ICOMM Tele Ltd. Vs. Punjab State Water Supply and Sewerage Board and Ors. - (Supreme Court) (11 Mar 2019)

Pre-deposit clauses to invoke arbitration struck down by Supreme Court as it makes arbitral process ineffective and expensive

MANU/SC/0349/2019

Arbitration

In present case, the Respondent issued 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. The Appellant-Company, was awarded the said tender. A formal contract was entered into between the Appellant and Respondent No. 2. The notice inviting tender formed part and parcel of the formal agreement.

Contained in the notice inviting tender was a detailed arbitration clause that, the amount claimed under each claim and shall furnish a deposit-at-call for ten percent of the amount claimed. It had therefore addressed letters to Respondent No. 2 with regard to appointment of arbitrator in those matters and sought for waiving the deposit fee. After having received no response, the Appellant had filed a writ petition, which was dismissed by the High Court. Question raised in present case is whether Clause 25(viii) of agreement can be said to be arbitrary and violative of Article 14 of the Constitution of India, 1950.

It is well settled that the terms of an invitation to tender are not open to judicial scrutiny, as they are in the realm of contract, unless they are arbitrary, discriminatory, or actuated by malice. The 10% "deposit-at-call" of the amount claimed is in order to avoid frivolous claims by the party invoking arbitration. It is well settled that a frivolous claim can be dismissed with exemplary costs.

A deposit-at-call of ten percent of the amount claimed, which could amount to large sums of money, was without any direct nexus to the filing of frivolous claims, as it applies to all claims made at the very threshold. A ten percent deposit had to be made before any determination that a claim made by the party invoking arbitration was frivolous. Such a Clause would be arbitrary in the sense of being something which would be unfair and unjust.

Further, it is also 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.

Deterring a party to an arbitration from invoking this alternative dispute resolution process by a pre-deposit of ten percent would discourage arbitration, contrary to the object of de-clogging the Court system, and would render the arbitral process ineffective and expensive.

Therefore, said clause of the notice inviting tender is struck down. This Clause being severable from the rest of Clause would not affect the remaining parts. The judgment of the High Court was set aside. Appeal allowed.

Tags : ARBITRAL PROCESS PRE-DEPOSIT CLAUSE