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2004 DIGILAW 287 (HP)

ANIL KUMAR MAHAJAN v. STATE OF H. P.

2004-10-19

R.L.KHURANA

body2004
JUDGMENT R.L. Khurana, J,—This order will dispose of the following preliminary issue: "Whether a dispute can be referred to arbitration by the defendant during the pendency of the suit without taking recourse to Section 8 of Arbitration and Conciliation Act, 1996? If so, its effect?" 2. The plaintiff who is Class-A Contractor, was awarded vide four separate agreements No. 60 of 1998-99, 34 of 1999-2000,1 of 2002-2003 and 3 of 2002-2003, the execution of the following works: (i) Improvement and widening of PCM road Km. 26/500 to 35/00 (SH: C/O roadside structures and cross drainage work, culverts, retaining wall and breast-wall; (ii) Improvement and widening of narrow and low grade section of PCM road NH 20 Km. 26/500 to Km.41/500 (SH: Providing and laying earth/gravel filling behind R/wall and culvert beyond 60 cm. boulder filling in Km.26/500 to 39/00; (iii) Improvement and widening of narrow and low grade Section of PCM road NH 20 Km. 26/500 to Km.35/00 (SH: Supply of stone and gravel); and (iv) Improvement and widening of narrow and low grade section of PCM road NH 20 Km. 26/500 to Km.39/00 (SH: supply of stone and gravel. 3. All the four agreements contained an arbitration clause in the following terms: "Except where otherwise provided in the contract all questions and dispute relating to the meaning of the specifications, designs, drawings and instructions hereinbefore mentioned and as to the quality of workmanship of materials used on the work or as to any other question, claim right matter or thing whatsoever, in any way arising out of are relating to the contract designs, drawings specifications, estimates, instructions, orders or those conditions or otherwise concerning the works or the execution of failure to execute the same whether arising during the progress of the work or after the completion or abandonment thereof shall be referred to the sole arbitration of the person appointed by the Engineer-in Chief/ Chief Engineer, Himachal Pradesh Public Works Department. It will be no objection to any such appointment that the arbitrator so appointed is a Government servant, that he had to deal with the matters to which the contract relates and that in the course of his duties as Government servant he had expressed views on all or any of the matters in dispute of difference. It will be no objection to any such appointment that the arbitrator so appointed is a Government servant, that he had to deal with the matters to which the contract relates and that in the course of his duties as Government servant he had expressed views on all or any of the matters in dispute of difference. The arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason, to Engineer-in-Chief/Chief Engineer, Himachal Pradesh Public Works Department at the time of such transfer vacation of office or inability to act, shall appoint another person to act as arbitrator in accordance with the terms of the contract. Such person shall be entitled to proceed with the reference from the stage at which it was left by his predecessor. It is also a term of this contract that no person other than a person appointed by the Engineer-in-Chief/ Chief Engineer, Himachal Pradesh Public Works Department should act as arbitrator and, if for any reason, that is not possible the matter is not to be referred to arbitration at all. In all cases where the amount of the claim in dispute is Rs. 50,000-00 (Rupees fifty thousand) and above the arbitrator shall give reasons for the award. Subject as aforesaid the provisions of the Arbitration Act, 1940 or any statutory modification or re-enactment thereof and the rules made thereunder and for the time being in force shall apply to the arbitration proceeding under this clause. It is also term of the contract that the party invoking arbitration shall specify the dispute or disputes to be referred to arbitration under this clause together with the amount or amounts claimed in respect of each such dispute. It is also a term of the contract that if the contractor(s) do/does not make any demand for arbitration in respect of any claim(s) in writing within 90 days of receiving the intimation from the Government that the bill is ready for payments, the claim of contractor(s) will be deemed to have been waived and absolutely barred and the Government, shall be discharged and released of all liabilities under the contract in respect of these claims. The arbitrator(s) may from time to time with consent of the parties enlarge the time, for making and publishing the award 4. The arbitrator(s) may from time to time with consent of the parties enlarge the time, for making and publishing the award 4. The plaintiff, who is a party to the above agreements containing the arbitration clause without getting the dispute referred to arbitration, has filed the present suit for the recovery of Rs. 21,50,000/- against the defendants. It has been averred that the above referred to works stand duly executed by him. The measurements thereof have been duly recorded and entered in the measurement books maintained by the defendants. The bills amounting to Rs. 20,36,284/- were prepared and duly checked and passed by defendant No. 2, the Engineer-in-Charge of the works and who is duly authorized under the agreements. However, such amount have not been paid. A further sum of Rs. 10,42,276/- towards price escalation, to which the plaintiff is entitled in terms of clause-lOCC of the agreements, also has not been paid by the defendants. Thus, a total sum of Rs. 20,78,560 is due from the defendants on which outstanding amount the plaintiff is entitled to interest at the rate of 2% per annum. After giving up the claim to the extent of Rs. 71,040/- the plaintiff has confined his claim to the extent of Rs. 21,50,000/- towards principal amount due and interest thereon. It was further pleaded that the matters involved in the present suit are not governed and covered by the arbitration clause contained in the agreements. 5. The defendants upon having been served on 8.7.2003 filed the written statement. The defendants pleaded that the plaintiff was not entitled to any amount towards price escalation. In so far as the amount pertaining to the five pending bills (as detailed in para 4 of the plaint) are concerned, it was pleaded that a sum of Rs. 1,45,076/- stand paid to the plaintiff by way of two cheques dated 17.5.2003 and the balance amount has been withheld since various amounts towards deviations, royalty, penalty and cost of empty cement bags etc. are still to be recovered from him. It was further pleaded that a sum of Rs. 32,189/- would be paid to the plaintiff on receipt of L.O.C. from the State Government. 6. are still to be recovered from him. It was further pleaded that a sum of Rs. 32,189/- would be paid to the plaintiff on receipt of L.O.C. from the State Government. 6. In the replication filed by the plaintiff, he prayed that pending determination of other disputes, a decree to the extent of the amount admitted to be due from the defendants be passed in his favour under Order 12 Rule 6, Code of Civil Procedure. 7. The defendants thereafter on an application, being OMP No. 54 of 2004, made under Order 6 Rule 17, Code of Civil Procedure, were allowed vide order dated 8.4.2004 to amend the written statement. In the amended written statement filed on 10.3.2004 an additional preliminary objection was raised in the following terms:— "That the present civil suit for the claims of the plaintiff are not maintainable because the contract contains an arbitration clause No. 25 which provides for the settlement of disputes arising out of the contract to be settled through arbitration by the Arbitrator appointed by the Chief Engineer, H.P.P.W.D. because the defendant department as per the provisions of clause No. 25 of the respective agreements in question have already appointed an Arbitrator i.e., S.E. Arbitration, HPPWD, Solan vide order dated 6.1.2004 who can adjudicate and decide the claims of the contractor plaintiff. Therefore, the present civil suit on this ground is not maintainable." 8. In its replication filed on 11.5.2004 the plaintiff pleaded:— "Para 5 of the preliminary objections as alleged is also wrong and denied. It is submitted that the disputes raised in the suit are not covered by the arbitration agreement between the parties and the.defendants having already filed their "statement on the substance of the dispute" by filing the written statement, cannot seek reference of disputes to arbitration as the said relief would be barred by Section 8 of the Arbitration and Conciliation Act, 1996." 9. On such pleadings of the parties, the above noted preliminary issue came to be framed:— 10. I have heard the learned counsel for the parties and have also gone through the record of the case. My findings on the above preliminary issue are as under:— 11. On such pleadings of the parties, the above noted preliminary issue came to be framed:— 10. I have heard the learned counsel for the parties and have also gone through the record of the case. My findings on the above preliminary issue are as under:— 11. Section 8 of the Arbitration and Conciliation Act, 1996 (for short: the Act) provides:— "Power to refer parties to arbitration where there is an arbitration agreement.—(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration. (2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof. (3) Notwithstanding that an application has been made under subsection (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made." Few admitted facts of the case may be noticed at this state:— (a) the present suit was filed on 15.3.2003; (b) Defendant No. 1 was served on 19.5.2003 while defendant No. 2 was served on 23.5.2003; (c) Appearance on behalf of the defendants, after service, was put in for the first time on 3.6.2003; (d) Written statement was filed by the defendants on 8.7.2003; (e) Amended written statement was filed on 10.3.2004; (f) An arbitrator came to be appointed by the defendant No. 1 in terms of the arbitration clause contained in the agreements on 6.1.2004, that is, during the pendency of the suit and after filing of the first written statement on 8.7.2003; and (g) The Arbitrator came to be appointed without taking recourse to Section 8 of the Act. 12. The Honble Supreme Court in P. Anand Gajapathi Raju and others v. P.V.G. Raju (Dead) and others [(2000) 4 SCC 539] dealing with Section 8 of the Act has held that the language of the Section is pre-emptory and it is obligatory for the court to refer the parties to arbitration in terms of their arbitration agreement and nothing remains to be decided in original action after such an application is made to refer the dispute to an arbitrator. 13. 13. The above ratio has been reiterated in Hindustan Petroleum Corporation Ltd. v. Pinkdty Midway Petroleums [(2003) 6 SCC 503]. Section 8 of the Act corresponds substantially to Section 34 of the Arbitration Act, 1940 (for short: the Old Act) except that— (a) a party should file an application under the Act in the Court alleging the existence of an arbitration agreement "not later than when submitting his first statement on the substance of the disputes as against the earlier stipulation under the Old Act at any time before filing a written statement or taking any other steps in the proceedings; (b) the expression "ready and willing" for arbitration under Section 34 of the Old Act has been omitted and deleted in Section 8 of the Act; (c) under the Act legal proceedings in the Court will not be stayed as under the Old Act and the dispute(s) shall be referred to arbitration. 14. Dealing with the scope and ambit of Section 34 of the Old Act the Honble Supreme Court in The State of Uttar Pradesh and another v. M/s. Janki Saran Kailash Chandra and another [AIR 1973 SC 2071] has held: "..........The legal position with respect to the scope and meaning of Section 34 of the Arbitration Act admits of little doubt, the language of this section being quite plain. When a party to an arbitration agreement commences any legal proceedings against any other party to the said agreement with respect to the subject-matter thereof, then the other party is entitled to ask for such proceedings to be stayed so as to enable the arbitration agreement to be carried out. It is, however to be clearly understood that the mere existence of an arbitration clause in an agreement does not by itself operate as a bar to a suit in the Court. It does not by itself impose any obligation on the Court to stay the suit or to give any opportunity to the defendant to consider the question of enforcing the arbitration agreement. The right to institute a suit in some Court is conferred, on a person having a grievance of a civil nature, under the general law. It is a fundamental principle of law that where there is a right there is a remedy. The right to institute a suit in some Court is conferred, on a person having a grievance of a civil nature, under the general law. It is a fundamental principle of law that where there is a right there is a remedy. Section 9 of the Code of Civil Procedure confers this general right of suit on aggrieved person except where the cognizance of the suit is barred either expressly or impliedly. A party seeking to curtail this general right of suit has to discharge the onus of establishing his right to do so and the law curtailing such general right has to be strictly complied with. To enable a defendant to obtain an order staying the suit, apart from other conditions mentioned in Section 34 of the Arbitration Act, he is required to present his application praying for stay before filing his written statement or taking any other step in the suit proceedings." 15. In R. Katnalam v. The State of Tamil Nadu and another [AIR 1980 Madras 86] the plaintiff therein had filed a suit for the recovery of the value of the work done by him upto the date of termination of the contract and also for the value of the articles stated to have been unauthorisedly removed by the department. Such suit was resisted on merits by the defendants. One of the legal objections raised in the written statement was that the suit was not maintainable in view of the arbitration clause contained in the contract. No separate application under the Old Act was made. 16. It was held by a Division Bench of the Madras High Court that so long as the defendants have not chosen to file an application for stay of the suit under Section 34 of the Old Act and obtain a stay in that regard the Civil Court is entitled to proceed to deal with the matters at issue in the suit notwithstanding the existence of an arbitration clause in the contract. 17. A Division Bench of the Patna High Court in The Belsand Sugar Co. Ltd. v. Thakur Girja Nandan Singh [AIR 1969 Patna 8] has held that an objection raised in the written statement as to the jurisdiction of the Court in view of arbitration clause contained in the agreement governing the parties is of no effect. 17. A Division Bench of the Patna High Court in The Belsand Sugar Co. Ltd. v. Thakur Girja Nandan Singh [AIR 1969 Patna 8] has held that an objection raised in the written statement as to the jurisdiction of the Court in view of arbitration clause contained in the agreement governing the parties is of no effect. Such a plea has to be taken by way of an application under Section 34 of the Old Act before the written statement is filed. 18. The High Court of Gujarat in Bhailal Manilal v. Amratlal Lallubhai Shah [AIR 1963 Gujarat 141] dealing with Section 34 of the Old Act has held: "The legislature has, therefore, made provisions for cases where a party to an arbitration agreement commences a legal proceeding without complying with the terms of the arbitration agreement, in such a case the Court can stay the proceedings of the suit, in such a case the Court does not make a reference to any arbitrator but merely makes an order staying the proceedings of the suit so that the parties can comply with the provisions contained in the arbitration agreement. But in cases to which Section 21, which is in Chapter IV, is applicable, that is, where an arbitration agreement is arrived at after the suit has been filed, then the Court has to make a reference under Section 23 of the Act. That is the difference between suits filed after the arbitration agreement and suits in which the arbitration agreement is arrived at after the suit is filed. Where the arbitration agreement is arrived at after the suit is filed, the provisions of Chapter IV should be followed, but where the suit is filed after the arbitration agreement, the provisions of Section 34 of the Act should be followed and where they are followed the provisions of II would come into operation after the suit has been stayed/ 19. Recently in Kalpana Kothari (Smt.) v. Sudha Yadav (Smt.) and others [(2002) 1 SCC 203] the Honble Supreme Court while dealing with Section 34 of the Old Act and Section 8 of the Act has held that Section 34 of the Old Act have nothing to do with the actual reference to the arbitration of the disputes and that was left to be taken care of under Sections 8 and 20 of the Old Act. In striking contrast to the said scheme underlying the provisions of the Old Act, in the Act there is no provision corresponding to Section 34 of the Old Act and Section 8 of the Act mandates that the judicial authority before whom an action has been brought in respect of a matter, which is the subject matter of an arbitration agreement, shall refer the parties to arbitration if a party to such an agreement applies not later than submitting his first statement. The provisions of the Act do not envisage the specific obtaining of any stay as under the Old Act, for the reason that not only the direction to make a reference is mandatory but notwithstanding the pendency of the proceedings before the judicial authority or the making of an application under Section 8(1) of the Act, the arbitration proceedings are enabled under Section 8(3) of the Act to be commenced or continued and an arbitral award also made unhampered by such pendency. 20. In the present case, admittedly, no application as envisaged under Section 8(1) of the Act has been made by the defendants till date. The first statement on the substance of dispute by way of a written statement was filed on 8.7.2003. Even in such statement no objection as to jurisdiction of the Court on the ground of arbitration clause was taken. It was only in the second written statement filed on 10.3.2004 that such an objection was raised. 21. Having filed the first statement on the substance of dispute on 8.7.2003, the defendants had waived the arbitration clause and submitted to the jurisdiction of this Court in so far as the matter(s) involved in the suit are concerned. 22. As stated above, without taking recourse to Section 8(1) of the Act, the defendants on 6.1.2004 referred the disputes to the Arbitrator during the pendency of the suit. Permitting a party to refer the dispute(s) to Arbitration in the manner it has been done by the defendants in the present case, would render the provisions of Section 8(1) redundant since the party having the dominant role and power to refer the dispute(s) to Arbitration would be able to make such a reference at any stage of the judicial proceedings and thereby non-suit the plaintiff. 23. The language of Section 8 of the Act is clear. 23. The language of Section 8 of the Act is clear. It mandates that once an action has been brought before a judicial authority regarding an arbitration matter which is subject of an agreement, the opposite party has to apply for reference of such dispute(s) to arbitration and such application has to be made not later than when submitting the first statement on the substance of the dispute. Once a statement on the substance of the dispute has been submitted, unless both the parties agree neither the Court nor any of the parties has the right/power to refer the dispute(s) forming subject matter of the judicial proceedings to arbitration. 24. The defendants, in the present case, having submitted their statement of the substance of the dispute(s) on 8.7.2003 and having failed to apply under Section 8(1) of the Act, therefore, could not have referred the dispute(s) to arbitration during the pendency of the suit on 6.1.2004. 25. For the foregoing reasons it is held that a dispute included in the present suit could not be referred to arbitration by the defendants during the pendency of the suit without taking recourse to Section 8 of the Act. The above preliminary issue is, accordingly, decided in favour of the plaintiff and against the defendants. The reference of the disputes to the Arbitrator by the defendants on 6.1.2004 shall have no effect on the present case. 26. The contention raised on behalf of the plaintiff that the dispute(s) involved in the present case are not arbitrable and are not covered by the arbitration clause, has no merit in view of the judicial pronouncement by the Honble Supreme Court in Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleums (supra). It has been held that under Section 16 of the Act the Arbitrator has been empowered to rule on its own jurisdiction including rule on any objection with respect to the existence or validity of the arbitration agreement. The objection as to the applicability clause to the facts of the case will have to be raised before the Arbitral Tribunal concerned.