In South Delhi Municipal Corporation vs. SMS AAMW Tollways Private Ltd., 2018 SCC OnLine SC 2523, the Supreme Court of India decided the issue of whether a clause in question provides for arbitration or expert determination (departmental appeal). The Court observed that an arbitration should be in the nature of a judicial enquiry involving hearing of both the parties and since the impugned clause in the instant case provided bilateral right of reference, the Court held that the parties had not agreed to refer their dispute for arbitration. Detailed case analysis given below:
The Dispute amongst the parties culminated from two distinct Agreements i.e. the State Support Agreement (‘SSA’) entered into between National Highway Authority of India (‘NHAI’) and its Concessionaire for collecting toll tax from a particular entry point (‘A’) in Delhi and Bilateral Agreement (‘BA’) entered into between the Appellant (‘SDMC’) and the Respondent (‘SMS’) in lieu of the tax collected from all entry points of Delhi. Although, SMS was not a party of SSA, yet collection of certain type of toll tax (Entry Toll Tax) was agreed to be collected by the Concessionaire for A who will then pass it on to SMS after deducting Service Charge. In a nutshell, under BA, SMS was obliged to pay a cap amount of Rs 26 Million to SDMC per month including the Entry Toll Tax passed on to it by Concessionaire for A. Later, Toll Plaza at A was dismantled and since SMS was obliged to pay a cap of Rs 26 Million to SDMC per month including the Entry Toll Tax from A, the additional cost falls on to SMS.
SMS sent a notice of arbitration to SDMC under the SSA. The Competent Officer of SDMC raised a demand in response. Being dissatisfied, SMS later filed an appeal against the decision of the Competent Officer of SDMC under Clause 16.3 of BA. the SDMC intimated to SMS that since there is no arbitration clause in existence between the parties, the arbitration is not acceptable.
SMS filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 (‘Act’) before the Delhi High Court to appoint an arbitrator which was allowed by the Court appointing an arbitrator. This order of the High Court was assailed before the Supreme Court in the present case.
“16. DISPUTE RESOLUTION
16.1 Except where otherwise provided in the Agreement, all questions and disputes in any way arising out of or relating to the Agreement shall be dealt with as mentioned below.
16.2 In the event the Contractor considers any work demanded of it as being outside the requirements of the Agreement, or disputes any record or decision given in writing by the Competent Officer in any matter in connection with or arising out of the Agreement, to be unacceptable, it shall promptly within  days request the Competent Officer in writing to give his instructions or decision in respect of the same. Thereupon, the Competent Officer shall give his written instructions or decision within a period of  days from the receipt of the Contractor’s letter.
16.3 If the Competent Officer fails to give his instructions or decision in writing within the aforesaid period or if the Contractor is dissatisfied with the instructions or decision of the Competent Officer, the Contractor may, within  days of receipt of the Competent Officer’s instructions or decision, appeal to the Commissioner who shall afford an opportunity to the Contractor to be heard, if the latter so desires, and to offer evidence in support of its appeal. The Commissioner shall give his decision in writing within  days of receipt of Contractor’s appeal which shall be acceptable to the Contractor.”
Applicable Legal Principles
Section 11(6) of the Act
Section 11 – Appointment of arbitrators
(6) Where, under an appointment procedure agreed upon by the parties,-
(a) a party fails to act as required under that procedure; or
(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court] to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.
SMS relied on a paragraph in Russell on Arbitration to submit that Clause 16.3 does not provide for an appeal to the Commissioner but provides for arbitration by the Commissioner. The said paragraph is reproduced below:
“If it appears from the terms of the agreement by which a matter is submitted to a person’s decision, that the intention of the parties was that he should hold an enquiry in the nature of a judicial enquiry and hear the respective cases of the parties and decide upon evidence laid before him, then the case is one of an arbitration. The intention in such case is that there shall be a judicial inquiry worked out in a judicial manner. On the other hand, there are cases in which a person is appointed to ascertain some matter for the purpose of preventing differences from arising, not of setting them when they have arisen.”
The question before the Court was whether Clause 16.3 which provides for an appeal really provides for an arbitration and therefore whether the High Court was entitled to appoint an Arbitrator under Section 11(6) of the Act.
The Court noticed that from a plain reading of Clause 16 one can see that it provides for the resolution of disputes at two stages. First, by the Competent Officer of the SDMC vide Clause 16.2 followed by the Commissioner of the Municipal Corporation vide Clause 16.3
With regard to Clause 16.3 under which an application to appoint an Arbitrator under Section 11(6) of the Act was made, the Court noted that it is described as an appeal in the said Clause since the SMS is entitled to take recourse to appeal, if the SMS is dissatisfied with the decision of the Competent Officer including a possible failure to decide within the prescribed period i.e. within 30 days. However, the Court also noted that the right of appeal is restricted to SMS only (and not to SDMC) in case SMS is dissatisfied and that too upon a failure to obtain redressal under Clause 16.2. The Court concluded that the language of Clause 16.3 does not lend itself to any other construction other than that it provides for an appeal against the decision of a Competent Officer rendered under Clause 16.2.
On the passage cited by SMS from Russell on Arbitration, the Court observed, that the passage clearly contemplates that an arbitration should be an enquiry in the nature of a judicial enquiry i.e. an enquiry which involves hearing both the parties. The appeal involved in the present case clearly does not involve hearing both the parties. On the contrary, the authority which decides the appeal is in a sense the other party. The Commissioner is a higher officer than the Competent Officer in the same organization. It is, therefore, clear that the appeal to the Commissioner is not intended to provide a forum for a decision by an impartial adjudicator but is only intended to ascertain some matter for the purpose of preventing differences from arising and not for settling them after they have arisen. It is thus clear that the Commissioner is not intended to be an arbitrator, as his jurisdiction cannot be invoked by both parties.
The Court concluded that in the present case, under Clause 16 of BA, only the party dissatisfied by the order of the Competent Officer can approach the Commissioner. It is, therefore, not possible to hold that the proceedings before the Commissioner constitutes as an arbitration. To reach this conclusion, the Court relied on K.K. Modi v. K.N. Modi 1998 (3) SCC 573, State of Orissa v. Damodar Das, 1996 (2) SCC 216, State of U.P. v. Tipper Chand AIR 1980 SC 1522.
Therefore, the Court set aside the Order of the Delhi High Court of appointing an arbitrator under Section 11(6) of the Act.
It is appropriate to discuss the case of M/s. P. Dasaratharama Reddy Complex vs. Government of Karnataka and Ors., AIR 2014 SC 168 which was decided on the similar issue under similar facts an circumstances. While dealing with similar inter-departmental dispute redressal mechanism as provided in the Clause 16 in BP in the instant case, the Supreme Court inter alia held that the clause by which any disputes or differences with respect to specifications etc had to be first referred to the Chief Engineer or the designated officer of the department could not be treated as arbitration clause. The Chief Engineer or the designated officer was not an independent authority or person. On the contrary, he had overall supervision and charge of the execution of the work in that case. He was not required to hear the parties or take the evidence, oral or documentary. He was not invested with the power to adjudicate upon the rights of the parties to the dispute or difference, and his decision was subject to the right of the aggrieved party to seek relief before the court. The decision of the Chief Engineer could be considered to be non-adjudicatory, subject to the right of the aggrieved party to seek remedy. Thus, the sense of judicial inquiry or judicial determination echoed back in M/s. P. Dasaratharama (Supra) as well which is further discussed by the Court in the instant case as well placing reliance on Russell on Arbitration.
Further, the distinction between an expert determination and arbitration has been spelt out in Russell on Arbitration, 21 Edn., in the following words:
“Many cases have been fought over whether a contract’s chosen form of dispute resolution is expert determination or arbitration. This is a matter of construction of the contract, which involves an objective enquiry into the intentions of the parties. First, there are the express words of the disputes clause. If specific words such as ‘arbitrator’, ‘arbitral tribunal’, ‘arbitration’ or the formula ‘as an expert and not as an arbitrator’ are used to describe the manner in which the dispute resolver is to act, they are likely to be persuasive although not always conclusive….”
The Supreme Court in Bharat Bhushan Bansal v. U.P. Small Industries Corporation Limited, Kanpur (1999) 2 SCC 166 while noting the distinction between a ‘Preventer of disputes’ and an ‘adjudicator of disputes’ extracted with approval the following illustration from Hudson on ‘Building and Engineering Contracts’ (11th Edition, Volume II, para 18.067) to show that it was not an arbitration clause as the duties of the Engineer were administrative and not judicial
the engineer “[s]hall be the exclusive judge upon all matters relating to the construction, incidents, and the consequences of these presents, and of the tender, specifications, schedule and drawings of the contract, and in regard to the execution of the works or otherwise arising out of or in connection with the contract, and also as regards all matters of account, including the final balance payable to the contractor, and the certificate of the engineer for the time being, given under his hand, shall be binding and conclusive on both parties.”
The Court held that the clause in question was not an arbitration clause and that the duties of the Engineer were administrative and not judicial.
Therefore, in my view, an expert, who is agreed by the parties to adjudicate any dispute amongst the parties by adopting some dispute resolution method can be regarded as arbitration when such expert is empowered to hold a judicial inquiry, which includes rendering a decision after taking into account relevant evidence and submissions of the parties.
Position in England and Wales
The English case of British Telecommunications plc v SAE Group Inc  EWHC 252 was decided on similar lines.
In that case, one of the Appendix of the underlying supply contract contained a clause providing for the appointment of an expert to arbitrate all disputes arising under the contract. The Clause is reproduced below:
“17.3 The Third Party (whether appointed under Clause 17.1 or 17.2 above) shall act as an expert whose decision (including as to costs) shall except in the case of manifest error be final and binding upon the parties hereto.”
When the dispute arose, an expert arbitrator was appointed by the Institution of Electrical Engineers. The other party then applied to the English High Court for a declaration that the expert lacked jurisdiction to arbitrate the dispute, as there was no binding arbitration agreement between the parties. While refuting to hold such proceedings as arbitration, Justice Ramsey held
“(1) The reference to the person acting “as an expert” in Clause 17.3 is a clear reference to the dispute being determined by person acting in that capacity which is inconsistent with arbitration.”
It is prudent to cite Justice Longmore (as he then was) in David Wilson Homes Ltd v. Survey Services Ltd  BLR 267 as cited in British Telecommunication (Supra) who have emphasised the importance of Judicial Inquiry to determine whether the proceedings arbitration or expert determination
“13. Since it is just a matter of construction, not much assistance can be gained from authority, but the question whether an agreement is an agreement to arbitrate or merely to value as an expert has occasionally had to be decided, and Mr Bowdery has referred us to one such case, Re Carus-Wilson v. Green (1887) 18 QBD 7. ……. The passage to which Mr Bowdery referred us is at page 9, where Lord Esher MR said this:
“The question here is whether the umpire was merely a valuer substituted for the valuers originally appointed by the parties in a certain event, or arbitrator. If it appears from the terms of the agreement by which a matter is submitted to a person’s decision, that the intention of the parties was that he should hold an inquiry in the nature of a judicial inquiry, and hear the respective cases of the parties, and decide upon evidence laid before him, then the case is one of an arbitration. The intention in such cases is that there shall be a judicial inquiry worked out in a judicial manner. On the other hand, there are cases in which a person is appointed to ascertain some matter for the purpose of preventing differences from arising, not of settling them when they have arisen, and where the case is not one of arbitration but of a mere valuation. There may be cases of an intermediate kind, where, though a person is appointed to settle disputes that have arisen, still it is not intended that he shall be bound to hear evidence or arguments. In such cases it may be often difficult to say whether he is intended to be an arbitrator or to exercise some function other than that of an arbitrator. Such cases must be determined each according to its particular circumstances.”
14. For my own part, it seems to me that the clause in the present case falls fairly and squarely into Lord Esher’s first category, where the intention is that the inquiry is to be in the nature of a judicial inquiry and that the Queen’s Counsel is to hear the respective cases of the parties and decide on evidence before him. That is what Queen’s Counsel are normally expected to do when matters are referred to them, and all the more so if the formality of the position is such that, if there is disagreement as to the identity of the Queen’s Counsel, he is to be appointed by the Chairman of the Bar.”
Position in Singapore
In my view, the difference in expert determination and arbitration is most appropriately decided by Justice V K Rajah (as he then was) in Evergreat Construction Co Pte Ltd v Presscrete Engineering Pte Ltd  1 SLR(R) 634 wherein he propagated an ‘Acid Test’ to ascertain this factor. The case involved an independent assessor appointed to assess the respective claims of the plaintiff main contractor and the defendant subcontractor. In that case, the independent assessor was given liberty to determine all issues of procedure for the assessment and his decisions and findings on procedure, liability and quantum were to be final. The assessor having rendered decisions and findings that were unfavourable to the plaintiff, the plaintiff then applied to set aside his findings on the basis that the assessor had failed to consider several items. Rajah J disallowed the application and held
34 Both arbitration and expert awards, however, have the same fundamental and common foundation – contract law. The law upholds and recognises such agreements and the consequential awards because of the sanctity it accords to contractual arrangements. I can do no better than to echo the observations of Lord Mustill in Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd  AC 334 at 353:
[T]hose who make agreements for the resolution of disputes must show good reasons for departing from them, …
An expert’s decision can be set aside on the basis of fraud or partiality. Beyond that it is probably correct to say that only a breach of an expert’s terms of appointment would suffice to set aside his decision. Errors of fact or law will not vitiate an award if the expert acts within his contractual mandate. In contrast, there is a statutory mechanism albeit a very limited one for the review of both domestic and international arbitration awards.
Justice Rajah further explained that the distinction between an expert and an arbitrator is not a question of form or of terminology but a question of substance governed by the parties’ contractual arrangements. The critical distinction is that the terms of an arbitrator’s appointment oblige him to act solely on the material which the parties place before him and to so in accordance with strict rules of procedure. The expert is not bound by the fair hearing branch of the rules of natural justice:
“35 At the end of the day, the modern distinction between an expert and arbitrator does not lie purely in whether the office holder is performing a judicial, quasi-judicial or purely discretionary function. The essential difference is in the duties and/or functions the terms of appointment impose on an appointee. The labelling of an appointment as “arbitrator” or “expert” is not in itself always conclusive. It is the precise contractual arrangement and the ensuing obligations of the office holder that is, in the final analysis, paramount. Is he obliged to act solely on the evidence before him and the submissions made to him or does he have a discretion to adopt an inquisitorial function? Does he have complete discretion over the applicable rules of procedure? If he has the sole discretion to arrive at his determination without being hamstrung by procedural and evidential intricacies or niceties, it is most unlikely that the court will view the proceedings to be arbitration proceedings. An expert is permitted to inject into the process his personal expertise and to make his own inquiries without any obligation to seek the parties’ views or consult them. An expert is also not obliged to make a decision on the basis of the evidence presented to him. He can act on his subjective opinion; that is the acid test.
36 There are two fundamental aspects or facets of natural justice that generally apply to dispute resolution. The first is that a decision maker should be disinterested in the outcome. The second is due process; both parties have the right to be heard on all the issues that are to be determined. This second facet of natural justice does not apply to an expert’s determination. This is the single most significant distinction between expert determination and litigation/arbitration.
Thus, in addition to the variable of judicial inquiry followed by the Indian Supreme Court and the English Commercial High Court, the Singapore High Court went a step ahead to add the duties and/or functions which the terms of appointment imposes on an appointee to be the criteria to ascertain whether the mode agreed by the parties is one of expert determination or arbitration.