Supreme Court Strikes Down 10% Deposit for Arbitration: ICOMM Tele Ltd. vs. Punjab State Water Supply & Sewerage Board (2019)

Introduction

Date of the Judgment: 11 March 2019
Citation: (2019) INSC 235
Judges: R.F. Nariman, J. and Vineet Saran, J.
Can a contractual clause that mandates a 10% deposit of the claimed amount before arbitration be considered fair? The Supreme Court of India recently addressed this critical question in a case involving a dispute over a tender condition. The Court examined whether such a clause, intended to deter frivolous claims, actually impedes access to arbitration, a crucial alternative dispute resolution mechanism. The bench, composed of Justices R.F. Nariman and Vineet Saran, delivered a unanimous judgment striking down the contentious clause.

Case Background

In 2008, the Punjab State Water Supply & Sewerage Board, Bhatinda (respondent No. 2), issued a tender for the extension and augmentation of water supply and sewerage schemes. M/S ICOMM TELE LTD. (the appellant), a company involved in civil and electrical works, was awarded the tender on 25 September 2008. A formal contract was signed on 16 January 2009, incorporating the tender’s terms, including a detailed arbitration clause. The appellant had previously entered into similar contracts with the respondent containing the same arbitration clause. The appellant had sought a waiver of the 10% deposit fee for arbitration in those matters, but received no response. Consequently, the appellant filed a writ petition before the High Court of Punjab and Haryana, which was dismissed. Subsequently, the appellant challenged the validity of the arbitration clause regarding the 10% deposit.

Timeline:

Course of Proceedings

The appellant initially filed a writ petition before the High Court of Punjab and Haryana, challenging the 10% deposit clause in the arbitration agreement. The High Court dismissed this petition, citing that such tender conditions were neither arbitrary nor unreasonable. Subsequently, the appellant filed another writ petition challenging the validity of the arbitration clause, which was also dismissed by the High Court, following its earlier judgment. Aggrieved, the appellant approached the Supreme Court of India.

Legal Framework

The core of the dispute revolves around clause 25(viii) of the notice inviting tender, which is part of the formal agreement between the parties. This clause stipulates that:

“viii. 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. In the event of an award in favour of the claimant, the deposit shall be refunded to him in proportion to the amount awarded w.r.t the amount claimed and the balance, if any, shall be forfeited and paid to the other party.”

Additionally, clause 25(xv) states:

“xv. No question relating to this contract shall be brought before any civil court without first invoking and completing the arbitration proceedings, if the issue is covered by the scope of arbitration under this contract. The pending arbitration proceedings shall not disentitle the Engineer-in-charge to terminate the contract and to make alternate arrangements for completion of the works.”

This clause emphasizes that arbitration is the primary mode of dispute resolution, barring direct access to civil courts for matters covered by the arbitration clause.

Arguments

Appellant’s Arguments:

• The appellant argued that the arbitration clause is a contract of adhesion, where there is unequal bargaining power between the parties.
• Relying on Central Inland Water Transport Corpn. v. Brojo Nath Ganguly, (1986) 3 SCC 156, the appellant contended that such clauses should be struck down due to unfair bargaining power.
• The 10% deposit requirement acts as a clog on the alternative dispute resolution process of arbitration.
• The appellant also argued that claims may be found untenable but not frivolous.
• Frivolous claims can be addressed through heavy costs, and even if a claim is successful, the deposit is not fully refunded, which is arbitrary.

Respondent’s Arguments:

• The respondents argued that the clause does not violate Article 14 of the Constitution, as it applies equally to both parties.
• The principle in Central Inland Water Transport Corpn. (supra) does not apply to commercial contracts.
• The respondents contended that similar challenges have not been entertained by the Supreme Court in the past.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue:

1. Whether clause 25(viii) of the notice inviting tender, which requires a 10% deposit of the claimed amount to invoke arbitration, is arbitrary and violative of Article 14 of the Constitution of India.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

On Arbitrariness and Article 14:

• A.L. Kalra v. The Project & Equipment Corporation of India Limited, [1984] 3 S.C.R. 646: The Court cited this case to emphasize that arbitrariness is a distinct facet of Article 14 and not merely a facet of discrimination.
• Ajay Hasia v. Khalid Mujib Sehravardi, [1981] 2 S.C.R. 79: This case was referred to highlight that any arbitrary state action violates Article 14.
• Maneka Gandhi v. Union of India, [1978] 2 S.C.R. 621: The Court noted that Article 14 strikes at arbitrariness in State action and ensures fairness and equality of treatment.

On Contracts and Judicial Scrutiny:

• Directorate of Education v. Educomp Datamatics Ltd., (2004) 4 SCC 19: The Court reiterated that terms of a tender are generally not open to judicial scrutiny unless they are arbitrary, discriminatory, or malicious.
• Global Energy Ltd. v. Adani Exports Ltd., (2005) 4 SCC 435: This case was cited to reinforce the principle that courts cannot interfere with tender terms unless they are wholly arbitrary, discriminatory, or malicious.

On Unequal Bargaining Power:

• Central Inland Water Transport Corpn. v. Brojo Nath Ganguly, (1986) 3 SCC 156: The Court distinguished this case, stating that the concept of unequal bargaining power does not apply to commercial contracts between businessmen.

On Arbitration Clauses:

• S.K. Jain v. State of Haryana, (2009) 4 SCC 357: The Court distinguished this case, noting that the security deposit clause was different from the one in the present case.

On State Obligations:

• ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd., (2004) 3 SCC 553: The Court emphasized that state instrumentalities must act fairly, justly, and reasonably, as required by Article 14.

On Frivolous Claims:

• Dnyandeo Sabaji Naik v. Pradnya Prakash Khadekar, (2017) 5 SCC 496: The Court referred to this case to highlight that frivolous claims can be dismissed with exemplary costs.
• General Motors (I) (P) Ltd. v. Ashok Ramnik Lal Tolat, (2015) 1 SCC 429: This case was cited to show that punitive damages are only awarded when litigation is deemed frivolous.

On Encouraging Arbitration:

• State of J&K v. Dev Dutt Pandit, (1999) 7 SCC 339: The Court cited this case to emphasize that arbitration is an important alternative dispute resolution process that should be encouraged.
• Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228: The Court reiterated that arbitration should be a speedy, effective, and inexpensive process.
• Union of India v. Varindera Constructions Ltd., (2018) 7 SCC 794: This case was referred to emphasize the primary object of arbitration is to reach a final disposition in a speedy and expeditious manner.

Judgment

How each authority was viewed by the Court?

• Central Inland Water Transport Corpn. v. Brojo Nath Ganguly, (1986) 3 SCC 156:* The Court distinguished this case, stating that the principle of unequal bargaining power does not apply to commercial contracts.
• S.K. Jain v. State of Haryana, (2009) 4 SCC 357:* This case was distinguished as the security deposit clause in it was materially different from the one in the present case.
• A.L. Kalra v. The Project & Equipment Corporation of India Limited, [1984] 3 S.C.R. 646:* The Court relied on this case to emphasize that arbitrariness is a separate and distinct facet of Article 14.
• ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd., (2004) 3 SCC 553:* The Court used this case to highlight that state instrumentalities must act fairly, justly, and reasonably, as required by Article 14.
• Directorate of Education v. Educomp Datamatics Ltd., (2004) 4 SCC 19:* The Court cited this case to state that the terms of a tender are not open to judicial scrutiny unless they are arbitrary, discriminatory, or malicious.
• Global Energy Ltd. v. Adani Exports Ltd., (2005) 4 SCC 435:* The Court used this case to reinforce that courts cannot interfere with tender terms unless they are wholly arbitrary, discriminatory, or malicious.
• Dnyandeo Sabaji Naik v. Pradnya Prakash Khadekar, (2017) 5 SCC 496:* The Court referred to this case to highlight that frivolous claims can be dismissed with exemplary costs.
• General Motors (I) (P) Ltd. v. Ashok Ramnik Lal Tolat, (2015) 1 SCC 429:* This case was cited to show that punitive damages are only awarded when litigation is deemed frivolous.
• State of J&K v. Dev Dutt Pandit, (1999) 7 SCC 339:* The Court cited this case to emphasize that arbitration is an important alternative dispute resolution process that should be encouraged.
• Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228:* The Court reiterated that arbitration should be a speedy, effective, and inexpensive process.
• Union of India v. Varindera Constructions Ltd., (2018) 7 SCC 794:* The Court referred to this case to emphasize the primary object of arbitration is to reach a final disposition in a speedy and expeditious manner.

The Supreme Court struck down clause 25(viii) of the notice inviting tender, finding it arbitrary and violative of Article 14 of the Constitution. The Court held that the 10% deposit requirement, intended to deter frivolous claims, was not directly linked to such claims, as it applied to all claims at the outset. The Court also noted that even if a claim is successful, the deposit is not fully refunded, leading to an unjust outcome. The Court emphasized that arbitration is an important alternative dispute resolution process that should be encouraged, and that the deposit requirement acts as a clog on this process.

“It is well settled that a frivolous claim can be dismissed with exemplary costs.”

“Clearly, therefore, 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.”

“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.”

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the following:

• The 10% deposit requirement was seen as arbitrary because it applied to all claims regardless of their merit.
• The deposit was not fully refundable, even if the claimant was successful, leading to an unjust outcome.
• The deposit requirement acted as a deterrent to arbitration, which is an important alternative dispute resolution mechanism.
• The Court emphasized the need to promote arbitration to reduce the burden on the courts.

Fact:Law Ratio

Key Takeaways

• A clause requiring a 10% deposit to invoke arbitration is arbitrary and violates Article 14 of the Constitution.
• Such clauses can deter parties from using arbitration, an important alternative dispute resolution mechanism.
• The judgment emphasizes the need to encourage arbitration to reduce the burden on the courts.
• This ruling could impact other contracts with similar clauses, potentially leading to their invalidation.

Directions

The Supreme Court did not issue any specific directions other than striking down clause 25(viii) of the notice inviting tender.

Development of Law

The ratio decidendi of this case is that a clause requiring a 10% deposit of the claimed amount to invoke arbitration is arbitrary and violates Article 14 of the Constitution of India. This judgment clarifies that such clauses, which act as a clog on the arbitration process, cannot be upheld. This case also reiterates that arbitrariness is a distinct facet of Article 14 and not merely a facet of discrimination. The decision reinforces the importance of promoting arbitration as an effective and efficient alternative dispute resolution mechanism.

Conclusion

The Supreme Court’s decision in M/S ICOMM TELE LTD. vs. PUNJAB STATE WATER SUPPLY & SEWERAGE BOARD & ANR. is a significant ruling that strikes down a clause requiring a 10% deposit to invoke arbitration. The Court found this clause to be arbitrary and a violation of Article 14 of the Constitution. This judgment underscores the importance of fair and accessible arbitration processes and reinforces the principle that state instrumentalities must act fairly and reasonably.