A Division bench of the Supreme Court of India (“SC”) in the case of Indian Oil Corporation Limited v. NCC Limited, (Civil Appeal No. 341 of 2022, on July 20, 2022), inter-alia, held that, if the facts are very clear and glaring then at the stage of deciding an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”), the Court can consider the issues such as of (i) accord and satisfaction and (ii) excepted clauses. However, it is always advisable and appropriate that in cases of debatable and disputable facts, the same would be left to the arbitral tribunal.
Facts in Brief: -
1. In 2010, Indian Oil Corporation Limited (“IOCL/Appellant”) floated a tender for civil works and the same was awarded to NCC Limited (“NCCL/Respondent”). General Conditions of Contract (“GCC”) were entered between the parties.
2. The GCC provided that the disputes arising out of a notified claim of NCCL, which are included in the final bill in accordance with the provisions of GCC, shall be referred to arbitration. The GCC also provided that ‘whether or not a Claim sought to be referred to arbitration is a “Notified Claim” in terms of GCC’ shall have to be first decided by General Manager before referring the same to arbitrator.
3. For sake of brevity, as per GCC “Notified Claim” includes (i) the claim by the contractor (here NCCL) towards its entitlement for any extra payment or compensation in respect of the works over and above the amounts due in terms of contract or (ii) dispute regarding validity of deductions made or threatened by IOCL from any ‘Running Account Bill’.
4. There was delay in completion of the civil work. Therefore, NCCL applied for Extension of Time (“EOT”). Whilst such application for extension was pending, NCCL raised its final bill with specific reference to Notified Claims.
5. Subsequently, correspondence was exchanged between the parties for settlement of claims wherein it was indicated to NCCL to revise its final bill and request for EOT would be considered only if it gives up its insistence on notified claims. It is the case of NCCL that it was constrained to issue a letter withdrawing its notified claim. However, while withdrawing the notified claim, NCCL had put two conditions viz. (i) application for EOT to be considered favorably (for entire period) and (ii) price discount not to exceed 4% of contract value.
6. Thereafter, IOCL partially allowed the application for EOT and price discount of 4% was applied for the period for which EOT was not allowed. Accordingly, IOCL disbursed amount as per their calculations. It is NCCL’s case that its ‘Notified Claims’ still hold good as the conditional offer was not accepted by IOCL. NCCL raised the disputes, which were referred to General Manager of IOCL. The General Manager rejected the claim on the ground that there was full and final settlement between the parties.
7. Being aggrieved by the same, NCCL approached the Hon’ble Delhi High Court (“Delhi HC”) under Section 11(6) of the Act. The Delhi High Court allowed the application and appointed an arbitrator to adjudicate the disputes between the parties. Being aggrieved, IOCL filed approached the SC.
IOCL’s Arguments: -
1. Where parties agree to have an arbitration clause, however, consensually agree that certain specified disputes alone will be subject matter of arbitration, then in such a case Section 11(6-A) cannot be invoked with regard to disputes which are ‘excepted’ or ‘excluded’ from the arbitration clause. As there is a restricted arbitration clause, the question of referring ‘excepted’ or ‘excluded’ disputes would not arise.
2. In the present case, the final bill payment had been made to NCCL and accepted by it pursuant to an understanding between the parties by which notified claims were expressly waived. As a result, notified claims cannot be subject matter of dispute.
3. As agreed in the GCC, the disputes concerning scope of arbitration agreement qua notified claims are subject matter of decision of General Manager. Therefore, considering ‘party autonomy principle’, in view of rejection of NCCL’s demand for ‘Notified Claim’ by General Manager, the matter cannot be referred to arbitration.
NCCL’s Arguments: -
1. NCCL withdrew its notified claim under duress. Further, such withdrawal was subject to the conditions (mentioned above) and was in the nature of an offer. Disregarding NCCL’s conditions for withdrawal of notified claim, IOCL made unilateral payment. The decision of General Manager rejecting the demand of NCCL on the ground of full and final payment was erroneous.
2. At the stage of appointment of arbitrator, the scope of intervention by the courts is confined to the examination of the existence of an arbitration agreement. The Courts cannot look into (i) the aspect of ‘accord and satisfaction’ and (ii) whether the claim is excepted.
Decision of the Court: -
1. Following ‘the party autonomy’ principle the Court observed that whether or not a claim sought to be referred to arbitration by the contractor is a Notified Claim’ is specifically excluded from the scope, purview and ambit of arbitration agreement. Thus, unless there is a decision by the General Manager as to whether the claim is notified claim or not, the arbitrator or arbitral tribunal shall have no jurisdiction to entertain such a dispute.
2. In facts and circumstances of this case, the issue/ aspect about ‘accord and satisfaction’ of claims is seriously disputed and is debatable and it cannot be said that it is an open and shut case. Therefore, it is always advisable and appropriate that in cases of debatable and disputable facts, good reasonably arguable case, the aspect with regard to ‘accord and satisfaction’ should be left to the arbitral tribunal.
3. On the issue of ‘excepted clauses’, the Court observed that at the stage of deciding Section 11 application if the facts are very clear and glaring and in view of the specific clauses in the agreement binding between the parties, the Court can decide the question as to whether the dispute is non-arbitrable and/ or it falls within the excepted clauses.
Please find attached a copy of the judgment.
This update has been contributed by Ranjit Shetty (Partner) and Tejas Gokhale (Senior Associate).
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