India: "Excepted Matters" In Arbitration

INTRODUCTION

In agreements executed between parties to the contract, generally there exists an arbitration clause and when the subject matter touches the doorsteps of the Court/Tribunal for adjudication of the claims raised by the aggrieved party to the contract, the Court/ Tribunal is concerned with interpreting the arbitration clause which stipulates, "In the event of any question, dispute or difference arising under this agreement or in connection there-with (except as to the matters, the decision to which is specifically provided under this agreement), the same shall be referred to the sole arbitration..." or the arbitration clause commencing with the words "except where otherwise' provided in the contract" or "The Superintending Engineer's/Engineer's decision shall be final" or with similar words attaching finality to the decisions of the concerned authorities.

When a dispute arises between the parties, relating to (i) payment of compensation / damages (ii) extension of time, (iii) the power of any authority under the contract to take a decision on any issue relating to the contract and similar other matters, and when the aggrieved party to the contract raises such a claim, naturally the other party to the arbitration will raise the objection contending that the said claim(s) fall under excepted matters and as such they are outside the scope and jurisdiction of arbitrator/arbitral tribunal, because of the specific provision in the agreement. Therefore, it was contended that there was no valid arbitration agreement between the parties in respect of the particular dispute(s).

FIRST CATEGORY OF EXCEPTED MATTERS

The Division Bench of the Hon'ble Supreme Court construed the expression in clause 2 of the conditions of contract that 'The Superintending Engineer's decision shall be final' as referring only to finality by a specified official in the department; in other words, that it only constitutes a declaration that no officer in the department can determine the quantification and that the quantum of compensation levied by the Superintending Engineer shall not be changed without the approval of the Government. After referring to certain judicial decisions regarding the word 'final' in various statutes, the Division Bench concluded that the finality cannot be construed as excluding the jurisdiction of the arbitrator under clause 25. The Court is unable to accept the view. Clause 25, which is the arbitration clause, starts with an opening phrase excluding certain matters and disputes from arbitration and these are matters or disputes in respect of which provision has been made elsewhere or otherwise in the contract. These words in our opinion can have only reference to provisions such as the one in parenthesis in clause 2 by which certain types of determinations are left to the administrative authorities concerned. If that be not so, the words 'except where otherwise' provided in the contract would become meaningless. The Court is, therefore, inclined to hold that the opening part of clause 25 clearly excludes matters like those mentioned in clause 2 in respect of which any dispute is left to be decided by a higher official of the department. Our conclusion, therefore, is that the question of awarding compensation under clause 2 is outside the purview of the arbitrator and that the compensation determined under clause 2 either by the Engineer-in-charge or on further reference by the Superintending Engineer will not be capable of being called in question before the arbitrator. [Vishwanath Sood –vs- Union of India (AIR 1989 SC 952(SC)] This judgment declared that when the arbitration clause opens with the words 'except where otherwise provided in the contract' and somewhere in the contract finality was attached to the decisions of the specified authorities on the said matters.

SECOND CATEGORY OF EXCEPTED MATTERS

Similarly, the Hon'ble Supreme Court brought in the concept of excepted matters to some other categories also.

The Supreme Court considered the matter and held that a bare reading of Clause 63 shows that it consists of three parts. One of the three parts is qualified by a proviso which deals with 'excepted matters'. 'Excepted matters' are divided into two categories: (i) matters for which provision has been made in specified clauses of the General Conditions, and (ii) matters covered by any clauses of the Special Conditions of the Contract. The other of the three parts is a further proviso, having an overriding effect on the earlier parts of the clause, that all 'excepted matters' shall stand specifically excluded from the purview of the Arbitration Clause and hence, shall not be referred to arbitration. The source of controversy is the expression "matters for which provision has been made in any clauses of the Special Conditions of the contract shall be deemed as 'excepted matters' and decisions thereon shall be final and binding on the contractor." In GENERAL MANAGER NORTHERN RAILWAYS & ANR. –vs- SARVESH CHOPRA 2002 AIR 1272, 2002, it was submitted by the learned counsel for the respondent that to qualify as 'excepted matters' not only the relevant clause must find mention in that part of the contract which deals with special conditions, but should also provide for a decision by an authority of the Railways by way of an 'in-house remedy' which decision shall be final and binding on the contractor. In other words, if a matter is covered by any of the clauses in the Special Conditions of the contract but no remedy is provided by way of decision by an authority of the Railways then that matter shall not be an 'excepted matter'. ------ The bench found it difficult to agree. In their opinion those claims which are covered by several clauses of the Special Conditions of the Contract can be categorized into two. One category is of such claims which are just not leviable or entertainable. Clauses 9.2., 11.3 and 21.5 of Special Conditions are illustrative of such claims.

Each of these clauses provides for such claims being not capable of being raised or adjudged by employing such phraseology as "shall not be payable", "no claim whatsoever will be entertained by the Railway", or "no claim will/shall be entertained". These are 'no claim', 'no damage', or 'no liability' clauses. The other category of claims is where the dispute or difference has to be determined by an authority of Railways as provided in the relevant clause. In such other category fall such claims as were read out by the learned counsel for the respondent by way of illustration from several clauses of the contract such as General Conditions Clause 18 and Special Conditions Clause 2.4.2.(b) and 12.1.2. The first category is an 'excepted matter' because the claim as per terms and conditions of the contract is simply not entertainable; the second category of claims falls within 'excepted matters' because the claim is liable to be adjudicated upon by an authority of the Railways whose decision the parties have, under the contract, agreed to treat as final and binding and hence not arbitrable. The expression "and decision thereon shall be final and binding on the contractor" as occurring in Clause 63 refers to the second category of 'excepted matters'. []

In a case, where the agreement had provided for complete machinery for settlement of disputes, including machinery for fixation of the liability, the position seems to be that "excepted matters" clauses will be construed strictly; and the Courts will prefer an interpretation narrowing the scope of "excepted matters".

The Court can also consider another important issue, where the clause in the agreement providing for the computation of damages provided that the appellant would calculate the amount of damages in accordance with the agreed formula. The appellant had contended that the quantum of liquidated damages decided by the appellant, even if it is exorbitant and contrary to the formula, would be final and could not be challenged. The Supreme Court rejected this argument as well, saying that such an argument would mean that the agreement was contrary to Section 28 (agreement in restraint of legal proceedings is void) and Section 74 (compensation for breach of contract where penalty is stipulated) of the Indian Contract Act. In this connection, it is worth noting that although Section 28 does allow for an exception in the case of arbitration agreements, a provision stating that a certain person shall compute damages in accordance with a formula cannot be regarded as an 'arbitration' proceeding. In K.K. Modi v. K.N. Modi (AIR 1998 SC 1297), the Supreme Court had made clear - the distinction between arbitration and an expert determination – the provision relating to the computation of damages in accordance with a given formula would be a 'determination' and not an 'arbitration'.

CONCLUSION

Whenever any dispute is referred to adjudication by the arbitral tribunal, first aspect that can be contested, if exists, is that of the jurisdiction of the arbitral tribunal. One of the aspects touching the jurisdiction of arbitral tribunal is that in the agreement between the parties to the contract there exists a clause dealing with arbitration and in most of the contracts it may be stated as : 'In the event of any question, dispute or difference arising under this agreement or in connection therewith (except as to the matters, the decision to which is specifically provided under this agreement), the same shall be referred to the sole arbitration..." or the arbitration clause commenced with the words "except where otherwise provided in the contract" or "The Superintending Engineer's / Engineer's decision shall be final" or with similar words attaching finality to the decisions of the concerned authorities.' Unless a decision on the issue of 'excepted matters' is finalized, if the arbitral tribunal goes with adjudication of the disputes, it will be a futile exercise and ultimately in respect of those claims that come under excepted matters, the award passed by the arbitral tribunal will be set aside.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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