LEGAL ISSUE: Whether a pre-deposit clause in an arbitration agreement is valid and enforceable under the Arbitration and Conciliation Act, 1996 and the Constitution of India.
CASE TYPE: Arbitration Law
Case Name: Lombardi Engineering Limited vs. Uttarakhand Jal Vidyut Nigam Limited
[Judgment Date]: 6 November 2023
Introduction
Date of the Judgment: 6 November 2023
Citation: 2023 INSC 976
Judges: Dr. Dhananjaya Y. Chandrachud, CJI, J.B. Pardiwala, J., and Manoj Misra, J. (authored by J.B. Pardiwala, J.)
Can a clause in an arbitration agreement that requires a party to deposit a percentage of the claimed amount before initiating arbitration be valid? The Supreme Court of India recently examined this critical issue in a case involving a dispute between Lombardi Engineering Limited and Uttarakhand Jal Vidyut Nigam Limited. The court addressed whether such pre-deposit clauses hinder access to justice and violate constitutional principles.
Case Background
Lombardi Engineering Limited, a design consultancy firm based in Switzerland, entered into a contract with Uttarakhand Project Development and Construction Corporation Limited (UPDCC) on 25 October 2019, for consultancy services related to the Arakot Tiuni Hydro Electric Project. The project was valued at Rs. 1,39,45,000 and was to be completed within 24 months, by 25 September 2021.
On 8 May 2020, the Government of Uttarakhand ordered the transfer of the project from UPDCC to Uttarakhand Jal Vidyut Nigam Limited (the respondent). This transfer was formalized through a tripartite agreement on 6 October 2020, where the respondent assumed all obligations under the original contract.
Disputes arose between the parties, leading Lombardi Engineering to issue a notice of arbitration on 6 May 2022, seeking a total of INR 1,04,32,664.86. The respondent, instead of responding to the arbitration notice, terminated the contract on 9 May 2022, citing non-compliance and non-fulfillment of contractual obligations. Consequently, Lombardi Engineering filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996, for the appointment of an arbitrator.
Timeline
| Date | Event |
|---|---|
| 25 October 2019 | Contract signed between Lombardi Engineering and UPDCC. |
| 8 May 2020 | Government of Uttarakhand orders transfer of project from UPDCC to Uttarakhand Jal Vidyut Nigam Limited. |
| 6 October 2020 | Tripartite agreement formalizing the transfer of the project and novation of contract to the respondent. |
| 25 September 2021 | Original project completion date. |
| 6 May 2022 | Lombardi Engineering issues notice of arbitration. |
| 9 May 2022 | Uttarakhand Jal Vidyut Nigam Limited terminates the contract. |
| 6 November 2023 | Supreme Court delivers judgment. |
Course of Proceedings
The judgment does not mention any prior court proceedings before the matter reached the Supreme Court. The case was directly filed as an arbitration petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator due to the disputes that arose between the parties after the termination of the contract.
Legal Framework
The primary legal framework for this case is the Arbitration and Conciliation Act, 1996. The following sections and clauses are relevant:
- Section 2(f) of the Arbitration and Conciliation Act, 1996: Defines “international commercial arbitration.”
- Section 11(6) of the Arbitration and Conciliation Act, 1996: Provides for the appointment of arbitrators by the Supreme Court or High Court in certain circumstances.
- Section 11(6A) of the Arbitration and Conciliation Act, 1996: Limits the court’s examination to the existence of an arbitration agreement when considering applications under Section 11(4), (5), or (6).
- Section 31A of the Arbitration and Conciliation Act, 1996: Deals with the regime for costs in arbitration proceedings.
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Clause 53 of the General Conditions of Contract (GCC): Sets out the procedure for claims and refers to the Arbitration and Conciliation Act, 1996, for dispute resolution.
“53.1 If a dispute of any kind, whatsoever, arises between the Employer and contractor in connection with or arising out of the contract for the execution of this works, whether during the execution of the works or after their completion and whether before or after repudiation or termination of the contract, including any disagreement by either party with any action, inaction, opinion, instruction determination, certificate or valuation of the Engineer, the matter in dispute shall, be referred to 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.”
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Clause 55 of the General Conditions of Contract (GCC): Contains the arbitration agreement, including a pre-deposit requirement and the appointment of an arbitrator by the Principal Secretary/Secretary (Irrigation), Government of Uttarakhand.
“(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 security deposit.”
“(b) On submission of claims the Arbitrator shall be appointed as per the following procedure: I) For claim amount upto 10.00 Crores, the case shall be referred to Sole Arbitrator to be appointed by the Principal Secretary/Secretary (Irrigation), GoU,… ”
The legal framework is further influenced by Article 14 of the Constitution of India, which guarantees equality before the law and prohibits arbitrary state action.
Arguments
Submissions on Behalf of the Petitioner
- The petitioner argued that this is an “international commercial arbitration” under Section 2(f) of the Arbitration and Conciliation Act, 1996, giving the Supreme Court jurisdiction under Section 11(12)(a).
- The petitioner contended that Clause 55.1(b)(I) of the Contract, which allows the Principal Secretary/Secretary (Irrigation) to appoint a sole arbitrator, is in conflict with the Supreme Court’s decision in Perkins Eastman Architects DPC and Another v. HSCC (India) Limited [(2020) 20 SCC 760], which held that unilateral appointment of arbitrators is unenforceable.
- The petitioner submitted that the requirement to pre-deposit 7% of the claimed amount to initiate arbitration, as per Clause 55.1(b)(I) of the Contract, is contrary to the Supreme Court’s decision in ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Another [(2019) 4 SCC 401].
- The petitioner argued that such a pre-deposit clause is arbitrary, violates Article 14 of the Constitution, and lacks a nexus with preventing frivolous claims.
Submissions on Behalf of the Respondent
- The respondent argued that the petition should be rejected because the petitioner failed to comply with two pre-conditions: (i) pre-deposit of 7% of the claimed amount and (ii) approaching the Principal Secretary/Secretary (Irrigation) for appointment of an arbitrator.
- The respondent relied on Iron & Steel Co. Ltd. v. Tiwari Road Lines [(2007) 5 SCC 703], National Highways Authority of India and Another v. Bumihiway DDB Ltd. (JV) and Others [(2006) 10 SCC 763], and Yashwith Constructions (P)Ltd. v. Simplex Concrete Piles India Ltd. and Another [(2006) 6 SCC 204], to support the validity of the pre-deposit clause.
- The respondent cited S.K. Jain v. State of Haryana and Another [(2009) 4 SCC 357], where a similar pre-deposit clause was held valid. The respondent argued that ICOMM Tele Limited was not applicable, as the clause there was different.
- The respondent contended that the 7% pre-deposit is a security deposit, refundable after the completion of proceedings, and that its purpose is to ensure genuine claims.
- The respondent submitted that there was no challenge to the pre-deposit clause in the petition and that the petitioner, having consented to the clause, cannot question its validity now, invoking the principle of “party autonomy.”
- The respondent argued that any order passed under Section 11(6) cannot be treated as a binding precedent, citing State of West Bengal and Others v. Associated Contractors [(2015) 1 SCC 32].
| Petitioner’s Submissions | Respondent’s Submissions |
|---|---|
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Issues Framed by the Supreme Court
The Supreme Court framed the following issues for consideration:
- Whether the dictum in ICOMM Tele Limited can be applied to this case, particularly with Clause 55 of the GCC providing for a 7% pre-deposit.
- Whether there is a direct conflict between the decisions of the Supreme Court in S.K. Jain and ICOMM Tele Limited.
- Whether the Court, while deciding a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, can hold that a pre-deposit condition in the arbitration clause is violative of Article 14 of the Constitution.
- Whether Clause 55 of the Contract, empowering the Principal Secretary/Secretary (Irrigation) to appoint an arbitrator, is in conflict with the decision in Perkins Eastman.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Applicability of ICOMM Tele Limited | Applied | The court found that the pre-deposit clause in this case was similar to the one in ICOMM Tele Limited and was therefore arbitrary and violative of Article 14. |
| Conflict between S.K. Jain and ICOMM Tele Limited | No Direct Conflict | The court clarified that the clauses in the two cases were different and the pre-deposit clause in S.K. Jain was materially different from that in ICOMM Tele Limited. |
| Validity of pre-deposit clause under Article 14 | Can be examined under Section 11(6) | The court held that it could examine the validity of the pre-deposit clause under Article 14, even in a Section 11(6) petition. |
| Validity of Clause 55 under Perkins Eastman | In Conflict | The court held that the clause allowing the Principal Secretary/Secretary (Irrigation) to appoint an arbitrator was in conflict with Perkins Eastman and therefore invalid. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | Legal Point | How Considered |
|---|---|---|---|
| Perkins Eastman Architects DPC and Another v. HSCC (India) Limited [(2020) 20 SCC 760] | Supreme Court of India | Unilateral appointment of arbitrator | Followed; held that unilateral appointment of arbitrator is not valid. |
| ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Another [(2019) 4 SCC 401] | Supreme Court of India | Pre-deposit clause in arbitration | Followed; held that pre-deposit clause is arbitrary and violative of Article 14. |
| S.K. Jain v. State of Haryana and Another [(2009) 4 SCC 357] | Supreme Court of India | Pre-deposit clause in arbitration | Distinguished; the court clarified that the pre-deposit clause in this case was materially different from the one in ICOMM Tele Limited. |
| Iron & Steel Co. Ltd. v. Tiwari Road Lines [(2007) 5 SCC 703] | Supreme Court of India | Pre-deposit clause in arbitration | Distinguished; the court did not find it applicable to the present facts. |
| National Highways Authority of India and Another v. Bumihiway DDB Ltd. (JV) and Others [(2006) 10 SCC 763] | Supreme Court of India | Pre-deposit clause in arbitration | Distinguished; the court did not find it applicable to the present facts. |
| Yashwith Constructions (P)Ltd. v. Simplex Concrete Piles India Ltd. and Another [(2006) 6 SCC 204] | Supreme Court of India | Pre-deposit clause in arbitration | Distinguished; the court did not find it applicable to the present facts. |
| Municipal Corpn., Jabalpur and Others v. Rajesh Construction Co., (2007) 5 SCC 344 | Supreme Court of India | Pre-deposit clause in arbitration | Discussed; the court distinguished the case on the facts and circumstances. |
| Duro Felguera, S.A. v. Gangavaram Port Limited [(2017) 9 SCC 729] | Supreme Court of India | Jurisdiction under Section 11(6) | Discussed; the court reiterated the limited scope of judicial scrutiny at the pre-referral stage. |
| Vidya Drolia and Others v. Durga Trading Corporation [(2021) 2 SCC 1] | Supreme Court of India | Scope of judicial review under Section 11(6) | Discussed; the court reiterated the limited scope of judicial scrutiny at the pre-referral stage. |
| Pravin Electricals Private Limited v. Galaxy Infra and Engineering Private Limited [(2021) 5 SCC 671] | Supreme Court of India | Arbitrability of disputes | Discussed; the court referred the parties to arbitration as the review on non-arbitrability was inconclusive. |
| Sanjiv Prakash v. Seema Kukreja and Others [(2021) 9 SCC 732] | Supreme Court of India | Arbitrability of disputes | Discussed; the court referred the parties to arbitration as the review on non-arbitrability was inconclusive. |
| Indian Oil Corporation Limited v. NCC Limited [(2023) 2 SCC 539] | Supreme Court of India | Arbitrability of disputes | Discussed; the court referred the parties to arbitration as the review on non-arbitrability was inconclusive. |
| Bharat Sanchar Nigam Limited and Another v. Nortel Networks India Private Limited [(2021) 5 SCC 738] | Supreme Court of India | Arbitrability of disputes | Discussed; the court refused arbitration as the claims were time-barred. |
| Secunderabad Cantonment Board v. B. Ramachandraiah and Sons [(2021) 5 SCC 705] | Supreme Court of India | Arbitrability of disputes | Discussed; the court refused arbitration as the claims were time-barred. |
| B and T AG v. Ministry of Defence [2023 SCC OnLine SC 657] | Supreme Court of India | Arbitrability of disputes | Discussed; the court refused arbitration as the claims were time-barred. |
| TRF Limited v. Energo Engineering Projects Limited [(2017) 8 SCC 377] | Supreme Court of India | Ineligibility of arbitrator | Discussed; the court held that an ineligible arbitrator cannot nominate another arbitrator. |
| Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited [(2017) 4 SCC 665] | Supreme Court of India | Independence and impartiality of arbitrator | Discussed; the court emphasized the need for independence and impartiality of arbitrators. |
| Olga Tellis and Others v. Bombay Municipal Corporation and Others [(1985) 3 SCC 545] | Supreme Court of India | Waiver of fundamental rights | Discussed; the court reiterated that there can be no waiver of fundamental rights. |
| Uber Technologies Inc., Uber Canada, Inc., Uber B.V. and Rasier Operations B.V. v. David Heller [2020 SCC OnLine Can SC 13] | Supreme Court of Canada | Unconscionable pre-conditions in arbitration | Discussed; the court relied on this case to support its reasoning that pre-deposit conditions can be unconscionable. |
| Patterson v. ITT Consumer Financial Corporation [18 Cal. Rptr. 2d 563 (Cal. Ct. App. 1993)] | Court of Appeal of California | Unconscionable pre-conditions in arbitration | Discussed; the court relied on this case to support its reasoning that pre-deposit conditions can be unconscionable. |
| Vegter v. Forecast Financial Corporation [2007 WL 4178947] | United States District Court, W.D. Michigan | Unconscionable pre-conditions in arbitration | Discussed; the court relied on this case to support its reasoning that pre-deposit conditions can be unconscionable. |
| Lite Bite Foods Pvt. Ltd. v. Airports Authority of India [2020 SCC OnLine Ker 4736] | High Court of Kerala | Pre-deposit clause in arbitration | Discussed; the court relied on this case to support its reasoning that pre-deposit conditions can be unconscionable. |
| 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) | High Court of Punjab and Haryana | Pre-deposit clause in arbitration | Discussed; the court discussed the different viewpoints on pre-deposit clauses. |
| Garg and Company v. State of Haryana & Ors., CWP Nos. 21840 of 2020, 21857 of 2020 and 21858 of 2020 (O&M) | High Court of Punjab and Haryana | Pre-deposit clause in arbitration | Discussed; the court discussed the different viewpoints on pre-deposit clauses. |
| Brij Gopal Construction Co. Pvt. Ltd. v. Haryana Shehri Vikas Pradhikaran, CWP -14587 -2022 (O&M) | High Court of Punjab and Haryana | Pre-deposit clause in arbitration | Discussed; the court discussed the different viewpoints on pre-deposit clauses. |
| Bathinda Railway Transhipment Cooperative L&C Society Ltd. v. Punjab Mandi Board & Ors., Civil Writ Petition No. 28981 of 2019 (O&M) | High Court of Punjab and Haryana | Pre-deposit clause in arbitration | Discussed; the court discussed the different viewpoints on pre-deposit clauses. |
| Amazing India Contractors Pvt. Ltd. v. Airport Authority of India and Others [2023 SCC OnLine Cal 1704] | High Court of Calcutta | Pre-deposit clause in arbitration | Discussed; the court relied on this case to support its reasoning that pre-deposit conditions can be unconscionable. |
| Squadron Leader H. S. Kulshrestha v Union of India [1999 SCC OnLine All 270] | High Court of Allahabad | Concept of Grundnorm | Discussed; the court relied on this case to support its reasoning that the Constitution is the grundnorm. |
| Abdur Sukur & Another v State of West Bengal & others [2019 SCC Online Cal 5455] | High Court of Calcutta | Concept of Grundnorm | Discussed; the court relied on this case to support its reasoning that the Constitution is the grundnorm. |
| Om Prakash Gupta v Hindustan Petroleum Corporation Ltd. & Anr. [2009 SCC OnLine Raj 1381] | High Court of Rajasthan | Concept of Grundnorm | Discussed; the court relied on this case to support its reasoning that the Constitution is the grundnorm. |
| Sunil v State of M. P. & Another [2016 SCC OnLine MP 8551] | High Court of Madhya Pradesh | Concept of Grundnorm | Discussed; the court relied on this case to support its reasoning that the Constitution is the grundnorm. |
| Government of Andhra Pradesh & Ors vs Smt. P. Laxmi Devi [(2008) 4 SCC 720] | Supreme Court of India | Concept of Grundnorm | Discussed; the court relied on this case to support its reasoning that the Constitution is the grundnorm. |
Judgment
| Party | Submission | Court’s Treatment |
|---|---|---|
| Petitioner | Clause 55.1(b)(I) is in conflict with Perkins Eastman. | Accepted; held that unilateral appointment of arbitrator is unenforceable. |
| Petitioner | Pre-deposit of 7% is contrary to ICOMM Tele Limited. | Accepted; held that the pre-deposit clause was arbitrary and violative of Article 14. |
| Petitioner | Pre-deposit clause is arbitrary and violates Article 14. | Accepted; held that the pre-deposit clause was arbitrary and violative of Article 14. |
| Respondent | Petition should be rejected due to non-compliance with pre-conditions. | Rejected; held that the pre-conditions were invalid. |
| Respondent | Pre-deposit clause is valid as per S.K. Jain. | Rejected; the court distinguished S.K. Jain and held that the pre-deposit clause was arbitrary and violative of Article 14. |
| Respondent | Petitioner cannot challenge pre-deposit clause due to party autonomy. | Rejected; the court held that there can be no waiver of fundamental rights. |
| Respondent | Section 11(6) order is not a binding precedent. | Not relevant; the court did not address this argument directly as it was not relevant to the core issue. |
How each authority was viewed by the Court?
| Authority | Court’s View |
|---|---|
| Perkins Eastman Architects DPC and Another v. HSCC (India) Limited [(2020) 20 SCC 760] | Followed; the court held that unilateral appointment of arbitrator is not valid. |
| ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Another [(2019) 4 SCC 401] | Followed; the court held that pre-deposit clause is arbitrary and violative of Article 14. |
| S.K. Jain v. State of Haryana and Another [(2009) 4 SCC 357] | Distinguished; the court clarified that the pre-deposit clause in this case was materially different from the one in ICOMM Tele Limited. |
| Iron & Steel Co. Ltd. v. Tiwari Road Lines [(2007) 5 SCC 703] | Distinguished; the court did not find it applicable to the present facts. |
| National Highways Authority of India and Another v. Bumihiway DDB Ltd. (JV) and Others [(2006) 10 SCC 763] | Distinguished; the court did not find it applicable to the present facts. |
| Yashwith Constructions (P)Ltd. v. Simplex Concrete Piles India Ltd. and Another [(2006) 6 SCC 204] | Distinguished; the court did not find it applicable to the present facts. |
| Municipal Corpn., Jabalpur and Others v. Rajesh Construction Co., (2007) 5 SCC 344 | Discussed; the court distinguished the case on the facts and circumstances. |
| Duro Felguera, S.A. v. Gangavaram Port Limited [(2017) 9 SCC 729] | Discussed; the court reiterated the limited scope of judicial scrutiny at the pre-referral stage. |
| Vidya Drolia and Others v. Durga Trading Corporation [(2021) 2 SCC 1] | Discussed; the court reiterated the limited scope of judicial scrutiny at the pre-referral stage. |
| Pravin Electricals Private Limited v. Galaxy Infra and Engineering Private Limited [(2021) 5 SCC 671] | Discussed; the court referred the parties to arbitration as the review on non-arbitrability was inconclusive. |
| Sanjiv Prakash v. Seema Kukreja and Others [(2021) 9 SCC 732] | Discussed; the court referred the parties to arbitration as the review on non-arbitrability was inconclusive. |
| Indian Oil Corporation Limited v. NCC Limited [(2023) 2 SCC 539] | Discussed; the court referred the parties to arbitration as the review on non-arbitrability was inconclusive. |
| Bharat Sanchar Nigam Limited and Another v. Nortel Networks India Private Limited [(2021) 5 SCC 738] | Discussed; the court refused arbitration as the claims were time-barred. |
| Secunderabad Cantonment Board v. B. Ramachandraiah and Sons [(2021) 5 SCC 705] | Discussed; the court refused arbitration as the claims were time-barred. |
| B and T AG v. Ministry of Defence [2023 SCC OnLine SC 657] | Discussed; the court refused arbitration as the claims were time-barred. |
| TRF Limited v. Energo Engineering Projects Limited [(2017) 8 SCC 377] | Discussed; the court held that an ineligible arbitrator cannot nominate another arbitrator. |
| Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited [(2017) 4 SCC 665] | Discussed; the court emphasized the need for independence and impartiality of arbitrators. |
| Olga Tellis and Others v. Bombay Municipal Corporation and Others [(1985) 3 SCC 545] | Discussed; the court reiterated that there can be no waiver of fundamental rights. |
| Uber Technologies Inc., Uber Canada, Inc., Uber B.V. and Rasier Operations B.V. v. David Heller [2020 SCC OnLine Can SC 13] | Discussed; the court relied on this case to support its reasoning that pre-deposit conditions can be unconscionable. |
| Patterson v. ITT Consumer Financial Corporation [18 Cal. Rptr. 2d 563 (Cal. Ct. App. 1993)] | Discussed; the court relied on this case to support its reasoning that pre-deposit conditions can be unconscionable. |
| Vegter v. Forecast Financial Corporation [2007 WL 4178947] | Discussed; the court relied on this case to support its reasoning that pre-deposit conditions can be unconscionable. |
| Lite Bite Foods Pvt. Ltd. v. Airports Authority of India [2020 SCC OnLine Ker 4736] | Discussed; the court relied on this case to support its reasoning that pre-deposit conditions can be unconscionable. |
| 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) | Discussed; the court discussed the different viewpoints on pre-deposit clauses. |
| Garg and Company v. State of Haryana & Ors., CWP Nos. 21840 of 2020, 21857 of 2020 and 21858 of 2020 (O&M) | Discussed; the court discussed the different viewpoints on pre-deposit clauses. |
| Brij Gopal Construction Co. Pvt. Ltd. v. Haryana Shehri Vikas Pradhikaran, CWP -14587 -2022 (O&M) | Discussed; the court discussed the different viewpoints on pre-deposit clauses. |
| Bathinda Railway Transhipment Cooperative L&C Society Ltd. v. Punjab Mandi Board & Ors., Civil Writ Petition No. 28981 of 2019 (O&M) | Discussed; the court discussed the different viewpoints on pre-deposit clauses. |
| Amazing India Contractors Pvt. Ltd. v. Airport Authority of India and Others [2023 SCC OnLine Cal 1704] | Discussed; the court relied on this case to support its reasoning that pre-deposit conditions can be unconscionable. |
| Squadron Leader H. S. Kulshrestha v Union of India [1999 SCC OnLine All 270] | Discussed; the court relied on this case to support its reasoning that the Constitution is the grundnorm. |
| Abdur Sukur & Another v State of West Bengal & others [2019 SCC Online Cal 5455] | Discussed; the court relied on this case to support its reasoning that the Constitution is the grundnorm. |
| Om Prakash Gupta v Hindustan Petroleum Corporation Ltd. & Anr. [2009 SCC OnLine Raj 1381] | Discussed; the court relied on this case to support its reasoning that the Constitution is the grundnorm. |
| Sunil v State of M. P. & Another [2016 SCC OnLine MP 8551] | Discussed; the court relied on this case to support its reasoning that the Constitution is the grundnorm. |
| Government of Andhra Pradesh & Ors vs Smt. P. Laxmi Devi [(2008) 4 SCC 720] | Discussed; the court relied on this case to support its reasoning that the Constitution is the grundnorm. |
The Supreme Court held that the pre-deposit clause requiring the petitioner to deposit 7% of the claimed amount before initiating arbitration was arbitrary, unreasonable, and violative of Article 14 of the Constitution. The Court reiterated that the right to access justice is a fundamental right and cannot be hampered by onerous pre-conditions.
The Court noted that the pre-deposit clause did not have any nexus with the objective of preventing frivolous claims and was therefore arbitrary. It also held that the clause empowering the Principal Secretary/Secretary (Irrigation) to appoint an arbitrator was in conflict with the principle of neutrality and impartiality, as laid down in Perkins Eastman.
The Court clarified that the principle of “party autonomy” cannot be invoked to justify a clause that violates fundamental rights. It emphasized that the Constitution is the grundnorm, and no contractual clause can be enforced if it is contrary to the Constitution.
The Court appointed Justice (Retd.) K.M. Joseph as the sole arbitrator to adjudicate the disputes between the parties.
Final Decision
The Supreme Court allowed the arbitration petition filed by Lombardi Engineering Limited. The Court made the following orders:
- The pre-deposit clause in the arbitration agreement was declared invalid and unenforceable.
- The clause empowering the Principal Secretary/Secretary (Irrigation) to appoint an arbitrator was declared invalid.
- Justice (Retd.) K.M. Joseph was appointed as the sole arbitrator to adjudicate the disputes between the parties.
- The parties were directed to appear before the arbitrator on 20 December 2023 at 11:00 AM.
- All other contentions were kept open for the arbitrator to decide.
Implications
This judgment has significant implications for arbitration law in India. The Supreme Court has clearly stated that pre-deposit clauses in arbitration agreements that impose onerous conditions on parties seeking to initiate arbitration are invalid, especially if they are arbitrary and lack a nexus with preventing frivolous claims.
The judgment also reinforces the principle that the right to access justice is a fundamental right and cannot be restricted by contractual clauses. It clarifies that the principle of “party autonomy” cannot be invoked to justify clauses that violate fundamental rights.
The ruling further emphasizes the importance of neutrality and impartiality in the appointment of arbitrators and reiterates that unilateral appointment of arbitrators is not valid. The judgment reaffirms the limited scope of judicial scrutiny at the pre-referral stage under Section 11(6) of the Arbitration and Conciliation Act, 1996, but also clarifies that the court can examine the validity of pre-deposit clauses under Article 14 of the Constitution, even at this stage.
The judgment will likely lead to a re-evaluation of arbitration clauses in contracts, particularly those involving government entities, to ensure they comply with the principles of fairness, equality, and access to justice.
Flowchart