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Supreme Court struck down the pre-deposit clauses to invoke Arbitration

clauses to invoke arbitration

In a path-breaking judgment, the Supreme Court has observed that pre-deposit clauses to invoke arbitration would clog the arbitral process ineffective and make it expensive. In the case of M/s. Icomm Tele Ltd. Vs. Punjab State Water Supply & Sewerage Board & Anr a bench comprising of Justice R.F. Nariman and Vineet Saran struck down the pre-deposit clause in a notified tender of Punjab water supply and Sewerage Board.

Facts and development of the case

Punjab State Water Supply & Sewerage Board had invited a tender in 2008 for extension and augmentation of water supply, sewerage scheme, etc. The appellate company (M/s. Icomm Tele Ltd.) was awarded the above-said tender. Appellant had entered into the contract with the board where clause 25 (viii) of the contract says that 10 % deposit fee is necessary in case of invoking the arbitration. Appellant sought for waiving off the clause and asked the board to remove it. After no response from the board, they had approached Punjab and Haryana High court where the court had quashed their writ petition.

The matter was finally listed before the supreme court where appellant argued that the clause in arbitration amounts to a contract of adhesion, and owing to unfair bargaining strength between the respondent and the appellant, this clause ought to be struck down following the judgment of Brojo Nath Ganguly case. In the end, the court decided in favor of the appellant and struck down the pre-deposit clauses to invoke arbitration.

What is a pre-deposit clause in arbitration?

The pre-deposit clause or more commonly known as deposit-at-call is usually inserted in contracts to deter a party from invoking a frivolous arbitration. In the instant case, Punjab State Water Supply & Sewerage Board had issued a notice inviting a tender where clause 25 (viii) of the notice read as:

“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.”  

Supreme Court has rejected the notion that 10% deposit-at-call aims to avoid a frivolous claim. The court said that a frivolous claim could be taken care of with exemplary costs. The bench has also observed that such a clause does not have any direct nexus with the frivolous claim as it applies to all type of claim(frivolous or Genuine) at the very outset.

Impact of the Judgment

In the contemporary era, the Alternative Dispute Resolution (ADR) method is more in use as compared to the last century. ADR is a boon for the Indian judiciary as it is already ailing from the pendency of cases. Justice Nariman and Vineet saran while delivering the judgment observed that:

“Primary object of arbitration is to reach final disposal of disputes in a speedy, effective, inexpensive and expeditious manner…. 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.”

From the above observations of the bench, it can be safely assumed that Indian Judiciary is more inclined towards the ADR methods and we may see a few more judgment of the similar kind in future.

Some Important Observations of the bench & Conclusion

Bench in an unequivocal term held that arbitration is an important alternative dispute resolution process and it needs to be encouraged more. The bench was quick in observing the fact that in the arbitration process usually, stakes are high so charging 10 % of the total claim may exceed the amount that one may have to bear as court fee for the filing of a civil suit in such cases.

The bench has said that it is a well-settled principle that terms of a contract are not open to the judicial scrutiny unless they are arbitrary. It is one of the important principles of contract law and the same has been reiterated by the court again and again in many cases including the current case as well. It is to be observed that, in the present case, the court has highlighted the need for a positive approach towards Alternative Dispute Resolution (ADR), for it has the efficacy to lower the pendency rate of matters in courts and to save the parties from the lengthy legal proceedings.

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by Pankaj Kumar Shukla

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