India: Pre-Deposit Clause For Initiating Arbitration Is Arbitrary And Contrary To Article 14

Introduction

In the recent judgment passed by Hon'ble Supreme Court in case titled "M/s Icomm Tele Ltd. Vs Punjab State Water Supply & Sewerage Board & Anr.", it is stated that the pre-deposit clause for initiating arbitration is contrary to the object of de-clogging the court system and would render the arbitral process ineffective and expensive.

Facts of the case

In 2008, the Punjab State Water Supply & Sewerage Board, Bhatinda, issued a 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.

M/s Icomm Tele Ltd., which is involved in civil/electrical works in India, was awarded the tender by the Board. A contract was entered into between both the parties. The concerned arbitration clause 25(viii) which is set out, stated as follows:-

"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."

The company addressed letters to the board with regard to the appointment of arbitrator regarding the disputes which arose between the parties and sought for waiving the 10% deposit fee. After receiving no response from the board, the company filed a writ petition challenging the validity of clause 25(viii) of the arbitration clause before the High Court of Punjab and Haryana. The writ petition was dismissed by the High Court of Punjab and Haryana stating that such tender condition can in no way said to be arbitrary or unreasonable.

The company challenged the order passed by the High Court of Punjab and Haryana before the Hon'ble Supreme Court. The company argued that the arbitration clause contained in the tender condition amounts to a contract of adhesion, and since there is unfair bargaining strength between Board and the Company, this clause ought to be struck down following the judgment in Central Inland Water Transport Corpn. v. Brojo Nath Ganguly, (1986) 3 SCC 156. The company also argued that arbitration being an alternative dispute resolution process, a 10% deposit would amount to a clog on entering the aforesaid process. Further, claims may ultimately be found to be untenable but need not be frivolous. Also, frivolous claims can be compensated by heavy costs. Further, even in the event that the award is in favour of the claimant, what can be refunded to him is only in proportion to the amount awarded and the rest is to be forfeited. This would also be a further arbitrary and highhanded action on the part of the Board.

The Board argued that there is no infraction of Article 14 in the present case. It is clear that clause 25(viii) would apply to both the parties equally, and as this is so, the said sub-clause cannot be struck down as being discriminatory. Further, the principle contained in Central Inland Water Transport Corpn. (supra) cannot possibly be applied to commercial contracts. Also, in similar cases, this Court has not entertained this kind of a challenge.

The Hon'ble Supreme Court observed that the 10% "deposit-at call" of the amount claimed is in order to avoid frivolous claims by the party invoking arbitration is against the well settled law that a frivolous claim can be dismissed with exemplary costs. 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.

The important principle established by the judgments passed by Hon'ble Supreme Court in the case titled as General Motors (I) (P) Ltd. v. Ashok Ramnik Lal Tolat, (2015) 1 SCC 429 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% 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.

The 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 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 or more 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 learned 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.

Further, Hon'ble Supreme Court also emphasized the settled law that 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.

Conclusion

The Hon'ble Supreme Court set aside the judgments passed by the Hon'ble High Court of Punjab and Haryana and allowed the appeal of the company stating that 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.

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