-
contract by reference, we are of the view that the
appellant could not have claimed the benefit of the
arbitration clause. This is in view of the principle
that if the document to which a general reference is
made, contains an arbitration clause whose provisions
are clearly inapt or inapplicable with reference to the
contract between the parties, it would be assumed or
inferred that there was no intention to incorporate the
arbitration clause from the referred document. In this
case the wording of the arbitration clause in the main
contract between the PW Department and contractor
makes it clear that it cannot be applied to the sub-
contract between the contractor and the sub-
contractor. The arbitration clause in the main
contract states that the disputes which are to be
referred to the committee of three arbitrators under
Clause 67.3 are disputes in regard to which the
decision of the Engineer (Engineer refers to person
appointed by State of Kerala to act as Engineer for
the purpose of the contract between PW Department
and the respondent) has not become final and binding
pursuant to sub-clause 67.1 or disputes in regard to
which amicable settlement has not been reached
between the State of Kerala and the respondent
within the period stated in sub-clause 67.2.
Obviously, neither sub-clause 67.1 nor sub-clause
67.2 will apply as the question of Engineer issuing
any decision in a dispute between the contractor and
sub-contractor, or any negotiations being held with
the Engineer in regard to the disputes between the
contractor and sub-contractor does not arise. The
position would have been quite different if the
arbitration clause had used the words all disputes
arising between the parties or all disputes arising
under this contract. Secondly, the arbitration clause
contemplates a committee of three arbitrators, one
each to be appointed by the State of Kerala and the
respondent and the third (Chairman) to be nominated
by the Director-General (Road Development),
Ministry of Surface Transport, Roads Wing,
Government of India. There is no question of such
nomination in the case of a dispute between the
contractor and sub-contractor. It is thus seen that the
entire arbitration agreement contained in the main
contract between the employer and the contractor was
tailor-made to meet the requirements of the contract
between the employer and the contractor and is
wholly inapt and inapplicable in the context of a
dispute between the contractor and the sub-
contractor. This makes it clear that the arbitration
clause contained in the main contract would not apply
to the disputes arising with reference to the sub-
contract.
16. Keeping in view, the guiding factor emphasized in
paragraph No.8 by the Honble Supreme Court, when there is
reference to a document in a contract, the Court has to consider
whether the reference to the document is with the intention of
incorporating the contents of that document in entirety into the
contract, or with the intention of adopting or borrowing specific
portions of the said document for application to the contract, we
would like to infer the intention of the parties in incorporating the
words you are deemed to have full knowledge of the terms and
conditions stipulated in the main contract between the employer and
us and such terms and conditions, shall apply to you in so far as it is
applicable occurring in clause 6 of the sub-contract between the
parties.
17. Admittedly, dispute resolution mechanism has been
separately incorporated by the parties in clause 17 of the sub-contract.
Even a dispute resolution mechanism is provided in the main contract
between the employer and the contractor in sub clauses 1 to 4 of
clause 67, as extracted in the above. The very fact that a distinct
dispute resolution mechanism has been incorporated by the parties in
clause 17 of the sub-contract reflects the intention of the parties that
they never inclined to adopt the dispute resolution mechanism
contained in clause 67 of GCC. When viewed in that perspective,
certainly, the words mentioned in clause 6 of the sub-contract afore
extracted, in our view, definitely indicate the intention of the parties
that only the terms and conditions of the main contract relating to
execution of the work were adopted as part of the sub-contract
between the parties herein and not the contract in its entirety. Thus,
clause 17 of the sub-contract would completely exclude the invocation
of arbitration clause contained in sub clause 4 of clause 67 of the main
contract between the employer and the respondent. Thus, the
principle enunciated by the Honble Supreme Court in M.R.
Engineers Case (Supra), would not render any assistance to the
revision petitioners to interpret clause 6 of the sub-contract in the
manner in which it intends to, while rendering complete assistance to
the stand taken by the respondent.
18. Adverting to clause (c) of sub-section 4 of Section 7 of the
Act, 1996, in relation to the submission of the learned counsel for the
revision petitioners that the respondent did not deny the specific
reference made to arbitration agreement contained in the main
contract in the letters, dated 18-10-2012 and 24-06-2013, we are of
the considered view, that the said circumstance does not improve the
case of the revision petitioners for the reason that there has been
distinct sub-contract between the revision petitioners and the
respondent, more particularly, incorporation of clause 17 in relation to
a distinct dispute resolution mechanism. Therefore, we are not
convinced with the argument of the learned counsel for the revision
petitioners in that regard.
19. In view of the foregoing discussion, we find no merit in
the instant revision petition, and the same stands dismissed. We make
no order as to costs.
20. As a sequel thereto, miscellaneous petitions, if any,
pending in the revision, stand disposed of.
__________________________
R. SUBHASH REDDY, J
A. SHANKAR NARAYANA, J
August 17, 2015.
CIVIL REVISION PETITION No.1394 OF 2015
17-08-2015
M/s Lakshmi Sai Constructions Company & another.. Petitioners
M/s IJM Corporation, Berhard.. Respondent
Counsel for the Petitioners:Sri S. Rajan,
Counsel for Respondent:Sri N.V. Sumanth
M/s Indus Law Firm.
<GIST:
>HEAD NOTE:
? CASES REFERRED:
1. 2009 (3) Arb. L.R. 1 (SC)
HONBLE SRI JUSTICE R. SUBHASH REDDY
AND
HONBLE SRI JUSTICE A. SHANKAR NARAYANA
CIVIL REVISION PETITION No.1394 OF 2015
ORDER:(Per Honble Sri Justice A. Shankar Narayana)
Assailing the order, dated 13-02-2015, in I.A. No.660 of 2014
in O.S. No.1265 of 2013, passed by the learned III Additional District
Judge, Ranga Reddy District at L.B. Nagar, the instant appeal is
preferred by the revision petitioners.
2. By the aforesaid order, the Court below dismissed I.A.
No.660 of 2014 filed by the revision petitioners herein in O.S.
No.1265 of 2013 under Section 8 of the Arbitration and Conciliation
Act, 1996 (for brevity the Act, 1996) refusing to refer the dispute to
the arbitration.
3. The respondent herein is the plaintiff M/s IJM
Corporation, Berhadin O.S. No.1265 of 2013, while the revision
petitioners herein are the defendants M/s Lakshmi Sai Construction
Company, Hyderabad and its proprietor Gunturu Venkata Bhaskara
Raju.
4. The respondent instituted the above suit for recovery of
Rs.94,22,889/- from the revision petitioners consisting of
Rs.79,85,499/- towards excess payment made to the defendants and
Rs.14,37,390/- towards interest calculated at 24% per annum from 19-
12-2012 to 19-09-2013 concerning the sub-contracts given to the
revision petitioners.
5. The relevant facts, for adjudication of the instant revision,
are as under:
i) The respondent has been engaged in the business of
infrastructure and property development. National Highways
Authority of India (hereinafter referred to as NHAI) had awarded
contract relating to Rehabilitation and Up-gradation to Four Laning of
Jhansi Lakhnadon Section from Km 132 - 187.8 (up to start of Sagar
Bypass) on National Highway - 26 in the State of Madhya Pradesh,
under contract package ADB-II/C-4 by entering into contract
agreement on 19-04-2006.
a) Clause 4.1 of the General Conditions of Contract empowers
the respondent herein to sub-contract any portion of the awarded
works. The revision petitioners approached the respondent expressing
its incling in executing the said work. After due deliberations and
negotiations, the respondent agreed to sub-contract certain portions of
the work, i.e., awarding three separate contracts to construct Culverts,
Bridges and Underpasses from chainage 132.28 to 160, package I
including construction of Open Cross-Drains. The respondent herein
elaborated the details in Table -A incorporated in paragraph No.4of
the plaint. To resolve site related issues, an amendment was
introduced to the Letter of Award (for brevity LOA) relating to the
first two items, being construction of bridges and underpasses and for
construction of culverts, which details have been mentioned in Table
B in paragraph No.5 of the plaint. Further amendment was made
pursuant to the instructions/requirements of NHAI to the LOAs, dated
02-11-2007, which details have been mentioned in Table - C in
paragraph No.6 of the plaint pertaining to construction of bridges,
underpasses and culverts covered by LOAs. Certain other details have
been mentioned in Table - D pertaining to supply of material, such
as cement, reinforcement steel etc.
b) The respondent herein has also referred to relevant clauses,
which are clause - 2 relating to scope of subcontract work; clause - 5
relating to construction of culverts covered by LOAs. Finally, the
respondent incorporated the material supplied by it to the revision
petitioners as per the sub-contract agreement in table - G, the cost of
which is also shown. Likewise, certain other details have been
mentioned in Table -H showing various amounts relating to the
material supplied by the respondent towards other recoveries. The
respondent then incorporated the materials procured by the revision
petitioners and the amounts reimbursed by it in Table - I. The gist
of the entire transactions and the payments details between the parties
have been shown in Table - J and, thus, claimed the aforesaid
amount from the revision petitioners.
ii) Since it appears at that stage there was no necessity for the
respondent to refer to the dispute resolution mechanism between
them, the relevant clauses touching the sub-contract agreement were
not projected in the plaint. Only, when the revision petitioners made
their appearance and filed I.A. No.660 of 2014, the respondent has
come up with pertinent clauses touching the dispute resolution
mechanism between them.
iii) The revision petitioners admit accepting and execution of
sub-contracts relating to the works entrusted to it by the respondent
covered by LOAs.1, 2 and 3. But, according to it, the suit is liable to
be dismissed in limini, as there has been a valid and subsisting
arbitration agreement between them which applies to the subject
matter of the present suit and the respondent has given a go-by to it
and instituted the instant suit.
a) According to the revision petitioners, when certain disputes
have arisen, both the parties had personal discussions in the office of
the respondent at Kuala Lumpur on 27-09-2012 to settle the claims
refused by the respondent and, therefore, addressed a detailed letter,
dated 18-10-2012, enlisting all their pending claims with the
respondent under the subject sub-contracts and requested for early
settlement. The respondent, asked through its letter dated31-10-2012,
requiring the revision petitioners to submit certain documents, which
were duly furnished through their letter, dated 07-11-2012.
Subsequently, as per the desire of the respondent expressed through
the letter, dated 23-11-2012, requiring the presence of the revision
petitioners on 27-11-2012 for valuation of the work, the officials of
the respondent and the revision petitioners sat in a meeting and the
officials of the respondent required the revision petitioners to sign on
a set of papers agreeing to the quantities and the rates indicated
therein promising to settle their claims as notified on 18-10-2012.
The Officials of the revision petitioners signed therein without
prejudice to their claim. It is, according to the revision petitioners,
that later, the respondent strangely has come up with the theory of
excess payments said to have made to it to a tune of Rs.79,85,499/-.
b) It is also according to the revision petitioners that they have
addressed a letter of final claim, dated 24-06-2013, reiterating earlier
claims referred to in the letter, dated 18-10-2012, and thereby
contends that in their letters, dated 18-10-2012 and 24-06-2013, they
asserted that there has been an arbitration agreement in the subject
sub-contracts which were not denied by the respondent.
c) The revision petitioner also state that as per clause 6 of the
LOA, dated 02-11-2007, the terms and conditions of the main contract
of the respondent with NHAI, will apply even to the sub-contracts in
so far as they are applicable. The revision petitioners further state that
clause 17 of the subject sub-contracts also deals with a dispute
resolution mechanism, to resolve the dispute and differences sought to
be referred to the heads of the contracting parties for mutual
settlement. The revision petitioners even state that clause 67.3 of the
Conditions of Particular Application (for brevity COPA) as
contained in the main agreement deals with amicable settlement, and
clause 67.4 thereof provides for arbitration contemplating that the
disputes on which there is no mutual settlement shall be settled by
arbitration of three arbitrators, one each to be appointed by each of the
contracted parties and the third, presiding arbitrator to be appointed by
the two arbitrators.
d) It is the case of the revision petitioners that in terms of
clause 67.4 of COPA read with Clauses 6 and 17 of the sub- contracts,
it has invoked the arbitration vide their letter, dated 05-04-2014 and
appointed a former Judge of this Court as their nominee-arbitrator and
called upon the respondent to appoint their nominee - arbitrator.
Thus, according to the revision petitioners, a conjoint reading of
clauses 6 and 17 of the subject LOA, dated 02-11-2007 read with
clause 17 thereof and sub-clauses 67.3 and 67.4 of the main
agreement would explicitly reveal that there is a binding arbitration
agreement between the parties, and more so, the conduct of the
respondent in not denying when the existence of the said arbitration
agreement was asserted by them in their letters dated 18-10-2012 and
24-06-2013. Therefore, a request was made to refer the respondent to
arbitration for its suit claim under Section 8 of the Act, 1996.
iv) Respondent- Plaintiff has strongly resisted the request.
Having referred to the details relating to the sub-contracts and the
relevant clauses touching the terms and conditions of the sub-
contracts between the parties, which, we have afore-referred to in
brief, comes up with the stand that clause 17 of the contract/work
orders/LOAs entered into between them provide that any dispute or
differences which shall arise either during the progress or on the
completion of the sub-contract work shall be referred to the respective
Chief Executive Officer/Managing Director of the parties to the
contract/work orders/LOAs to mutually agree and resolve the dispute
or differences, and except the said clause, there is no other clause
which deals with resolution of dispute that would arise between the
parties.
a) It is according to the respondent, as per the said dispute
resolution mechanism, its C.E.O. and, the C.E.O. of the revision
petitioners met on 27-09-2012 in Malaysia and discussed the issue at
length, but the same proved abortive and, thereafter, it has got issued
demand notice to the revision petitioners on
19-12-2012 demanding to pay Rs.79,85,449/- which was not obliged
by the revision petitioners. Having left with no other option except to
seek redressal, the instant suit was instituted.
b) Touching invocation of arbitration clause, it is according to
the respondent that the reliance placed by the revision petitioners on
clause 6 of the contract/work order is totally misconceived, in view of
the fact that clause 6 refers to full knowledge of the terms and
conditions stipulated in the main contract and they shall apply to the
present contract/work orders in so far as it is applicable indicating that
it relates to quality and quantity of the work to be executed and that
cannot be stretched beyond the same. It is also according to the
respondent that the emphasis laid on clause 67 of the main contract by
the revision petitioners is totally misconceived for the reason that the
said mechanism is exclusive to NHAI and cannot be substituted
anywhere else. The respondent has extracted sub-clause 67.1 dealing
with disputes adjudication board; sub-clause 67.2 dealing with
procedure for obtaining the boards decision; sub-clause 67.3 dealing
with amicable settlement; sub-clause 67.4 dealing with arbitration;
sub-clause 67.5 dealing with failure to comply with the boards
decision; and sub-clause 67.6 which provides expiry of the boards
appointment and contends that alternative dispute resolution
mechanism provided in clause 67 is exclusive to NHAI and cannot be
relied on by the revision petitioners, more particularly, when it is not
a signatory to the said contract, and even if it is to be accepted that
clause 67 of the main contract can be operated upon by the revision
petitioners, still, the same cannot be done in a piecemeal manner and
has to be operated in its entirety, and unless sub-clauses 1 to 3 of
clause 67 are invoked or exhausted, sub-clause 67.4 cannot be
operated upon as the same is not independent of sub-clauses 1 to 3 of
clause 67 and, therefore, reliance on clause 67.4 is misconceived.
c) Concerning the notice, dated 05-04-2014, got issued by the
revision petitioners seeking to invoke the arbitration clause and to
appoint an arbitrator, the respondent states that it has given reply
dated 25-04-2014, emphasizing the absence of arbitration agreement
between them as contemplated under the Act, 1996 and, as such, the
question of appointing arbitrator for adjudication/ resolving the
purported dispute cannot be countenanced. Therefore, it sought to
reject the request.
6. The Court below observing that sub-contract agreement
between the respondent and the revision petitioners does not contain
an arbitration clause and placing reliance on the decision relied on by
both parties in M.R. Engineers & Contractors Pvt. Ltd., v. Som
Datt Builders Ltd. , holding that the main agreement between the
respondent and NHAI is not applicable to the sub-contract agreement
between the parties herein and does not bind them, rejected the
request and dismissed the application.
7. It is the aforesaid order which drove the defendants -
revision petitioners to approach this Court requesting to set aside the
order under challenge contending that in the process of settlement of
dispute amicably, which ultimately proved abortive, the respondent
herein has not denied when the revision petitioners notified reference
to arbitration through its letter, dated 18-10-2012 and reiterated in the
letter, dated 24-06-2013, for resolving the dispute in terms of the
contract conditions, which, inter alia, includes the arbitration
agreement.
i) It is also stated that clause 6 of the LOAs in question, since
provides that the terms and conditions of the parent contract shall
apply to the revision petitioners in so far as it is applicable, the
arbitration clause as contained in sub clause 67.4 shall also apply to
the disputes arising out of the subject matter of the LOAs, which the
Court below has, somehow, side-lined.
ii) It is also stated that the Honble Supreme Court in M.R.
Engineers Case (Supra), held that where contract refers to
a document and it has been agreed that the contract is governed by the
provisions of the said document, then the terms and conditions of the
said document in entirety will get bodily lifted and incorporated into
the contract and, therefore, the order under challenge suffers from the
vice of non-application of mind and liable to be set aside.
iii) It is stated that the Court below, somehow, went wrong in
applying the last paragraph of the judgment in M.R. Engineers Case
(Supra), in as much as it has failed to apply the well-settled legal
principle that a judgment is only an authority for what it decides and
not what can be logically deduced there from.
iv) Lastly, it is stated that while the main agreement
contemplates resolution of disputes by Dispute Board, the terms of the
Letter of Award provides for a separate mechanism through mutual
discussions, but that itself would not make the arbitration agreement
in sub-clause 67.4 inapplicable between the parties herein, especially
when clause 6 of the LOAs uses the expression in so far as
applicable which the Court below has completely overlooked. Thus,
the revision petitioners sought to set aside the impugned order.
8. Heard Sri S. Rajan, learned counsel for the revision
petitioners, and Sri N.V. Sumanth of M/s Indus Law Firm, learned
counsel for the respondent.
9. Learned counsel for the revision petitioners would submit
that sub-clause 67.4 of the General Conditions of Contract (for brevity
GCC) entered into between the respondent and NHAI gets
incorporated in the contract between the parties herein in view of sub-
clause 6 of the LOA and, hence, the same constitutes an arbitration
agreement as defined under section 7 of the Act, 1996 and, therefore,
rejection of request by the Court below amounts to improper exercise
of jurisdiction requiring the revision of the order under challenge.
i) He would further submit that non-denial by the respondent
herein when the petitioner asserts arbitration agreement through its
letters, dated 18-10-2012 and 24-06-2013, would suffice to cull out
acceptance of arbitration agreement between the parties by virtue of
the main contract between the principal employer and the respondent.
ii) He would further submit that the law laid down by the
Honble Supreme Court in M.R. Engineers Case (Supra) that where a
contract refers to a document and it has been agreed that the contract
is governed by the provisions of the said document, then the terms and
conditions of the said document in its entirety will get bodily lifted
and incorporated into the contract and, therefore, the order under
challenge is unsustainable. Hence, requests to set aside the order
under challenge and refer the respondent to arbitration for the suit
claim.
10. Learned counsel for the respondent would submit that
clause 6 of the LOAs, since refers to the full knowledge of the terms
and conditions stipulated in the main contract, they shall apply to the
sub-contract in so far as it is applicable indicating that the terms
stipulated in the main contract between the principal employer and the
contractor in so far as it relates to quality and quantity of the work to
be executed and cannot be stretched beyond the same.
i) He would further submit that the dispute resolution
mechanism contained in clause 67 of the main contract is exclusive to
NHAI and cannot be a substitute any-where else. He would further
submit that mere non-denial of reference to arbitration alleged to have
made in the letters, dated 18-10-2012 and 24-06-2013, cannot be
brought within the purview of clause 7 (4) (c) of the Act, 1996, since
there has been an independent contract in existence between the
revision petitioners and the respondent herein.
ii) He would further submit that the fact-situation occurring in
the instant case, and the fact-situation occurring in M.R. Engineers
Case (Supra), are identical and, therefore, the law laid down therein
would not render any assistance to the revision petitioners.
11. In the light of the pleas put-forth by the respective parties
and the arguments advanced by their respective counsel, the question
that arises for consideration is:
Whether the provision of arbitration contained in
the main agreement between the respondent and the
NHAI, was incorporated by reference in the sub-
contract agreement between the respondent and the
revision petitioners?
12. For proper appreciation of matter in controversy between
the parties, it would be apt to refer to the relevant clauses of Section 7
of the Act, 1996, which read thus:
7. Arbitration Agreement:
(1) In this Part, arbitration agreement means
an agreement by the parties to submit to arbitration
all or certain disputes which have arisen or which
may arise between them in respect of a defined legal
relationship, whether contractual or not.
(2) xxxx
(3) xxxx
(4) An arbitration agreement is in writing if it is
contained in,-
(a) xxxx
(b) xxxx
(c) an exchange of statements of claim and defence
in which the existence of the agreement is alleged by
one party and not denied by the other.
(5) The reference in a contract to a document
containing an arbitration clause constitutes an
arbitration agreement if the contract is in writing and
the reference is such as to make that arbitration
clause part of the contract.
13. To examine whether the sub-contract agreement between
the parties herein can be brought within the ambit of sub-section 5 of
section 7 of the Act, 1996, it is indispensable to refer to clauses 6 and
17 of the sub-contract and sub-clauses 67.1 to 67.4 of the main
contract between the principal employer and the contractor.
All the three LOAs are replica to one another, by which, the
respondent entrusted the work to the revision petitioners for
execution. Clause 6, on which the revision petitioners mainly
resting, deals with main contract between the parties. It reads thus:
6. Main Contract
You are deemed to have full knowledge of the
terms and conditions stipulated in the Main Contract
between the Employer and us and such terms and
conditions shall apply to you in so far as it is
applicable.
Clause 17 thereof which deals with Dispute Resolution, is thus:
17. Dispute Resolution
If any dispute or difference shall arise between you
and us, either during the progress or after the
completion or abandonment of the Subcontract
Works, then either party may forthwith give to the
other party a notice in writing of such dispute or
difference and such dispute or difference shall be
referred to the respective chief executive officer /
managing director of the parties for them to mutually
agree and resolve the dispute or difference.
Sub-clause 67.1 of GCC deals with disputes adjudication board and
relevant sub-clauses are thus:
Sub-clause 67.1: Disputes Adjudication Board
Delete the text of Clause 67 and substitute with the
following:
If a dispute of any kind whatsoever arises between
the Employer and the Contractor in connection with
or arising out of the contract or the execution of the
Works, including any dispute as to any opinion,
instruction, determination, certificate or valuation of
the Engineer, the dispute shall initially be referred in
writing to the Disputes Adjudication Board (the
Board) for its decision. Such reference shall state
that it is made under this Sub-clause, unless the
member or members of the Board have been
previously mutually agreed upon by the parties and
named in the Contract, the parties shall within 90
days of the Commencement Date, jointly ensure the
appointment of the Board. The Board shall comprise
suitably qualified persons as members, the number of
members being one or three, as stated in the
Appendix to Bid. If the Board is to comprise three
members, each party shall nominate one member for
the approval of the other party and the parties shall
mutually agree upon and appoint the third member
(who shall act as Chairman).
The terms of appointment of the Board shall:
a) x xxx
b) x xxx
c) x xxx
d) x xxx
67.2 x xxx
67.3 Amicable Settlement
Where notice of dissatisfaction has been given under
Sub-clause 67.2, the parties shall attempt to settle
such dispute amicably before the commencement of
arbitration. Provided that unless the parties agree
otherwise, arbitration may be commenced on or after
the fifty-sixth day after the day on which notice of
dissatisfaction was given, even if no attempt at
amicable settlement has been made.
Sub-clause 67.4 deals with Arbitration, which is thus:
Sub-clause 67.4: Arbitration
Any dispute in respect of which:
(a) the decision, if any, of the Board has not become
final and binding pursuant to Sub-Clause 67.2, and
(b) Amicable settlement has not been reached:
shall be finally settled as set forth below:
(i) (1) In the case of dispute arising between
the Employer and a domestic Contractor or
between the Employer and a foreign
Contractor who opts for the application of the
Indian Arbitration and Conciliation Act,
1996 related to any matter arising out of or
connected with this Contract, such dispute
shall be referred to the Arbitral Tribunal
consisting of 3 (three) arbitrators, one each to
be appointed by the Employer and
Contractor, the third arbitrator shall be
chosen by the two arbitrators so appointed by
the parties and shall act as Presiding
Arbitrator. In case of failure of the two
arbitrators, appointed by the parties to reach
upon a consensus within a period of 30 days
from the appointment of the arbitrators
subsequently appointed then upon the request
of either or both parties, the Presiding
arbitrator shall be appointed by the President,
Indian Road Congress. The Indian
Arbitration and Conciliation Act, 1996 the
rules there under and any statutory
modification of re-enactment thereof, shall
apply to these arbitration proceedings.
14. Now, turning to the submissions of the learned counsel for
the revision petitioners that the conjoint reading of clauses 6 and 17 of
the LOAs read with clause 17 and sub-clauses 67.3 and 67.4 of the
main agreement would indicate in definite terms that there is
a binding arbitration agreement between the parties, and that the law
laid down by the Honble Supreme Court in M.R. Engineers Case
(Supra), that where a contract refers to a document and it has been
agreed that the contract is governed by the provisions of the said
document, the terms and conditions thereof in entirety will get bodily
lifted and incorporated into the contract, in our considered view, it is
difficult to agree with the said submission, for the reasons hereinafter
we indicate.
15. What was agreed between the parties herein under clause
6 of the contract is that the revision petitioners deemed to have full
knowledge of the terms and conditions stipulated in the main contract
between the employer and the contractor - respondent and, such terms
and conditions shall apply to the revision petitioners in so far as it is
applicable. In the case of M.R. Engineers (Supra), somewhat, similar
terms were mentioned in the sub-contract stating that the said sub-
contract would be carried out on the terms and conditions as
applicable to main contract, unless otherwise mentioned in the work
order letter. The learned counsel for the revision petitioners relying
on sub-section 5 of Section 7 of the Act, 1996, drawn our attention to
the observations of the Honble Supreme Court contained in
paragraph No.9 in M.R. Engineers Case (Supra), to fortify his
submission that sub-clause 67.4 contained in the main agreement
between the employer and the respondent herein binds the parties
herein and with such intention, clause 6 of the sub-contract has been
incorporated. The learned counsel for the respondent, on the other
hand, placed reliance on the observations of the Honble Supreme
Court contained in paragraph Nos.8, 13 and 16 of the very same
decision. We have extracted sub-section 5 of section 7 of the Act,
1996, in the above. The observations of the Honble Supreme Court
in M.R. Engineers Case (Supra) contained in paragraph No.9 are
thus:
9. If a contract refers to a document and provides
that the said document shall form part and parcel of
the contract, or that all terms and conditions of the
said document shall be read or treated as a part of the
contract, or that the contract will be governed by the
provisions of the said document, or that the terms and
conditions of the said document shall be incorporated
into the contract, the terms and conditions of the
document in entirety will get bodily lifted and
incorporated into the contract. When there is such
incorporation of the terms and conditions of a
document, every term of such document (except to
the extent it is inconsistent with any specific
provision in the contract) will apply to the contract.
If the document so incorporated contains a provision
for settlement of disputes by arbitration, the said
arbitration clause also will apply to the contract.
The Honble Supreme Court while explaining the difference between
the reference to another document in a contract and incorporation of
another document in a contract by reference held in paragraph No.8
thus:
8. There is a difference between reference to
another document in a contract and incorporation of
another document in a contract, by reference. In the
first case, the parties intend to adopt only specific
portions or part of the referred document for the
purposes of the contract. In the second case, the
parties intend to incorporate the referred document in
entirety, into the contract. Therefore, when there is a
reference to a document in a contract, the court has to
consider whether the reference to the document is
with the intention of incorporating the contents of
that document in entirety into the contract, or with the
intention of adopting or borrowing specific portions
of the said document for application to the contract.
We will give a few instances of incorporation and
mere reference to explain the position (illustrative
and not exhaustive).
The scope and intent of sub-section 5 of Section 7 of the Act, 1996
was summarized by the Honble Supreme Court in sub-paragraph
Nos.(iv) and (v) of paragraph No.13. We are inclined to extract sub
paragraph Nos.(iv) and (v) of paragraph No.13, which are thus:
(iv) Where the contract provides that the standard
form of terms and conditions of an independent trade
or professional institution (as for example the
standard terms and conditions of a trade association
or architects association) will bind them or apply to
the contract, such standard form of terms and
conditions including any provision for arbitration in
such standard terms and conditions, shall be deemed
to be incorporated by reference. Sometimes the
contract may also say that the parties are familiar
with those terms and conditions or that the parties
have read and understood the said terms and
conditions.
(v) Where the contract between the parties stipulates
that the conditions of contract of one of the parties to
the contract shall form a part of their contract (as for
example the general conditions of contract of the
government where government is a party), the
arbitration clause forming part of such general
conditions of contract will apply to the contract
between the parties.
While culling out the intention of the parties from the use of the words
this sub-contract shall be carried out on the terms and conditions as
applicable to main contract in relation to sub-contract therein, the
Honble Supreme Court in paragraph no.15 held that the work order
therein would indicate the intention that only the terms and conditions
in the main contract relating to the execution of the work were
adopted as a part of sub-contract between respondent and appellant,
and not the parts of the main contract which did not relate to
execution of the work. The Honble Supreme Court held in paragraph
No.16 relied on by the learned counsel for the respondent thus:
16. Even assuming that the arbitration clause from
the main contract had been incorporated into the sub-
contract by reference, we are of the view that the
appellant could not have claimed the benefit of the
arbitration clause. This is in view of the principle
that if the document to which a general reference is
made, contains an arbitration clause whose provisions
are clearly inapt or inapplicable with reference to the
contract between the parties, it would be assumed or
inferred that there was no intention to incorporate the
arbitration clause from the referred document. In this
case the wording of the arbitration clause in the main
contract between the PW Department and contractor
makes it clear that it cannot be applied to the sub-
contract between the contractor and the sub-
contractor. The arbitration clause in the main
contract states that the disputes which are to be
referred to the committee of three arbitrators under
Clause 67.3 are disputes in regard to which the
decision of the Engineer (Engineer refers to person
appointed by State of Kerala to act as Engineer for
the purpose of the contract between PW Department
and the respondent) has not become final and binding
pursuant to sub-clause 67.1 or disputes in regard to
which amicable settlement has not been reached
between the State of Kerala and the respondent
within the period stated in sub-clause 67.2.
Obviously, neither sub-clause 67.1 nor sub-clause
67.2 will apply as the question of Engineer issuing
any decision in a dispute between the contractor and
sub-contractor, or any negotiations being held with
the Engineer in regard to the disputes between the
contractor and sub-contractor does not arise. The
position would have been quite different if the
arbitration clause had used the words all disputes
arising between the parties or all disputes arising
under this contract. Secondly, the arbitration clause
contemplates a committee of three arbitrators, one
each to be appointed by the State of Kerala and the
respondent and the third (Chairman) to be nominated
by the Director-General (Road Development),
Ministry of Surface Transport, Roads Wing,
Government of India. There is no question of such
nomination in the case of a dispute between the
contractor and sub-contractor. It is thus seen that the
entire arbitration agreement contained in the main
contract between the employer and the contractor was
tailor-made to meet the requirements of the contract
between the employer and the contractor and is
wholly inapt and inapplicable in the context of a
dispute between the contractor and the sub-
contractor. This makes it clear that the arbitration
clause contained in the main contract would not apply
to the disputes arising with reference to the sub-
contract.
16. Keeping in view, the guiding factor emphasized in
paragraph No.8 by the Honble Supreme Court, when there is
reference to a document in a contract, the Court has to consider
whether the reference to the document is with the intention of
incorporating the contents of that document in entirety into the
contract, or with the intention of adopting or borrowing specific
portions of the said document for application to the contract, we
would like to infer the intention of the parties in incorporating the
words you are deemed to have full knowledge of the terms and
conditions stipulated in the main contract between the employer and
us and such terms and conditions, shall apply to you in so far as it is
applicable occurring in clause 6 of the sub-contract between the
parties.
17. Admittedly, dispute resolution mechanism has been
separately incorporated by the parties in clause 17 of the sub-contract.
Even a dispute resolution mechanism is provided in the main contract
between the employer and the contractor in sub clauses 1 to 4 of
clause 67, as extracted in the above. The very fact that a distinct
dispute resolution mechanism has been incorporated by the parties in
clause 17 of the sub-contract reflects the intention of the parties that
they never inclined to adopt the dispute resolution mechanism
contained in clause 67 of GCC. When viewed in that perspective,
certainly, the words mentioned in clause 6 of the sub-contract afore
extracted, in our view, definitely indicate the intention of the parties
that only the terms and conditions of the main contract relating to
execution of the work were adopted as part of the sub-contract
between the parties herein and not the contract in its entirety. Thus,
clause 17 of the sub-contract would completely exclude the invocation
of arbitration clause contained in sub clause 4 of clause 67 of the main
contract between the employer and the respondent. Thus, the
principle enunciated by the Honble Supreme Court in M.R.
Engineers Case (Supra), would not render any assistance to the
revision petitioners to interpret clause 6 of the sub-contract in the
manner in which it intends to, while rendering complete assistance to
the stand taken by the respondent.
18. Adverting to clause (c) of sub-section 4 of Section 7 of the
Act, 1996, in relation to the submission of the learned counsel for the
revision petitioners that the respondent did not deny the specific
reference made to arbitration agreement contained in the main
contract in the letters, dated 18-10-2012 and 24-06-2013, we are of
the considered view, that the said circumstance does not improve the
case of the revision petitioners for the reason that there has been
distinct sub-contract between the revision petitioners and the
respondent, more particularly, incorporation of clause 17 in relation to
a distinct dispute resolution mechanism. Therefore, we are not
convinced with the argument of the learned counsel for the revision
petitioners in that regard.
19. In view of the foregoing discussion, we find no merit in
the instant revision petition, and the same stands dismissed. We make
no order as to costs.
20. As a sequel thereto, miscellaneous petitions, if any,
pending in the revision, stand disposed of.
__________________________
R. SUBHASH REDDY, J
A. SHANKAR NARAYANA, J
August 17, 2015.
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