2009 (2) TMI 926 - SC - Indian Laws

Mandatory 7% deposit requirement for arbitration proceedings upheld as valid and reasonable contractual provision

S.K. Jain Versus State of Haryana and Ors.

SC dismissed appeal challenging mandatory deposit requirement of 7% of claimed amount for arbitration proceedings. Court held unequal bargaining power ... Failure to deposit the mandatory amount for proceedings before Arbitration Tribunal - Reasonableness of amount as 7% of total amount claimed - Unequal bargaining power of the parties - Payment in respect of allotted work - Prescription under Sub-clause (7) of Clause 25-A of the agreement was in conflict with the provisions of Section 31(8) read with Section 38 - It was submitted that the costs involved cannot be more than Rs. 20 crores and, therefore, the demand of Rs. 1.81 crores which is 7% of the total amount claimed is wholly arbitrary, unreasonable and capricious - HC dismissed the Writ Petition. HELD THAT:- It is to be noted that the plea relating to unequal bargaining power was made with great emphasis based on certain observations made by this Court in Central Inland Water Transport Corporation Ltd. and Anr. v. Brojo Nath Ganguly and Anr.[1986 (4) TMI 271 - SUPREME COURT]. The said decision does not in any way assist the appellant, because it has been clearly stated that the concept of unequal bargaining power has no application in case of commercial contracts. A bare perusal of the Sub-section (8) of Section 31 and Section 38, clearly shows that the provision is to operate in the absence of agreement with regard to cost. It cannot be pressed into service to get over Sub-clause (7) of Clause 25-A. The stand taken by the appellant is squarely answered by what has been stated by this Court in Assistant Excise Commissioner and Ors. v. Issac Peter and Ors.[1994 (2) TMI 294 - SUPREME COURT] held that in case of contracts freely entered into with the State, like the present ones, there is no room for invoking the doctrine of fairness and reasonableness against one party to the contract (State), for the purpose of altering or adding to the terms and conditions of the contract, merely because it happens to be the State. In such cases, the mutual rights and liabilities of the parties are governed by the terms of the contracts (which may be statutory in some cases) and the laws relating to contracts. It has been submitted by ld Counsel for the appellant that there should be a cap in the quantum payable in terms of Sub-clause (7) of Clause 25-A. This plea is clearly without substance. It is to be noted that it is structured on the basis of the quantum involved. Higher the claim, the higher is the amount of fee chargeable. There is a logic in it. It is the balancing factor to prevent frivolous and inflated claims. If the appellants' plea is accepted that there should be a cap in the figure, a claimant who is making higher claim stands on a better pedestal than one who makes a claim of a lesser amount. Appeal is clearly without merit, deserves dismissal which we direct. Issues Involved:1. Legality of Sub-clause (7) of Clause 25-A of the agreement.2. Applicability of Sections 31(8) and 38 of the Arbitration and Conciliation Act, 1996.3. Allegation of unequal bargaining power.4. Doctrine of fairness and reasonableness in contracts involving the State.5. Cap on the quantum payable under Sub-clause (7) of Clause 25-A.Issue-wise Detailed Analysis:1. Legality of Sub-clause (7) of Clause 25-A of the agreement:The appellant challenged the validity of Sub-clause (7) of Clause 25-A, which mandated a security deposit of 7% of the total claim for arbitration. The High Court dismissed the writ petition, upholding the clause's legality. The Supreme Court noted that the clause was a part of the agreement and must be honored as per the contract's terms. The court emphasized the importance of adhering to the clear language of the contract, as established in Central Bank of India Ltd. v. Hartford Fire Insurance Co. Ltd., where it was stated that the court must give effect to the plain meaning of the words used in the contract.2. Applicability of Sections 31(8) and 38 of the Arbitration and Conciliation Act, 1996:The appellant argued that Sub-clause (7) of Clause 25-A conflicted with Sections 31(8) and 38 of the Act, which deal with the costs of arbitration and deposits. However, the court clarified that these sections apply in the absence of an agreement regarding costs. Since Sub-clause (7) was part of the agreement, it took precedence over the statutory provisions. The court asserted that the provisions of the Act could not be used to override the explicit terms of the contract.3. Allegation of unequal bargaining power:The appellant contended that the clause was a result of unequal bargaining power, citing Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly. The court dismissed this argument, stating that the concept of unequal bargaining power does not apply to commercial contracts. The court reiterated that the terms of a contract freely entered into must be honored, regardless of the parties' bargaining power.4. Doctrine of fairness and reasonableness in contracts involving the State:The appellant invoked the doctrine of fairness and reasonableness, arguing that the State should not impose unreasonable terms. The court referred to Assistant Excise Commissioner and Ors. v. Issac Peter and Ors., which held that the doctrine of fairness cannot be used to alter the terms of a contract. The court emphasized that contracts with the State are governed by their terms and the laws relating to contracts, and the State is not obligated to ensure the profitability of such contracts.5. Cap on the quantum payable under Sub-clause (7) of Clause 25-A:The appellant suggested that there should be a cap on the amount payable under Sub-clause (7). The court found this argument without merit, explaining that the clause's structure based on the claim's quantum serves as a balancing factor to prevent frivolous and inflated claims. The court noted that higher claims naturally entail higher fees, which is logical and fair.Conclusion:The Supreme Court dismissed the appeal, upholding the legality and enforceability of Sub-clause (7) of Clause 25-A. The court affirmed that the terms of the contract must be respected, and statutory provisions could not override explicit contractual agreements. The allegations of unequal bargaining power and the invocation of the doctrine of fairness were rejected, emphasizing the sanctity of commercial contracts.