CASE TITLE:.
M/S Incomm Tele Ltd. v. Punjab State Water Supply Sewerage Board &Anr.
DATE OF ORDER:
11 March, 2019
JUDGE(S):
Justice R.R. Nariman
Justice Vineet Saran
SUBJECT
The Hon’ble Apex Court in this case, while highlighting the importance and object of arbitration proceedings in view of high pendency of cases in Courts held that deterring a party to an arbitration from invoking the 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. The Court also observed that “even within the contractual sphere, the requirement of Article 14 to act fairly, justly and reasonably by persons who are ‘state’ authorities or instrumentalities continues.”
IMPORTANT LEGAL PROVISIONS
THE CONSTITUTION OF INDIA
- Article 14-The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India
BRIEF FACTS OF THE CASE
- Respondent invited tenders 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 won the bid and a formal contract to that effect was entered into by the parties.
- The notice inviting the said tender formed part and parcel of the contract. It contained a detailed arbitration clause, which is the subject matter of the dispute here.
- The said clause i.e clause 25(viii) provided that it should be mandatory for the party invoking arbitration to deposit a sum amounting to 10% of the total amount claimed in the arbitration so as to avoid frivolous claims. It further provided that if the award is made in the favour of the party claiming, the amount deposited shall be refunded to him in proportion to the amount awarded w.r.t the amount claimed and if any amount remains, it shall be paid to the other party.
- The validity of the above mentioned clause was challenged before this Court.
ARGUMENTS RAISED BY THE PETITIONER
- It was contended by the learned counsel for the petitioner that clause 25(viii) amounts to contract of Adhesion involving unfair bargaining strength between the parties. Thus, it must be struck down.
- The learned counsel further contended that a mandatory pre-deposit for invoking arbitration as is imposed in the present contract would amount to a clog on entering the arbitration procedure.
- It was argued that ultimately claims may be found to be untenable but need not be frivolous. It was also submitted that even if the award was made in the favour of the party invoking arbitration, it was not entitled to refund of the entire amount of the deposit.
- That the said clause is violative of Article 14 of the Constitution.
ARGUMENTS RAISED BY THE RESPONDENT
- The learned counsel for the respondent opposed the arguments advanced by the petitioner on the ground that the clause in question would apply to both the parties equally and as such there is no any violation of Article 14.
LEGAL ISSUE
- Whether or not the State authorities are required to act fairly, justly and reasonably in view of Article 14 of the Constitution of India, even in matters arising within the realm of contracts? If yes, can clause 25(viii) of the notice inviting tender be said to be violative of Article 14?
ANALYSIS BY THE COURT
- The Court observed that the 10% ‘deposit-at-call’ for invoking the arbitration clause is on the basis that frivolous claims can be avoided.
- It is well settled that the terms of an invitation to tender are not open to scrutiny by judiciary, as they are in the nature of contract, unless they are arbitrary, discriminatory or actuated by malice. A similar view was upheld by the this Court in Tata Cellular v. Union of India [(1994) 6 SCC 651] and Global Energy Ltd. v. Adani Exports Ltd.[(2005) 4 SCC 435].
- On the contention of the respondent that the matters involving a contract of adhesion can not be set aside if both the parties are businessmen and contract is a commercial transaction, the court agreed with the respondent. However, it noted that the position is different when a plea that the clause is violative of Article 14 is taken.
- The Court relied upon the observations made by it in ABL International Ltd. v. Export Credit Guarantee Corpn. Of India Ltd. [(2004) 3 SCC 553], wherein it was held that even in matters arising from contracts, the requirement of Article 14 to act fairly, justly and reasonably by State continues.
- On the issue whether clause 25(viii) is violative of Article 14 of the Constitution, the Court noted that though it is mentioned that 10% ‘deposit-at-call’ of the amount claimed is in order to avoid frivolous claims, it is well settled that a frivolous claim can be dismissed with exemplary cost. It further noted that unless it is discovered that the litigation that has been invoked is frivolous, exemplary damages do not follow. As such it can reasonably be concluded that the said amount of ‘deposit-at-call’ does not have any direct nexus with the filing of frivolous claims.
- The Court also noted that the fact that even if the award is made in the favour of the party invoking arbitration, the said party will not be entitled to the refund of entire amount with some being forfeited by the party losing the arbitration renders the entire clause wholly arbitrary.
- The Court also highlighted the importance of arbitration proceedings in view of the high pendency of cases in courts and cost of litigation and observed that any requirement as to deposit would amount to a clog on this process and defeat the object of arbitration to reach final dispositions in a speedy, effective and inexpensive manner.
CONCLUSION
In view of the above observation, the Hon’ble Supreme Court held that clause 25(viii) of the notice inviting tender ought to be struck down for being arbitrary and unjust. The sub-clause (viii) being severable from the rest of clause 25, the remaining part of clause 25 was to remain valid.
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