Bombay High Court: 'Finality Of Decision And Non-Arbitrability' Clause In GCC Does Not Imply An Arbitration Agreement

Bombay High Court: 'Finality Of Decision And Non-Arbitrability' Clause In GCC Does Not Imply An Arbitration Agreement

In the recent case between a construction company and the Mumbai Municipal Corporation (BMC), the Bombay High Court ruled against the company's claim for arbitration. The company argued that the dispute resolution clause within the General Conditions of Contract (GCC) constituted a valid arbitration agreement. However, the Court determined that a critical element, mutual intent to arbitrate, was absent, rendering the clause ineffective.

The Court, in its decision, highlighted the crucial issue of mutual intent to arbitrate. Analysing the construction company's claim that the GCC's dispute resolution clause served as a valid arbitration agreement, the Court pointed out a critical inconsistency: the title itself, "Finality of Decision and Non-Arbitrability," directly contradicted the notion of arbitration. This contradiction casts serious doubt on the parties' genuine intention to utilise arbitration for dispute resolution.

Furthermore, Justice Firdosh P. Pooniwalla observed that simply labelling the adjudication committee's decision as "final and binding" is not sufficient to establish an implicit agreement to arbitrate. Such labels, the Court stressed, do not inherently translate to an intention to engage in an arbitral process governed by specific legal principles and procedures distinct from regular adjudication.

Crucially, the Court further noted that the clause lacked any mention of arbitration or the appointment of an arbitrator. This absence was deemed essential because it directly contradicted the core principles and procedures associated with a legitimate arbitration agreement. Without such references, the court concluded that the disputed clause could not be considered a valid agreement to arbitrate.

Kalpataru Projects International Ltd. faced a dispute with the Municipal Corporation of Greater Mumbai over the construction of the Ghatkopar-Mankhurd Link Road Flyover. The project, which included additional structures like foot-over bridges and a vehicular underpass, encountered delays, required extra work, and ultimately led to altered deadlines and work scopes.

Upon completion, Kalpataru submitted claims based on the contract terms, but the Municipal Corporation Chief Engineer rejected them. This triggered disputes, prompting Kalpataru to initiate pre-arbitral steps as outlined in Clause 96 of the General Conditions of Contract (GCC). However, these efforts failed to resolve the issue.

Kalpataru then sought to invoke arbitration under Clause 96 and filed an application before the court for the appointment of an arbitrator. This application hinged on the crucial question: does Clause 96 of the GCC constitute a valid arbitration agreement for resolving such disputes? The court's decision on this matter will determine the path forward for resolving the ongoing disagreement between Kalpataru and the Municipal Corporation of Greater Mumbai.

Clause 96 of the GCC lays out a multi-step process for resolving disputes arising from the contract between parties. The process kicks off when a party encounters a "dispute, difference, or claim" and must notify the concerned Additional Municipal Commissioner within seven days. The Commissioner then assembles a three-person committee comprising the relevant Deputy Municipal Commissioner or Director of Engineering Services & Procurement, a Chief Engineer excluding the Contract Engineer, and the concerned Chief Accountant. This committee has 60 days to reach a written decision.

However, dissatisfied parties have the option to appeal the committee's decision within seven days by escalating it to the Municipal Commissioner. In response, the Municipal Commissioner forms a second, higher-level committee composed of three Additional Municipal Commissioners specifically in charge of the Finance Department. This second committee's decision constitutes the final and binding resolution, settling the dispute definitively for both parties.

The petitioner argued that Clause 96 of the GCC fulfils all the crucial elements of a valid arbitration agreement, as established by the Supreme Court in the landmark case of Bihar State Mineral Development Corporation and Another v. Encon Builders (I)(P) Ltd.

An arbitration agreement requires certain key components: the existence of a current or anticipated dispute related to a contemplated matter, the mutual intent of the involved parties to resolve this dispute through a private tribunal, a written agreement by the parties to abide by the tribunal's decision, and a shared understanding between the parties, known as "ad idem."

The respondent contended that the clause lacks evidence of a shared intention to engage in arbitration, thereby falling short of meeting the second stipulation.

Further bolstering their argument, the petitioner cited a precedent set by a single judge within the same court. In the case of Tatva Global Environment (Deonar) Ltd. v. The Municipal Corporation of Greater Mumbai, a clause remarkably similar to the modified Clause 96 of the GCC was upheld as a valid arbitration agreement.

The petitioner further asserted that Clause 96, specifying that the committee's decision would be deemed final and binding on the parties, serves as a clear indication that the amended Clause 96 in the GCC constitutes an arbitration agreement between the involved parties.

The Bombay High Court sided with the respondents, supporting their argument that Clause 96 of the GCC does not sufficiently exhibit a shared intention to engage in arbitration.

The Court distinguished the Tatva Global case from the present dispute, citing key real differences. While both cases involved clauses with similarities to Clause 96 of the GCC, Tatva Global included an additional reference to arbitration within its Clause 23 that explicitly linked it to Clause 21, resembling Clause 96. This crucial distinction, according to the Court, rendered the Tatva Global precedent not directly applicable to the current case, where such an explicit reference to arbitration was absent.

The Court found the argument that the final and binding nature of the committee's decision constitutes an arbitration agreement to be insufficient. They cited the case of Food Corporation of India v/s. National Collateral Management Services Ltd. emphasises that such clauses are merely declaratory and clarificatory, simply stating that the committee's decision is final but not necessarily implying intent to resolve disputes through arbitration. In other words, the finality of the decision alone does not automatically translate to choosing arbitration as the dispute resolution mechanism.

Hence, the Court concluded that the amended Clause 96 of the GCC did not establish an arbitration agreement between the parties due to the absence of a mutual intent to arbitrate. Consequently, the Court dismissed the current arbitration application.