Arbitration

Rajvansh Singh on discussion of Supreme Court on the validity of “Pre-Deposit clause”

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Introduction

Speedy and effective settlements of dispute are the two most important attributes for the smooth flow of trade. Unfortunately, the Indian Judiciary is infamous for speedy settlement of disputes. Recently, arbitration has emerged as an efficient alternative to the public justice delivery system.

 

Pre-deposit clause implies that if a party to the agreement intends to bring a claim before the arbitrator, it must first deposit security of a determinable sum, usually a percentage of the claimed amount. The underlying object behind these clauses is to prevent frivolous and extravagant claims being brought by the parties, in the hope of “trying their luck” with the arbitrators. The Hon’ble Supreme Court (the “Court”) in M/S Icomm Tele Ltd. v. Punjab State Water Supply & Sewerage Board & Anr.[1]struck down the validity of a pre-deposit clause on the ground that usage of such clauses to invoke the arbitration clause makes the arbitral process ineffective and onerous. In the current post, the author argues that the court erred in its judgement on several grounds as certain aspects were left untouched and misconstrued.

 

Factual Matrix

 

In 2008, the Punjab State Water Supply & Sewage Board, Bhatinda (“Respondent”) issued notice for inviting tender for the purpose of extension and augmentation of water supply, sewage scheme, pumping station and sewage treatment plants. M/S Icomm Tele LTD. (“Appellant”) was awarded the said contract after having been found to be best suited for the task. A contract was entered into between the parties and it contained an arbitration clause, which included clause 25 (viii), which reads as –

“It shall be an essential term of this contract that in order to avoid frivolous 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 deposit-at-call for ten percent 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”[2].

Dispute arose and the appellant wrote a letter for the appointment of arbitrator and for waiver of the 10% of the deposit fee, which was not responded to. Subsequently, the appellant approached the High Court of Punjab and Haryana (the “High Court”) assailing the validity of the clause on the ground of arbitrary and unreasonable, but the petition was dismissed. Aggrieved by this, the appellant approached the Supreme Court

 

Arguments:

The counsel on behalf of appellant contended –

  • The arbitration clause amounts to contract of adhesion since there is unfair bargaining power between the parties. To bolster the said argument the counsel relied on Central Inland Water Transport Corporation v. Brojo Nath Ganguly[3](“Central Inland”).
  • A mandate to deposit of 10% of the amount claimed would be a clog on the arbitration process.

 

The counsel on behalf of respondent contended –

  • There is no infringement of Article 14 as clause 25 (viii) would apply to both the parties equally.
  • The principle put forth in Central Inland cannot possibly be applied to commercial contract.

 

Judgement

  • The argument pertaining to contracts of adhesion does not sustain as the contract is a commercial contract.[4]
  • The Court in General Motors (I) (P) Ltd. v. Ashok Ramnik Lal Tolat[5](“General Motors”) has settled the principle that punitive damages are embarked only if a court is approached with a frivolous litigation. Thus, a pre-deposit of 10% of the amount claimed is without any nexus to the filing of frivolous claims, as it is applies to all claims, even non-frivolous. Thus, it conflicts the basic tenets of the Article 14 of the Indian Constitution.
  • Alternative dispute resolution needs to be encouraged because of high pendency of cases in courts and cost of litigation. Any requirement to deposit a certain sum would be clog on the process of Alternative Dispute Resolution as it would make the arbitration process expensive.

 

Analysis and Conclusion

The author is of the opinion that the judgement can be challenged on the given points-

  • The Court in Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd.[6]highlighted party autonomy as a paramount principle of arbitration. Party autonomy is the guiding principle according to which the arbitration proceeding has to be conducted. Article 19(1) of the UNCITRAL Model Law empowers the parties to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings. In light of the principle mentioned, the author argues that the validity of pre deposit clause cannot be struck down, as parties to the agreement are free to incorporate various terms and conditions in the arbitration agreement.
  • The Court erred in relying on the judgement of General Motors as the said judgement talks about litigation in court and not about arbitration. The principle enunciated in General Motors may lead to practical difficulties, when applied to arbitration process. This is because of two reasons i) the parties have to spend a lot of time and money to appoint arbitrators to hear the dispute and any frivolous claim will nullify the same ii) as rightly argued here, the arbitral tribunal rarely award cost, especially when the Government and the PSUs are the receiving end.
  • Pre-deposit clauses are useful in arbitration as it provides negative incentive on the claimant from making exaggerated claims. If the claimant is prevented form making exaggerated claims, the fee of the arbitrator is also kept at a reasonable level since it is ad valorem.

 

The author would like to conclude that the court should refrain from applying Article 14 in realm of commercial contract as the contracting parties are the best judges of their own contractual arrangement. In Municipal Corporation, Jabalpur v. Rajesh Construction Co.[7]the Court held that it is the duty of the court to comprehend the arbitration agreement in a manner to uphold the same. Once the party has decided the procedure, they will have to follow that and cannot challenge that at later stage. If not done so, the parties will often pursue litigation contending that the terms of the contract is onerous on them.

[1]2019 SCC OnLine SC 361

[2]idat para 2.

[3](1986) 3 SCC 156.

[4]idat para 89.

[5](2015) 1 SCC 429.

 

[6]Civil Appeal No. 2562 of 2006.

 

[7]AIR 2007 SC 2069.

 

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