SC: Clauses fixing pre-deposit for invoking arbitration liable to be set aside.

The Hon’ble Supreme Court, today i.e. on 11th March 2019, in the matter of M/S Icomm Tele Ltd. v. Punjab State Water Supply & Sewerage Board & Anr. observed that a clause fixing a “pre-deposit” to arbitration deters a party to invoke arbitration, thus rendering the arbitral process ineffective and expensive. Therefore, such clause is liable to be struck down.

The Hon’ble Supreme Court observed 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. (Para 9)

Arbitrariness is a separate and distinct facet of Article 14. (Para 17)

A frivolous claim can be dismissed with exemplary costs. 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 on imposition of exemplary costs.  (Para 20 & Para 21)

Unless it is first found that the litigation that has been embarked upon is frivolous, exemplary costs or punitive damages do not follow.  (Para 23)

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. (Para 24)

If a clause mandates a pre-deposit to be made in order to invoke arbitration, then such clause would certainly amount to a clog on this process. (This inference has been drawn on the basis of Para 24)

Deterring a party to an arbitration from invoking this alternative dispute resolution process by a pre-deposit would discourage arbitration, contrary to the object of de-clogging the Court system, and would render the arbitral process ineffective and expensive. (Para 27)

Copy of judgement: Judgement_11-Mar-2019

-Tushar Kaushik

Leave a Reply

Your email address will not be published. Required fields are marked *