Acknowledgement.

I have taken efforts in the time-bound and plagiarism-free competition of this project.
However, it would not have been possible without the kind support and help of a number of
individuals that are part of the National Law Institute University, Bhopal.

I am greatly indebted to Kavita Ma’am for her able guidance and constant supervision
towards this project as well as for imparting the knowledge required for the same. I would
also like to express my gratitude towards all staff members of the National Law Institute
University, Bhopal for their kind cooperation and for providing us all with the resources
required to make this project.

My gratitude and appreciation also goes out to my colleagues who helped me in developing
this paper and to people who have willingly helped me out with their abilities. Thank you.
Appellant: M/s ICOMM Tele Ltd
v.
Respondents: Punjab State Water Supply and Sewerage Board & Anr.

Forum: Supreme Court of India

Date of Judgment: March 11, 2019

Bench: Justice R.F. Nariman, Justice Vineet Saran

Citation: Civil Appeal No. 2713 of 2019

Issue under consideration: Pre-deposit requirement in arbitration agreement

1. Brief Background & Material Facts.

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.

The present case, before the Supreme Court is a Civil Appeal arising out of a Special Leave
Petition.
2. Provisions under Consideration

Article 14 of the Indian Constitution provides for equality before law.

“The State shall not deny to any person equality before the law or the equal protection of the
laws within the territory of India.”

The State shall not deny to any person equality before the law or the equal protection of the
laws within the territory of India. Prohibition of discrimination on grounds of religion, race,
caste, sex or place of birth.
3. Issues before the Supreme Court.

1. Whether the requirement of pre-deposit agreement in arbitration agreement is

violative of Article 14 of the Indian Constitution?

2. Whether 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 an
arbitration agreement valid?

The issues before the Supreme Court are legal in nature and there are no questions of facts
involved.
4. Contentions (Arguments) Advanced.

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”.

Appellant’s contentions:

 The Appellant argued that the arbitration clause amounts to a contract of adhesion since
there is unfair bargaining power between the parties due to which it ought to be struck
down in keeping with the principals laid down in “Central Inland Water Transport Corpn
v Brojo Nath Ganguly (1986) 3 SCC 156”.
 The Appellant further argued 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 by the Respondent,
despite it having lost the case.
 Further, it argued that the 10% deposit requirement would amount to a clog on entering
the arbitration process while attempting to discourage filing of frivolous claim, and that in
any event, frivolous claims could be compensated through heavy costs stipulated in the
eventful award.

Respondents’ contentions:

 The Respondents countered the Petitioner’s submissions that there is no infraction of

Article 14 since the said clause would apply to both parties equally, and this being the
case, the clause cannot be struck down as being discriminatory.
 It further submitted that the case of Central Inland Water Transport Corp. which lays
down that contracts of adhesion i.e., contracts in which there is unequal bargaining power
between private persons and the State are liable to be set aside because they are
unconscionable, does not apply where both parties are businessmen and where the
contract is a commercial transaction.
5. References Cited.

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.

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”.
6. Judgment & Conclusion.

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.