Supreme Court Limits Arbitrator’s Power to Award Claims Beyond Final Bill: Union of India vs. Bharat Enterprise (2023)

Date of the Judgment: March 23, 2023

Citation: Civil Appeal Nos. 3441-3442 of 2015

Judges: K.M. Joseph, J., Krishna Murari, J., B.V. Nagarathna, J. (authored by K.M. Joseph, J.)

Can an arbitrator award claims to a contractor that were not part of the final bill, especially when the contract explicitly states that no further claims can be made after the submission of the final bill? The Supreme Court of India addressed this critical question in a recent judgment, focusing on the binding nature of contractual terms in arbitration. This case revolves around a dispute between the Union of India and a contractor, M/S Bharat Enterprise, concerning additional claims made after the submission of the final bill. The Supreme Court, in this case, examined the extent to which an arbitrator is bound by the contractual terms agreed upon by the parties.

Case Background

The case originated from a contract between the Union of India and M/S Bharat Enterprise for the repair of bathrooms and other related works, entered on July 2, 2001. The contract completion date was extended to January 19, 2002. The contractor submitted a final bill on February 13, 2002, which included a “No Claims Certificate.” Despite this, the payment was not made immediately, prompting the contractor to send several reminders over a year. On February 25, 2003, the contractor sent a letter listing additional claims and stated that the final bill should be considered “under protest.” However, on May 24, 2003, the contractor signed an affidavit withdrawing the protest letter. An undertaking was also signed on September 12, 2003. Later, on November 14, 2003, the contractor revoked the affidavit and undertaking, citing non-payment and invoked the arbitration clause, and on November 25, 2003, the payment of Rs. 100,358 was made. The contractor then sought arbitration on September 8, 2004, leading to the appointment of an arbitrator.

Timeline

Course of Proceedings

Initially, the arbitrator rejected the appellant’s (Union of India) application under Section 16 of the Arbitration and Conciliation Act, 1996, which sought dismissal of the claims based on clauses 65 and 65A of the contract. The arbitrator then proceeded to evaluate the claims on their merits, disallowing seven out of ten claims while allowing three. The District Judge, in a petition under Section 34 of the Arbitration and Conciliation Act, 1996, overturned the arbitrator’s award. However, the High Court reversed the District Judge’s decision in an appeal under Section 37 of the Arbitration and Conciliation Act, 1996.

Legal Framework

The core legal framework of this case revolves around Clauses 65 and 65A of the contract, which pertain to the submission of final bills. Clause 65 states that “No further claims shall be made by Contractor after submission of the Final Bill and these shall be deemed to have been waived and extinguished.” Similarly, Clause 65A stipulates that “No further claims shall be made by the Contractor after submission of a Final Bill and these shall be deemed to have been waived and extinguished.” These clauses restrict the contractor from raising any new claims after submitting the final bill. The Supreme Court also considered Section 16 and Section 37 of the Arbitration and Conciliation Act, 1996, which deal with the competence of the Arbitral Tribunal and appealable orders, respectively. Additionally, the Court referred to Sections 15 to 18 of the Indian Contract Act, 1872, which relate to factors vitiating a contract, such as coercion and undue influence.

Arguments

Arguments by the Appellants (Union of India):

• The arbitrator cannot go beyond the boundaries of the contract and is bound by its terms.
• Clauses 65 and 65A of the contract explicitly prohibit the contractor from adding new claims after submitting the final bill.
• The contractor submitted the final bill on February 13, 2002, and the claims allowed by the arbitrator were raised later, which is a violation of the contract.
• The High Court erred in overlooking the contractual bar and granting relief to the contractor.
• They relied on the judgments in Bharat Coking Coal Ltd. vs. Annapurna Construction (2003) 8 SCC 154 and PSA SICAL Terminate (P) Ltd. v. Board of Trustees of V.O. Chidambaranar Port Trust Tuticorin 2021 SCC Online SC 508, which held that an arbitrator cannot disregard the terms of the contract.

Arguments by the Respondent (M/S Bharat Enterprise):

• There was a significant delay in the payment of the final bill, and the arbitrator only awarded amounts that were due.
• The arbitrator’s jurisdiction was challenged under Section 16(2) of the Arbitration and Conciliation Act, 1996, but the challenge was rejected, and the decision was not appealed under Section 37 of the Act.
• The Court should not exercise its jurisdiction under Article 136 of the Constitution in this case, especially since it is an appeal by the State.
• They relied on Union of India and Others v. Master Construction Company (2011) 12 SCC 349 and Union of India v. Parmar Construction Company (2019) 15 SCC 682, which discuss the circumstances under which a “No Claim Certificate” can be challenged.

Issues Framed by the Supreme Court

The Supreme Court framed the central issue as:

1. Whether the impugned order is sustainable having regard to clauses 65 and 65A of the Contract.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• Bharat Coking Coal Ltd. vs. Annapurna Construction (2003) 8 SCC 154*: The Supreme Court followed this judgment, emphasizing that the arbitrator must consider the relevant clauses of the contract.
• PSA SICAL Terminate (P) Ltd. v. Board of Trustees of V.O. Chidambaranar Port Trust Tuticorin 2021 SCC Online SC 508*: The Court followed this judgment, reiterating that an arbitrator cannot disregard the terms of the contract.
• Union of India and Others v. Master Construction Company (2011) 12 SCC 349*: The Court distinguished this case, noting that it dealt with “No Claim Certificates” and the circumstances under which they can be challenged, which was not the core issue in the present case. The court held that there was no finding of duress.
• Union of India v. Parmar Construction Company (2019) 15 SCC 682*: The Court distinguished this case, stating that while it related to delays in payment, it did not directly address the issue of claims made after the final bill.
• National Insurance Company Limited v. Boghara Polyfab Private Limited (2009) 1 SCC 267*: The Court referred to this case for its discussion on the circumstances under which a court will refuse to refer a dispute to arbitration and the issue of full and final settlement discharge vouchers.
• SBP & Co. v. Patel Engineering Ltd. and Another (2005) 8 SCC 618*: The Court referred to this case for its framework on the duty of the Chief Justice or his designate in appointing an Arbitral Tribunal.
• Central Inland Water Transport Corporation & Anr. v. Brojo Nath Ganguly AIR 1986 SC 1571*: The Court acknowledged this case’s principle of fairness in contracts but stated that it cannot be applied out of context. It cannot be used to override the specific contractual terms agreed upon by the parties.
• Tahera Khatoon (D)By LRs. v. Salambin Mohammad (1999) 2 SCC 635*: The Court referred to this case for the guiding principles for the exercise of jurisdiction in an appeal generated under Article 136 of the Constitution.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that an arbitrator is a creature of the contract and is bound by its terms. The Court emphasized that clauses 65 and 65A of the contract clearly prohibited the contractor from making additional claims after submitting the final bill. The Court also noted that there was no finding by the arbitrator that the final bill was the result of duress or any other vitiating factor, which would have allowed the arbitrator to disregard the contractual clauses. While the Court acknowledged the delay in payment, it did not find this sufficient to override the clear contractual terms. The Court also considered the principle of fairness in contracts but concluded that it could not be used to bypass the specific terms agreed upon by the parties.

Logical Reasoning:

The Court considered alternative interpretations, such as the possibility that the final bill was submitted under duress due to the delay in payment. However, since there was no finding of duress by the arbitrator, the Court rejected this interpretation. The Court also considered the principle of fairness in contracts but concluded that it could not be used to override the specific contractual terms agreed upon by the parties.

The final decision was that the arbitrator could not have awarded claims that were not part of the final bill, as the contract explicitly prohibited such claims. The Court also held that the arbitrator’s decision was not correct in the eyes of law.

The majority opinion was delivered by K.M. Joseph, J., with Krishna Murari, J., and B.V. Nagarathna, J., concurring.

“The Arbitrator comes on the scene as a result of the agreement between the parties. Not unnaturally, the fundamental and primary foundation for the Arbitrator to settle the dispute is the contract between the parties.”

“There may be cases where a final bill may be submitted and the contention is taken that the final bill was submitted under duress. In such a case, it may be open to the claimants to urge and the Arbitrator to find that the final bill was itself vitiated on account of the fact that it was brought about by duress or any other vitiating factors under law.”

“If the clauses operate, the inevitable result is the arbitrator could not have traveled outside of the contractual prohibition and passed an award allowing claims which were submitted after the submission of the final bill.”

Key Takeaways

• An arbitrator is bound by the terms of the contract and cannot award claims that are explicitly prohibited by the contract.
• Contractual clauses that restrict claims after the submission of the final bill are generally enforceable unless there is evidence of duress, coercion, or other vitiating factors.
• Delay in payment of a final bill alone is not sufficient to invalidate a “No Claims Certificate” or to justify new claims.
• Parties must clearly establish any vitiating factors to challenge a final bill or “No Claims Certificate.”
• The Supreme Court can exercise its discretion under Article 136 of the Constitution to mold relief even after the grant of special leave.

Directions

The Supreme Court set aside the High Court’s order and directed the appellants to pay a global sum of Rs. 3 lakhs to the respondent within six weeks, in full and final settlement of all claims.

Development of Law

The ratio decidendi of this case is that an arbitrator is bound by the contractual terms agreed upon by the parties, and cannot award claims that are expressly prohibited by the contract, unless there is a finding that the final bill was vitiated by factors such as duress or coercion. This judgment reinforces the principle that the arbitrator’s authority is derived from the contract itself, and any deviation from the contract’s express terms would render the award vulnerable. This case does not change the previous position of law but reaffirms the binding nature of contractual terms in arbitration.

Conclusion

In conclusion, the Supreme Court’s judgment in Union of India vs. M/S Bharat Enterprise clarifies that an arbitrator’s powers are limited by the contractual terms agreed upon by the parties. The court emphasized that an arbitrator cannot award claims that are expressly barred by the contract, such as those made after the submission of a final bill unless there is evidence of coercion or other vitiating factors. This decision reinforces the importance of adhering to contractual obligations and the principle that an arbitrator is primarily a creature of the contract.