Capacite Infraprojects Ltd v. T. Bhimjyani Realty Pvt Ltd

(ii) Ved Prakash Mittal and Sons vs. Delhi

Development Authority and Anr 2018 SCC

(iii) National Highways Authority of India Vs.

PATI-BEL (JV) 2019 SCC online Del 6793.

(iv) Sushil Kumar Bharadwaj Vs. Union of India

2009 SCC Online Del 4355 10 Dr. Chandrachud responding to the objection raised above, would submit that, the decision of the Disputes Adjudication Board is not binding and in fact, he goes to the extent of submitting that the Board is not composed at all. He would blame the respondent for not constituting the DAB within a period of 28 days and according to him, the entire process is to be completed within 28 days and he would place reliance upon the addendum issued. Apart from this, it is his submission that the entire process got frustrated on account of the defunct approach of the respondent who did not take steps within the period stipulated and before two days of the expiry of 28th day, they sought replacement of the nominee member. He would place reliance upon the decision in case of M.K. Shah Engineers & Contractors Vs. State of Madhya Pradhesh, (1999) 2 SCC 594, in support of his submission that since the respondent has failed to nominate the third member, it cannot be heard to say that it is not within his domain to invoke arbitration and ultimately, since now the period of 28 days has expired, there can be no going back on the process, since the clause contemplated is not an open ended clause and hence, cannot be resorted to after 28 days.

11 Dr.Chandrachud has also placed reliance upon the further two decisions

(i) N.A. Constructions Pvt. Ltd vs. Vasai Virar City

Municipal Corporation (CARBP(L) 19394/2021 with CARAP 28013/2021).

(ii) M/s. Karam Chand Thapar and Bros. Vs. Tehri

Hydro Development Corporation India Ltd 2013(133) DRJ 178.

12 In order to appreciate the rival submissions, I have perused the relevant clauses I the GCC and in particular, clause no.20.[2] which contemplate a prior mechanism for resolution of disputes through DAB in accordance with sub-clause 20.4. The clause clearly contemplate that the parties shall jointly appoint the DAB by the date 28 days, after a party give notice to the other party of it’s intention to refer the dispute to DAB. The DAB, which shall comprise of three suitably qualified persons, being the members of Indian Institute of Architects or of the Consulting Engineers Association of India. In case if the DAB is to be constituted by involving three persons, each party is empowered to nominate one member for the approval of the other party and the parties shall then consult both these members and shall appoint third member, who shall act as a ‘Chairman’. Clause 20.[3] provide for four contingencies, in failure to agree for the DAB, and one of the contingency contemplated is when the parties fail to agree upon the appointment of third Member of DAB, and in such a scenario, the appointing entity or official named to the appendix to the tender, shall upon the request of either or both of the parties and after due consultation, appoint this member of the DAB and this appointment is accorded finality.

13 Clause 20.[4] provide for the decision of the DAB, which is expected to be given within 84 days of receipt of such reference or within such other period, as may be proposed by DAB and approved by both parties. If either party is dissatisfied with the DAB’s decision, then it is open for it, within 28 days of receipt of the decision to give a notice of dissatisfaction. A notice of dissatisfaction is also permitted, in a situation, where DAB fails to give its decision within period of 84 days and in such a case, either party may, within 28 days of expiry of this period, give notice of dissatisfaction.

14 The aforesaid mechanism is a pre-condition for commencement of arbitration for resolving the existing dispute and relevant clause 20.[4] of the GCC clearly contemplate that except where there is a failure to comply with the DAB’s decision or expiry of the DAB’s appointment, neither party shall be entitled to commence arbitration of a dispute, unless a notice of dissatisfaction is given. In case where the DAB has given its decision as to the matter in dispute and no notice of dissatisfaction is given by either party within 28 days of its decision, the decision shall become final and binding upon both the parties. The process so prescribed, also offer one more chance of amicable settlement under clause 20.[5] which prescribe that when a notice of dissatisfaction is given, both parties shall attempt to settle the dispute, before commencement of arbitration and unless both parties agree otherwise, arbitration can be commenced on or after 56th day, after the day on which the notice of dissatisfaction was given, even if no attempt of amicable settlement has been made.

15 In the aforesaid scheme contained in the GCC, in the backdrop of the LOA dated 28/1/2014, and AOA being executed on 13/3/2014, the disputes arose as it is the claim of the applicant that the respondent caused delay in procurement of the relevant statutory clearances, design, modifications, and as a result of which the contract period of 30 months was extended to 45 months, which constrained the applicant to dedicate additional resources towards the project incurring enormous costs. This constrained the applicant to call upon the respondent to pay the dues, but there was a failure on part of the respondent to pay the admitted dues, which constrained the applicant to cease with the balance work on account of non-payment of the certified R.A. Bill, though it is the case of the applicant that it expressed willingness to complete the balance work. According to the applicant, it approached the respondent for settlement of dues on two occasions in February 2018, and in fact, a statement came to be recorded, wherein a sum of Rs.10,00,00,000/- (Rupees Ten Crore only) was agreed to be paid by the respondent to the applicant as compensation to be released with monthly running account bill, commencing from 1//2018. On this assurance, the applicant continued to execute a project work, but despite repeated demands, the respondent failed to clear the outstanding dues, is its case.

16 Discussions and negotiations followed, but no settlement could be arrived at, and on 24/9/2020, R.A. Bill No.64 was raised by the applicant in the tune of Rs.6,88,80,000/along with GST. The applicant informed the respondent that it will be finishing the work as per the timeline within the grace period and the applicant kept its commitment and called upon the respondent to clear the dues.

17 On 28/9/2020, the applicant issued a letter to the respondent demanding the said amount excluding the taxes towards full and final settlement against he actual claim, in relation to delay, idling of equipment and machinery. A draft settlement agreement was released by the applicant with a view to establish new terms of settlement but was taken aback when the respondent on 3/10/2020, addressed an email to the applicant, expressing its intention to terminate the contract and replace the applicant, if there was even a single day’s delay. The aforesaid discord triggered the invocation of clause 20.[2] of GCC and the timeline of actions, at the end of the parties to the dispute, is abridged as below:- (a) The applicant addressed a letter to the respondent on 10/11/2020 by nominating Mr.Hiten Sethi, its nominee DAB Member and staked a claim of Rs.58,08,28,931/- by providing the bifurcation thereof. (b) On 7/12/2020, the respondent replied to the notice, disputing the claim raised by the applicant and nominating Mr.Jaisingh Aher as its nominee DAB Member.

(c) On 19/12/2020, the applicant responded contesting the appointment of Mr.Aher, the Member nominated by the respondent on the ground that the DAB Member is imperatively, a Member from the Indian Institute of Architect or Consulting Engineers Associates.

(d) On 29/12/2022, the nominee of the respondent was replaced by Mr.Ajit Bhuta.

(e) On 18/2/2021, the Office of Mr. Hiten Sethi (applicant’s DAB nominee) addressed an email to the nominee of the respondent, proposing the name of Mr.Paresh Kapadia as Chairman of DAB. (f) Despite consistent and repeated efforts to secure the accent for appointment of the Chairman on 25/2/2021, the nominee of the respondent, responded by stating that appointment of DAB, being a confidential process, there was no role for any staff members of the parties.

18 With these events having transpired, the argument of the applicant is despite the efforts intended at progressing with the DAB mechanism, the respondents nominee failed to agree on the nomination of Chairman, nor did it nominate the Chairman, and this resulted into a failure of the process contemplated and as such, DAB is deemed never to have come into existence as per its prescribed Constitution.

19 The submission of Dr. Chandrachud is that the steps preceding recourse to the arbitration clause are capable of being waived by conduct of parties and defaulting party shall not be permitted to set up the bar of non-performance of pre-requisite obligations so as to exclude the applicability and the operation of the arbitration clause. This resulted in the arbitration being invoked by the applicant as per clause 20.[6] of the Contract and name of the applicant’s nominee was circulated to the respondent, but since there is no response to the notice of arbitration, the applicant has approached this Court seeking appointment under sub-section (6) of Section 11 of the Arbitration and Conciliation Act, 1996.

20 Looking to the nature of the clause contained in the GCC and PCC, which is a pre-requisite before the arbitration mechanism, is resorted to for resolving the disputes, the nature of such a preceding clause deserve a consideration. It is not uncommon for the contracts containing arbitration clauses to provide for the parties first to try to settle the matter by negotiation or discussion, if that fails, the dispute be referred to mediation or some other ADR process. Some agreements contemplate atleast two different levels of Dispute Resolution Procedure, which is often set out as multi-tier of multi-level clause. Russell on arbitration (24th Edition) has discerned the impact of such clauses as below:- “Depending upon the form of the words used, these clauses may or may not give rise to binding obligation to submit to the different forms of Dispute Resolution before starting an arbitration. Where such preliminary steps are expressed in mandatory terms so also constitute a condition precedent to the right to the arbitrate they must be complied with. In many cases however they will not be mandatory and it may then be possible for the claimant to commence arbitration even without complying with them. Generally speaking, an obligation simply to negotiate is not binding. However, this an area in which the law is currently unsettled in particular as regards a requirement to negotiate before commencing arbitration. In Emirates Trading LLC vs Prime Mineral Exports Pvt. Ltd., Teare J held that a time-limited requirement to hold “friendly discussions” was not only a binding pre-condition to commencing arbitration, it was also subject to an implied obligation to do so in good faith”

21 It is one of the common mode, where the parties clearly contract for setting up of a specific dispute resolution mechanism as pre-condition for arbitration and when it is agreed between the parties that such a mechanism should be resorted to, it will definitely bind the respective parties. Such type of a clause referred to as “Atlantic Shipping Clause” and M.K. Shah Engineering (supra), the Hon’ble Apex Court has reproduced the Halsbury’s Laws of England, (Fourth Edition Volume 2), wherein, it finds a mention in the following words:- “The arbitration agreements may contain a clause which requires a certain act to be completed within a specified period and which provides that if that act is not done either the claim or the ability to commence an arbitration will be barred. Such clauses are sometimes known as `Atlantic Shipping' clauses. The consequences of the expiry of a contractual limitation period before the completion of the specific act may however be avoided in three circumstances: (i) if the Court exercises its discretion statutorily conferred on it, to extend the period to avoid undue hardship; (ii) if the arbitration clause confers a discretion on the arbitrator to extend the period and he exercises it; (iii) if the conduct of the either party precludes his relying on the time bar against the claimant”.

22 Russell on Arbitration (20th Edition at page 324) opines as under:- “Arbitrations peculiar to building and work contracts, the issuance of an Architects or Engineer’s certificate is often made a condition precedent to a contractor’s right to payment for work done by him. If in such a case, there is a general reference of a dispute arising out of a refusal to issue a certificate and the Arbitrator determines that the certificate has been given, he will normally have the power to order payment for the amount for which certificate should be given.” It is not unknown to have such clauses in the work contracts, particularly, when it stipulate that if any dispute arises with the contractor, as regards the execution of the work, payments to be made etc, as per the terms of the contract, the same should be referred to an expert in the field for its decision and if dissatisfaction and if dissatisfaction is expressed against the said decision, of a first time adjudication, in that case, the remedy of arbitration can be resorted to”. At times, an agreement may contain a multi-tiered resolution mechanism and in such a situation, the question that for determination is, whether without fulfilling such preconditions, the arbitration can be commenced.

23 In case of Ved Prakash Mithal & Sons (supra), when the application was filed under sub-section (6) of Section 11, seeking appointment of a Sole Arbitrator for adjudicating the disputes that had arisen between the parties in relation to the contract for carrying out the work of construction of 268 EWS Houses by the applicant for the respondent, clause no.25 which incorporated a pre-condition for resolving the disputes arose for consideration. The relevant clause contemplated that if the contractor wanted to raise any dispute about any work, demanded of him to be outside the requirements of the contract or disputes any drawings, record or decision given in writing by engineer-incharge, he shall make a request to the Superintending Engineering within 15 days in writing for written instructions or decision, who shall give his decision within a period of one month from receipt of such letter. In case of any dissatisfaction of such decision or instructions, the Director was permitted to appeal to the Chief Engineer, who was duty bound to give a decision within 30 days. In case the Director was still dissatisfied with the decision, he would give notice to the Engineers praying for appointment of Arbitrator, failing which the decision was to attain finality and conclusiveness. In paragraph no.7, Justice Navin Chawla specifically held as under:- “7 The above provision does not deal with the question of maintainability of the petition under Section 11(6) of the Act. A petition under Section 11(6) of the Act would be maintainable only where the respondent has failed to act in accordance with the procedure prescribed in the Arbitration Agreement. In the present case, as the petitioner itself has not followed the procedure prescribed in the Arbitration Agreement, the petition is clearly premature and would not be maintainable and therefore, the question of applicability of Section 11(6A) of the Act would not arise”

24 Dealing with a somehow identical clause placed before me for consideration in form of clause 20.[2] and 20.6, the Delhi High Court in case of National Highways Authority of India Vs.

PATI-BEL has ruled upon the nature of such clause contained in the contract between the parties contemplating constitution of “Dispute Review Board”, the relevant clause was worded as under:- “67.[1] If any disputes arises between the Employer and the Contractor in connection with, or arising out of, the Contract Disputes Review or the execution of the Works, whether during the execution of the Works or after their completion and whether before or Board after the repudiation or other termination of Contract, including any disagreement by either party with any action, inaction, opinion, instruction, determination, certificate or valuation of the Engineer, the matter in dispute shall, in the first place, be referred to the Disputes Review Board. The Board shall be established when each of the three Board Member has signed a Board Members Declaration of Acceptance as required by the DRB's rules and procedures (which, along with the declaration of acceptance form, are attached as Annex "A" to these Conditions of Particular Applications"- Para 12.) The Board shall comprise three Members experienced with the type of construction involved in the Works and with the interpretation of contractual documents. One Member shall be selected by each of the Employer and the Contractor and approved by the other. If either of these Members is not so selected and approved within 28 days of the date of the Letter of Acceptance, then upon the request of either or both parties such members shall be selected as soon as practicable by the Appointing Authority i.e. Chairman of the Executive Committee, Indian Road's Congress. The third Member shall be selected by the other two and approved by the parties. If the two Members selected by or on behalf of the parties fail to select the third Member within 14 days after the later of their selections or if within 14 days after the selection of the third member, the parties fail to approve that Member shall be selected promptly by the same Appointing Authority specified in the Appendix to Bid who shall seek the approval of the proposed third Member by the parties before selection but, failing such approval, nevertheless shall select the third Member. The third Member shall serve as Chairman of the Board. ………. ………. If either the Employer or the Contractor is dissatisfied with the Recommendation of the Board, or if the Board fails to issue as Recommendation within 56 days after receipt by the Chairman of the Board of the written Request for Recommendation, then either the Employer or the Contractor may, within 14 days after the expiry of the said 56 days period, as the case may be give notice to the other party, with a copy for information to the Engineer of his intention to commence arbitration herein provided, as to the matter in dispute. Such notice shall established the entitlement of the party giving the same to commence arbitration as hereinafter provided, as to such dispute and, subject to Sub-Clause 6 7.[4] arbitration in respect thereof may be commenced unless such notice is given. If the Board has issued a Recommendation to the Employer and the Contractor within the said 56 days and no notice of intention to commence arbitration as to such dispute has been given by either the Employer or the Contractor within 14 days after the parties received such Recommendation from the Board, the Recommendation shall become final and binding the Employer and the Contractor.

25 Dealing with such a clause, and the argument that reference to DRB is a condition precedent in order to trigger the Arbitration mechanism, the learned Single Judge (Justice Rajiv Shakdher, J) opined that reference to DRB would be a crucial first step prior to the dispute being referred to an Arbitral Tribunal. The following observations are most pertinent and I must reproduce the same:- “32 To my mind, the observations are relevant to the present case as well. The parties should be able to show good reason, as to why they should not be held to, what they have agreed between themselves. The parties, in this case, had agreed that before they trigger the arbitration agreement, they would agitate their grievance before the DRB. The DRB is constituted in a manner whereby each party is entitled to select a nominee and the two nominees can decide upon the Chairperson of the DRB. It is only when there is no agreement as to the Chairperson of the DRB that another Authority has been given the right to select the Chairperson. Furthermore, the decision of the DRB has been given preeminence and, as noted hereinabove, is factored in the final adjudication, in case of one of the parties refuses to accept the decision of the DRB.

33 Therefore, in my view, the language of Clause 67.[1] gives an enforceable right to the parties to insist that the opposite party should, in the first instance, take their grievance to the DRB before it embarks upon the arbitration route. The clause, apart from anything else, provides for a defined structure and the timeline within which the DRB is to process the matter, once it is placed before it.

34 As noticed above, the outcomes reached by the DRB are given due weight in the final adjudication proceedings. Therefore, the overall sense, which, one gets upon reading Clause 67.1, is that it is mandatory in nature and that the parties cannot opt out from this preliminary step and not have their grievance examined by the DRB in the first instance.

35 Clause 67.[1] is a typical multi-tier clause, which is found in many domestic and international arbitration agreements. The language of the multi-tier clause determines as to whether or not the preliminary step(s) indicated therein would form a condition precedent before the aggrieved party is able to escalate the matter to the next stage, that is, have its disputes adjudicated upon by an Arbitral Tribunal. Therefore, where the clause is so structured that it does give rise to a binding obligation, it may not be possible to contend that the preliminary step provided in the concerned clause is not a condition precedent.”

26 In the wake of the position of law expounded as above, it is imperative for the parties to take recourse to the remedy which is provided as a pre-condition for invocation of the arbitration proceedings and before an appointment is sought under sub-section (6) of Section 11, the procedure agreed to by the parties in a contract or in any other manner, preceding the settlement of dispute by arbitration must be adhered to. The Apex Court in case of Iron & Steel Co. Ltd Vs. Tiwari Road lines, 2007 (5) SCC 703, while analysing the scope of sub-section (6) of Section 11, as categorically held that if the parties have agreed on a procedure for appointing arbitrator or arbitrators, in that case, the dispute between the parties has to be decided in accordance with that procedure and in case if this appointment of arbitrator is preceded by a prescribed and settled mechanism, then it must be followed in it’s entirety.

27 In the wake of the aforesaid legal scenario, the argument of Dr.Chandrachud shifting the blame upon the respondent for not nominating the third Member of DAB/Chairman do not appeal to me. Though he heavily rely upon the observations of the Apex Court in case of M.K. Shah Engineers (supra), where it is held that, no one can be permitted to take advantage of one’s wrong and the background facts in the said decision, clearly disclose that the State of Madhya Pradesh had failed to abide by the relevant clause, and it was the Superintending Engineer, who unreasonably delayed the decision, inspite of persuasion and protest by the Contractor and ultimately the State Government yielded to the demand of the contractor by appointing an arbitrator. The peculiar facts of the case would disclose that after the Arbitrator commenced the proceedings, State of M.P gave a second thought and receded it’s step by choosing to raise an objection to the maintainability of Arbitration and the Arbitrator allowed time to the Government of Madhya Pradesh for securing a judicial pronouncement on it’s objection. The facts involved reveal that the appellant raised the dispute, demanding the decision by the Superintending Engineer and by the letter of the Executive Engineer, it was conveyed to the appellants that it was the decision of the Superintending Engineer not to accept the claims of the appellant, which resulted in the appellants clearly expressing its dissatisfaction to the Superintending Engineer. The final decision was in fact taken by the Executive Engineer and not by the Superintending Engineer and in this context, Their Lordships held that the respondent State cannot take shelter of clause no.3.3.29, but must thank itself for the situation who had made over the dispute to the Executive Engineer for decision in place of the Superintending Engineer. In this background, it was held that the State is refrained from taking benefit of the situation, since by itself it was responsible for frustrating the operation thereof. This situation, however, do not apply here.

28 Mr.Tamboly is right in submitting that the mechanism prescribed under the GCC was a complete and full proof mechanism, as it contemplated the disputes to be adjudicated by the DAB, which comprised of the experts in the field and permitted the parties to jointly appoint the DAB within 28 days. Needless to state that the nominee on the DAB was appointed by both the parties, but if it is the case of the applicant that the third Member/Chairman was not appointed by the respondent, and in such a situation, it was open for it to take recourse to Clause no.20.[3] which offered a solution where the parties fail to agree upon appointment of a third member/Chairman who shall act as Chairman by such date, then, the appointing entity or official named in the Appendix to the tender is duty bound, upon request of either or both of the parties to appoint the third member of the DAB. Admittedly, when there was failure on part of the respondent to appoint the third member, it was open for the applicant to follow the said pursuit. Further, the notice of dissatisfaction ought to have been given if the appointment is not fructified, but even on this count, there is a failure on part of the applicant who declared that the period of 28 days is over and therefore, no such steps can be taken. The Clause in the GCC pertaining to appointment of DAB is accompanied with an Appendix prescribing General Conditions of the Dispute Adjudication Agreement and the procedural rules, which ensure that the DAB shall act fairly and impartially as between the employer and the contractor, giving each of them a reasonable opportunity of putting his case and responding to the other’s case and adopt procedure suitable to the dispute, avoiding unnecessary delay or expense.

29 In this scenario when the clause in the agreement contemplate a mechanism preceding invocation of arbitration through an expert body like DAB, who are not the arbitrators,but the technical persons like Architects/Engineers, I do not find fault with the respondent and specially, by referring to the sequence of events when the communications were exchanged between the parties for appointment of a third nominee. If the respondent had dragged its feet, then it was open to the applicant to act and take the necessary steps. In any case, the period of 28 days is not so sacrosanct and the correspondence as regards appointment of third Member is definitely beyond the period of 28 days. The essence and spirit of the intention expressed in the contract to have an entire mechanism in place for resolving the same through technical persons, which appear to be the need of the peculiar nature of the contract, and since the agreed procedure under the agreement contemplate that unless there is dissatisfaction expressed about the decision of the DAB, the parties would not be permitted o go to arbitration, is not permissible to be regaled out. Since subsection (6) of Section 11 of the Arbitration and Conciliation Act, is permitted to be invoked only where a party fails to act as required under the procedure agreed and in this case, since the petitioner has failed to adhere to the said procedure, he cannot seek appointment of the Arbitrator by invoking arbitration which is a mechanism for Dispute Resolution, in case the decision of DAB has not attained finality. A submission of Dr.chandrachud that if he had to approach as per clause 20.[3] to the official named in the Appendix which was the President of the Architect Association located in Switzerland, then it would have been an absurd proposal, I am unable to convince myself with the said submission as it is not necessary for the priest to physically approach the Authority and in any case, if it is agreed between the parties that this is the manner by which the disputes shall be resolved and a contract specifically included such a stipulation, then sufficient ground must be shown from departing from the stipulation. When the parties agreed that before they trigger the arbitration agreement, they would agitated their grievance through DAB, then it was the choice of the parties to so determine and once this choice is made, it must be adhered to, and in its absence, section 11 is not permitted to be invoked. In view of the above, the present application cannot be entertained and is dismissed as being premature. The applicant nonetheless shall have the liberty to file such an application, if so required after following the procedure contemplated in clause no.20.2and 20.[4] of the GCC. Needless to state that I have not expressed any opinion on the merits of the mater. As far as section 9 petition is concerned, it is directed to be listed on 23/8/2023 for hearing as the present application will not have an impact upon the same. (SMT.

BHARATI DANGRE, J)