Supreme Court clarifies the scope of ‘Notified Claims’ in Arbitration: Indian Oil Corporation Ltd. vs. NCC Ltd. (20 July 2022)

Date of the Judgment: 20 July 2022
Citation: (2022) INSC 614
Judges: M.R. Shah, J., B.V. Nagarathna, J.
Can a dispute regarding whether a claim qualifies as a ‘Notified Claim’ under a contract be decided by an arbitrator, or does it fall outside the scope of arbitration? The Supreme Court recently addressed this question, clarifying the extent to which parties can restrict the scope of arbitration through contractual clauses. The court examined the specific clauses of a contract between Indian Oil Corporation Limited (IOCL) and NCC Limited (NCCL), focusing on the definition and implications of “Notified Claims” and the role of a General Manager in determining arbitrability. The bench comprised Justices M.R. Shah and B.V. Nagarathna.

Case Background

Indian Oil Corporation Limited (IOCL) issued a tender for civil, structural, and associated piping works for the Paradip Refinery Project. NCC Limited (NCCL) was the successful bidder, and a formal agreement was executed on 28 April 2010. The project’s scheduled completion date was 2 October 2011, but it was delayed and completed on 28 December 2015. NCCL requested an extension of time (EOT) on 23 May 2016. While the EOT request was pending, NCCL submitted its final bill on 5 August 2016, referencing ‘Notified Claims’. There were communications between the Engineer-in-Charge, Thyssenkrupp Industrial Solutions India (TKIS), and NCCL regarding the final bill and EOT. On 2 November 2016, NCCL communicated to TKIS that it would withdraw its extra claims if the EOT request was favorably considered and the price adjustment did not exceed 4%. TKIS approved EOT from 3 October 2011 to 3 November 2015, but imposed a 4% price adjustment for the period from 4 November 2015 to 28 December 2015, attributing the delay to NCCL. Aggrieved, NCCL wrote to IOCL on 23 January 2017, seeking reconsideration. IOCL released ₹4,53,04,021 after adjustments on 8 May 2017. Subsequently, on 16 May 2017, NCCL claimed that it was coerced to withdraw its Notified Claims.

Timeline

Course of Proceedings

NCCL approached the High Court of Delhi under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of a sole arbitrator. The High Court allowed the petitions, overruling the objections raised by IOCL, and appointed the sole arbitrator. IOCL then appealed to the Supreme Court.

Legal Framework

The case revolves around the interpretation of specific clauses within the General Conditions of Contract (GCC) governing the agreement between IOCL and NCCL. Key clauses include:

• Clause 1.21.0.0: Defines “Notified Claim” as a claim by the contractor notified as per Clause 6.6.1.0.
• Clause 6.6.1.0: Requires the contractor to give written notice of any extra payment claims to the Engineer-in-Charge and Site Engineer within ten days of the event giving rise to the claim. It specifies that the owner is not liable for claims not notified in this manner. “The OWNER shall not anywise be liable in respect of any claim by the CONTRACTOR unless notice of such claim shall have been given by the CONTRACTOR to the Engineer­in­Charge and the Site Engineer in the manner and within the time aforesaid and the CONTRACTOR SHALL be deemed to have waived any and all claims and all his rights in respect of any claim not notified to the Engineer­in­Charge and the Site Engineer in writing in the manner and within the time aforesaid.”
• Clause 6.6.3.0: States that any notified claims remaining at the time of the final bill preparation must be included in the final bill as a Statement of Claims.
• Clause 6.6.3.1: Specifies that the owner is not liable for any notified claim not included in the final bill and any such claims are deemed waived.
• Clause 6.6.4.0: Prohibits any claims after the final bill, with the intent that the final bill reflects all notified claims and the contractor waives any claims not included in the final bill.
• Clause 6.7.1.0: Stipulates that acceptance of the final bill payment constitutes full and final settlement, without prejudice to notified claims included in the final bill.
• Clause 6.7.2.0: States that acceptance of payment for notified claims included in the final bill constitutes full and final settlement of those claims, discharging the contract and arbitration clause. “The acceptance by the CONTRACTOR of any amount paid by the OWNER to the CONTRACTOR in respect of the notified claims of the CONTRACTOR included in the Final Bill in accordance with the provisions of Clause 6.6.3.0 hereof and associated provisions thereunder, upon the condition that such payment is being made in full and final settlement of all the claims of the CONTRACTOR shall, subject to the provisions of Clause 6.7.3.0 hereof, be deemed to be in full and final satisfaction of all claims of the CONTRACTOR notwithstanding any qualifying remarks, protest or condition imposed or purported to be imposed by the CONTRACTOR relative to the acceptance of such payment with the intent that upon acceptance by the CONTRACTOR of any payment made as aforesaid, the Contract (including the arbitration clause) shall stand discharged and extinguished insofar as relates to and/or concerns the claims of the CONTRACTOR.”
• Clause 9.0.1.0: Allows arbitration for disputes arising from a Notified Claim included in the final bill, subject to Clauses 6.7.1.0, 6.7.2.0, and 9.0.2.0.
• Clause 9.0.2.0: Excludes certain matters from arbitration, including disputes concerning the scope or existence of the arbitration agreement, whether a claim is a Notified Claim, and whether a Notified Claim is included in the final bill. These excluded matters are to be decided by the General Manager. “Any dispute(s) or difference(s) with respect to or concerning or relating to any of the following matters are hereby specifically excluded from the scope, purview and ambit of this Arbitration Agreement with the intention that any dispute or difference with respect to any of the said following matters and/or relating to the Arbitrator’s or Arbitral Tribunal’s jurisdiction with respect thereto shall not and cannot form the subject­matter of any reference or submission to arbitration, and the Arbitrator or the Arbitral Tribunal shall have no jurisdiction to entertain the same or to render any decision with respect thereto, and such matter shall be decided by the General Manager prior to the Arbitrator proceeding with or proceeding further with the reference. The said excluded matters are: (i) With respect to or concerning the scope or existence or otherwise of the Arbitration Agreement; (ii) Whether or not a Claim sought to be referred to arbitration by the CONTRACTOR is a Notified Claim; (iii) Whether or not a Notified Claim is included in the CONTRACTOR’s Final Bill in accordance with the provisions of Clause 6.6.3.0 hereof.”

Arguments

IOCL’s Arguments:

• The parties are governed by the terms of the contract, and party autonomy is paramount in arbitration.
• There are three categories of contracts: (i) those without an arbitration agreement; (ii) those with an absolute arbitration clause; and (iii) those with a restricted arbitration clause, where specific disputes are excluded from arbitration.
• The present case falls under the third category, with a restricted arbitration clause.
• Only “Notified Claims” included in the final bill can be referred to arbitration.
• The arbitration clause is subject to Clauses 6.7.1.0 and 6.7.2.0, which state that acceptance of final bill amounts or payments for Notified Claims extinguishes the arbitration clause.
• NCCL expressly waived its Notified Claims, and the final bill payment was accepted in full settlement.
• Clause 9.0.2.0 specifically excludes disputes regarding whether a claim is a Notified Claim from the scope of arbitration.
• The General Manager’s decision on Notified Claims is final and binding, and the claims not considered as Notified Claims are not arbitrable.

NCCL’s Arguments:

• The delay in project completion was attributable to IOCL.
• NCCL was coerced into withdrawing its Notified Claims to process the EOT request.
• The letter withdrawing the claims was conditional, and the conditions were not fully met by IOCL.
• The General Manager is not empowered to decide if a claim is barred due to accord and satisfaction or if it is an excepted claim.
• Under Section 11(6A) of the Arbitration Act, the court’s scope is limited to examining the existence of an arbitration agreement.
• The court cannot decide on accord and satisfaction or whether a claim is an excepted claim at the stage of appointment of an arbitrator.
• Contractual clauses cannot abridge statutory rights, and the power to determine arbitrability cannot be unilaterally conferred upon one party.
• IOCL’s application should be dismissed as they have also challenged the jurisdiction of the arbitral tribunal under Section 16 of the Arbitration Act.
• The General Manager’s decision was erroneous, malafide, and on technical grounds.
• The General Manager’s decision was made in an inordinately belated manner, and in some cases, after the arbitration petitions were filed.
• The final bill payment does not include the Notified Claims, and as such the Notified Claims still hold good.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issues addressed were:

1. Whether the High Court was correct in referring the dispute to arbitration despite the clauses in the contract excluding certain matters from arbitration and the decision of the General Manager?
2. Whether the dispute regarding the nature of the claim (i.e., whether it is a Notified Claim) can be decided by the arbitrator or falls within the excluded matters which are to be decided by the General Manager?
3. Whether the acceptance of the final bill amount constitutes a full and final settlement of all claims, including the Notified Claims, thereby extinguishing the arbitration clause?
4. Whether the General Manager’s decision on Notified Claims is final and binding, or if such a decision is subject to review by the Arbitral Tribunal?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

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 Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd. [ (2017) 2 SCC 228]* to emphasize party autonomy in arbitration, stating that parties are free to agree on the laws governing their contract.
• The Court cited United India Insurance Co. Ltd. v. Hyundai Engg. & Construction Co. Ltd. [(2018) 17 SCC 607]* to support the view that parties can agree to exclude certain disputes from arbitration.
• The Court referred to Vidya Drolia v. Durga Trading Corpn. [(2021) 2 SCC 1]* to discuss the scope of court intervention under Section 11 and what constitutes a non-arbitrable dispute.
• The Court used Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. [(2019) 9 SCC 209]* to show that an arbitration clause can be considered non-existent in law if the underlying contract is not stamped.
• The Court cited Oriental Insurance Co. Ltd. v. Narbheram Power & Steel (P) Ltd. [(2018) 6 SCC 534]* to emphasize that arbitration clauses must be strictly construed and any exclusion must be clear.
• The Court relied on Food Corporation of India v. Sreekanth Transport [(1999) 4 SCC 491]* to show that parties can agree to a departmental machinery for resolving certain disputes outside of arbitration.
• The Court cited Harsha Constructions v. Union of India [(2014) 9 SCC 246]* to support the view that if a contract specifically excludes certain disputes from arbitration, the arbitrator cannot arbitrate on those disputes.
• The Court referred to Mitra Guha Builders (India) Company v. Oil and Natural Gas Corporation Ltd. [(2020) 3 SCC 222]* to show that when parties agree to a final decision by a departmental authority, that decision cannot be subject to arbitration.
• The Court cited Duro Felguera, S.A. v. Gangavaram Port Ltd. [(2017) 9 SCC 729]* to emphasize the limited scope of court intervention at the stage of appointing an arbitrator.
• The Court relied on Mayavati Trading Private Limited v. Pradyuat Deb Burman [(2019) 8 SCC 714]* to clarify that the court’s power at the stage of appointing an arbitrator is limited to the examination of the existence of the arbitration agreement.
• The Court cited Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd. [(2020) 2 SCC 455]*, BSNL & Anr. v. Nortel Networks India Pvt. Ltd. [(2021) 5 SCC 738]*, Pravin Electricals (P) Ltd. v. Galaxy Infra & Engg. (P) Ltd. [(2021) 5 SCC 671]*, and Sanjiv Prakash v. Seema Kukreja [(2021) 9 SCC 732]* to show the limited jurisdiction of courts while considering an application under Section 11(6A) of the Arbitration Act.
• The Court referred to Swiss Timing Limited v. Commonwealth Games 2010 Organizing Committee [(2014) 6 SCC 677]* to highlight the role of a court to assist and support arbitration.
• The Court cited Ambica Construction v. Union of India [(2006) 13 SCC 475]* and R.L. Kalathia & Co. v. State of Gujarat [(2011) 2 SCC 400]* to emphasize that contractors are often coerced to issue no-dues certificates.
• The Court relied on BSNL v. Motorola India (P) Ltd. [(2009) 2 SCC 337]*, National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd. [(2009) 1 SCC 267]*, and Zostel Hospitality (P) Ltd. vs. Oravel StLtd. [(2021) 9 SCC 765]* to emphasize that the question whether a claim is an excepted claim is within the exclusive domain of the arbitrator.
• The Court cited Datar Switchgears Ltd. v. Tata Finance Ltd. [(2000) 8 SCC 151]* to show that the decision of the General Manager should be within a reasonable time.
• The Court relied on DLF Universal Ltd. & Anr. v. Director, Town and Country Planning Department, Haryana & Ors. [(2010) 14 SCC 1]* to emphasize that a contract is to be interpreted according to its purpose and the joint intent of the parties.
• The Court cited Rajasthan State Industrial Development and Investment Corporation & Anr. v. Diamond and Gem Development Corporation Ltd. & Anr. [(2013) 5 SCC 470]* to show that a contract has to be interpreted giving literal meanings unless there is ambiguity.
• The Court referred to DLF Home Developers Limited v. Rajapura Homes Private Limited and Another [2021 SCC Online SC 781]* to reiterate the limited jurisdiction of the court under Section 11 of the Arbitration Act.

Final Order

The Supreme Court set aside the High Court’s order appointing a sole arbitrator. The Court clarified that the issue of whether a claim is a “Notified Claim” is to be decided by the General Manager, and the arbitrator has no jurisdiction over this matter. However, the Court held that the issue of whether there was an accord and satisfaction due to acceptance of the final bill amount was a debatable question that should be decided by the Arbitral Tribunal.

Ratio Decidendi

The ratio decidendi of the case is that:

1. Parties are bound by the terms of the arbitration agreement, and if certain disputes are excluded from arbitration, the arbitrator cannot decide on those matters.
2. The decision of the General Manager on whether a claim is a “Notified Claim” is final and binding, and the arbitrator has no jurisdiction to decide on this issue.
3. The issue of whether there was an accord and satisfaction due to acceptance of the final bill amount is a debatable question that should be decided by the Arbitral Tribunal.

Obiter Dicta

The obiter dicta of the case includes the following:

• The Court reiterated the importance of party autonomy in arbitration, emphasizing that parties are free to agree on the terms of their contract and the scope of arbitration.
• The Court reiterated the limited scope of court intervention under Section 11(6A) of the Arbitration Act, stating that the court’s role is primarily to examine the existence of the arbitration agreement.
• The Court emphasized that contractual clauses should be interpreted literally unless there is ambiguity.

Analysis

The Supreme Court’s judgment in *Indian Oil Corporation Ltd. vs. NCC Ltd.* clarifies the importance of adhering to the specific terms of an arbitration agreement. The court emphasized that party autonomy is paramount in arbitration, and parties are bound by the terms they agree upon. The court’s decision to uphold the exclusion of certain matters from arbitration reinforces the principle that parties can restrict the scope of arbitration through contractual clauses. This case also highlights the importance of carefully drafting arbitration clauses to avoid disputes over arbitrability. The court’s clarification on the role of the General Manager in determining “Notified Claims” provides clarity on the extent to which internal dispute resolution mechanisms can be used to resolve certain disputes outside of arbitration. The decision also underscores the limited scope of court intervention at the stage of appointing an arbitrator, as the court’s role is primarily to examine the existence of the arbitration agreement. However, the court also clarified that the court can also consider non-arbitrability at the Section 11 stage if the facts are clear. The judgment provides a balanced approach to arbitration, respecting party autonomy while ensuring that the arbitration process is not used to circumvent contractual agreements.

Flowchart of the Dispute Resolution Process

Sentiment Analysis

The judgment reflects a complex interplay of legal principles and contractual terms. The sentiment towards the parties and the judgment can be analyzed as follows: