2019 (3) TMI 600 - SC - Indian Laws

Supreme Court strikes down arbitrary arbitration deposit requirement, citing violation of Constitution.

M/s ICOMM TELE LTD. Versus PUNJAB STATE WATER SUPPLY & SEWERAGE BOARD & ANR.

The Supreme Court held that clause 25(viii) of the arbitration agreement, mandating a 10% deposit, was arbitrary and violated Article 14 of the ... Arbitration agreement - Whether the Sub-clause (7) of Clause 25-A of the agreement can be said to be arbitrary or discriminatory and violative of Article 14 of the Constitution of India? Whether the 10% “deposit-atcall” of the amount claimed is in order to avoid frivolous claims by the party invoking arbitration? - Held that:- It is well settled that a frivolous claim can be dismissed with exemplary costs - It is therefore always open to the party who has succeeded before the arbitrator to invoke this principle and it is open to the arbitrator to dismiss a claim as frivolous on imposition of exemplary costs. The important principle established by this case is that unless it is first found that the litigation that has been embarked upon is frivolous, exemplary costs or punitive damages do not follow. Clearly, therefore, a “deposit-at-call” of 10% of the amount claimed, which can amount to large sums of money, is obviously without any direct nexus to the filing of frivolous claims, as it applies to all claims (frivolous or otherwise) made at the very threshold. A 10% deposit has to be made before any determination that a claim made by the party invoking arbitration is frivolous. This is also one important aspect of the matter to be kept in mind in deciding that such a clause would be arbitrary in the sense of being something which would be unfair and unjust and which no reasonable man would agree to. Further, it is also settled law that 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. Also, it is easy to visualize that 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. Deterring a party to an arbitration from invoking this alternative dispute resolution process by a pre-deposit of 10% would discourage arbitration, contrary to the object of de-clogging the Court system, and would render the arbitral process ineffective and expensive. Clause 25(viii) of the notice inviting tender is striked off - appeal allowed. Issues Involved:1. Validity of the arbitration clause requiring a 10% deposit.2. Allegation of the arbitration clause being a contract of adhesion.3. Applicability of Article 14 of the Constitution in contractual matters.4. Judicial scrutiny of tender terms.5. Encouragement of arbitration as an alternative dispute resolution process.Issue-wise Detailed Analysis:1. Validity of the Arbitration Clause Requiring a 10% Deposit:The core issue revolved around the validity of clause 25(viii) of the arbitration agreement, which mandated a 10% 'deposit-at-call' of the claimed amount to avoid frivolous claims. The appellant argued that this clause was arbitrary and created an unfair burden, potentially discouraging legitimate claims. The Supreme Court noted that frivolous claims could be dismissed with exemplary costs, and a mandatory deposit without initial determination of frivolousness was excessive and unjust. The Court highlighted that a claim might be dismissed without being frivolous, and the clause's provision for partial refund even in successful claims was deemed arbitrary. Consequently, the Court struck down clause 25(viii) for being arbitrary and violative of Article 14.2. Allegation of the Arbitration Clause Being a Contract of Adhesion:The appellant contended that the arbitration clause amounted to a contract of adhesion due to unequal bargaining power between the parties. The Court referred to the judgment in Central Inland Water Transport Corpn. v. Brojo Nath Ganguly, which dealt with contracts of adhesion. However, it distinguished this case by noting that the principle of unequal bargaining power does not apply to commercial contracts between businessmen. Therefore, the appellant's argument based on this principle failed.3. Applicability of Article 14 of the Constitution in Contractual Matters:The appellant argued that the arbitration clause violated Article 14 of the Constitution, which guarantees equality before the law. The Court acknowledged that while the clause applied equally to both parties, arbitrariness is a distinct facet of Article 14. The Court emphasized that arbitrariness in state action, including contractual obligations, is subject to judicial scrutiny under Article 14. The Court concluded that clause 25(viii) was arbitrary as it imposed an unreasonable burden without a direct nexus to preventing frivolous claims, thus violating Article 14.4. Judicial Scrutiny of Tender Terms:The Court reiterated that terms of an invitation to tender are generally not open to judicial scrutiny as they fall within the realm of contract, except when they are arbitrary, discriminatory, or actuated by malice. The Court cited previous judgments, including Directorate of Education v. Educomp Datamatics Ltd. and Global Energy Ltd. v. Adani Exports Ltd., to affirm that judicial interference is limited to cases where the terms are wholly arbitrary or discriminatory. The Court found that clause 25(viii) fell within this exception due to its arbitrary nature.5. Encouragement of Arbitration as an Alternative Dispute Resolution Process:The Court underscored the importance of arbitration as an alternative dispute resolution mechanism, aimed at reducing the burden on courts and providing an effective, inexpensive, and expeditious resolution of disputes. The Court noted that any requirement for a pre-deposit could deter parties from opting for arbitration, contrary to the objective of de-clogging the court system. The Court referenced judgments like State of J&K v. Dev Dutt Pandit and Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., which emphasized the need to encourage arbitration. The Court concluded that the 10% deposit requirement was a clog on the arbitration process and struck down clause 25(viii).Conclusion:The Supreme Court struck down clause 25(viii) of the arbitration agreement as arbitrary and violative of Article 14. The remaining parts of clause 25 were unaffected. The judgment of the High Court was set aside, and the appeal was allowed.