Arbitrability of Excepted Matters | Arbitration

“Party Autonomy” under the Arbitration and Conciliation Act [“the Act”] is the brooding and guiding spirit in arbitration proceedings. The Act confers upon the parties the power to take decisions upon various key aspects of the reference to arbitration viz. the place of arbitration, the venue, applicable law, the dispute and the procedure. All of it has been left to the wisdom of the parties to the dispute thereby constituting “Party Autonomy”. The parties sometimes choose to completely exclude some matters of the dispute from the reference to arbitration and such matters are called “Excepted Matters” which are outside the purview of arbitration proceedings and an Award, if passed by the Arbitrator, upon such excepted matter, is susceptible to a challenge under Section 34 of the Act in which case the Court would set aside such an Award.

Therefore, at reference stage, it is incumbent upon the court to refer only those matters to arbitration which the parties have intended to refer, for which purpose it becomes imperative to interpret the arbitration clause embodying the party autonomy. A three judge Bench of Supreme Court in Vidya Drolia vs Durga Trading¹ has categorically held that non-arbitratbility of dispute can be decided by the court at the reference stage itself. The clauses pertaining to excepted matters are usually found in Government Contracts. The Supreme Court in Food Corporation of India vs Sreekanth Transport² explained ‘excepted matters’ vis-à-vis the arbitration clause in a Government Contract as follows- “…in the usual Government Contracts, there is exclusion of some maters from the purview of arbitration and a senior officer of the Department usually is given authority and power to adjudicate the same. The clause itself records that the decision of the senior officer, being the adjudicator, shall be final and binding between the parties- this is what popularly knowns ‘excepted matters’ in a Government or Governmental agencies contract.”

The Clauses with respect to ‘excepted matters’ in Government contracts have been found to be of two categories-

Clauses which stipulate that the concerned authority’s decision on the issue/dispute raised is final and binding.
No damage clauses- These clauses simply disentitle the contractor from seeking any claim of compensation (or any other claim) and stipulate that no such claim shall be entertained.

Matters falling in the aforesaid two categories, read with the arbitration clause are generally referred to as excepted matters and therefore, non-arbitrable.

In Vishwanath Sood vs Union of India & Ors AIR 1989 SC 952, the Supreme Court was dealing with a contractual dispute, clause 2 whereof inter alia stipulated that if the contractor fails to adhere to the time schedule, then the contractor would be liable to pay compensation of an amount which the Superintendent Engineer will decide, and his decision would be final. The Arbitration clause further provided that all disputes shall be referred to arbitration except where otherwise provided in the contract. Therefore, the court was called on to adjudicate whether clause 2 of the contract constituted an ‘excepted matter’ not referrable to arbitration. The Supreme Court held that the arbitration clause clearly excludes matters like those mentioned in clause 2 i.e. matters pertaining to imposition of compensation upon the contractor for causing delay and a decision taken by the Superintendent Engineer thereto, is outside the scope of arbitration proceedings.

In General Manager Northern Railway & Anr. vs Sarvesh Chopra ³, the Supreme Court was posed with both the categories of excepted matters. The counsel for the Respondent, placing reliance upon Vishwanath Sood (supra), laboriously argued to put forth a case for consideration before the court that only those matters shall qualify as ‘excepted matters’ for which an adjudicatory process has been provided in the contract, the decision of the concerned authority regarding which is final and binding. (This was in view of the fact that the no damage clause did not provide any adjudicatory process and simply denied the claim of the Contractor for compensation). However, the Supreme Court refused to accede to such an argument and held that the decision in Vishwanath Sood (supra) was with respect to a clause for which a departmental or in-house remedy was provided attaching finality to it and the decision of the court was only with respect to that clause only. Therefore, the decision in that case cannot be called on to adjudicate the facts of the present case bearing clauses of two different nature. The court ultimately held that, to be an excepted matter it is not necessary that a departmental or in-house remedy for settlement of claim must be provided in the contract. Merely for the absence of provisions for in-house settlement of claim, the claim does not cease to be an excepted matter. Therefore, in effect, the Supreme Court held that if an arbitration clause specifically excludes certain clauses of the contract from being referred to arbitration, it is immaterial whether or not such clauses provide for an adjudicatory process in which a decision of an authority is final, such clauses would be deemed ‘excepted matters’ regardless.

In Bharat Sanchar Nigam Ltd. & Ors vs Motorola India Pvt. Ltd.⁴, the Supreme Court was dealing with a contractual dispute, clause 16.2 whereof inter alia stipulated that if the tenderer fails to deliver the goods and services on turn key basis within the period prescribed, the purchaser shall be entitled to levy liquidated damages upon the contractor and the quantum of liquidated damages levied by the purchaser shall be final and not challengeable by the supplier. Clause 15.2, preceding the clause 16.2 levying liquidated damages, inter alia stipulated that delay committed by the supplier would result in imposition of liquidated damages amongst various other penalties. The Supreme Court held that clause 16.2 cannot be held to be an excepted matter for the following reasons-

Court noted that there is a dispute between the parties on the question whether any breach was committed.
The decision contemplated in clause 16.2 is the decision regarding the quantification of the liquidated damages and not any decision regarding the fixing of the liability of the supplier. It is necessary as a condition precedent to find that there has been a delay on the part of the supplier in discharging his obligation for delivery under the agreement.
Reading Clause 15 and 16 together, it is apparent that Clause 16.2 will come into operation only after a finding is entered in terms of Clause 15 that the supplier is liable for payment of liquidated damages on account of delay on his part in the matter of making delivery. Therefore, Clause 16.2 is attracted only after the supplier’s liability is fixed under Clause 15.2. It has been correctly pointed out by the High Court that the question of holding a person liable for Liquidated Damages and the question of quantifying the amount to be paid by way of Liquidated Damages are entirely different. Fixing of liability is primary, while the quantification, which is provided for under Clause 16.2, is secondary to it.
Quantification of liquidated damages may be an excepted matter as argued by the appellant, under Clause 16.2, but for the levy of liquidated damages, there has to be a delay in the first place. In the present case, there is a clear dispute as to the fact that whether there was any delay on the part of the respondent.
Clause 16.2 cannot be treated as an excepted matter because of the fact that it does not provide for any adjudicatory process for decision on a question, dispute or difference, which is the condition precedent to lead to the stage of quantification of damages.
Power to assess damages is a subsidiary and consequential power and not the primary power.

The Court also distinguished the case of Vishwanath Sood (supra) and observed that the court in that case held a particular claim to be an excepted matter because the superintendent engineer acted as a revisional authority to decided disputes between the two parties by an adjudicatory process. Also distinguishing Sarvesh Chopra (supra), the Court observed that in that case the contract involved no damage clause, and the arbitration clause excepted such a clause from the purview of arbitration proceedings.

However, the reasoning of the court in distinguishing the aforesaid cases appears to be flawed. It is pertinent to mention that the decision of the Supreme Court in the above case is at stark variance with the ratio laid down in Sarvesh Chopra (supra). The court in the above case held that clause 16.2 cannot be treated as an excepted matter because it does not provide for any adjudicatory process. In this regard, the Supreme Court in Sarvesh Chopra (supra) held in no uncertain terms that in order to qualify as an excepted matter it is not necessary that the clause must provide an adjudicatory process and a mere absence of such a process will not operate to construe that the clause has ceased to be an excepted matter. Furthermore, it is pertinent to mention that in the matter of Vishwanath Sood (supra) and the above matter, the clauses under consideration were, in effect, the same. The Supreme court in Vishwanath Sood (supra) was dealing with clause 2 which inter alia stipulated that if the contractor fails to adhere to the prescribed time schedule, then he shall be liable to pay a compensation of an amount which the superintendent engineer may decide, whose decision regarding which shall be final. Whereas, in Motorola (supra) the court was dealing with clause 16.2 which inter alia stipulated that if the tenderer fails to deliver the goods and services within the stipulated period then the purchaser shall levy liquidated damages upon the tenderer of an amount regarding which the decision of the purchaser shall be final and not challengeable by the supplier.

Despite the similarity of the clauses, the Supreme Court in both the cases has reached separate conclusions. In Vishwanath Sood (supra), the Court held that the clause would fall within the category of an excepted matter as the superintendent engineer as per clause 2 acted as a revisional authority, having the power to delve into factual aspects of the case before arriving at the quantum of compensation. However, when posed with a similar clause in Motorola (supra), the court held it to be not an excepted matter as it does not provide an adjudicatory process which is clearly in teeth of the ratio laid down in Sarvesh Chopra(supra) by Supreme Court.

In Madani Construction Corporation Pvt. Ltd. vs Union of India and Ors.⁵ , the Supreme Court was dealing with clause 45(a) of the Contract which stipulated a mechanism for carrying re-measurements viz. (a) an opportunity is to be accorded to the contractor to take a specific objection to any recorded measurement within seven days of such measurements; (b) then re-measurement is to be taken by the Engineer or the Engineer’s representative in the presence of the contractor or in his absence after due notice. After the aforesaid process has been followed, the clause stipulated that no claim by the contractor shall be entertained about the accuracy of measurement. The Arbitration clause further stipulated that matters for which provisions have been made in clause 45(a) shall be excepted matters. The Arbitrator, in his Award gave a finding that the very process as stipulated in clause 45(a) for arriving at the measurement was not followed therefore allowed the claim of the Claimant under the said clause in his Award. However, the High Court reversed the finding and held that matters pertaining to clause 45(a) are excluded from the scope of arbitration proceedings. In appeal before the Supreme Court, the Court reiterated the settled principle of law that the arbitrator is the master of facts and when the arbitrator on the basis of record and materials which are placed before him came to specific findings, the High Court, in reaching its conclusion cannot ignore those findings. Therefore, the Supreme Court upheld the award passed by the Arbitrator by setting aside the judgment of High Court.

In Lift and Shift India Pvt. Ltd. vs Central Warehousing Corporation⁶ the Delhi High Court was dealing with a matter, the arbitration clause whereof, stipulated that all disputes shall be referred to arbitration except for clauses 3 to 12, the decision of which is expressly provided in the contract. The court observed that there are two requirements for a matter to be an excepted matter-

It should be a matter contained in clause 3 to 12.
The decision in respect of such matters must be expressly provided for in the contract.

The Ld. Arbitrator in his Award simply declined to accept the claims of the Claimant by referring to the dispute falling in clause 3 to 12 of the contract without actually examining if the foundational conditions for construing such claims as excepted matters existed i.e. the matter must not only fall in the clauses 3 to 12 of the contract but with respect to such matter there needs to be a conclusive decision also of the concerned authority. In the above matter, although the dispute fell in the category of clauses as indicated in the arbitration clause, however, there was no decision by the concerned authority qua such disputes. The Award was eventually set aside by the High Court. Therefore, merely referring to a clause, in the arbitration matter would not qualify it as an excepted matter unless the finality attached to it i.e. the decision of the concerned authority, has also been made regarding the matter mentioned in the clause.

Conclusion

From a conspectus of the above case laws, it appears that prior to 2008 the Courts have strictly construed the excepted matter clauses and upheld them in letter and spirit. The judgment of Supreme Court, in Sarvesh Chopra (supra), perhaps, takes the most extreme view in holding that not only those clauses would fall in the category of excepted matters which simply disentitle the contractor from raising any claim (No damage clause) (read with the arbitration clause) but it would also take within its ambit those matters for which there is no adjuratory process stipulated. Post 2008, the Supreme Court in Motorola (supra) has taken the liberal view in interpreting the excepted matter clause and inter alia held that a clause cannot be treated as an excepted matter if it does not provide an adjudicatory process in which a decision of the concerned authority is final. However, the same is in teeth of the ratio laid down in Sarvesh Chopra (supra) which has held the opposite. The judgments in Madani Construction and Central Warehouse Corporation (supra) demonstrate that an excepted matter clause cannot be enforced as a matter of right. If there is a finality attached to the said clause concerning an authority whose decision on the matter is final, unless this finality is not fulfilled, the arbitrator is fully within his jurisdiction to adjudicate upon the matter pertaining to the excepted matters.

By Daksh Pandit