In BSNL v. Motorola (MANU/SC/2008/1274, Civil Appeal No. 5645/2008), the Supreme Court clarified the position of law with respect to the interpretation of “excepted matters” in arbitration agreements. The Court was concerned with interpreting an arbitration clause which stipulated, “In the event of any question, dispute or difference arising under this agreement or in connection there-with (except as to the matters, the decision to which is specifically provided under this agreement), the same shall be referred to the sole arbitration…” The agreement between the parties went on to make a provision for liquidated damages for certain breaches.
A dispute arose between the parties, and it was of such a nature that the compensation would be in accordance with the clause providing for liquidated damages. On this basis, it was argued that the dispute was of such a nature as would fall under the “excepted matters”, because of the specific provision in the agreement. Therefore (it was contended) there was no valid arbitration agreement between the parties in respect of the particular dispute.
The Supreme Court however rejected this argument. It was held that there is a distinction between computation of liquidated damages, and fixation of liability. For any computation of liquidated damages to take place, the liability must be established in the first place. The “excepted matters” were those for which a decision was specifically provided in the agreement. A decision was provided in relation to determining liquidated damages – this, however, went to computation of amount of damages and not to the fixation of liability. Therefore, it was held that a dispute as to whether or not a breach has occurred would be within the purview of the arbitration clause.
In reaching this conclusion, the Supreme Court distinguished its earlier judgment in Vishwanath Sood v. Union of India (MANU/SC/0646/1989) on the ground that in that case, the agreement had provided for a complete machinery for settlement of disputes, including a machinery for fixation of the liability. Thus, the position seems to be that “excepted matters” clauses will be construed strictly; and the Courts will prefer an interpretation narrowing the scope of “excepted matters”.
The Court also touched upon another important issue. The clause in the agreement providing for the computation of damages provided that the appellant would calculate the amount of damages in accordance with the agreed formula. The appellant had contended that the quantum of liquidated damages decided by the appellant, even if it is exorbitant and contrary to the formula, would be final and could not be challenged. The Supreme Court rejected this argument as well, saying that such an argument would mean that the agreement was contrary to Section 28 (agreement in restraint of legal proceedings is void) and Section 74 (compensation for breach of contract where penalty is stipulated) of the Indian Contract Act.
In this connection, it is worth noting that although Section 28 does allow for an exception in the case of arbitration agreements, a provision stating that a certain person shall compute damages in accordance with a formula cannot be regarded as an ‘arbitration’ proceeding. In K.K. Modi v. K.N. Modi (AIR 1998 SC 1297), the Supreme Court had made clear the distinction between an arbitration and an expert determination – the provision relating to the computation of damages in accordance with a given formula would be a ‘determination’ and not an ‘arbitration’.