Arbitration:
Arbitration agreement – Arbitration clause in notice inviting tender in commercial contracts – Pre-deposit clause-10% “depositat-call” of the amount claimed by party invoking arbitration, if arbitrary or discriminatory and violative of Art. 14 of the Constitution – Held: A pre-deposit of 10% would discourage a party to an arbitration from invoking this alternative dispute resolution process, contrary to the object of de-clogging the court system, and would render the arbitral process ineffective and expensive – Thus, the pre deposit clause is struck down – Constitution of India – Art. 14.
Allowing the appeal, the Court
HELD: 1.1 The 10% “deposit-at-call” before a party can successfully invoke the arbitration clause is on the basis that this is in order to avoid frivolous claims. From clause 25 (xv) of the notice inviting tender it also becomes clear that arbitration is considered to be an alternative dispute resolution process and entry to the civil court is sought to be taken away if the disputes between the parties are covered by the arbitration clause. Clause
25 (viii) cannot be said to be discriminatory in that it applies equally to both respondent No. 2 and the appellant. However, arbitrariness is a separate and distinct facet of Article 14. A frivolous claim can be dismissed with exemplary costs. Therefore, it is 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. [Paras 7, 8, 17, 20, 21][988-H; 989-B; 995-B-C; 996-C]
1.2 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. Indeed, a claim may be dismissed but need not be frivolous, as is obvious from the fact that where three arbitrators are appointed, there have been known to be majority and minority awards, making it clear that there may be two possible or even plausible views which would indicate that the claim is dismissed or allowed on merits and not because it is frivolous. Further, even where a claim is found to be justified and correct, the amount that is deposited need not be refunded to the successful claimant. Take for example a claim based on a termination of a contract being illegal and consequent damages thereto. If the claim succeeds and the termination is set aside as being illegal and a damages claim of one crore is finally granted by the arbitrator at only ten lakhs, only one tenth of the deposit made will be liable to be returned to the successful party. The party who has lost in the arbitration proceedings will be entitled to forfeit nine tenths of the deposit made despite the fact that the aforesaid party has an award against it. This would render the entire clause wholly arbitrary, being not only excessive or disproportionate but leading to the wholly unjust result of a party who has lost an arbitration being entitled to forfeit such part of the deposit as falls proportionately short of the amount awarded as compared to what is claimed. [Para 23][996-H; 997-A-E]
1.3 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 struck down. The judgment of the High Court is set aside. [Paras 24, 27, 28][997-F, G; 999-D, E] Central Inland Water Transport Corpn. v. Brojo Nath Ganguly, (1986) 3 SCC 156 : [1986] 2 SCR 278 – distinguished.
Directorate of Education v. Educomp Datamatics Ltd., (2004)
4 SCC 19 : [2004] 2 SCR 1010 ; Global Energy Ltd. v. Adani Exports Ltd., (2005) 4 SCC 435 : [2005] 3 SCR 1108 ; S.K. Jain v. State of Haryana, (2009) 4 SCC 357 : [2009] 2 SCR 1080 ; ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd., (2004) 3 SCC 553 ; A.L. Kalra v. The Project & Equipment Corporation of India Limited, [1984] 3 SCR 646 ; Dnyandeo Sabaji Naik v. Pradnya Prakash Khadekar, (2017) 5 SCC 496 : [2017] 2 SCR 95 ; General Motors (I) (P) Ltd. v. Ashok Ramnik Lal Tolat, (2015) 1 SCC
429 : [2014] 11 SCR 16 ; State of J&K v. Dev Dutt Pandit, (1999) 7 SCC 339 : [1999] 2 Suppl. SCR 1 ; Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228 : [2016] 9 SCR 83; Union of India v. Varindera Constructions Ltd., (2018) 7 SCC 794 : [2018] 5 SCR 587 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
This page is for informational and research purposes only and does not constitute legal advice. Consult a qualified advocate for advice specific to your situation.