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.

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