Supreme Court Clarifies Scope of Dispute Resolution Clauses in Contracts: South Delhi Municipal Corporation vs. SMS AAMW Tollways Private Ltd (22 November 2018)

Introduction

Date of the Judgment: 22 November 2018

Citation: (2018) INSC 1015

Judges: S.A. Bobde, J., L. Nageswara Rao, J.

When a contract has a clause for dispute resolution, does an internal appeal mechanism qualify as an agreement for arbitration? The Supreme Court of India recently addressed this question in a case involving the South Delhi Municipal Corporation (SDMC) and SMS AAMW Tollways Private Ltd. (SMS AAMW). This case examines whether a clause providing for an appeal to a higher authority within an organization constitutes an arbitration agreement, which is a critical aspect of contract law.

The core issue revolves around the interpretation of a dispute resolution clause in a contract between SDMC and SMS AAMW. The clause provided for an appeal to the Commissioner of SDMC if the contractor was dissatisfied with the decision of the Competent Officer. The question before the Supreme Court was whether this appeal mechanism should be considered an arbitration agreement, which would allow for the appointment of an arbitrator under the Arbitration and Conciliation Act, 1996. The judgment was delivered by a two-judge bench consisting of Justice S.A. Bobde and Justice L. Nageswara Rao, with the opinion authored by Justice S.A. Bobde.

Case Background

The National Highways Authority of India (NHAI) entered into a State Support Agreement (SSA) with M/s Jaypee-DSC Ventures Limited for the operation and maintenance of certain sections of the NH-8 highway. This agreement included the collection of toll tax by the concessionaire, as well as the entry toll levied by the South Delhi Municipal Corporation (SDMC) on commercial vehicles entering Delhi.

SDMC, as a designated agency, decided to engage a contractor for the collection of this entry toll tax. The Respondent, SMS AAMW, was the successful bidder and was awarded the contract for a period of three years. A Bilateral Agreement was signed between SDMC and SMS AAMW on 14 May 2011. As per the agreement, SMS AAMW was to pay Rs. 26 crores monthly to SDMC in lieu of the tax collected from all entry points within Delhi.

However, the toll tax for the Rajokri integrated toll plaza was to be collected by the NHAI’s concessionaire and then passed on to SMS AAMW. On 19 February 2014, the Rajokri toll plaza was dismantled, leading to SMS AAMW incurring additional expenses to collect the toll tax. As a result, SMS AAMW claimed to have suffered a loss of approximately Rs. 80 crores.

Following this, SMS AAMW issued a notice of arbitration on 9 March 2015, detailing the disputes that had arisen under Clause 9 of the SSA. SDMC responded by raising a demand of Rs. 97,08,76,449 against SMS AAMW, which was later reduced to Rs. 80,46,31,504 after reconciliation. Dissatisfied with SDMC’s decision, SMS AAMW filed an appeal under Clause 16.3 of the Agreement on 26 May 2015. SDMC rejected the appeal on 17 June 2015, stating that there was no arbitration clause between the parties. SMS AAMW then filed an Arbitration Petition before the Delhi High Court for the appointment of an arbitrator.

Timeline:

Course of Proceedings

The Respondent, SMS AAMW, filed an Arbitration Petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the High Court of Delhi, seeking the appointment of an arbitrator. They relied on Clause 9 of the SSA and Clause 16 of the Agreement dated 14 May 2011.

The learned Single Judge of the High Court of Delhi allowed the petition and appointed Justice Deepak Verma, a former judge of the Supreme Court, as the sole arbitrator. The High Court held that the dispute resolution clause in the agreement constituted an arbitration agreement.

Aggrieved by the decision of the High Court, the Appellant, SDMC, appealed to the Supreme Court, challenging the order of the High Court and contending that the dispute resolution clause was not an arbitration clause.

Legal Framework

The case primarily revolves around the interpretation of Clause 16 of the Bilateral Agreement dated 14 May 2011, which outlines the dispute resolution mechanism. This clause is central to determining whether the agreement provides for arbitration.

Clause 16 of the Agreement reads as follows:

“16.DISPUTE RESOLUTION
16.1 Except where otherwise provided in the Agreement, all questions and disputes in any way arising out of or relating to the Agreement shall be dealt with as mentioned below.
16.2 In the event the Contractor considers any work demanded of it as being outside the requirements of the Agreement, or disputes any record or decision given in writing by the Competent Officer in any matter in connection with or arising out of the Agreement, to be unacceptable, it shall promptly within [15] days request the Competent Officer in writing to give his instructions or decision in respect of the same. Thereupon, the Competent Officer shall give his written instructions or decision within a period of [30] days from the receipt of the Contractor’s letter.
16.3 If the Competent Officer fails to give his instructions or decision in writing within the aforesaid period or if the Contractor is dissatisfied with the instructions or decision of the Competent Officer, the Contractor may, within [15] days of receipt of the Competent Officer’s instructions or decision, appeal to the Commissioner who shall afford an opportunity to the Contractor to be heard, if the latter so desires, and to offer evidence in support of its appeal. The Commissioner shall give his decision in writing within [30] days of receipt of Contractor’s appeal which shall be acceptable to the Contractor.”

Additionally, Clause 20, which pertains to miscellaneous provisions, includes the following:

“20.MISCELLANEOUS PROVISIONS
20.1 Governing Laws and Jurisdiction
(a)……
(b) All disputes arising out of this Agreement shall be subject to sole and exclusive jurisdiction of the courts of Delhi only.”

The dispute resolution mechanism involves two stages: first, a decision by the Competent Officer under Clause 16.2, and second, an appeal to the Commissioner under Clause 16.3. The key question is whether the appeal to the Commissioner under Clause 16.3 constitutes an arbitration agreement.

Arguments

Arguments of the Appellant (South Delhi Municipal Corporation):

• The Appellant argued that Clause 16.3 of the Agreement provides for an internal departmental appeal, not an arbitration.
• The term “appeal” used in Clause 16.3 clearly indicates that it is not an arbitration clause.
• The right to appeal under Clause 16.3 is restricted to the contractor (SMS AAMW) if they are dissatisfied with the decision of the Competent Officer, and it cannot be invoked by SDMC.
• The Commissioner, who decides the appeal, is not an independent arbitrator but a higher officer within the same organization.
• The dispute resolution mechanism under Clause 16 is intended to prevent disputes by providing supervisory control, rather than to resolve disputes through arbitration.
• The Appellant relied on the judgment in State of Orissa v. Damodar Das [1996 (2) SCC 216], which held that an arbitration agreement must be express or implied, and the clause in the contract must contain such an agreement.

Arguments of the Respondent (SMS AAMW Tollways Private Ltd.):

• The Respondent contended that Clause 16.3 provides for arbitration by the Commissioner, not merely an appeal.
• The Respondent relied on a passage from Russell on Arbitration, which states that if an agreement intends for a person to hold an inquiry in the nature of a judicial inquiry, it is an arbitration.
• The Respondent argued that the Commissioner’s role in hearing the appeal and considering evidence constitutes a judicial inquiry, thus qualifying as arbitration.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether Clause 16.3 of the Agreement dated 14.05.2011 between the Appellant-SDMC and the Respondent-SMS AAMW contains an agreement for arbitration.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Corporation of the City of Nagpur v. Employees AIR 1960 SC 675, Nelson Motis v. Union of India (1992) 4 SCC 711, and Nathi Devi v. Radha Devi Gupta (2005) 2 SCC 271 to support the principle that unless a word raises an ambiguity, it is not necessary to consider another meaning.
• The Court cited Ganga Bai v. Vijay Kumar (1974) 2 SCC 393, State of Haryana v. Maruti Udyog Ltd. (2000) 7 SCC 348, and Raj Kumar Shivhare v. Directorate of Enforcement (2010) 4 SCC 772 to support the principle that a right of appeal is a creature of statute and can only be exercised in the manner provided by the statute.
• The Court referred to K.K. Modi v. K.N. Modi [1998 (3) SCC 573] to list the attributes that must be present for an agreement to be considered an arbitration agreement.
• The Court relied on State of Orissa v. Damodar Das [1996 (2) SCC 216] and State of U.P. v. Tipper Chand [(1980) 2 SCC 341] to emphasize that an arbitration agreement must be express or implied, and the clause in the contract must contain such an agreement.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the understanding that an arbitration agreement requires an independent adjudicator and a process that involves both parties. The Court emphasized that the term “appeal” in Clause 16.3 indicates a departmental appeal, not arbitration. The Court also noted that the Commissioner, being a higher officer within the same organization, could not be considered an independent arbitrator. The Court was also influenced by the fact that the dispute resolution mechanism was intended to prevent disputes by providing supervisory control, rather than resolving disputes through arbitration. The Court also emphasized that the right to appeal was restricted to the contractor only.

Logical Reasoning:

The Court considered the alternative interpretation that Clause 16.3 could be an arbitration clause, but rejected it because the clause did not provide for an independent arbitrator or a process that involves both parties. The Court also emphasized that the right to appeal was restricted to the contractor only.

The Court held that the clause did not provide for a reference of any dispute to an arbitrator. The Court emphasized that the intention was not to provide a forum for resolving disputes, but to vest supervisory control to prevent disputes. The Court stated that the High Court could not have appointed an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996.

The Court stated:

“It is a settled principle of interpretation that unless the word raises an ambiguity it is not necessary to consider another meaning.”

“We see no reason, why this Court should adopt a different approach while construing a clause in a contract executed by a statutory body and providing for an appeal.”

“It is thus clear that the Commissioner is not intended to be an arbitrator, as his jurisdiction cannot be invoked by both parties.”

Key Takeaways

• A clause providing for an appeal to a higher authority within an organization does not automatically constitute an arbitration agreement.
• For a dispute resolution clause to be considered an arbitration agreement, it must provide for an independent arbitrator and a process that involves both parties.
• The intention of the clause is critical. If the purpose of the clause is to provide supervisory control and prevent disputes, it is not an arbitration agreement.
• The right to appeal is a creature of statute and can only be exercised in the manner provided by the statute.
• The use of the word “appeal” generally indicates a departmental appeal, not arbitration.

Directions

The Supreme Court set aside the order of the Delhi High Court dated 17.06.2016, which had appointed an arbitrator. The Supreme Court allowed the appeal of the South Delhi Municipal Corporation.

Development of Law

The ratio decidendi of this case is that a clause providing for an internal appeal mechanism within an organization does not constitute an arbitration agreement. The Supreme Court clarified that for a dispute resolution clause to be considered an arbitration agreement, it must provide for an independent arbitrator and a process that involves both parties. This judgment reinforces the understanding that arbitration is a process where an independent third party resolves the dispute, and it is not merely an internal review process. This case also reinforces the principle that the right of appeal is a creature of statute and can only be exercised in the manner provided by the statute.

Conclusion

The Supreme Court held that Clause 16.3 of the agreement between South Delhi Municipal Corporation and SMS AAMW Tollways Private Ltd. did not constitute an arbitration agreement. The Court emphasized that the clause provided for a departmental appeal and not arbitration. The Court set aside the order of the Delhi High Court which had appointed an arbitrator. This decision clarifies the distinction between internal appeal mechanisms and arbitration agreements, providing important guidance for contract interpretation in dispute resolution.