1. Turnkey contract for water and sewerage works — Arbitration clause requiring ten percent pre-deposit of claimed amount — Challenge to validity of deposit condition. (Para 2 , 3 , 4 )
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2019 Supreme(SC) 271
SUPREME COURT OF INDIA
R. F. NARIMAN, VINEET SARAN, JJ.
M/S Icomm Tele Ltd. – Appellant
Versus
Punjab State Water Supply And Sewerage Board And Anr. – Respondent
Civil Appeal No. 2713 of 2019 (Arising Out of SLP (Civil) No. 3307 of 2018)
Decided on : 11-03-2019
Important Points
IMPORTANT POINT
Arbitration is an important alternative dispute resolution process which is to be encouraged because of high pendency of cases in courts and cost of litigation.
Arbitration is an important alternative dispute resolution process which is to be encouraged because of high pendency of cases in courts and cost of litigation.
Subject
Arbitration Law - Arbitration Clause
Act Referred
Headnote
Civil Procedure Code, 1908 – Section 89 – Arbitration and Conciliation Act, 1996 – Section 11 – Arbitration – Work contract – Arbitration is considered to be an alternative dispute resolution process and entry to civil court is sought to be taken away if disputes between parties are covered by arbitration clause – Terms of an invitation to tender are not open to judicial scrutiny as they are in realm of contract unless they are arbitrary, discriminatory, or actuated by malice – 10% “deposit-at-call” of amount claimed is in order to avoid frivolous claims by party invoking arbitration – A frivolous claim can be dismissed with exemplary costs – It is always open to party who has succeeded before Arbitrator to invoke this principle and it is open to Arbitrator to dismiss a claim as frivolous on imposition of exemplary costs – A claim may be dismissed but need not be frivolous – Unless it is first found that litigation that has been embarked upon is frivolous, exemplary costs or punitive damages do not follow – “Deposit-at-call” of 10% of amount claimed which can amount to large sums of money, is without any direct nexus to filing of frivolous claims, as it applies to all claims (frivolous or otherwise) made at very threshold – 10% deposit has to be made before any determination that a claim made by party invoking arbitration is frivolous – Arbitration is an important alternative dispute resolution process which is to be encouraged because of high pendency of cases in courts and cost of litigation – Any requirement as to deposit would certainly amount to a clog on this process – Often a deposit of 10% of a huge claim would be even greater than court fees that may be charged for filing a suit in a civil court – Impugned clause 25(viii) of notice inviting tender struck down. (Paras 8, 9, 20, 21, 23, 24, 27 and 28)
Facts of Case:
Alternative Dispute Resolution (Arbitration). Dispute emanating from work contract. appellant had entered into similar contracts with respondent No. 2 which contained the same arbitration clause. It had addressed letters to respondent No. 2 with regard to Appointment of arbitrator in those matters and sought for waiving 10% deposit fee. After having received no response, appellant had filed a writ petition before High Court of Punjab and Haryana. This writ petition was dismissed stating that such tender condition can in no way be said to be arbitrary or unreasonable.
Findings of Court:
Deterring a party to an arbitration from invoking this alternative dispute resolution process by a pre-deposit of 10% would discourage arbitration, contrary to object of de-clogging Court system and would render the arbitral process ineffective and expensive.
Result : Appeal allowed.
Legal Category Hierarchy
Advocates Appeared:
for the Appellant :Mr. Sandeep Kumar Jha, Advocate
For the Respondent: Mr. Ram Naresh Yadav, AOR
for the Appellant :Mr. Sandeep Kumar Jha, Advocate
For the Respondent: Mr. Ram Naresh Yadav, AOR
Table of Contents
2. Validity of pre-deposit clause — Contract of adhesion and unequal bargaining power versus commercial nature of contract and non-discriminatory application of the clause. (Para 5 , 6 )
3. State instrumentalities must act reasonably under Article 14 — Pre-deposit for all claims lacks nexus to preventing frivolous litigation and creates an unjust barrier to arbitration. (Para 15 , 17 , 18 , 23 , 24 , 25 , 26 , 27 )
4. Mandatory pre-deposits for invoking arbitration are arbitrary and violative of Article 14 if they act as a clog on the dispute resolution process. (Para 23 , 27 )
5. Arbitration clause requiring pre-deposit struck down as arbitrary — High Court judgment set aside — Appeal allowed. (Para 28 )
6. To what extent are the terms of an invitation to tender open to judicial scrutiny?
Terms of an invitation to tender are generally not open to judicial scrutiny as they are in the realm of contract, unless they are found to be arbitrary, discriminatory, or actuated by malice. (Para 9 , 10 )
7. Does the doctrine of unequal bargaining power apply to commercial contracts between businessmen and the State?
No, the principle that contracts of adhesion between private persons and the State are liable to be set aside for being unconscionable does not apply where both parties are businessmen and the contract is a commercial transaction. (Para 11 , 13 )
8. Does Article 14 of the Constitution apply to the contractual obligations of the State or its instrumentalities?
Yes, once the State or its instrumentality is a party to a contract, it has a legal obligation to act fairly, justly, and reasonably, as required by Article 14. (Para 15 )
9. Is a state action only violative of Article 14 if it is discriminatory?
No, arbitrariness is a separate and distinct facet of Article 14. An action that is per se arbitrary denies equal protection of law, even without a comparative evaluation between two persons. (Para 17 , 18 )
10. Is a mandatory pre-deposit for invoking arbitration legally sustainable to prevent frivolous claims?
Such a requirement is arbitrary if it applies to all claims at the threshold without a determination of frivolity, as it lacks a direct nexus to the goal and clogs the arbitration process. (Para 23 , 27 )
JUDGMENT
R.F. Nariman. J.
Leave granted.
2. In 2008, the Punjab State Water Supply & Sewerage Board, Bhatinda issued notice inviting tender for extension and augmentation of water supply, sewerage scheme, pumping station and sewerage treatment plant for various towns mentioned therein on a turnkey basis. On 25.9.2008, the appellant company, which is involved in civil/electrical works in India, was awarded the said tender after having been found to be the best suited for the task. On 16.1.2009, a formal contract was entered into between the appellant and respondent No. 2. It may be mentioned that the notice inviting tender formed part and parcel of the formal agreement. Contained in the notice inviting tender is a detailed arbitration clause. In this matter, we are concerned with clause 25(viii) which is set out as follows:-
"viii. It shall be an essential term of this contract that in order to avoid frivolous claims the party invoking arbitration shall specify the dispute based on facts and calculations stating the amount claimed under each claim and shall furnish a "deposit-at-call" for ten percent of the amount claimed, on a schedule bank in the name of the Arbitrator by his official designation who shall keep the amount in deposit till the announcement of the award. In the event of an award in favour of the claimant, the deposit shall be refunded to him in proportion to the amount awarded w.r.t the amount claimed and the balance, if any, shall be forfeited and paid to the other party."
3. The appellant had entered into similar contracts with respondent No. 2 which contained the same arbitration clause. It had therefore addressed letters to respondent No. 2 with regard to appointment of arbitrator in those matters and sought for waiving the 10% deposit fee. After having received no response, the appellant had filed a writ petition, being Civil Writ Petition No. 18917 of 2016, before the High Court of Punjab and Haryana. This writ petition was dismissed by a judgment dated 14.9.2016 stating that such tender condition can in no way be said to be arbitrary or unreasonable.
4. On 8.3.2017, the appellant approached the High Court of Punjab and Haryana challenging the validity of this part of the arbitration clause by filing Civil Writ Petition No. 4882 of 2017. The High Court in the impugned judgment merely followed its earlier judgment and dismissed this writ petition as well.
5. Learned counsel appearing on behalf of the appellant has argued that the arbitration clause contained in the tender condition amounts to a contract of adhesion, and since there is unfair bargaining strength between respondent No. 2 and the appellant, this clause ought to be struck down following the judgment in Central Inland Water Transport Corpn. v. Brojo Nath Ganguly, (1986) 3 SCC 156. He has also argued that arbitration being an alternative dispute resolution process, a 10% deposit would amount to a clog on entering the aforesaid process. Further, claims may ultimately be found to be untenable but need not be frivolous. Also, frivolous claims can be compensated by heavy costs. Further, even in the event that the award is in favour of the claimant, what can be refunded to him is only in proportion to the amount awarded and the rest is to be forfeited. This would also be a further arbitrary and highhanded action on the part of respondent No. 2.
6. Learned counsel appearing on behalf of the respondents has argued that there is no infraction of Article 14 in the present case. It is clear that clause 25(viii) would apply to both the parties equally, and as this is so, the said sub-clause cannot be struck down as being discriminatory. Further, the principle contained in Central Inland Water Transport Corpn. (supra) cannot possibly be applied to commercial contracts. Also, in similar cases, this Court has not entertained this kind of a challenge.
7. Having heard learned counsel for both parties, it will be seen that the 10% "deposit-at-call" before a party can succ
