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CONSTITUTIONALITY OF PRE DEPOSIT CLAUSES IN ARBITRATION AGREEMENT
In a landmark decision, the Supreme Court of India struck down part of an arbitration clause which required a claimant to deposit 10 percent of the amount claimed with the arbitrator before the arbitration went ahead. The contract was between a government entity and a private party where the Court relied on principles of Indian constitutional and administrative law to hold that the clause was arbitrary and therefore liable to be struck down. The Court further emphasised the need for arbitration to be speedy, effective and inexpensive so that it can “de-clog” the overburdened court system in India.
Background of the case
In 2008, Punjab State Water Supply & Sewerage Board assigned a tender to M/S ICOMM Tele Ltd. relating to work on a sewage treatment plant. The contract between the parties included the Board’s tender notice. The notice contained an arbitration provision and clause 25(vii) of the agreement provided that the party initiating arbitration would have to furnish a deposit for ten per cent of the amount claimed in a bank. In case the award was granted in favour of the claimant, the deposit would be refunded to them in proportion to the amount awarded with respect to the amount claimed and the balance, if any, would be paid to the other party.
After a dispute arose between the parties and consequently arbitration was initiated, ICOMM wrote to the Board requesting a waiver of the 10 per cent deposit fee. ICOMM received no response from the Board and then filed a writ petition in the Punjab and Haryana High Court, challenging the validity of clause 25(vii). After the High Court dismissed the writ petition, ICOMM appealed further to the Supreme Court.
ICOMM’s argument
ICOMM argued that the arbitration clause was void as it was a ‘contract of adhesion’ owing to the unfair bargaining power between ICOMM and the Board. ICOMM pointed towards Central Inland Water Transport Corporation v Brojo Nath Ganguly, a case concerning the disciplinary rules in an employment contract between a state-owned entity and its employees. In this case, the court found that the employees had no choice but to accept the rules owing to the inequality in bargaining power, and that the rules were discriminatory and arbitrary. However, the court pointed out that its reasoning would not apply to a commercial transaction. Due to this reason, the Court rejected ICOMM’s arguments.
Arbitration and Article 14 of the Indian Constitution
ICOMM also argued that the clause was arbitrary and hence violated Article 14 of the Indian Constitution. The Court noted that “even within the contractual aspects, the requirement of Article 14 to act fairly, justly and reasonably by persons who are “state” authorities or instrumentalities continues“. The court accepted ICOMM’s submissions that the clause was arbitrary for these reasons:
- The main purpose of the 10 per cent deposit, as mentioned in clause 25(vii), was to avoid frivolous claims. The Court held that the requirement to deposit 10 percent of the claim had no connection with discouraging frivolous claims as the deposit was to be made for all claims, frivolous or otherwise.
- The court also emphasized on the fact that even if a claimant were successful, it still may not be able to claim a refund of the entire deposit. This made the clause disproportionate and arbitrary.
- The Court also elaborated the need to encourage arbitration as an alternative means of dispute resolution due to the time and costs associated with litigation. Having said this, it reminded that often a deposit of 10 percent of a large claim would be more than the court fees which parties would have filed. The Court held that such pre-deposit clauses discourage arbitration and lead to “burdening” of the court system.
Recently, a number of Indian appellate court judgments have focused on arbitration clauses in government contracts – for instance, we discussed a line of case law on the appointment of former or current employees as arbitrators, a common feature in government contracts, here. Private parties may often have limited ability to negotiate terms in such contracts particularly (as in the ICOMM case) where these terms are contained in the invitation to tender and subsequently incorporated into the contract. This case shows that private parties may subsequently be able to challenge onerous provisions in arbitration clauses under Indian constitutional law, although the threshold will be a high one.
Even more significantly, from an international perspective, this judgment offers further evidence of the support for, and promotion of, arbitration by the Indian judiciary, and the goal to make India a global hub for arbitration.
- Background of the case
- Reasons for judgement
- Conclusion
