Home Blawgs Expected Matters under the Arbitration & Conciliation Act, 1996- An Analysis

Expected Matters under the Arbitration & Conciliation Act, 1996- An Analysis

The article is written by Advocate Advait Ghosh

Introduction

Arbitration has become the preferred mode of dispute resolution in the country, and commercial disputes are being increasingly resolved by arbitration due to their advantages over the traditional Court system.

Arbitration is conducted by an arbitral tribunal consisting of a single arbitrator or an arbitral tribunal of an odd number of arbitrators. Arbitral Tribunals are often chosen because of their experience in adjudicating the technical subject-matter of the disputes, and consequentially professionals from a non-legal background, such as engineers or scientists are appointed to adjudicate these disputes. The award rendered by the Arbitral Tribunal is considered sacrosanct, and can only be interfered under Section 34(2) of The Arbitration & Conciliation Act, 1996. One of the conditions in which the Arbitral Award can be set aside if “the arbitral award deals with a dispute not contemplated by or not falling within the terms of submission to arbitration, or it contains decisions on matters beyond scope of submission to arbitration”. This is in terms of Section 34(2)(iv) of The Arbitration & Conciliation Act, 1996. Thus, if the arbitral tribunal deals with a finding, which does not fall within the scope of its reference, such award will be set aside or it will be set aside to the extent it is void.

The meaning of excepted matters

In terms of legal parlance the term “excepted matters” can be anything ranging from a decision as to quantification of damages arising from the breach of the contract to technical terms.

Why some issues are excepted in that manner? 

The important question which can arise is why are some of these issues excluded from the purview of the arbitration tribunal. It is considered that questions of technical expertise are often best understood by technical and subject-matter experts, and are hence are excluded from the purview of the arbitration.

We shall now embark on a detailed Case – Law analysis to understand how courts deal with the question of excepted matters in arbitration.

  1. VISHWANATH SOOD VS UNION OF INDIA[1]

A Government Works Contract had a clause for compensation for the delay, which was worded as follows-“In the event of the contractor failing to comply” with some conditions relating to timely execution of the contract, “he shall be liable to pay as compensation an amount equal to one percent or such smaller amount as the Superintending Engineer (whose decision in writing shall be final) may decide provided always that the entire amount of compensation … shall not exceed 10 percent, on the estimated cost of the work as shown in the tender.” A subsequent clause provided for arbitration of all disputes, but “except where otherwise provided in the contract”. The question was, was the issue of compensation arbitrable, or was it to be decided by the Superintending Engineer. The Supreme Court opined that since compensation was payable in the event of “contractor failing to comply”, with the prescribed schedule, the levy was conditioned on some default or negligence on the part of the contractor. Further, the clause gave the Superintending Engineer discretion to levy a maximum of 10 percent and also to reduce the rate of penalty from one percent. The court also noted that though the clause did not contemplate a notice to the contractor, as a matter of practice, compensation was initially levied by the Engineer-in-charge and the Superintending Engineer came into the picture only as some sort of revision or appellate authority to which the contractor appealed for redress. “The decision of the Superintending Engineer”, the court said, “is in the nature of a considered decision which he has to arrive at after considering the various mitigating circumstances that may be pleaded by the contractor or his plea that he is not liable to pay compensation at all under this clause”. Therefore, according to the court, the clause provided complete machinery for the determination of compensation.

The court also reasoned that the words “except where otherwise provided in the contract” in the arbitration clause were a reference to the compensation-for-delay and other like clauses by which certain types of determinations are left to the administrative authorities, and any other interpretation would render such words meaningless. Then, recognizing a critical aspect of the case, the court said that it had “some hesitation” in coming to its conclusion because “the question of any negligence or default on the part of the contractor has many facets and to say that such an important aspect of the contract cannot be settled by arbitration but should be left to one of the contracting parties might appear to have far-reaching effects.”

However, the court overcame its hesitation because the power of the Superintending Engineer “is not an undefined power” and “the amount of compensation is strictly limited to a maximum of 10 percent and with a wide margin of discretion to the Superintending Engineer, who might not only reduce the percentage but who, we think, can even reduce it to nil, if the circumstances so warrant”.

B:-BHARAT SANCHAR NIGAM LTD VS MOTOROLLA INDIA PVT LTD.[2]

Appellant had issued a notice inviting tenders dated 4.01.2001 calling eligible bidders for turn-key projects on planning, engineering, the supply of Indian mobile personal communication system in the southern regions of India. Respondent was awarded the bid. The purchase order provided a schedule for the delivery of goods. It also provided for Liquidated damages to be paid in case of a delay in supply. It is the case of the Appellants that Respondent had failed to complete the project and therefore liquidated damages were imposed for the delay. The respondent challenged the levy and sought recourse to arbitration. It was contended before the arbitral tribunal by the Respondents that the” levy of liquidated damages was not excepted”, and hence were the subject-matter of arbitration”. The appeal reached the Kerela High Court, and the High Court opined that the “authority of the purchaser(BSNL) to quantify the liquidated damages only arises when it is found out that the supplier is liable to pay for the damages. It is necessary as a condition precedent to find out whether there has been any delay on part of his obligation of delivery. The Appellant has appealed to the Supreme Court on this issue. The Supreme Court opined that quantification of liquidated damages may be an excepted issue, but before there can be a levy of liquidated damages, first there has to be a delay on the part of the Respondent,  and the delay has to be ascertained before the levy of damages. Clause 16.2 of the contract cannot be treated as an excepted matter, because it does not provide for any adjudicatory process for a decision on the dispute, which is the condition precedent for quantification. The position was sufficiently delineated in the case of State of Karnataka vs Shree. Rameshwara Rice Mills(1987 AIR 1359), where the Court said that the right to assess damages for breach of contract and the right to assess whether the damage has occurred are two separate issues.

C: JG ENGINEERS VS UNION OF INDIA[3]

Respondents were awarded the work of construction of airport terminal building. As per the contract, the date of commencement of work was 10.4.1993 and the period of completion of the contract was 21 months, to be completed as per different stages. As the Appellant did not complete the work within the requisite time period, the contract was rescinded and the matter was referred to arbitration. The arbitrator made a claim in favor of the Appellant (contractor) and rejected the counter-claims of the Union of India. The Respondents challenged the Award under Section 34 of The Arbitration and Conciliation Act, 1996, claiming that the arbitrator had adjudicated on issues that were “excepted”. The matter reached the Supreme Court in appeal. The Supreme Court held that the right to quantify damages arising from the breach can be said to be an excepted matter, however the issue of deciding whether there is a breach is the sole domain of an adjudicatory forum and cannot be decided by a non-adjudicatory body. Hence the Appeal was dismissed.

Conclusion

The basic premise of arbitration is consent, and it is based on this principle that certain issues are excluded from the purview of the Arbitral Tribunal. It is noteworthy to mention that only technical aspects in the contract or agreement can be excluded from the purview of the arbitration tribunal. In the case of JG engineers and BSNL VS MOTOROLLA INC LTD, the Supreme Court reiterated that fundamental issues as to whether there is actually a breach of contract is the sole domain of the adjudicatory forum, and cannot be treated as excepted matters. It is on this premise that the recent ONGC judgment of the Supreme Court has been criticized by some authors who have opined that the issue of determining the breach of contract cannot be excluded from the purview of the arbitral tribunal as previous Supreme Court judgments have ruled to the contrary.


References

[1] 1989 AIR 952

[2] CIVIL APPEAL NO.5645 OF 2008

[3] CIVIL APPEAL NO.3349 OF 2005

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