Validity of pre-deposit requirement in arbitration agreement: analysis of the

Supreme Court judgment in M/s ICOMM Tele Ltd. v. Punjab State Water
Supply and Sewerage Board & Anr.

Introduction:

The Supreme Court of India in its judgment in M/s ICOMM Tele Ltd. (“ICOMM”) v. Punjab State
Water Supply and Sewerage Board (“the Board”) & Anr. dated 11 March, 2019 ruled on the validity
of an arbitral clause mandating deposit of a certain percentage of the claim amount by the claimant
as a pre-condition for initiating arbitration proceedings. In the instant matter, which was heard by a
division bench comprising Justice R.F. Nariman and Justice Vineet Saran, judgment of the High Court
of Punjab and Haryana dated 08 March, 2017 (“impugned judgment”) was under challenge by way
of a Special Leave Petition.

Facts in brief:

In 2008, the Respondent issued a Notice Inviting Tender (“NIT”) for extension and augmentation of
water supply, sewerage scheme, pumping station and sewerage treatment plant for various towns
mentioned therein. The Appellant Company, which is primarily an engineering, procurement and
construction company in India, was awarded the said tender after having been found to be the best
suited for the task, following which a formal contract was entered into between the Appellant and
the Respondent. The NIT formed part and parcel of the formal agreement, and contained a detailed
arbitration clause. Clause 25(viii) in the NIT, which seems to be the bone of contention in the instant
case, is set out as follows:-

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

Upon disputes arising out of the conduct of the parties, ICOMM addressed letters to the respondent
seeking waiver of the 10% deposit fee. After having received no response, the Appellant filed a writ
petition before the High Court of Punjab and Haryana, challenging the validity of this part of the
arbitration clause, which was dismissed vide the impugned judgment stating that such tender
condition can in no way be said to be arbitrary or unreasonable.

Submissions of the parties & view of the apex court:

The Appellant contended that the arbitration clause contained in the NIT amounts to a contract of
adhesion, i.e., contracts in which there is unequal bargaining power, the clause ought to be struck
down in keeping with the principals laid down in Central Inland Water Transport Corpn. v. Brojo
Nath Ganguly. The Respondent expressed the contrary view arguing that the principle laid down in
the aforementioned judgment cannot possibly be applied to commercial contracts. The Court
concurred with the Respondent, and concluded that the apex court’s judgment in Central Inland
Water Transport Corpn., which lays down that contracts of adhesion between private persons and
the State are liable to be set aside on the ground that they are unconscionable, does not apply
where both parties are businessmen and the contract is a commercial transaction.

Violation of Article 14 of the Constitution of India, in light of the facts of the case, was strongly
contested by both parties. Respondents argued that the clause in contention cannot be said to be
discriminatory in that it applies equally to both the Respondent and the Appellant. The Appellant
further claimed that such a clause was arbitrary and violative of Article 14 as even if the award is in
favour of a claimant, what would be refunded is only in proportion to the actual amount awarded
with the rest being forfeited to a respondent, despite it having lost the case. The court placed
reliance on the apex court’s judgment in ABL International Ltd. v. Export Credit Guarantee to hold
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”.

Conclusion & key implications:

The Court thus opined that conditions laid down in the arbitration clause are arbitrary and violative
of Article 14 (even if not discriminatory) as a “deposit-at-call” clause, which can amount to large
sums of money, is without any direct nexus to the filing of frivolous claims; and the said clause
envisaged refund only in proportion to the amount awarded, with the balance being forfeited to the
other party, even though such a party may have lost the case.

The Court further held that it is well-settled that in case of a frivolous claim, the same may be
dismissed with exemplary costs.

The Supreme Court laid down great emphasis on the fact that the primary object of arbitration is to
reach a final disposal of disputes in a speedy, effective, inexpensive and expeditious manner, which
has also been reiterated by several judgments of the court. The Court consequently held that
“deterring a party to an 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”.

While the Court failed to delve into the policy argument supporting the incorporation of the other
half of the impugned clause, which provided for “the balance, if any, to be forfeited and paid to the
other party”, into the arbitration agreement, the judgment is laudable for being a unique example of
a court forwarding the object of arbitration by in fact taking the bold step of ‘interfering’ and
rectifying a commercial understanding between parties that was found to be arbitrary and
discouraging towards the arbitration process in a time when courts exercise judicial restraint in such
matters.