Laxmi Civil Engineering Services Ltd. & Ors vs Gail (India) Limited

S.No.,Name of Contractor,Amount to be paid (INR)

1.,M/s Awasthi Traders,"Â Rs. 88,88,181/-

2.,M/s K. R. Engineers,"Â Rs. 9,86,686/-

3.,M/s Sai Builders,"Â Rs. 10,44,089/-

4.,M/s Laxmi Civil Engineering Services Pvt. Ltd.,"Â Rs. 1,94,76,326/-

5.,"Retained from the Final Bill. (Final Bill amount cleared fo

Rs.2,33,26,149/-. However, Rs.2,32,26,149/- was released by

GAIL)","r Rs. 1,00,000/-

Mr Lahoti, learned counsel appearing for the petitioners contended that there is no dispute as to the existence of the Arbitration Agreement",,

(Arbitration Clause) and the same would be binding amongst the parties. He contended that the said clause would also cover the disputes with the,,

Sub-Contractors (petitioner nos. 2 to 4).,,

He submitted that the Sub-Contractors (petitioner nos. 2 to 4 ) are also parties to the Contract for, essentially, three reasons. First, he submitted",,

that the Definition of the term ‘Contractor’ under the General Conditions of Contract (GCC) also include ‘assignees’. He stated that,,

petitioner no.1 had assigned a part of the Contract to the Sub-Contractors and therefore, they were parties to the Arbitration Agreement.",,

Second, he submitted that the Contract (GCC and SCC) contained several clauses, which governed the rights and obligations of the Sub-",,

Contractors and therefore, it was not open for GAIL to contend that an Arbitration Agreement did not exist between them â€" GAIL and the Sub-",,

Contractors. In particular, he referred to Clause no. 43.4 and Clause no. 82.1 of the GCC.",,

Third, he submitted that the Sub-Contractors (petitioner nos. 2 to 4) were appointed as Sub-Contractors with the approval of GAIL and EIL and,",,

they had therefore, accepted that a part of the work relating to the Project would be executed by them. Thus, it was implicit that they were accepted",,

as parties to the Contract. He stated that it was not open for GAIL to accept the work executed by Sub-Contractors in terms of the Contract and,,

exclude them from the Arbitration Agreement. He further contended that payments were made directly by GAIL to the Sub-Contractors and,,

therefore, it is not open for GAIL to now resile from the Arbitration Agreement.",,

He also referred to the decisions of the Supreme Court in Chloro Controls India (P) Ltd. V. Severn Trent Water Purification Inc. and Others:,,

(2013) 1 SCC 641 and Ameet Lalchand Shah v. Rishabh Enterprises: (2018) 15 SCC 678, in support of his contention.",,

He also countered the contention that since GAIL had made allegations of fraud against petitioner no.1, the disputes could not be referred to",,

Arbitration. He referred to the decision of a Coordinate Bench of this Court in Rajesh Gupta v. Smt. Mohit Lata Sunda & Ors.: Arb. P. No. 494/2019,,

decided on 27.05.2020 and the decision of the Supreme Court in Avitel Post Studioz Limited and Others v. HSBC PI Holdings (Mauritius) Limited:,,

(2020) SCC OnLine SC 656, in support of his contention.",,

He stated that the petitioners had attempted to resolve the disputes amicably and had sent several letters, however, the said disputes were not",,

addressed. He pointed out that in view of the above, the petitioners had specifically mentioned in the notice invoking Arbitration that they are not",,

willing to proceed with Conciliation.,,

Mr Chaturvedi, the learned counsel appearing for GAIL submitted that there was no Arbitration Agreement between petitioner nos. 2 to 4 and",,

GAIL and therefore, the present petition was liable to be dismissed. He further contended that it was incumbent upon the parties to take recourse to",,

Clause 52 of the SCC and to refer the disputes for Conciliation prior to invoking the Arbitration Agreement. And, since petitioner no.1 had not done so,",,

the present petition was pre-mature.Lastly, he submitted that there were allegations of fraud, which cannot be adjudicated by the Arbitral Tribunal.",,

Reasons and Conclusion,,

The GCC includes an Arbitration Clause (Clause 107). The SCC also includes an Arbitration Clause (Clause 43) that replaces Clause 107 of the,,

GCC. Clause 43.0 of SCC is set out below:-,,

“43.0 ARBITRATION,,

43.1 Clause No.1 07.0 of GCC pertaining to Arbitration shall be replaced by the following:-,,

43.1.1 All disputes, controversies, or claims between the parties (except in matters where the decision of the Engineer-in-Charge is deemed to be final",,

and binding) which cannot be mutually resolved within a reasonable time shall be referred to Arbitration by sole arbitrator.,,

43.1.2 The Employer/Consultant shall suggest a panel of three independent and distinguished persons to the other party (Bidder/Contractor/,,

Supplier/Buyer as the case may be) to select any one among them to act as the sole Arbitrator.,,

43.1.3 In the event of failure of the other party to select the sole Arbitrator within 30 days from the receipt of the communication suggesting the panel,,

of arbitrators, the right of selection of sole Arbitrator by the other party shall stand forfeited and the Employer/Consultant shall have discretion to",,

proceed with the appointment of the sole Arbitrator. The decision of the Employer/Consultant on the appointment of Sole Arbitrator shall be final and,,

bidding on the parties.,,

43.1.4 The award of the Sole Arbitrator shall be final and binding on the parties and unless directed/awarded otherwise by the Sole Arbitrator, the cost",,

of arbitration proceedings shall be shared equally by the Parties. The arbitration proceeding shall be in English language and the venue shall be at New,,

Delhi, India.",,

43.1.5 Subject to the above, the provisions of (Indian) Arbitration & Conciliation Act, 1996 and the rules framed there under shall be applicable.",,

43.1.6 All matters relating to this contract are subject to the exclusive jurisdiction of the Courts situated in the State of Delhi (India).,,

43.1.7 Bidders/ Supplier/ Contractors may please note that the Arbitration & Conciliation Act, 1996 was enacted by the Indian Parliament and is",,

based on United Nations Commission on International Trade Law (UNCITRAL, model law), which were prepared after extensive consultation with",,

Arbitral Institutions and centres of International Commercial Arbitration.The United Nations General Assembly vide resolution 31/98 adopted the,,

UNCITRAL Arbitration rules on 15 December 1976.â€​,,

There is no dispute that the Arbitration Agreement, as embodied in Clause 43 of the SCC, exists between petitioner no.1 and GAIL and the",,

subject disputes between them are liable to be referred to Arbitration. The principal controversy to be addressed is as to whether the Sub-Contractors,,

are also parties to the said Arbitration Agreement. In other words, the principal question to be addressed is whether an Arbitration Agreement exists",,

between the Sub-Contractors and GAIL.,,

Admittedly, the Sub-Contractors are not signatories to any agreement with GAIL. They claim to be parties to the Arbitration Agreement,",,

essentially, on three grounds. First, it is contended that the Sub-Contractors are claiming through petitioner no.1 and therefore, they must also be",,

considered parties to the Contract between petitioner no.1 and GAIL. Second, it is contended that the Contract provides for several obligations to be",,

performed by the Sub-Contractors and therefore, the Sub-Contractors cannot be denied the benefit of the Arbitration Clause under the Contract.",,

Third, it is contended that since GAIL had accepted that the works would be executed by the Sub-Contractors (petitioner nos.2 to 4) and had made",,

payments directly to them, it was implicit that it has accepted them as parties to the Arbitration Agreement.",,

Mr Lahoti relied upon Clause 1.1.2 of the GCC in support of his contention that the expression “Contractor†also includes its representatives,",,

successors and permitted assigns. It is claimed that petitioner no.1 had assigned the works under the Contract to the Sub-Contractors and therefore,",,

they would fall within the definition of the term “Contractorâ€​ under the Contract.,,

Clause 1.1.2 of the GCC reads as under:-,,

“1.1.2 The “CONTRACTOR†means the person or the persons, firm or Company or corporation whose tender has been accepted by the",,

EMPLOYER and includes the CONTRACTOR’s legal Representatives his successors and permitted assigns.â€​,,

Undoubtedly, the term “Contractor†would also include permitted assigns. Therefore, if petitioner no.1 had assigned the Contract to any third",,

party with the permission of GAIL, the said party would undoubtedly fall within the definition of the term “Contractor†and consequently, would",,

also be a party to the Arbitration Agreement. However, the contention that the Sub-Contractors are assignees of the Contract, is unmerited. There is",,

a material difference in engaging Sub-Contractors to execute the works, which are to be executed by a Contractor under a Contract and assigning a",,

Contract to a Sub-Contractor. The Work Orders placed by petitioner no.1 on the Sub-Contractors (petitioner nos.2 to 4) specify the works to be,,

executed by them respectively and do not amount to petitioner No. 1 assigning the Contract to them. The assignment of a contract would entail,,

assigning all rights and obligations under the contract to the assignee and the assignee would step into the shoes of the assignor. This is not a case,,

where the Sub-Contractors (petitioner nos.2 to 4) have stepped into the shoes of petitioner no.1 as a ‘Contractor’ under the Contract. Their,,

obligations to execute the works are to the other contracting party, namely, petitioner no.1 and not GAIL. Further, the obligation to pay for the works",,

executed by the Sub-Contractors rests with petitioner no.1 and not GAIL.,,

Mr Lahoti heavily relied on Clause 1(a) of the Work Orders placed by petitioner no.1 on the Sub-Contractors. The opening sentence of Clause,,

1(a) of all the Work Orders are similar and use the word “assignsâ€. However, the same has to be understood in the context of the said clause. It",,

would be relevant to refer to Clause 1(a) of any one of the Work Orders placed on the Sub-Contractors to examine that context.,,

Clause 1(a) of the Work Order placed on Sail Builders (petitioner no.2) is extracted below:-,,

“Scope of Work a) The Company hereby assigns work of civil work consisting of excavation, disposal, filling, shuttering, fabrication, fixing and",,

other work required for satisfactory completion of work for Raw Water Treatment Plant at GAIL Pata for Petrochemical Complex-II on the fixed,,

rates, without any escalation agreed & acceptable by the Sub-Contractor.â€​",,

It is clear from the plain reading of the aforesaid clause that the said clause does not import to be an assignment of the Contract entered into,,

between GAIL and petitioner no.1. The word ‘assign’ is used in conjunction with the word ‘work’ and not the Contract. It merely means,,

that petitioner no.1 had engaged Sai Builders (petitioner no.2) to execute the work of “excavation, disposal, filling, shuttering, fabrication, fixing and",,

other workâ€. Thus, the contention that the Sub-Contractors are “permitted assignees†of petitioner no.1 is misplaced. And, they are not covered",,

under the scope of the definition of the term “Contractorâ€​, as defined under Clause 1.1.2 of the GCC.",,

The contention that the Contract also provides for various obligations to be performed by the Sub-Contractors is equally erroneous. None of the,,

clauses in the GCC or SCC make a reference to fulfillment of any obligations by the Sub-Contractors towards GAIL. Mr Lahoti had referred to two,,

clauses of the GCC â€" Clause 43.4 and 82.1 â€" to illustrate his point. The said Clauses are set out below:-,,

“43.4 The EMPLOYER shall indemnify and save harmless the CONRACTOR from any loss on account of claims against CONTRACTOR for,,

the contributory infringement of patent rights arising out and based upon the claim that the use of the EMPLOYER of the process included in the,,

design prepared by the EMPLOYER and used in the operation of the plant infringes on any patent right. With respect to any subcontract entered into,,

by CONTRACTOR pursuant to the provisions of the relevant clause hereof, the CONTRACTOR shall obtain from the SUB-CONTRACTOR an",,

undertaking to provide the employer with the same patent protection that CONTRACTOR is required to provide under the provisions of this clause.,,

82.1 For works like water-proofing, acid and alkali resisting materials, pre-construction soil treatment against termite or any other specialized works",,

etc. the CONTRACTOR shall invariably engage SUB-CONTRACTORS who are specialists in the field and firms of repute and such a SUB-,,

CONTRACTOR shall furnish guarantees for their workmanship to the EMPLOYER, through the CONTRACTOR. In case such a SUB-",,

CONTRACTOR firm is not prepared to furnish a guarantee to the EMPLOYER, the CONTRACTOR shall give that guarantee to the EMPLOYER",,

directly.â€​,,

It is apparent from a plain reading of Clause 43.4 that it casts an obligation on the Contractor (petitioner no.1) to obtain from the Sub-Contractors,",,

an undertaking to provide the same patent protection that the Contractor is required to provide. Obviously, if such an undertaking is provided, the same",,

would be enforced on its own terms. The Arbitration Clause under the GCC or the SCC cannot be assumed to be included as a term of the said,,

undertaking unless it is specifically incorporated. Similarly, Clause 82.1 also does not constitute any contract between GAIL and the Sub-Contractor. It",,

casts an obligation on the Contractor to obtain guarantees in respect of certain specialized works from any sub-contractor that it employs. The said,,

guarantees would also be binding only on the terms as executed by such specialized sub-contractors, in favour of GAIL. Clause 82.1 also expressly",,

provides that the said guarantees would be through the Contractor.,,

The contention that GAIL had made payments directly to the Sub-Contractors establishes the existence of a separate contract between GAIL and,,

the Sub-Contractors, is also erroneous. The payments made by GAIL to the Sub-Contractors were made at the instance of petitioner no.1 and on its",,

behalf.,,

Mr Lahoti also referred to the decisions of the Supreme Court in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. (supra),,

and Ameet Lalchand Shah v. Rishabh Enterprises (supra), in support of his contention that in such circumstances, non-signatories to an Arbitration",,

Agreement can also be considered as parties to the Arbitration Agreement.,,

The reliance placed on the said decision is misplaced. In Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. (supra), the",,

Supreme Court had explained that non-signatories or third parties could be subjected to Arbitration without their prior consent in certain exceptional,,

circumstances. In that case, the Supreme Court was examining a composite transaction, which was effected through various subsidiary agreements. It",,

is in that context, the Supreme Court had observed as under:-",,

“73. A non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The",,

court will examine these exceptions from the touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of",,

the subject-matter and the agreement between the parties being a composite transaction. The transaction should be of a composite nature where,,

performance of the mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements, for",,

achieving the common object and collectively having bearing on the dispute. Besides all this, the court would have to examine whether a composite",,

reference of such parties would serve the ends of justice. Once this exercise is completed and the court answers the same in the affirmative, the",,

reference of even non-signatory parties would fall within the exception afore-discussed.â€​,,

The non-signatories may also be construed as parties to the Arbitration Agreement in certain exceptional circumstances where it is found that the,,

non-signatory is a part of a single economic entity, which also includes the signatory to the Arbitration Agreement. In certain cases, courts have also",,

compelled non-signatories to arbitrate where it found such non-signatories to be alter ego of signatories.,,

The present case indicates that petitioner no.1 had entered into separate contracts with the Sub-Contractors (petitioner nos.2 to 4) for execution of,,

certain works. Such agreements were entered into, on a principal-to-principal basis. The contention that such contracts must be construed as a single",,

composite transaction between GAIL and the petitioners, is misconceived. GAIL is not a party to the respective contracts entered into between",,

petitioner no.1 and the Sub-Contractors. It had merely granted its approval to petitioner no.1 to engage the Sub-Contractors as Sub-Contractors in,,

terms of its Contract.,,

The reliance on the decision in the case of Ameet Lalchand Shah v. Rishabh Enterprises (supra), is equally misplaced. In that case, there were",,

four separate agreements entered into between Rishabh Enterprises with three separate companies. Two agreements were with one company and the,,

remaining two agreements were with two different companies. While, three of the agreements contained an Arbitration Clause, one of the agreements",,

did not. The court found that there was one principal agreement (Equipment Lease Agreement) and the remaining three agreements were ancillary,,

agreements. The court also found that parties to the agreements were also the parties to the main agreement â€" Equipment Lease Agreement and all,,

four agreements were interconnected. It is in that context, the court held that the appellant’s application for referring the parties to Arbitration",,

could not be rejected. It is material to note that there was no dispute as to the existence of an Arbitration Agreement between the parties as the main,,

Agreement included an Arbitration Clause. The question was whether disputes pertaining to an ancillary agreement, which was also between some of",,

the parties to the main Agreement could be referred to Arbitration. The decision in that case is wholly inapplicable in the facts of the present case as,,

there is no Arbitration Agreement between GAIL and the Sub-Contractors.,,

In view of the above, this Court is unable to accept that an Arbitration Agreement exists between GAIL and the Sub-Contractors (petitioner nos.2",,

to 4) and GAIL cannot be compelled to arbitrate with them.,,

The next contention to be addressed is whether the present petition is premature as petitioner no.1 has not exhausted the remedy of Conciliation in,,

terms of Clause 52 of the SCC. It would be necessary to refer to Clause 52 of the SCC for addressing the aforesaid contention. The said clause is set,,

out below:-,,

“52.0 DISPUTE RESOLUTION,,

52.1 Dispute resolution and relevant clauses in General Conditions of Contract (GCC) stand modified to the following extent:,,

52.1.1 GAIL (India) Limited has framed the Conciliation Rules 2010 in conformity with supplementary to Part - III of the Indian Arbitration and,,

Conciliation Act 1996 for speedier, cost effective and amicable settlement of disputes through conciliation. A copy of the said rules made available on",,

GAIL's web site www.gailonline.com for reference. Unless otherwise specified, the matters where decision of the Engineer-in-Charge is deemed to",,

be final and binding as provided in the Agreement and the issues/disputes which cannot be mutually resolved within a reasonable time, all disputes shall",,

be settled in accordance with the Conciliation Rules 2010.,,

52.1.2 Any dispute(s)/difference(s)/issue(s) of any kind whatsoever between/ amongst the Parties arising under/out of/in connection with this contract,,

shall be settled in accordance with the aforesaid rules.,,

52.1.3 In case of any dispute(s)/difference(s)/issue(s), a Party shall notify the other Party (ies) in writing about such a dispute(s)/ difference(s)",,

issue(s) between / amongst the Parties and that such a Party wishes to refer the dispute(s)/difference(s)/issue(s) to Conciliation. Such Invitation for,,

Conciliation shall contain sufficient information as to the dispute(s)/difference(s)/issue(s) to enable the other Party (ies) to be fully informed as to the,,

nature of the dispute(s)/difference(s)/issue(s), the amount of monetary claim, if any, and apparent cause(s) of action.",,

52.1.4 Conciliation proceedings commence when the other Party(ies) accept(s) the invitation to conciliate and confirmed in writing. If the other Party,,

(ies) reject(s) the invitation, there will be no conciliation proceedings.",,

52.1.5 If the Party initiating conciliation does not receive a reply within thirty days from the date on which he/she sends the invitation, or within such",,

other period of time as specified in the invitation, he/she may elect to treat this as a rejection of the invitation to conciliate. If he/she so elects, he/she",,

shall inform the other Party(ies) accordingly.,,

52.1.6 Where Invitation for Conciliation has been furnished, the Parties shall attempt to settle such dispute(s) amicably under Part-III of the Indian",,

Arbitration and Conciliation Act, 1996 and GAIL (India) Limited Conciliation Rules, 2010. It would be only after exhausting the option of Conciliation",,

as an Alternate Dispute Resolution Mechanism that the Parties hereto shall go for Arbitration. For the purpose of this clause, the option of",,

'Conciliation' shall be deemed to have been exhausted, even in case of rejection of 'Conciliation' by any of the Parties.",,

52.1.7 The cost of Conciliation proceedings including but not limited to fees for Conciliator(s), Airfare, Local Transport, Accommodation, cost towards",,

conference facility etc. shall be borne by the Parties equally.,,

52.1.8 The Parties shall freeze claim(s) of interest, if any, and shall not claim the same during the pendency of Conciliation proceedings. The",,

Settlement Agreement, as and when reached/agreed upon, shall be signed between the Parties and Conciliation proceedings shall stand terminated on",,

the date of the Settlement Agreement.,,

It is clear from the language of Clause 52 of the SCC that whilst the parties have an option to resort to Conciliation in accordance with the,,

Conciliation Rules, 2010 as framed by GAIL, it is not mandatory that the parties do so. Sub-Clause 52.1.3 of the SCC makes it amply clear that any",,

party wishing to resolve disputes through Conciliation has to notify the disputes or differences or issues to the other party and unequivocally,,

communicate its desire to refer such disputes, differences or issues to Conciliation. Sub-Clause 52.1.5 of the SCC also makes it amply clear that the",,

other party may expressly reject any proposal to refer disputes to Conciliation. Further, in the event, the party initiating Conciliation does not receive a",,

response from the other party within a period of thirty days, it is entitled to treat the same as a rejection of the invitation to conciliate.",,

Whilst Sub-clause 52.1.6 of the SCC expressly provides that the parties would proceed for Arbitration only after exhausting the option of,,

Conciliation as an Alternate Dispute Resolution mechanism; it also clarifies that the option of Conciliation would be deemed to have been exhausted,,

even in cases where any of the parties reject Conciliation.,,

In the present case, the petitioner in their notice dated 03.12.2019 invoking Arbitration had unequivocally stated that they have rejected the",,

proposal for Conciliation.,,

In view of the above, there is no merit in GAIL’s contention that the notice of invocation of Arbitration or, the present petition, is premature.",,

The contention that disputes between petitioner no.1 and GAIL are not arbitrable as GAIL has made an allegation of fraud is unsustainable. In N.,,

N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd and Ors.: 2021 SCC OnLine SC 13, the Supreme Court had observed as under:",,

Mere allegations of fraud simplicitor are not a sufficient ground to decline reference to arbitration. Parties may be referred to arbitration where,,

allegations of fraud pertain to disputes between parties inter se, and have no implication for third parties. The courts may, however, refuse to make a",,

reference to arbitration only in those cases where there are very serious allegations of fraud, which make a virtual case of criminal offence of fraud,",,

or where allegations of fraud are so complicated, that it becomes absolutely essential that such complex issues be decided only by the civil courts on",,

appreciation of voluminous evidence. This would also include those cases where there are serious allegations of forgery or fabrication of documents,",,

or where fraud is alleged with respect to the arbitration clause itself, or where the fraud alleged is of such a nature that it permeates the entire",,

contract, including the agreement to arbitrate. The judicial authority must carefully sift the materials for the purpose of determining whether the",,

defence is merely a pretext to avoid arbitration.,,

The ground on which fraud was held to be non-arbitrable earlier was that it would entail voluminous and extensive evidence, and would be too",,

complicated to be decided in arbitration. In contemporary arbitration practice, arbitral tribunals are required to traverse through volumes of material in",,

various kinds of disputes such as oil, natural gas, construction industry, etc. The ground that allegations of fraud are not arbitrable is a wholly archaic",,

view, which has become obsolete, and deserves to be discarded. However, the criminal aspect of fraud, forgery, or fabrication, which would be visited",,

with penal consequences and criminal sanctions can be adjudicated only by a court of law, since it may result in a conviction, which is in the realm of",,

public law,,

It is relevant to note that in the present case there is no allegation of fraud that goes to the root of the matter. The allegation that petitioner no.1,,

had assigned the Contract without permission and had concealed the same does not give rise to a dispute that cannot be considered and decided in,,

Arbitration.,,

There is no dispute as to the existence of an Arbitration Agreement between GAIL and petitioner no.1; the petitioner admittedly, invoked the",,

Arbitration Clause; and petitioner no.1 and GAIL have not concurred on appointment of an Arbitrator. In the circumstances, the Court considers it",,

apposite to appoint an Arbitrator to adjudicate the disputes between petitioner no.1 and GAIL.,,

In view of the above, this Court considers it apposite to allow the present petition. This Court proposes to appoint Dr. Ram Kishan Yadav, Retired",,

District & Sessions Judge (Mobile No.- 9910384623) as the Sole Arbitrator to adjudicate the disputes between GAIL and petitioner no.1 falling within,,

the scope of the Arbitration Clause 43.0 of the SCC.,,

The learned Arbitrator may furnish a disclosure as required under Section 12(1) of the A&C Act before the next date of hearing.,,

List on 19.03.2021.,,