Pre-Deposit For Arbitration

In the judgment of the case – M/s Icomm Tele Ltd. v. Punjab State Water Supply & Sewerage Board & another, delivered on March 11, 2019 by  Justice R.F. Nariman and Justice Vineet Saran, at the Supreme Court, the Court has observed that deterring a party to the 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.

After taking into consideration, all the reasons including this one, the apex-Court struck down clause 25 (viii)  of the notice inviting the tender. According to the Court, this clause being severable from the rest of clause 25 will not affect the remaining parts of clause 25.

In 2008, the respondent – Board at 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. On September 25, 2008, the appellant company, which is involved in civil/electrical works in India, was awarded the said tender after having been found best suited for the task. On January 16, 2009, a formal contract was entered into between the appellant and the second respondent. The notice inviting the tender formed part and parcel of the formal agreement. There is a detailed arbitration clause – 25(viii) – in the notice inviting the tender, Which is set out as under:

“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 scheduled 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 the 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 balance, if any, shall be forfeited and paid to the other party.”

The appellant had entered into similar contracts with the second respondent which contained the same arbitration clause. It had, therefore, addressed letters to the second respondent with regard to the appointment of an arbitrator in those matters and sought for waiving the 10% deposit fee. After having received no response, the appellant filed a civil writ petition 18917/2016, before the High Court of Punjab & Haryana. The HC dismissed this petition on September 14, 2016 stating that such a tender condition can in no way be said to be arbitrary or unreasonable.

On March 8, 2017, the appellant approached the HC challenging the validity of this part of the arbitration clause by filing civil writ petition 4882/2017. In the impugned judgment, the HC merely followed its earlier judgment and dismissed this petition as well.

The appellant’s counsel urged that the arbitration clause contained in the tender condition amounts to a contract of adhesion, and since there is unfair bargaining strength between the second respondent and the appellant, this clause ought to be struck down in line with the judgment of the case – Central India Water Transport Corporation v. Brojo Nath Ganguly  – (1986) 3 SCC 156. He also urged that arbitration being an alternative dispute resolution process, a 10% pre-deposit would amount to a clog on entering the said process. Further, claims may ultimately be found to be untenable but need not be frivolous. Also, frivolous claims can be compensated by heavy costs.

Commending all courts to deal with frivolous filings by ensuring that the legal system is not permitted to be exploited by those who use the forms of the law to defeat or delay justice, the Apex Court has stated that imposition of real-time costs is also necessary to ensure that access to courts is available to citizens with genuine grievances. Otherwise, the doors would be shut to legitimate causes simply by the weight of undeserving cases which flood the system.

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 with the imposition of exemplary costs.

The important principle established by the Supreme Court through its judgment in the case – 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. A 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 something that would be 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 the majority and minority awards making it clear that there may be two 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. For example, take a claim based on a termination of a contract being illegal and resulting in consequential damages thereto.

It is also settled law that arbitration is an important alternative dispute resolution process which is to be encouraged because of the high pendency of cases in courts and the cost of litigation. Any requirement as to deposit would certainly amount to a clog on this process. Often, a deposit of 10% of a huge claim would be even greater than the court fee that may be charged for filing a suit in a civil court. The Supreme Court has set aside the impugned judgment of the High Court and allowed the appeal.

Adv. R.S. Agrawal

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