The Northern Railway had floated a tender on 24 June 2008 for the construction of quarters within its Shantipuram Railway Colony at Alambagh, Lucknow; for the replacement of old quarters and other ancillary work. The petitioner submitted a bid which was accepted on 3 July 2008. The total cost of the work envisaged is stated to have been Rs.8.70 crores. A formal contract agreement was entered into on 24 November 2008. In pursuance of the agreement, the petitioner is stated to have submitted a bank guarantee in the amount of Rs.43,52,470/-. The petitioner invoked the arbitration clause in terms of the arbitration agreement between the parties. Clause 64 of the Standard General Conditions of Contract in connection with Engineering Works contains an arbitration agreement.
The record would indicate that the petitioner had submitted its claims to the competent authority by a letter dated 14 October 2013 (Annexure 8), raising the following claims :-
On 27 March 2014, the Deputy Chief Engineer called upon the petitioner to submit its options with reference to a proposed panel of names, out of which, it was stated that the General Manager would appoint an arbitrator to act as a nominee of the petitioner. The petitioner, by a letter dated 11 April 2014, suggested two names. On 8 May 2014, the Deputy Chief Engineer intimated to the petitioner of the constitution of an arbitral tribunal. A partial reference of the claims made by the petitioner was made in terms of Annexure 'A' to the letter containing both the claims of the contractor and the counter claims of the railways. On 17 May 2014, the petitioner addressed a communication to the Deputy Chief Engineer inquiring as to why all the claims which had been addressed, had not been referred to the arbitral tribunal. By a communication dated 18 June 2014, the petitioner was informed that claims 1, 2, 3, 4, 6, 7 and 8 had not been referred to arbitration since they constituted excepted matters in terms of Clause 61(3), Clause 21.5 and Clause 63 as well as under Clause 5.2 of the Special Tender Conditions. That has given rise to the filing of the present proceedings.
The submission which has been urged on behalf of the petitioner is that under Section 16 of the Arbitration and Conciliation Act, 19961, the Arbitral Tribunal is entitled to rule on its own jurisdiction, including with respect to the existence or validity of an arbitration agreement. It has been submitted that the issue as to whether a matter falls within an ''excepted matter'' under the agreement, falls within the jurisdiction of the Arbitral Tribunal to decide and it is not open to the competent authority to refuse to refer a claim to arbitration on the ground that it relates to an excepted matter.
On the other hand, the learned counsel appearing on behalf of the respondents has supported the impugned communication dated 18 June 2014 on the ground that once a claim falls within an excepted matter in the opinion of the competent authority, it could not be referred to arbitration and the jurisdiction of the arbitral tribunal to rule on an excepted matter would be ousted.
Section 16 of the Act empowers the arbitral tribunal to rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement. Whether a particular claim falls within the excepted category of claims which are not arbitrable, cannot be in the exclusive domain of one of the parties. The arbitral tribunal, having regard to the scheme of Section 16 of the Act, has jurisdiction to rule on whether or not a claim is arbitrable or, as asserted in the present case, on whether a claim falls within one of those matters, which are excepted from the purview of arbitration.
In National Insurance Co. Ltd. Vs. M/s Boghara Polyfab Pvt. Ltd.2, the Supreme Court held that basically, there are three issues which may arise before the Chief Justice or his designate when an application is made under Section 11 of the Act. The first category consists of those issues which the Chief Justice or his designate must decide. The second category consists of those issues which may be decided under Section 11 of the Act or may even be left to the Arbitral Tribunal to decide. The third category consists of those issues which must be left to the Arbitral Tribunal to decide. The issue as to whether a claim will fall within the arbitration clause or whether it has been reserved for the final decision of a departmental authority as an excepted or excluded matter, has to be left to the Arbitral Tribunal to decide. In this regard, the observations in the decision are as follows:-
"17. Where the intervention of the court is sought for appointment of an Arbitral Tribunal under section 11, the duty of the Chief Justice or his designate is defined in SBP & Co. This Court identified and segregated the preliminary issues that may arise for consideration in an application under section 11 of the Act into three categories, that is (i) issues which the Chief Justice or his Designate is bound to decide; (ii) issues which he can also decide, that is issues which he may choose to decide; and (iii) issues which should be left to the Arbitral Tribunal to decide.
17.1 The issues (first category) which Chief Justice/his designate will have to decide are:
(a) Whether the party making the application has approached the appropriate High Court.
(b) Whether there is an arbitration agreement and whether the party who has applied under section 11 of the Act, is a party to such an agreement.
17.2 The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are:
(a) Whether the claim is a dead (long barred) claim or a live claim.
(b) Whether the parties have concluded the contract/ transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.
17.3 The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are :
(i)Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration)
(ii)Merits or any claim involved in the arbitration."
These observations make it abundantly clear that whether a particular claim, which has been made by a contractor, is arbitrable or conversely, whether it has been excepted or excluded from the purview of arbitrability, cannot lie in the exclusive domain of the other party to the contract. Where a reference to arbitration is made outside the Court, a party making the reference on a claim which has been raised by the contractor, may do so subject to its reservations on the arbitrability of the claim. Hence, in the present case, it would have been open to the competent authority, while referring the claims to arbitration, to reserve its objections on the ground that a particular claim is an excepted matter which is not capable of being arbitrated upon. The arbitral tribunal would under Section 16 of the Act have the jurisdiction to decide as to whether a particular claim falls within an excepted matter or is within the purview of the arbitration agreement. What the third respondent has done by declining to even refer the claim to arbitration, is to prevent the arbitral tribunal from inquiring into whether the claim is arbitrable in the first place. This, in our view, is impermissible. If a reference to arbitration were to be made through the Court under Section 11 of the Act, there is no ambiguity about the legal position in view of the decision of the Supreme Court in Boghara Polyfab (supra). The issue as to whether the claim was arbitrable or fell within the scope of an excepted matter, must be left to the arbitral tribunal. Neither the Chief Justice nor his designate under Section 11 of the Act can decide an issue which pertains to the third category enlisted in the decision in Boghara Polyfab (supra). Similarly, where a reference to arbitration has taken place outside the Court, a party to the arbitral agreement cannot preclude the arbitral tribunal from deciding as to whether the claim is arbitrable or whether it pertains to an excepted matter. That issue has to be determined by the arbitral tribunal.
This principle finds support from the decision of the Supreme Court in J.G. Engineers Private Limited Vs. Union of India and another3, where it was held that a contract cannot provide that one party will be the arbiter to decide whether he committed breach or whether the other party committed a breach and this is a question which can only be decided by the arbitral tribunal, where there is an arbitration agreement. Whether a particular claim is arbitrable or not and whether an objection that a claim falls within an excepted matter is tenable, is within the jurisdiction of the arbitral tribunal under Section 16 of the Act.
In the circumstances, while constituting an arbitral tribunal in terms of Clause 64 of the Standard General Conditions of Contract, it was not open to the second respondent to decline to refer a portion of the claims raised by the petitioner on the ground that they pertained to an excepted matter. We, accordingly, direct the competent authority, namely, the General Manager of the Northern Railways to make a reference of all the claims, disputes and differences in terms as sought by the petitioner. We, however, expressly clarify that the reference to arbitration shall be subject to all the objections of the respondents in regard to the arbitrability of each claim and it would be open to the respondents to raise all appropriate objections before the arbitral tribunal including that a particular claim falls within an excepted matter under the terms of the contract. Any such objection shall be adjudicated upon by the arbitral tribunal under Section 16 of the Act. Nothing contained in this judgment shall be construed as the expression of any opinion on whether or not a claim falls within the jurisdiction of the Tribunal or whether it falls within an excepted matter. This shall be determined by the arbitral tribunal under Section 16.
The petition is, accordingly, disposed of. There shall be no order as to costs.
Order Date :- 16.12.2014 VMA (Dr. D.Y. Chandrachud, C.J.) (Manoj Misra, J.)