Alternative Dispute Resolution

State of Orissa v. Damodar Das

AIR 1996 SC 942; (1996) 2 SCC 216

Citation: AIR 1996 SC 942; (1996) 2 SCC 216
Court: Supreme Court of India
Date: 15 December 1995
Bench: K. Ramaswamy, Faizan Uddin and B.N. Kirpal, JJ.

Facts

Damodar Das was awarded three public works contracts by the State of Orissa concerning water-supply projects.
The contracts related to works undertaken during 1967, 1976 and 1977.
In some contracts, the contractor completed part of the work and later abandoned it.
Measurements were recorded and payments were accepted.
On 15 September 1980, the contractor alleged that disputes remained regarding amounts payable under the contracts.
He requested the Chief Engineer to appoint or nominate an arbitrator.
The Chief Engineer denied that the contracts contained an arbitration clause.
Damodar Das then filed applications under Sections 8 and 20 of the Arbitration Act, 1940.
The Subordinate Judge appointed arbitrators, and the Orissa High Court upheld that decision.
The State appealed to the Supreme Court.
It argued that:
Clause 25 was only a departmental finality clause;
it was not an arbitration agreement; and
at least one of the claims was hopelessly barred by limitation.

Issue

Whether Clause 25, which made the Public Health Engineer’s decision final, constituted an arbitration agreement.
Whether a clause giving an engineer administrative decision-making authority can be treated as an agreement to arbitrate.
When limitation begins to run for raising claims through arbitration.

Rule

An arbitration agreement requires an express or necessarily implied agreement to submit existing or future disputes to arbitration.
Merely declaring that an engineer’s decision on specifications, workmanship, measurements or execution will be final does not automatically create an arbitration agreement.
The clause must demonstrate an intention that:
disputes between the parties will be adjudicated;
the designated person will act judicially or quasi-judicially; and
the parties will be bound by the resulting arbitral determination.
The Limitation Act applies to arbitration.
A cause of arbitration arises when the claimant first becomes entitled to demand arbitration, ordinarily when the underlying claim or dispute arises.
A stale claim cannot be revived merely by issuing a fresh arbitration notice many years later.

Application

The Court read Clause 25 as a whole rather than isolating the words stating that the engineer’s decision would be “final, conclusive and binding.”
The clause authorised the Public Health Engineer to decide questions concerning:
specifications and drawings;
quality of materials and workmanship;
instructions and estimates; and
execution or failure to execute the work.
These functions were connected with departmental supervision and administration of the construction contract.
The clause did not state that:
disputes or differences between the contractor and the State would be referred to arbitration;
the engineer would hear both parties as an independent adjudicator;
the engineer would make an award; or
the Arbitration Act would govern the process.
The Court therefore refused to infer an arbitration agreement merely because the engineer’s administrative decision was described as final.
A finality clause may prevent ordinary contractual questions from being repeatedly reopened, but it does not necessarily transform the deciding officer into an arbitrator.
The contractor had also sent his demand to the Chief Engineer requesting appointment of another arbitrator.
That conduct itself indicated that he did not regard the Public Health Engineer as the contractually appointed arbitrator.
On limitation, the first contract had been completed and payment received in 1967.
The contractor waited until September 1980 to raise the claim.
The Court held that this claim was hopelessly time-barred.
The contractor could not postpone limitation until the date on which the Government formally denied his arbitration request.
For the other two contracts, there were disputed facts concerning extensions of time and completion or abandonment of work.
Those limitation questions might ordinarily have required adjudication.
However, because there was no arbitration agreement at all, no arbitrator could be appointed to decide them.

Conclusion

The Supreme Court held that Clause 25 was not an arbitration agreement.
It merely conferred administrative and supervisory decision-making authority on the Public Health Engineer.
The orders appointing arbitrators were set aside, and the contractor’s applications under Sections 8 and 20 were dismissed.
The Court also held that the claim arising from the 1967 contract was barred by limitation.
Use this case for: a departmental finality clause is not an arbitration agreement unless it clearly shows an intention to refer disputes for arbitral adjudication.