Facts of the Case

The applicant had been awarded a contract to construct an ITI building at Patli Kuhal, District Kullu, for Rs. 2,93,06,338, to be completed in twelve months under a letter of award dated 17.08.2016. Disputes arose over several heads of claim, including balance payment for unmeasured work, prolongation costs computed under the Hudson Engineering Formula, wrongful deduction of royalty, release of security, interest, and — as one item among these — "GST on the claimed amount as per applicable rates of 18%". The applicant sought appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, invoking the arbitration clause (Clause 25) in the agreement.

The respondent resisted the application, contending that a slip had been affixed over Clause 25 in the agreement, effectively cancelling the arbitration clause, so no valid arbitration agreement existed between the parties.

Issues Involved

  1. Whether a valid arbitration agreement existed between the parties given the disputed slip affixed over Clause 25 of the agreement.
  2. Whether this threshold question should be decided by the High Court at the Section 11(6) stage or left to the arbitrator.

Petitioner's Arguments

  • The original, typed agreement contained a clear arbitration clause at Clause 25; the slip purportedly cancelling it bore no initials or signatures of either party, unlike every other page of the agreement.
  • A case for appointment of an arbitrator under Section 11(6) had been made out.

Respondent's Arguments

  • A slip had been affixed over Clause 25 of the agreement, cancelling the arbitration clause altogether, so there was no arbitration agreement to invoke.

Court Order / Findings

  • The Court held that, prima facie, the original Clause 25 (without the slip) would govern the parties, since the slip bore no signatures or initials while every other page of the agreement did.
  • Relying on Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., (2020) 2 SCC 455 and Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, the Court held that where the validity of an arbitration agreement cannot be conclusively determined at the prima facie stage, the matter should be referred to arbitration, leaving the question of jurisdiction to the arbitrator.
  • The Court appointed a sole Arbitrator, directing that the question of whether a valid arbitration agreement exists be decided by the Arbitrator as a preliminary issue.

Important Clarification

GST here was simply one head of monetary claim in a construction-payment dispute, not a matter of GST law interpretation — the Court did not examine, and was not asked to examine, any GST question. The substantive point of law is about arbitration agreements: where a threshold dispute over the existence of an arbitration clause cannot be resolved on a prima facie basis, courts will refer the matter to the arbitrator rather than deciding it themselves.

Sections Involved

  • Arbitration and Conciliation Act, 1996 — Section 11(6) (appointment of arbitrator), Section 11(8) and Section 12(1) (disclosure)

Decision – In Favour of

Allowed in favour of the applicant to the extent of appointment of an arbitrator; the threshold dispute over the arbitration clause's validity, and hence all the underlying claims including the GST claim, were left open for the Arbitrator to decide.

Case Details

  • Court: High Court of Himachal Pradesh, Shimla
  • Case No.: Arb. Case No. 62 of 2023
  • Coram: Chief Justice M.S. Ramachandra Rao
  • Date of Order: 11.08.2023

Link to Download the Order

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