Holding

Clause 29 is a valid arbitration clause, Jala Nigam’s participation amounts to consent precluding a later challenge, and the award stands except for reduction of interest to 9% and idling charges to Rs.1 crore.

Summary

Krishna Bhagya Jala Nigam Ltd entered into a construction contract with G. Harischandra Reddy that contained Clause 29, which provided for disputes to be referred to the Chief Engineer as arbitrator. When a dispute arose, the contractor invoked Clause 29, but the Chief Engineer initially refused, leading the contractor to file a petition under Section 11 of the Arbitration and Conciliation Act, 1996. The High Court directed the Chief Engineer to act as arbitrator, the parties participated in the arbitration, and an award was rendered on 25 June 2000. Jala Nigam later challenged the award, arguing that Clause 29 was not an arbitration clause and that the award was therefore a nullity. The Supreme Court held that Clause 29 did constitute an arbitration clause, that Jala Nigam had consented to and participated in the arbitration, and thus could not later contest the existence of an arbitration agreement. On the merits, the Court modified the award by reducing the interest rate from 18% to 9% and reducing the idling charges from Rs.1.47 crore to Rs.1 crore. The appeal was partly allowed, with the award upheld subject to these modifications.

Issues considered

Whether Clause 29 of the contract constitutes a valid arbitration clause and whether the arbitral tribunal had jurisdiction.
Whether Jala Nigam, having participated in the arbitration, can later raise the plea that there was no arbitration agreement.
Whether the award should be set aside or modified on the grounds of interest rate and idling charges.

Legislation cited

Arbitration and Conciliation Act, 1996s. 11, s. 16, s. 34(2)(v), s. 37(1)(b)

Subjects

arbitration clausejurisdictionwaiver of objectionarbitral awardinterest rateidling chargesSection 11Section 37construction contract

Judgment

_j __

A KRISHNABHAGYA JALA NIGAM LTD. f-
v.
G. HARISCHANDRAREDDY AND ANR.

-JANUARY 10, 2007

B [DR. ARIJIT PASAYAT AND·S:H. KAPADIA, JJ.]

Arbitration and Conciliation Act, 1996 : ~

Ss. 11 and 37(i)(b)-Non-existence of arbitration clause-Plea of-
c Held, Not tenable since the aggrieved party had consented to the arbitration
of disputes and also proceeded on that basis-Therefore, it cannot be
allowed to contend now that contract did not constitute an arbitration
agreement.

Appellant-Jala Nigam entered into agreement for construction work
D with the Contractor-respondent No. 1. Dispute arose and the Contractor
called upon the Chief Engineer to act as.an arbitrator.under clause 29 of l
the contract. The Chief Engineer refused to act as an.arbitrator on the
ground that the contract did not provide for arbitration. The Contractor
filed petition under Section 11 of the Arbitration and •Conciliation Act,
E 1996. The High Court directed the ChiefEngineer to act as an Arbitrator.
The arbitrator gave directions to both the parties .to file statements and
counter statements. ·Both the parties complied with the .directions and
ultimately arbitrator gave his award.

Aggrieved by the award, Jala Nigam filed.a petition.under Section
F ;-
34(2)(v) before Civil Judge. The award was confirmed.by the Civil Judge.
High Court dismissed the appeal.

In appeal to this Court, appellant contended that.Clause:29 of the
Contract was not an arbitration clause -and, therefore the proceedings
G before the Arbitrator were without jurisdiction for want of arbitration
agreement which cannot be cured by appearance of.the parties;:that even
if there was no protest or even if there was a consent of JalaNigam,.consent
cannot confer jurisdiction and, therefore, the impugned Award was:nultand
void.
H
698
/
h
KRISHNA BHAGYA JALA NIGAM LTD. v. G. HARISCHANDRA REDDY 699

Partly allowing the appeal, the Court A
~

HELD: 1. The plea of"no arbitration clause" was not raised in the
written statement filed by Jala Nigam before the Arbitrator. The said plea
was not advanced before the civil court in Arbitration Case. On the
contrary, both the courts below on facts have found that Jala Nigam had
consented to the arbitration of the disputes by the Chief Engineer. Jala B
Nigam had participated in the arbitration proceedings. It submitted itself
to the authority of the Arbitrator. It filed its written statements to the
• additional claims made by the contractor. The executive engineer who
appeared on behalf of Jala Nigam did not challenge the competence of the
J arbitral tribunal. On the contrary, it submitted to the jurisdiction of the c
arbitral tribunal. It also filed written arguments. It did not challenge the
order of the High Court passed in the petition under S. 11 of Arbitration
and Conciliation Act, 1996. Both the parties accepted that there was an
arbitration agreement, they proceeded on that basis and, therefore, Jala
Nigam cannot be now allowed to contend that Clause 29 of the Contract did
D
not constitute an arbitration agreement. [Para 10] [703-D-G]

~
Mis. P Dasaratharama Reddy Complex v. Government of Karnataka
and Another dated 26. 7.2005 order of Supreme Court in Civil Appeal No.
1586 of 2004, referred to. [704-A]
E
2. The plea that Clause 29 of the Contract was not an arbitration
clause, was raised in the present case for the first time only in Miscellaneous
First Appeal filed under Section 37(l)(b) of the Act before the High Court
Therefore, on the facts and circumstances of this case and in view of the
conduct of the parties, Jala Nigam cannot be allowed to urge that Clause
F
29 of the Contract is not an arbitration clause. [Para 11) [704-B-C]

3. On the merits of the claims made by the contractor it is noted from
the impugned Award that it contains several Heads. The Arbitrator has
meticulously examined the claims of the contractor under each separate
Heads. There is no reason to interfere except on the rates of interest and G
on the quantum awarded for letting machines of the contractor remaining
idle for the periods mentioned in the Award. The interest awarded by the
Arbitrator at 18% for the pre-arbitration period, for the pendente lite
)
}\e\'\tid and future interest is reduced to 9%. As far as idling charges are
concerned, the Arbitrator bas awarded Rs. 42,000 per day for the period H
.~·
700 SUPREME COURT REPORTS [2007] I S.C.R

A 1.2.94 to 17.12.94 and from 1.6.95 to 31.12.95. On this basis the idling ,, .
charges awarded by the Arbitrator was arrived at Rs. 1.47 crores.
The Award of the Arbitrator is fair and equitable. He has excluded
certain periods from calculations. The delay took place on account of
non-supply of Drawings and Designs and in the meantime the
establishment of the contractor stood standstill. It is suggested to the
B respondent (contractor) for reduction of the awarded amount under this
Head from Rs. 1.47crores to Rs. 1 crore which was accepted. Therefore,
the amount awarded under this Head stands reduced from Rs. 1.47 crores
to Rs. 1 c;rore. [Paras 12, 13] [704-D-H, 705-A-BJ " ..
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 149 of 2007.
c t
From the Final Judgment and Order dated28.l.2005 of the High Court
of Karnataka at Bangalore in M.F .A. No. 1785/2002 (AA).

C.S. Vaidyanathan, Lalit Mohini Bhat, Naveen R. Nath and Ms. Hetu
Arora, with him for the Appellant.
D
K.K. Venugopal, K.G. Raghavan, L.K. Bhushan and Shiraz Contractor
Patodia, for the Respondents. (

The Judgment of the Court was delivered by

E KAPADIA, J. : ·1. Leave granted.

2. Two issues arise for determination in this civil appeal filed by
Krishna Bhagya Jala Nigam Ltd. (for short, 'Jala Nigam') against the decision
of the Division Bench of the Karnataka High Court dated 28.1.2005 in
Miscellaneous First Appeal No.1785 of 2002 dismissing the said appeal
F preferred by Jala Nigam under Section 37(1)(b) of the Arbitration and ;._

Conciliation Act, 1996 (for short, 'the Arbitration Act').

3. The first issue is : whether Jala Nigam could be allowed to raise the
contention, on the facts and circumstances of this case, that Clause 29 of
the Contract (Agreement) is not an arbitration clause and due to want of
G
jurisdiction of the arbitral tribunal to adjudicate upon the claims ma~e by the
contractor (respondent No. I), Award dated 25 .6.2000 published on 14.11.2000
was a nullity.

4. The second issue is regarding the merits of the claims made by the
H contractor.
"
KRISHNA BHAGYA JALA NIGAM LID. "· G. HARISCHANDRA REDDY [KAPADIA, J.) 701

5. The facts giving rise to the above civil appeal are as follows. A
6. On 27.11.93 Agreement bearing No. 41/93 was entered into between
Jala Nigam and the claimant (respondent no.I) concerning construction of
Mulawad Lift Irrigation Scheme. The contract was for 36 months. It was
to be completed by 26.11.96. In the course of execution of the contract, Jala
Nigam entrusted to the contractor, certain extra work vide two supplementary
B
agreements dated 11.6.96 and 7.11.98. The contract was extended up to
31.12.2003. The claimant (contractor) raised disputes, said to have arisen out
of the works entrusted under the contract. By letter dated 23.3.98 the
contractor called upon the Chief Engineer to act as an arbitrator under
Clause 29 of the Contract which is reproduced hereinbelow: c
"Clause 29 - (a) If any dispute or difference of any kind whatsoever
were to arise between the Executive Engineer/Superintending
Engineer and the contractor regarding the following matters namely.

(i) The meaning of the specifications designs, drawings and
D
instructions herein before mentioned,
\
(ii) The quality of workmanship or materials used on the work
and
E
(iii) Any other question, claim, right, matter thing whatsoever, in
any way arising out of or relating to the contract, designs, or
those conditions or failure to execute the same whether
arising during the progress of the work or after the completion,
termination or abandonment thereof the dispute shall, in the
F
first place, be referred to the ChiefEngineer who has jurisdiction
over the work specified in the Contract. The Chief Engineer
shall within a period of ninety days from the date of being
requested by the Contractor to do so, give written Notice of
his decision to the Contractor.
G
(b) Subject to other form of settlement hereafter provided, the
Chief Engineer's decision in respect of every dispute or
difference so referred shall be final and binding upon the
! Contractor. The said decision shall forthwith be given effect
H
7(12 SUPREME COURT REPORTS [2007] I S.C.R

A to the Contractor shall proceed with the execution of the work
with all due diligence.

(c) In case the decision of the Chief Engineer is not acceptable
to the Contractor, he may approach the Law Courts at....(*) for
settlement of dispute after giving due written Notice in this
B regard to the Chief Engineer within a period of ninety days
from the date ofreceipt of this Written Notice of the decision
of the Chief Engineer. r

(d) If the Chief Engineer has given written Notice of his decision
c to the Contractor and no Written Notice to approach the Law
Court has been communicated to him by the Contractor within
a period of Ninety days from receipt of such notice, the
decision shall be final and binding upon the Contractor."

7. By letter dated 26.3.98 the Chief Engineer refused to act as an
D arbitrator on the ground that the contract did not provide for arbitration.
This led the contractor to file C.M.P. No. 26199 under Section I I of the (

Arbitration Act. By order dated 10.9.99 the High Court directed the Chief
Engineer to act as an arbitrator. By the said order the High Court directed
both the parties to file their respective claims and counter claims before the
E arbitrator. By letter dated I2.l I .99 the Arbitrator entered upon the reference.
He fixed the date of appearance of the parties. The Arbitrator gave
necessary directions to both sides to file statements and counter statements.
The contractor placed before the Arbitrator I I claims in all. Jala Nigam filed
its counter statement. Ultimately, on the basis of the evidence produced by
F the parties, the Arbitrator gave his Award on 25.6.2000 and the same was
published on I4.1 l.2000.
,.__ .

G
8. Aggrieved by the A ward, Jala Nigam filed a petition under Section
34(2)(v) of the Arbitration Act before the Principal Civil Judge (Senior
Division) Bijapur vide Arbitration Case No.I of 2001. The Award was
confinned by the said civil court vide Judgment dated I 5. I2.200 I. Aggrieved
-
by the said decision, Jala Nigam carried the matter in first appeal filed under
Section 37(I)(b) of the Arbitration Act to the High Court. Vide impugned
judgment dated 28.1.2005 the appeal stood dismissed. Hence this civil (
appeal.
H
KRISHNABHAGYAJALANIGAM LTD. 1•. G. HARISCHANDRAREDDY [KAPADIA, J.) 703

9. Mr. C.S. Vaidyanathan, learned senior counsel for Jala Nigarh, A
contended that the above-quoted Clause 29 of the Contract was not an
arbitration clause and, therefore, the proceedings before the Arbitrator stood
vitiated for lack of jurisdiction. He contended that the proceedings before
the Arbitrator were without jurisdiction for want of arbitration agreement
which cannot be cured by appearance of the parties, even if there was no
protest or even if there was a consent of Jala Nigam, since consent cannot
B
confer jurisdiction and, therefore, the impugned Award was null and void.
..., Learned counsel submitted that though the plea of "no arbitration clause"
was not raised in the counter statement before the Arbitrator, such a plea
was taken by Jala Nigam in C.M.P. No. 26/99 filed .by the contractor and,
therefore, Jala Nigam was entitled to raise the plea of "no arbitration clause". C
Learned counsel submitted that under the circumstances the courts below
had erred in holding that Jala Nigam had waived its right to object to the
Award on the aforementioned grounds.

10. We do not find any merit in the above arguments. The plea of"no
D
arbitration clause" was not raised in the written statement filed by Jala
Nigam before the Arbitrator. The said plea was not advanced before the
)
civil court in Arbitration Case No. I of2001. On the contrary, both the courts
below on facts have found that Jala Nigam had consented to the arbitration
of the disputes by the Chief Engineer. Jala Nigam had participated in the
arbitration proceedings. It submitted itself to the authority of the Arbitrator. E
It gave consent to the appointment of the Chief Engineer as an Arbitrator.
It filed its written statements to the additional claims made by the contractor.
The executive engineer who appeared on behalf of Jala Nigam did not invoke
Section 16 of the Arbitration Act. He did not challenge the competence of
the arbitral tdbunal. He did not call upon the arbitral tribunal to rule on its F
' >
jurisdiction. On the contrary, it submitted to the jurisdiction of the arbitral
tribunal. It also filed written arguments. It did not challenge the order of
the High Court dated 10.9.99 passed in C.M.P. No. 26/99. Suffice it to say
that both the parties accepted that there was an arbitration agreement, they
proceeded on that basis and, therefore, Jala Nigam cannot be now allowed
to contend that Clause 29 of the Contract did not constitute an arbitration G
agreement.

11. Before concluding on this issue, one clarification needs to be
mentioned. On 26.7 .2005 a three-Judge Bench of this Court has referred the
question involving interpretation of Clause 29 of the Contract to the H
704 SUPREME COURT REPORTS [2007] 1 S.C.R.

A Constitution Bench in the case of Mis. P. Dasaratharama Reddy Complex
v. Government of Karnataka and Another Civil Appeal No. 1586 of 2004.
Placing reliance on the said order, learned counsel for Jala Nigam submitted
that the hearing of this civil appeal be postponed pending disposal of the
above reference by the Constitution Bench. We do not find any merit in
this argument. As stated above, the plea that Clause 29 of the Contract was
B not an arbitration clause, was raised in the present case for the first time only
in Miscellaneous First Appeal No. 1785 of2002 filed under Section 37(1)(b)
of the Arbitration Act before the High Court. As stated above, Jala Nigam, ,.
on the contrary, had consented to the Chief Engineer, acting as an Arbitrator.
For the aforestated reasons and particularly in view of the fact that there has
c been considerable delay in the litigation no useful purpose would be served
by keeping the matter pending in this Court awaiting the decision of the
Constitution Bench. Therefore, on the facts and circumstances of this case
and in view of the conduct of the parties, we hold that Jala Nigam cannot
be allowed to urge that Clause 29 of the Contract is not an arbitration clause.
D
12 On the merits of the claims made by the contractor we find from the
impugned Award dated 25.6.2000 that it contains several Heads. The (
Arbitrator has meticulously examined the claims of the contractor under each
separate Heads. We do not see any reason to interfere except on the rates
of interest and on the quantum awarded for letting machines of the
E contractor remaining idle for the periods mentioned in the Award. Here also
we may add that we do not wish to interfere with the Award except to say
that after economic reforms in our country the interest regime has changed
and the rates have substantially reduced and, therefore, we are of the view
that the interest awarded by the Arbitrator at 18% for the pre-arbitration
p period, for the pendente lite period and future interest be reduced to 9%.

13. As far as idling charges are concerned, the Arbitrator has awarded
Rs.42,000 per day for the period 1.2.94 to 17.12.94 and from 1.6.95 to 31.12.95
excluding the period 18.12.94 to 31.5.95 and from 1.1.96 to 12.11.96. On this
basis the idling charges awarded by the Arbitrator was arrived at Rs.1.47
G crores. · It is contended that the contractor has not led any evidence to show
the existence of the machinery at site and, therefore, he was not entitled to
idling charges. We are of the view that the Award of the Arbitrator is fair
and equitable. He has excluded certain periods from calculations, as
indicated above. We have examined the records. The delay took place on
H account of non-supply of Drawings and Designs and in the meantime the
KRISHNA BHAGY A JALA NIGAM LTD. "· G. HARJSCHANDRA REDDY [KAPADIA, J.) 705

~ establishment of the contractor stood standstill. We suggested to the A
learned counsel for the respondent (contractor) for reduction of the awarded
amount under this Head from Rs.1.4 7 crores to Rs. l crore. Learned counsel
for the respondent fairly accepted our suggestion. We suggested the
aforestated figure keeping in mind the longstanding dispute between the
parties. Therefore, the amount awarded under this Head shall stand reduced
from Rs. l.47 crores to Rs. I crore. B

.., 14. Accordingly the civil appeal stands allowed to the extent indicated
above with no order as to costs.

D.G. Appeal partly allowed. C

_,.