R.S.Khanna And Sons vs. Rites LTD. Through Its Executive Director & Anr.

Facts

The petitioner, R.S. Khanna and Sons, filed petitions under Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of an Arbitral Tribunal. The dispute arose from a contract dated April 29, 2016, with Respondent No. 1, RITES Ltd., for the renovation and upgradation of an auditorium at Ramjas College (Respondent No. 2). The contract value was Rs. 2,46,34,549.41. The work was completed on April 19, 2018, with a delay. The petitioner submitted a final bill in January 2019, which was certified for Rs. 2,69,83,534/- on October 14, 2019. However, only Rs. 2,17,66,547/- was paid, leaving a balance of Rs. 42,32,120/- and GST of Rs. 6,06,346/-. The petitioner also claimed additional expenses due to delays and loss of profit. Arbitration was invoked on March 8, 2022, and April 12, 2022, with a reminder on August 13, 2022, but no response was received.

Held

The Court held that the petitions are not maintainable because the petitioner failed to exhaust the mandatory dispute resolution mechanism stipulated in Clause 25 of the agreement. The Court found that Clause 25 provides a multi-tiered dispute resolution process, commencing with reference to the Engineer-in-Charge, followed by an appeal to an Appellate Authority, and only thereafter can the matter be referred to arbitration. The Court emphasized that the procedure prescribed in the agreement is mandatory and not directory, citing judgments like The Iron & Steel Co. Ltd. v. Tiwari Road Lines and Municipal Corp, Jabalpur v. Rajesh Construction Co. The Court reasoned that Section 11(6) of the Arbitration and Conciliation Act, 1996, provides a cause of action only after the agreed procedure has been followed. Therefore, by approaching the High Court directly without adhering to the pre-arbitration steps outlined in Clause 25, the petitioner's application was premature. The Court also noted that the arbitration clause is a feature of the agreement, and the agreement is supreme in arbitration matters, especially when it aims to facilitate settlement. The Court dismissed the petitions as premature, following precedents set in similar cases.

Key Issues

1. Whether the petitions filed under Section 11(6) of the Arbitration and Conciliation Act, 1996, are maintainable when the petitioner has not exhausted the dispute resolution mechanism agreed upon in Clause 25 of the contract. (Question of law) 2. Whether the procedure prescribed under Clause 25 of the agreement for dispute resolution is mandatory or directory. (Question of law) Petitioner's arguments: The petitioner argued that both respondents have taken contradictory stands to avoid liability. Respondent No. 1 claimed to be an agent of Respondent No. 2, while Respondent No. 2 denied being a signatory to the agreement. The petitioner relied on judgments emphasizing the obligation of courts to refer parties to arbitration when an arbitration clause exists. Respondents' arguments: Respondent No. 1 contended that it acted solely as an agent for Respondent No. 2 and, as per Section 230 of the Indian Contract Act, cannot be sued. Respondent No. 2 argued that the petitions are non-maintainable as the petitioner failed to comply with the mandatory pre-conditions under Clause 25 of the agreement, which provides a complete dispute redressal mechanism, including reference to the Engineer-in-Charge and then to an Appellate Authority before arbitration. They asserted that the cause of action for approaching the court under Section 11(6) did not arise.