TaxTMI 
TaxTMI 
2023 (11) TMI 406
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....erland and local Indian address at B3/61, 1st Floor, Safdarjung Enclave, Delhi - 110029. 3. The respondent is a wholly owned corporation of the Government of Uttarakhand having its registered office at Maharani Bagh, GMS Road, Dehradun, Uttarakhand, India and is engaged in the business of operating hydro power plants in the State of Uttarakhand. 4. The petitioner entered into a contract with the Uttarakhand Project Development and Construction Corporation Limited (hereinafter referred to as "UPDCC") for "Providing consultancy services and preparation of modified comprehensive and bankable Detailed Project Report of Arakot Tiuni Hydro Electric Project on river Pabar in district Uttarkashi of Uttarakhand" dated 25.10. 2019 (Tender Reference No. 01/DGM/UPDCC/2018-19) (hereinafter referred to as, 'the Contract' or 'the Project'). The Project was valued at Rs. 1,39,45,000/- (Rupees One Crore Thirty-Nine Lac Forty-Five Thousand only) (hereinafter referred to as the "Contract Value"). The petitioner was to commence work on the date of the execution of the Contract, i.e., 25.10.2019 and complete the work within 24 months, i.e., by 25.09.2021. 5. The Schedule A to Clause 5 of the S....
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....he Claim in sufficient detail to permit verification; and viii) details of the amount claimed and how it has been calculated. Xxx xxx xxx CLAUSE-55: ARBITRATION: (a) All question and disputes relating to the meaning of the specification design, drawing and instructions herein and as to the quality of workmanship or materials used on the work or as to any other question claim, right, matter or thing, whatsoever in any way arising out of or relating to the contract, designs, drawings, specification, estimates instructions, orders or these condition or otherwise concerning the works or the execution or failure to execute the same, whether arising during the progress of the work or after the cancellation, termination, completion or abandonment thereof, shall be conducted in accordance with the provisions of the Arbitration and Conciliation Act, 1996 or any statutory modification or re-enactment thereof and the rules made the under and for the time being in force, shall apply to the arbitration proceedings. However, the Party initiating the arbitration claim shall have to deposit 7% of the arbitration claim in the shape of Fixed Deposit Receipt as sec....
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.... Sarvaria, District & Sessions Judge (Retired), Mobile No. 9910384642, as the Sole Arbitrator for the claims raised by the Claimant. The Respondent is requested to intimate its confirmation for the aforementioned nominee or provide an alternative name for appointment of the Ld. Sole Arbitrator, who shall be appointed only by mutual consent after the Claimant's written approval. 28. The Respondent is requested to intimate its approval to the nominee proposed by the Claimant, within 15 (fifteen) days of the receipt of this Notice, failing which the Claimant will exercise all rights under applicable law for the commencement of arbitration proceedings." 9. It is the case of the petitioner that instead of appropriately responding to the aforesaid notice of arbitration, the respondent issued a letter dated 09.05.2022, terminating the Contract alleging non-compliance of work and nonfulfilment of the contractual obligation. 10. In such circumstances referred to above, the petitioner has preferred the present application for appointment of an arbitrator invoking Section 11(6) of the Act 1996. SUBMISSIONS ON BEHALF OF THE PETITIONER 11. Mr. Sidhant Goel, the learned coun....
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....aforesaid context, he strongly relied upon the decisions of this Court in the cases of Iron & Steel Co. Ltd. v. Tiwari Road Lines reported in (2007) 5 SCC 703, National Highways Authority of India and Another v. Bumihiway DDB Ltd. (JV) and Others reported in (2006) 10 SCC 763 and Yashwith Constructions (P)Ltd. v. Simplex Concrete Piles India Ltd. and Another reported in (2006) 6 SCC 204. 18. He submitted that the respondent cannot be said to have failed to act as required under the prescribed procedure. He invited the attention of a three- Judge Bench of this Court to a decision in the case of S.K. Jain v. State of Haryana and Another reported in (2009) 4 SCC 357, wherein a similar clause requiring a security deposit of certain percentage of the claim amount was held to be valid. He argued that the reliance on the decision of this Court in the case of ICOMM Tele Limited (supra) by the petitioner is completely misconceived as the relevant arbitration clause therein was quite differently worded vis-a-vis the pre-deposit clause provided in the case of S.K. Jain (supra). 19. He submitted that in the absence of any clause to the contrary, the security deposit is refundable by virt....
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....a binding precedent in view of the decision of this Court in State of West Bengal and Others v. Associated Contractors reported in (2015) 1 SCC 32. 23. In such circumstances referred to above, the learned counsel appearing for the respondent prayed that there being no merit in the petition, the same be rejected. ANAYLSIS 24. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the following issues fall for the consideration of this Court: (i) Whether the dictum as laid down in ICOMM Tele Limited (supra) can be made applicable to the case in hand more particularly when Clause 55 of the General Conditions of Contract provides for a pre-deposit of 7% of the total claim for the purpose of invoking the arbitration clause? (ii) Whether there is any direct conflict between the decisions of this Court in S.K. Jain (supra) and ICOMM Tele Limited (supra)? (iii) Whether this Court while deciding a petition filed under Section 11(6) of the Act 1996 for appointment of a sole arbitrator can hold that the condition of pre-deposit stipulated in the arbitration clause as provided in the Contract is violative ....
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...."Who Decides Arbitrability?" can be crystallised as under: 154.1. Ratio of the decision in Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] on the scope of judicial review by the court while deciding an application under Sections 8 or 11 of the Arbitration Act, post the amendments by Act 3 of 2016 (with retrospective effect from 23-10-2015) and even post the amendments vide Act 33 of 2019 (with effect from 9-8-2019), is no longer applicable. 154.2. Scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted. 154.3. The general rule and principle, in view of the legislative mandate clear from Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of "second look" on aspects of non-arbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act. 154.4. Rarely ....
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....nt exists or the disputes/subject-matter are not arbitrable, the application under Section 8 would be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary and not a mini trial... xxx xxx xxx 138...On the other hand, issues relating to contract formation, existence, validity and non-arbitrability would be connected and intertwined with the issues underlying the merits of the respective disputes/claims. They would be factual and disputed and for the Arbitral Tribunal to decide. 139. We would not like to be too prescriptive, albeit observe that the court may for legitimate reasons, to prevent wastage of public and private resources, can exercise judicial discretion to conduct an intense yet summary prima facie review while remaining conscious that it is to assist the arbitration procedure and not usurp jurisdiction of the Arbitral Tribunal. Undertaking a detailed full review or a long-drawn review at the referral stage would obstruct and cause delay undermining the integrity and efficacy of arbitration as a dispute resolution mechanism. Conversely, if the ....
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....ns reported in (2021) 5 SCC 705 and B and T AG v. Ministry of Defence reported in 2023 SCC OnLine SC 657, arbitration was refused as the claims of the parties were demonstrably timebarred. 30. In the case on hand, we are not concerned with the issue relating to the arbitrability of the dispute. It is not even the case of the respondent that the dispute is ex facie non-arbitrable. The case put up by the respondent is that there is definitely an arbitrable dispute and the same should be referred to the arbitral tribunal, however, the petitioner should abide by Clause 55 of the Contract. 31. In the case on hand, we are concerned first with the validity of the arbitration clause which provides for 7% pre-deposit of the total claim for the purpose of invoking arbitration and secondly, the discretion vested with the Principal Secretary/Secretary (Irrigation) to appoint a sole arbitrator. RE: ISSUE NOS. 1 AND 2 32. Before, we proceed to answer the issues framed by us, we must look into few decisions referred to by us as aforesaid. S.K. JAIN V. STATE OF HARYANA 33. In S.K. Jain (supra), the challenge was to an order passed in a writ petition filed by the appellant, wherei....
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....r contained various clauses; one amongst the same being clause 29 which pertained to arbitration in case any dispute arose between the parties and reads thus: "29. Except as otherwise provided in this contract all questions and disputes relating to the meaning of the specifications, drawing and instructions hereinbefore mentioned and as to thing (sic anything) whatsoever, in any way arising out or relating to the contract, designs, drawings, specifications, estimates concerning the works or the execution or failure to execute the same, whether arising during the progress of the work or after the completion or abandonment thereof shall be referred to the City Engineer in writing for his decision, within a period of 30 days of such occurrence. Thereupon the City Engineer shall give his written instructions and/or decisions within a period of 60 days of such request. This period can be extended by mutual consent of the parties. Upon receipt of written instructions of decisions, the parties shall promptly proceed without delay to comply with such instructions or decisions. If the City Engineer fails to give his instructions or decisions in writing within a period of 6....
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....ove 2% of the amount claimed subject to a minimum of Rs 3000" (Emphasis supplied) 37. The relevant findings recorded in Rajesh Constructions Co. (supra) are as under: "20. Clause 29 specifically stipulates, as indicated herein earlier, that if any dispute arises between the parties, the party seeking invocation of the arbitration clause, shall first approach the Chief Engineer and on his failure to arbitrate the dispute, the party aggrieved may file an appeal to MPL Com, failing which, the Corporation shall constitute an Arbitration Board to resolve the disputes in the manner indicated in clause 29. However, before doing so, the party invoking arbitration clause is required to furnish security of a sum to be determined by the Corporation. 21. In this case, admittedly, the security has not been furnished by the respondent to the Corporation. We, in fact, asked Mr Sharma, appearing on behalf of the respondent to ascertain on the date of the hearing of the appeal, whether the security deposit was made or not. On instruction, Mr Sharma informed us that such security has not yet been deposited. Such being the position even today, we hold that the obligation of....
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....ivolous 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 "depositat- call" for ten per cent 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 with reference to the amount claimed and the balance, if any, shall be forfeited and paid to the other party." (Emphasis supplied) 39. 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 25.09.2008, the appellant company, which was 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 16.01.2009, a formal contract was entered into between the appellant and respondent No. 2 therein. 40. ....
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....he amount claimed is in order to avoid frivolous claims by the party invoking arbitration. It is well settled that a frivolous claim can be dismissed with exemplary costs. ... 21. 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. xxx xxx xxx 23. 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 per cent 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 per cent 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 u....
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....rnative Dispute Resolution Process by pre-deposit of certain percentage would discourage arbitration. This would run contrary to the object of de-clogging the court system and would render the arbitral process ineffective and expensive. FEW DECISIONS OF THE HIGH COURTS ON THE SUBJECT 43. Lite Bite Foods Pvt. Ltd. v. Airports Authority of India reported in 2020 SCC OnLine Ker 4736, Nature of the Clause: "5.15. Dispute Resolution ....The Concessionaire by means of a written application can seek appointment of an Arbitrator and Authority would appoint such an Arbitrator within 30 days of receipt of the application, subject to fulfilling, the pre-requisites for appointment of the Arbitrator as laid hereunder:- i. The case shall be referred to the Sole Arbitrator as per AA1 delegation of powers in vogue subject to the condition that the Concessionaire shall have to deposit the disputed amount with AA1 as condition precedent and the consent shall have to be obtained from the concessionaire for acceptance of the recommendations of Arbitrator before making reference to the Arbitrator for adjudication of dispute." (Emphasis supplied) 44. The r....
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.... while appointing an arbitrator in an application filed under Section 11(6) of the Act 1996. 46. The Assan Co-Op. L & C Society v. Haryana Vidyut Prasaran Nigam Ltd., ARB-127-2019 (Section 11 Petition) and CWP-13539-2021 (Civil Writ Petition) Date of Order: 03.112021 Forum: High Court of Punjab and Haryana (Single-Judge) Nature of the Clause: "Clause 25A of the Contract (Annexure P-1) reads as under:- "If any question, dispute, difference of opinions whatsoever arises in any way connected with or arising out of instrument for meaning or operation of any part thereof or the rights, duties or liabilities of either party, including the termination of the contract by either party and correctness thereof at any stage whatsoever it shall be referred to arbitration of MD/Chief Engineer of HVPNL or his nominee not below the rank of Superintending Engineer subject to the following conditions:- xxx xxx xxx 7. In case the party invoking the arbitration is the contractor, the reference for arbitration shall be maintainable only after the contractor furnishes to the satisfaction of Engineering-In Charge a case security fee deposited @ 3% of the total amoun....
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....ought fit to follow the dictum as laid in S.K. Jain's case being a decision rendered by a Bench of three Judges. 49. Garg and Company v. State of Haryana & Ors., CWP Nos. 21840 of 2020, 21857 of 2020 and 21858 of 2020 (O&M) (Civil Writ Petitions) Date of Order : 08.04.2022 Forum: High Court of Punjab and Haryana (Single-Judge Bench) Nature of the Clause: "33(7). It is also a term of this arbitration agreement that where the party invoking arbitration is the contractor, no reference for Arbitrator shall be maintainable unless the contractor furnishes to the satisfaction of the Executive Engineer of the work, a security deposit of a sum determined according to details given below and the sum so deposited shall, on the termination of the arbitration proceedings, be adjusted against the cost, if any, awarded by the Arbitrator against the claimant party and the balance remaining after such adjustment, in the absence of any such cost being awarded the whole of the sum will be refunded to him within one month from the date of the award: Sr. No. Amount Claims Rate of Security Deposit i. For claims below Rs. 10,000/ 2% of amount claimed ii. For clai....
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....led till date." (Emphasis Supplied) 51. In the aforesaid decision of the Punjab and Haryana High Court, both the decisions of this Court i.e., ICOMM Tele Limited (supra) as well as S.K. Jain (supra) were looked into and the Court thought fit to follow the dictum as laid in S.K. Jain (supra). 52. Brij Gopal Construction Co. Pvt. Ltd. v. Haryana Shehri Vikas Pradhikaran, CWP-14587-2022 (O&M) (Civil Writ Petition) Date of Order: 02.08.2022 Forum: High Court of Punjab and Haryana (Single-Judge) Nature of the Clause: "25(A)(vii) It is also a term of this arbitration agreement that where the party invoking arbitration is the contractor, no reference for Arbitrator shall be maintainable unless the contractor, furnishes to the satisfaction of the Engineer In charge of the work, a security deposit of a sum determined according to details given below and the sum so deposited shall, on the termination of the arbitration proceedings, be adjusted against the cost, if any, awarded by the Arbitrator against the claimant party and the balance remaining after such adjustment or whole sum in the absence of any such cost being awarded the whole of the sum will be refunde....
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....and ultimately, the Court followed the dictum as laid down in S.K. Jain (supra). 55. Bathinda Railway Transhipment Cooperative L&C Society Ltd. v. Punjab Mandi Board & Ors., Civil Writ Petition No. 28981 of 2019 (O&M) Date of Order : 27.03.2023 Forum: High Court of Punjab and Haryana (Division Bench) Nature of Clause: "8. ... 25(viii) It shall be an essential term of this contract that in order to avoid frivolous claims, the party invoking arbitration shall specify the disputes based upon 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 scheduled bank in the name of the Arbitrator/Chairman of the Arbitral Tribunal, 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 with respect to the amount claimed and the balance, if any, shall be forfeited and paid to the other party." (Emphasis supplied) 56. The relevant observations from the Judgment are as under: "10. From a perusal o....
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.... or to which the public premises [Eviction of Unauthorized Occupants] Act and the rules framed there under which are now enforced or which may hereafter come into force are applicable), shall, in the first instance, be referred to a Dispute Resolution Committee (DRC) setup at the airports, for which a written application should be obtained from the party and the points clearly spelt out. In case the dispute is not resolved within 45 days of reference, then the case shall be referred to sole arbitration of a person to be appointed by the Chairman/Member of the Authority. The award of the arbitrator so appointed shall be final and binding on the parties. The Arbitration & Conciliation Act, 1996 shall be applicable. Once the arbitration clause has been invoked, the DRC process will cease to be operative. It will be no bar that the Arbitrator appointed as aforesaid is or has been an employee of the Authority and the appointment of the Arbitrator will not be challenged; or be open to Question in any Court of Law, on this account." 59. The relevant observations from the Judgment are as under: "25. ... That part of Clause 33 of the agreement between ....
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....and explained in ICOMM Tele Limited (supra). 62. The Court while distinguishing S.K. Jain (supra) in ICOMM Tele Limited (supra) made some relevant observations in para 14 of the Judgment. Para 14 reads thus: "14. It will be noticed that in this judgment there was no plea that the aforesaid condition contained in an arbitration clause was violative of Article 14 of the Constitution of India as such clause is arbitrary. The only pleas taken were that the ratio of Central Inland Water Transport Corpn. [Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156 : 1986 SCC (L&S) 429] would apply and that there should be a cap in the quantum payable by way of security deposit, both of which pleas were turned down by this Court. Also, the security deposit made would, on the termination of the arbitration proceedings, first be adjusted against costs if any awarded by the arbitrator against the claimant party, and the balance remaining after such adjustment then be refunded to the party making the deposit. This clause is materially different from Clause 25(viii), which, as we have seen, makes it clear that in all cases the deposit is to be 10 per cent of ....
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....dimensions and it cannot be "cribbed, cabined and confined" within traditional and doctrinaire limits. From a positivistic point of view, equality is antithetic to arbitrariness. In fact equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14, and if it affects any matter relating to public employment, it is also violative of Article 16. Articles 14 and 16 strike at arbitrariness in State action and ensure fairness and equality of treatment." This view was approved by the Constitution Bench in Ajay Hasia case [(1981) 2 SCR 79 : (1981) 1 SCC 722 : 1981 SCC (L&S) 258 : AIR 1981 SC 487 : (1981) 1 LLJ 103]. It thus appears wellsettled that Article 14 strikes at arbitrariness in executive/administrative action because any action that is arbitrary must necessarily involve the negation of equality. One need not confine the denial of equality to a comparative evaluation between two persons to arrive at a conclusion of di....
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....nce, shall furnish a Performance security deposit of 10% (Ten percent) of the Contract Price for due performance of contract, in any one of the following forms: (a) Demand draft on any Nationalized/scheduled Bank of India in the name of Employer; or FDR/CDR in the manner as specified in Section-I. (b) Bank Guarantee from an Indian Nationalized/Scheduled Bank of India or a foreign bank through its branch located in India acceptable to Employer in the prescribed proforma." 67. Thereafter our attention was drawn to Clause 4 which provides for refund of security deposit. Clause 4 reads thus: "CLAUSE-4: REFUND OF SECURITY DEPOSIT: The Security Deposit less any amount due shall, on demand, be returned to the contractor after 14 days of expiry of Defects Liability Period (referred in Clause 43 hereof). No interest on the amount of Security Deposit shall be paid to the Contractor at the time of release of Security Deposit as stated above." 68. We are of the view that Clauses 3 and 4 respectively as above relating to security deposit for performance and refund of the same has no nexus at all with the pre-deposit amount of 7% as stipulated in Clause ....
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.... (c) costs from or until a certain date only; (d) costs incurred before proceedings have begun; (e) costs relating to particular steps taken in the proceedings; (f) costs relating only to a distinct part of the proceedings; and (g) interest on costs from or until a certain date. (5) An agreement which has the effect that a party is to pay the whole or part of the costs of the arbitration in any event shall be only valid if such agreement is made after the dispute in question has arisen." 69. In the aforesaid context, we may refer to and rely upon a nine-Judge Bench decision of the Supreme Court of Canada in the case of Uber Technologies Inc., Uber Canada, Inc., Uber B.V. and Rasier Operations B.V. v. David Heller reported in 2020 SCC OnLine Can SC 13. We quote the relevant observations as under: "42. In our view, there are ways to mitigate this concern that make the overall calculus favour departing from the general rule of referring the matter to the arbitrator in these situations. Courts have many ways of preventing the misuse of court processes for improper ends. Proceedings that appear vexatious can be handled by requi....
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....Act"), is justified to repel the submissions of the appellants that once the person who was required to arbitrate upon the disputes arisen under the terms and conditions of the contract becomes ineligible by operation of law, he would not be eligible to nominate a person as an arbitrator, and second, a plea that pertains to statutory disqualification of the nominated arbitrator can be raised before the court in application preferred under Section 11(6) of the Act, for such an application is not incompetent. For the sake of clarity, convenience and apposite appreciation, we shall state the facts from Civil Appeal No. 5306 of 2017." xxx xxx xxx 54. In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate ....
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.... other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) and recognised by the decision of this Court in TRF Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72]" (Emphasis supplied) 75. In Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited reported in (2017) 4 SCC 665, this Court held as under: "28. Before we part with, we deem it necessary to make certain comments on the procedure contained in the arbitration agreement for constituting the Arbitral Tribunal. Even when there are a number of persons empanelled, discretion is with DMRC to pick five persons therefrom and forward their names to the other side which is to select one of these five persons as its nominee (though in this case, it is now....
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....dnorm, which is independent. The subordinate norms are controlled by norms superior to them in hierarchical order. The system of norms proceeds from downwards to upwards and finally closes at Grundnorm. (Reference: Application of Grundnorm in India, Zainab Arif Khan, Aligarh Muslim University) 79. Our Constitution is the paramount source of law in our country. All other laws assume validity because they are in conformity with the Constitution. The Constitution itself contain provisions that clearly provide that any law which is in violation of its provisions is unlawful and is liable to be struck down. As contained in Article 13, which provides that all laws which were made either before the commencement of the Constitution, or are made after it, by any competent authority, which are inconsistent with the fundamental rights enshrined in the Constitution, are, to the extent of inconsistency, void. This again unveils the principle of Grundnorm which says there has to be a basic rule. The Constitution is the basic and the ultimate source of law. 80. In the aforesaid context, we must look into view decisions of the High Courts explaining the theory of Grundnorm. (i) In t....
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....) should clinch the issue. Para 236 reads thus: "236. Having established the threshold standard for the court to examine the extent of validity of the arbitration agreement, as a starting point, it is necessary to go back to Duro Felguera [Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 : (2017) 4 SCC (Civ) 764], which laid down : (SCC p. 759, para 48) "48. ... From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one aspect-the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple-it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement." At first blush, the Court seems to have read the existence of the arbitration agreement by limiting the examination to an examination of its factual existence. However, that is not so, as the existence of arbitration agreement does not mean anything unless such agreement is contractually valid. This vi....
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....ation to representations made regarding the assertion or enforcement of fundamental rights. For example, the concession made by a person that he does not possess and would not exercise his right to free speech and expression or the right to move freely throughout the territory of India cannot deprive him of those constitutional rights, any more than a concession that a person has no right of personal liberty can justify his detention contrary to the terms of Article 22 of the Constitution. Fundamental rights are undoubtedly conferred by the Constitution upon individuals which have to be asserted and enforced by them, if those rights are violated. But, the high purpose which the Constitution seeks to achieve by conferment of fundamental rights is not only to benefit individuals but to secure the larger interests of the community. The Preamble of the Constitution says that India is a democratic Republic. It is in order to fulfil the promise of the Preamble that fundamental rights are conferred by the Constitution, some on citizens like those guaranteed by Articles 15, 16, 19, 21 and 29 and, some on citizens and non-citizens alike, like those guaranteed by Articles 14, 21, 22 and 25 o....
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....said to be covered by the decision of this Court in Perkins Eastman (supra): 87. If circumstances exist giving rise to justifiable doubts as to the independence and impartiality of the person nominated or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore the designated arbitrator and appoint someone else. [See: IOC v. Raja Transport Pvt. Ltd, (2009) 8 SCC 520] 88. In the aforesaid context, we must look into the amended Section 12 of the 1996 Act. Section 12 reads thus: "12. Grounds for challenge. (1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances,- (a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and (b) which are likely to affect his ability to devo....
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.... to "justifiable doubts", and it is clear that there can be many such circumstances and situations. The test is not whether, given the circumstances, there is any actual bias for that is setting the bar too high; but, whether the circumstances in question give rise to any justifiable apprehensions of bias. 56. The limits of this provision has been tested in the Indian Supreme Court in the context of contracts with State entities naming particular persons/designations (associated with that entity) as a potential arbitrator. It appears to be settled by a series of decisions of the Supreme Court (see Executive Engineer, Irrigation Division v. Gangaram Chhapolia [Executive Engineer, Irrigation Division v. Gangaram Chhapolia, (1984) 3 SCC 627] , Transport Deptt. v. Munuswamy Mudaliar [Transport Deptt. v. Munuswamy Mudaliar, 1988 Supp SCC 651] , International Airports Authority v. K.D. Bali [International Airports Authority v. K.D. Bali, (1988) 2 SCC 360] , S. Rajan v. State of Kerala [S. Rajan v. State of Kerala, (1992) 3 SCC 608] , Indian Drugs & Pharmaceuticals Ltd. v. Indo Swiss Synthetics Gem Mfg. Co. Ltd. [Indian Drugs & Pharmaceuticals Ltd. v. Indo Swiss Synthetics Gem Mf....
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.... hastens to add that Mr P.K. Malhotra, the ex officio member of the Law Commission suggested having an exception for the State, and allow State parties to appoint employee arbitrators. The Commission is of the opinion that, on this issue, there cannot be any distinction between State and non-State parties. The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous - and the right to natural justice cannot be said to have been waived only on the basis of a "prior" agreement between the parties at the time of the contract and before arising of the disputes. 58. Large-scale amendments have been suggested to address this fundamental issue of neutrality of arbitrators, which the Commission believes is critical to the functioning of the arbitration process in India. In particular, amendments have been proposed to Sections 11, 12 and 14 of the Act. 59. The Commission has proposed the requirement of having specific....
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....mmission has proposed seeking the disclosure in terms of Section 12(1) and in which context the High Court or the designate is to have "due regard" to the contents of such disclosure in appointing the arbitrator." (Emphasis supplied) 90. Although, the Law Commission discussed the aforesaid aspect under the heading "Neutrality of Arbitrators", yet the focus of discussion was on impartiality and independence of the arbitrators which has relation to or bias towards one of the parties. In the field of international arbitration, neutrality is generally related to the nationality of the arbitrator. In the international sphere, the "appearance of neutrality" is considered equally important, which means that an arbitrator is neutral if his nationality is different from that of the parties. However, that is not the aspect which is being considered and the term "neutrality" used is relatable to impartiality and independence of the arbitrators, without any bias towards any of the parties. In fact, the term "neutrality of arbitrators" is commonly used in this context as well. (See: Voestalpine Schienen GMBH (supra)) 91. Keeping in mind the aforequoted recommendation of the Law C....
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....n has to be necessarily adopted by the High Court in all cases, while dealing with an application under Section 11 of the Act or is there room for play in the joints and the High Court is not divested of exercising discretion under some circumstances? If yes, what are those circumstances? It is this very aspect which was specifically dealt with by this Court in Tripple Engg. Works [North Eastern Railway v. Tripple Engg. Works, (2014) 9 SCC 288 : (2014) 5 SCC (Civ) 30]. Taking note of various judgments, the Court pointed out that the notion that the High Court was bound to appoint the arbitrator as per the contract between the parties has seen a significant erosion in recent past. In paras 6 and 7 of the said decision, those judgments wherein departure from the aforesaid "classical notion" has been made are taken note of. It would, therefore, be useful to reproduce the said paragraph along with paras 8 and 9 hereinbelow: (SCC pp. 291-93) "6. The 'classical notion' that the High Court while exercising its power under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter for short 'the Act') must appoint the arbitrator as per the contract between the parties s....
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....rbitrator and appoint someone else." 8. The above discussion will not be complete without reference to the view of this Court expressed in Union of India v. Singh Builders Syndicate [(2009) 4 SCC 523 : (2009) 2 SCC (Civ) 246], wherein the appointment of a retired Judge contrary to the agreement requiring appointment of specified officers was held to be valid on the ground that the arbitration proceedings had not concluded for over a decade making a mockery of the process. In fact, in para 25 of the Report in Singh Builders Syndicate [(2009) 4 SCC 523 : (2009) 2 SCC (Civ) 246] this Court had suggested that the Government, statutory authorities and government companies should consider phasing out arbitration clauses providing for appointment of serving officers and encourage professionalism in arbitration. 64 9. A pronouncement of late in Deep Trading Co. v. Indian Oil Corpn. [(2013) 4 SCC 35 : (2013) 2 SCC (Civ) 449] followed the legal position laid down in Punj Lloyd Ltd. [Punj Lloyd Ltd. v. Petronet MHB Ltd., (2006) 2 SCC 638] which in turn had followed a two-Judge Bench decision in Datar Switchgears Ltd. v. Tata Finance Ltd. [(2000) 8 SCC 151]. The theory of for....
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....f arbitration law viz. (i) speedy, inexpensive and fair trial by an impartial tribunal; (ii) party autonomy; and (iii) minimum court intervention. This provision has to be applied purposively. In case of doubt as to the meaning of any provision of this Act, regard should be had to these principles. 15. In the book O.P. Malhotra on the Law and Practice of Arbitration and Conciliation (3rd Edn. revised by Ms Indu Malhotra), it is rightly observed that the Indian Arbitration Act is also based on the aforesaid four foundational pillars. 16. First and paramount principle of the first pillar is "fair, speedy and inexpensive trial by an Arbitral Tribunal". Unnecessary delay or expense would frustrate the very purpose of arbitration. Interestingly, the second principle which is recognised in the Act is the party autonomy in the choice of procedure. This means that if a particular procedure is prescribed in the arbitration agreement which the parties have agreed to, that has to be generally resorted to. It is because of this reason, as a normal practice, the court will insist the parties to adhere to the procedure to which they have agreed upon. This would apply e....
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....cers as arbitrators who are not able to devote time to the arbitration proceedings or become incapable of acting as arbitrators because of frequent transfers, etc., then the principle of "default procedure" at least in the cases where Government has assumed the role of appointment of arbitrators to itself, has to be applied in the case of substitute arbitrators as well and the Court will step in to appoint the arbitrator by keeping aside the procedure which is agreed to between the parties. However, it will depend upon the facts of a particular case as to whether such a course of action should be taken or not. What we emphasise is that Court is not powerless in this regard." (Emphasis supplied) 94. In the context of independence and impartiality of the arbitrator more particularly keeping in mind the amended Section 12 of the Act 1996, we must refer to and rely upon the observations made by this Court in paras 20 to 25 of the decision in the case of Voestalpine Schienen (supra): "20. Independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which ap....
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....h is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while partiality will more likely surface during the arbitration proceedings. 23. It also cannot be denied that the Seventh Schedule is based on IBA guidelines which are clearly regarded as a representation of international based practices and are based on statutes, case law and juristic opinion from a cross-section on jurisdiction. It is so mentioned in the guidelines itself. 24. Keeping in view the aforesaid parameters, we advert to the facts of this case. Various contingencies mentioned in the Seventh Schedule render a person ineligible to act as an arbitrator. Entry 1 is highlighted by the learned counsel for the petitioner which provides that where the arbitrator is an employee, consultant, advisor or has any other past or present business relationship with the party, would not act as an arbitrator. What was argued by the learned Senior Counsel for the petitioner was that the panel of arbitrators drawn by the respondent consists of those persons who are governmen....
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....Schedule 5 and Schedule 7 and admittedly the persons empanelled by the respondent are not covered by any of the items in the said list." (Emphasis supplied) FEW FOREIGN COURT JUDGMENTS ON THE SUBJECT 95. We also looked into a very lucid and erudite judgement on the issue of unconscionable pre-condition in the arbitration agreement delivered by a 9 Judge Bench of the Supreme Court of Canada in the case of Uber Technologies v. Heller (supra). 96. In the aforesaid case, Mr. Heller (driver) was required to accept the terms of Uber's standard form service agreement, which stipulated that to resolve any dispute through arbitration or mediation with Uber, the claimant would have to pay an up-front administrative and filing fee of USD 14,500. 97. The Supreme Court of Canada held the aforesaid pre-condition to be unconscionable and unenforceable by a majority of 8:1. The majority speaking through Abella and Rowe JJ., while explaining the doctrine of unconscionability held as under: "53. We agree with Mr. Heller that the arbitration agreement is unconscionable. The parties and interveners focused their submissions on unconscionability in accordance with this Cou....
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....m underlying freedom of contract is the "freely negotiated bargain or exchange" between "autonomous and self-interested parties" (McCamus, at p. 24; see also Swan, Adamski and Na, at pp. 922-23; P.S. Atiyah, Essays on Contract (1986), at p. 140). At the heart of this theory is the belief that contracting parties are best-placed to judge and protect their interests in the bargaining process (Atiyah, at pp. 146-48; Bigwood, at pp. 199-200; Alan Brudner, "Reconstructing contracts" (1993) 43 U.T.L.J. 1, at pp. 2-3). It also presumes equality between the contracting parties and that "the contract is negotiated, freely agreed, and therefore fair" (Mindy Chen-Wishart, Contract Law (6th ed. 2018), at p. 12) (emphasis in original). 57. In cases where these assumptions align with reality, the arguments for enforcing contracts carry their greatest weight (Melvin Aron Eisenberg, "The Bargain Principle and Its Limits" (1982) 95 Harv. L. Rev. 741, at pp. 746-48). But these arguments "may speak more or less forcefully depending on the context" (Wellman, at para. 53; see also B.J. Reiter, "Unconscionability : Is There a Choice? A Reply to Professor Hasson" (1980) 4 Can. Bus. L.J.....
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....able effects of enforcement without endangering the core values on which freedom of contract is based (p. 182; see also Eisenberg, at pp. 799-801; S.M. Waddams, "Good Faith, Unconscionability and Reasonable Expectations" (1995) 9 J.C.L. 55, at p. 60). This explains how unconscionability lines up with traditional accounts of contract theory while recognizing the doctrine's historical roots in equity, which has long operated as a "corrective to the harshness of the common law" (McCamus, at p. 10; see also Rotman, at pp. 503-4). 60. This Court has often described the purpose of unconscionability as the protection of vulnerable persons in transactions with others (Hodgkinson v. Simms, [1994] 3 SCR 377, at pp. 405 and 412; Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 SCR 426, at p. 462, per Dickson C.J., and p. 516, per Wilson J.; Norberg v. Wynrib, [1992] 2 SCR 226, at p. 247; see also Bhasin v. Hrynew, [2014] 3 SCR 494, at para. 43). We agree. Unconscionability, in our view, is meant to protect those who are vulnerable in the contracting process from loss or improvidence to that party in the bargain that was made (see Mindy Chen-Wishart, Unconscionable Bargain....
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..... L.J. 345, at pp. 353-54). Xxx xxx xxx 84. Unconscionability, moreover, can be established without proof that the stronger party knowingly took advantage of the weaker. Such a requirement is closely associated with theories of unconscionability that focus on wrongdoing by the defendant (see Boustany, at p. 6). But unconscionability can be triggered without wrongdoing. As Professor Waddams compellingly argues: The phrases 'unconscionable conduct', 'unconscionable behaviour' and 'unconscionable dealing' lack clarity, are unhistorical insofar as they imply the need for proof of wrongdoing, and have been unduly restrictive. (Waddams (2019), at pp. 118-19; see also Benson, at p. 188; Smith, at pp. 360-62.) 85. We agree. One party knowingly or deliberately taking advantage of another's vulnerability may provide strong evidence of inequality of bargaining power, but it is not essential for a finding of unconscionability. Such a requirement improperly emphasizes the state of mind of the stronger party, rather than the protection of the more vulnerable. This Court's decisions leave no doubt that unconscionability focuses on the latter pu....
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....Appeals (1960), pp. 370-71) 88. We do not mean to suggest that a standard form contract, by itself, establishes an inequality of bargaining power (Waddams (2017), at p. 240). Standard form contracts are in many instances both necessary and useful. Sophisticated commercial parties, for example, may be familiar with contracts of adhesion commonly used within an industry. Sufficient explanations or advice may offset uncertainty about the terms of a standard form agreement. Some standard form contracts may clearly and effectively communicate the meaning of clauses with unusual or onerous effects (Benson, at p. 234). 89. Our point is simply that unconscionability has a meaningful role to play in examining the conditions behind consent to contracts of adhesion, as it does with any contract. The many ways in which standard form contracts can impair a party's ability to protect their interests in the contracting process and make them more vulnerable, are well-documented. For example, they are drafted by one party without input from the other and they may contain provisions that are difficult to read or understand (see Margaret Jane Radin, "Access to Justice and Abuses....
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....ct on their moral impulses. An implication of this point is that, absent regulation, business culture will become ever more ruthless, so that the distinctions between "reputable businesses" and fringe marketers gradually wither away.... [p. 390] 92. This brings us to the appeal before us and whether Mr. Heller's arbitration clause with Uber is unconscionable. 93. There was clearly inequality of bargaining power between Uber and Mr. Heller. The arbitration agreement was part of a standard form contract. Mr. Heller was powerless to negotiate any of its terms. His only contractual option was to accept or reject it. There was a significant gulf in sophistication between Mr. Heller, a food deliveryman in Toronto, and Uber, a large multinational corporation. The arbitration agreement, moreover, contains no information about the costs of mediation and arbitration in the Netherlands. A person in Mr. Heller's position could not be expected to appreciate the financial and legal implications of agreeing to arbitrate under ICC Rules or under Dutch law. Even assuming that Mr. Heller was the rare fellow who would have read through the contract in its entirety before sig....
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....nenfabrik v. South India Shipping Corporation Ltd., [1981] A.C. 909 (H.L.), an arbitration agreement "constitutes a self-contained contract collateral or ancillary to the [main] agreement" (p. 980; see also p. 998, per Lord Scarman). Further support comes from the severability clause of the Uber Rasier and Uber Portier agreements, and s. 17(2) of the AA." (Emphasis supplied) 98. Brown J. in his separate but concurring opinion held that such a precondition as mentioned in the agreement was opposed to public policy as it impeded the claimant from resolving his dispute effectively. The relevant observations are as under: "110. The ground upon which I proceed is that which precludes an ouster of court jurisdiction or, more broadly, which protects the integrity of the justice system. As Lord Atkin stated in Fender v. St. John-Mildmay, [1938] A.C. 1 (H.L.), at p. 12, ousting the jurisdiction of the courts is harmful in itself and "injurious to public interests" (see also Kain and Yoshida, at pp. 20-23). A provision that penalizes or prohibits one party from enforcing the terms of their agreement directly undermines the administration of justice. There is nothing nove....
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.... the harm to the public that would result from holding contracting parties to a bargain they cannot enforce is "substantially incontestable" (Millar Estate, at p. 7, quoting Fender, at p. 12). It really is this simple : unless everyone has reasonable access to the law and its processes where necessary to vindicate legal rights, we will live in a society where the strong and well-resourced will always prevail over the weak. Or, as Frederick Wilmot-Smith puts it, "[l]egal structures that make enforcement of the law practically impossible will leave weaker members of society open to exploitation at the hands of, for example, unscrupulous employers or spouses." (Equal Justice : Fair Legal Systems in an Unfair World (2019), at pp. 1-2). 113. The reference to making enforcement of the law practically impossible leads to a further, related point : there is no good reason to distinguish between a clause that expressly blocks access to a legally determined resolution and one that has the ultimate effect of doing so. That this is so is illustrated by the judgment of Drummond J. in Novamaze Pty Ltd. v. Cut Price Deli Pty Ltd., (1995) 128 ALR 540 (F.C.A.). In Novamaze, the terms of a ....
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....d. The arbitrator will make an award which becomes executory by homologation. This indicates the similarity between the arbitrator's real function and that of a judge who has to decide a case. [Emphasis added.] In other words, any means of dispute resolution that serves as a final resort for contracting parties must be just. This is important because, unlike the submission of existing disputes to arbitration, and contrary to my colleague Côté J.'s assertion, an agreement to submit all future unknown disputes to arbitration is not simply a substitute for the parties' negotiations (para. 250). Rather, it serves as a transfer of dispute resolution authority away from public adjudicators (W.G. Horton, "A Brief History of Arbitration" (2017) 47 Adv. Q. 12, at p. 14; Sport Maska, at p. 581; Wellman, at para. 48; Desputeaux, [2003] 1 SCR 178, at para. 40). The legitimacy of such a transfer rests upon whether it can provide a comparable measure of justice. xxx xxx xxx 121. In sum, applying public policy to determine whether an arbitration agreement prohibits access to justice is neither stating a "new common law rule" as my colle....
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....nenforceable because it is unconscionable. (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925, fn. [216 Cal. Rptr. 345, 702 P.2d 503] ["Both analytical pathways should lead to the same result."].) The first model set out in Graham v. Scissor- Tail, Inc. (1981) 28 Cal.3d 807 [171 Cal.Rptr. 604, 623 P.2d 165] asks initially whether the contract is one of adhesion. (Id. at p. 819.) Since a contract of adhesion is still fully enforceable, the inquiry then turns to whether enforcement should be denied. First, enforcement will be denied if the contract or provision falls outside the reasonable expectations of the weaker party. (Id. at p. 820.) Second, enforcement will be denied even if it does fall within the reasonable expectations of the parties, but it is unduly oppressive or unconscionable. (Ibid.) The alternative analytical model was set out in A M Produce Co. v. FMC Corp., supra, 135 Cal.App.3d 473. It sought to define what rendered a contract or a contractual provision unconscionable and hence unenforceable under Civil Code section 1670.5 (135 Cal.App.3d at p. 485.) A M concluded that unconscionability has a procedural and a substantive component. (Id. at p. 486.)....
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....itration by the National Arbitration Forum, Minneapolis, Minnesota." xxx xxx xxx In order to obtain a participatory hearing, however, the responding party must make a prompt demand for one and accompany it with prepayment of fees. Prepayment of hearing fees can be waived for individuals, but only after filing an affidavit of indigency. However, the rule explaining the fee waiver process is, as the trial court aptly noted, "incomprehensible," since it requires compliance with rules concerning involuntary dismissals. The likely effect of these procedures is to deny a borrower against whom a claim has been brought any opportunity to a hearing, much less a hearing held where the contract was signed, unless the borrower has considerable legal expertise or the money to hire a lawyer and/or prepay substantial hearing fees. The latter is especially unlikely given the small dollar amounts at issue. In a dispute over a loan of $2,000 it would scarcely make sense to spend a minimum of $850 just to obtain a participatory hearing. In short the procedure seems designed to discourage borrowers from responding at all. In the event that they do not respond, an award may b....