Supreme Court of India
LOMBARDI ENGINEERING LIMITEDversusUTTARAKHAND JAL VIDYUT NIGAM LIMITED
- Citation
- 2023 INSC 976
- Decided
- 6 November 2023
- Disposal
- Appeal(s) allowed
- Bench
- D Y CHANDRACHUD
Holding
The 7% pre‑deposit requirement and the provision empowering the Principal Secretary to appoint a sole arbitrator are void as they are arbitrary, violate Article 14, and cannot be enforced, allowing the court to appoint an independent arbitrator.
Summary
Lombardi Engineering, a Swiss design consultancy, entered into a contract with Uttarakhand Vidyut Nigam Ltd for a hydro‑electric project, which was later transferred from UPDCC to the respondent. After the respondent terminated the contract, Lombardi invoked the arbitration clause in the General Conditions of Contract, which required a 7% pre‑deposit of the claim and gave the Principal Secretary (Irrigation) the power to appoint a sole arbitrator. Lombardi filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 seeking appointment of an arbitrator. The Supreme Court examined whether the pre‑deposit clause and the appointment provision were arbitrary and violative of Article 14 of the Constitution, and whether they conflicted with earlier decisions in S.K. Jain and ICOMM Tele. The Court held that the 7% pre‑deposit condition was vague, arbitrary and therefore unconstitutional, and that the clause empowering the government official to appoint an arbitrator could be ignored. Consequently, the Court exercised its power under Section 11(6) to appoint an independent arbitrator, disregarding the contractual appointment procedure.
Issues considered
- The applicability of the ICOMM Tele Limited ruling to the 7% pre‑deposit clause in Clause 55.
- Whether there is a direct conflict between the decisions in S.K. Jain and ICOMM Tele Limited.
- Whether the pre‑deposit condition in the arbitration clause violates Article 14 of the Constitution when examined in a Section 11(6) petition.
- Whether Clause 55’s empowerment of the Principal Secretary/Secretary (Irrigation) to appoint a sole arbitrator conflicts with the decision in Perkins Eastman Architects.
- The scope of the court’s jurisdiction under Section 11(6) after the 2015 amendment to the Arbitration Act.
Legislation cited
- Arbitration and Conciliation Act, 1996s. 11(12), s. 11(6), s. 12(5), s. 31A, s. 7
- Arbitration and Conciliation (Amendment) Act, 2015s. 6A
- Constitution of Indias. Article 14
Subjects
ArbitrationPre‑deposit clauseArticle 14Party autonomyArbitrator appointmentUnconscionabilityGrundnormSection 11(6)Neutrality of arbitratorsGovernment contracts
Judgment
[2023] 13 S.C.R. 943 : 2023 INSC 976
CASE DETAILS
LOMBARDI ENGINEERING LIMITED
v.
UTTARAKHAND JAL VIDYUT NIGAM LIMITED
(Arbitration Petition No. 43 of 2022)
NOVEMBER 6, 2023
[DR. DHANANJAYA Y. CHANDRACHUD, CJI,
J.B. PARDIWALA AND MANOJ MISRA, JJ.]
HEADNOTES
Issue for consideration: Whether the dictum as laid down in ICOMM
Tele Limited’s case can bemade applicable to the instant case, when Clause
55 of the General Conditions of Contract provides for a pre-deposit of 7%
of the total claim for the purpose of invoking the arbitration clause; whether
there is any direct conflict between the decisions of this Court in S.K. Jain’s
case and ICOMM Tele Limited ’s case; whether this Court while deciding
a petition filed u/s. 11(6) ofthe Arbitration andConciliation Act, 1996 for
appointment of a sole arbitrator can hold that the condition of pre-deposit
stipulated in the arbitration clause as provided in the Contract is violative of
the Article 14 of the Constitution; and whether the arbitration Clause No. 55
of the Contract empowering the Principal Secretary/Secretary (Irrigation)
to appoint an arbitrator of his choice is in conflict with the decision of this
Court in Perkins Eastman’s case.
Arbitration and Conciliation Act, 1996 – Arbitration agreement
– Arbitration clause – Invocation of – Clause 55 of the General
Conditions of Contract providing for a pre-deposit of 7% of the total
claim – Validity of:
Held: As regards 7% pre-deposit condition, nothing has been provided
as to how this amount of 7% is to be ultimatelyadjusted at the end of the
arbitral proceedings – Clauses 3 and 4 respectively relating to security
deposit for performance and refund of the same, has no nexus at all with
the pre-deposit amount of 7% as stipulated in Clause 55 of the GCC – Such
943
944 SUPREME COURT REPORTS [2023] 13 S.C.R.
vague and ambiguous condition of 7% pre-deposit of the total claim makes
the same more vulnerable to arbitrariness thereby violating Article 14 of the
Constitution – Thus, the Conditions contained in Clause 55 of the GCC,
relating to 7% deposit of the total amount claimed should be ignored.
[Para 66, 68]
Arbitration and Conciliation Act, 1996 – Arbitration agreement –
Pre-deposit clause – S.K. Jain’s case and ICOMM Tele Limited ’s case
where substantive challenges made to the pre-deposit clause , if any
direct conflict between the said decisions of this Court:
Held: There is no conflict between S.K. Jain’s case and ICOMM
Tele Limited’s case, as the relevant arbitration clauses that fell for the
consideration of this Court in both the cases stood completely on a different
footing. [Para 61]
Arbitration and Conciliation Act, 1996 – s. 11(6) – Petition under,
for appointment of arbitrator – Validity of the pre-deposit condition
as contained in the arbitration clause – If it could be looked into and
decided on the anvil of Article 14 of the C onstitution in the petition:
Held: It cannot be said that this Court while considering an application
u/s. 11(6) for the appointment of arbitrator should not testthe validity or
reasonableness of the conditions stipulated in the arbitration clause on the
touchstone or anvil of Article 14 of the Constitution – It would be too much
to say that it is only the writ court in a petition u/Art. 226 that can consider
whether a particular condition in the arbitration clause is arbitrary – Concept
of “party autonomy” cannot be stretched to an extent where it violates the
fundamental rights under the Constitution – For an arbitration clause to be
legally binding it has to be in consonance with the “operation of law” which
includes the Grundnorm-the Constitution – There can be no consent against
the law and there can be no waiver of fundamental rights. [Para 70, 71, 84, 85]
Arbitration and Conciliation Act, 1996 – s. 11(6) – Appointment
of an arbitrator – Arbitration Clause of the Contract empowering the
Principal Secretary/Secretary (Irrigation) to appoint an arbitrator of his
choice, if covered by the decision of this Court in Perkins Eastman’s case:
Held: If circumstances exist giving rise to justifiable doubts as
to the independence and impartiality of the person nominated or if other
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 945
VIDYUT NIGAM LTD.
circumstances warrant appointment of an independent arbitrator by ignoring
the procedure prescribed, the Chief Justice or his designate may, for reasons
to be recorded ignore the designated arbitrator and appoint someone else
– On facts, the condition contained in Clause 55 of the GCC as regardsthe
stipulation empowering the Principal Secretary (Irrigation) Government of
Uttarakhand to appoint a sole arbitrator is ignored and proceed to appoint
an independent arbitrator. [Para 87, 102]
s. 12(5) – Neutrality of Arbitrators:
Held: T erm “neutrality” used is relatable to impartiality and
independence of the arbitrators,without any bias towards any of the parties –
Sub-section (5) of s. 12 lays down that notwithstanding any prior agreement
to the contrary, any person whose relationship with the parties or counsel or
the subject-matter of the dispute falls under any of the categories specified in
the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator –
In suchan eventuality, when the arbitration clause finds foul with the amended
provisions, the appointment of an arbitrator would be beyond pale of the
arbitration agreement, empowering the court to appoint such arbitrator(s)
as may be permissible – That would be the effect of the non obstanteclause
contained in s. 12(5) and the other party cannot insiston appointment of the
arbitrator in terms of the arbitration agreement. [Para 90, 91]
Jurisprudence – Kelson’s Pure Theory of Law on the basic norm –
Application of “Grundnorm” in India:
Held: In the context of the Arbitration Agreement, the layers of the Grundnorm
as per Kelsen’s theory would be in the following hierarchy-Constitution of India;
Arbitration and Conciliation Act, 1996 & any other Central/State Law;
and Arbitration Agreement entered into by the parties in light of s. 7 of the
Arbitration and Conciliation Act, 1996 – Thus, the Arbitration Agreement
has to comply with the requirements of the following and cannot fall foul
of s. 7 of the Arbitration and Conciliation Act; any other provisions of
the Arbitration and Conciliation Act, 1996 & Central/State Law; and the
Constitution of India – Arbitration and Conciliation Act, 1996 – Constitution
of India .[Paras 78,81,82]
Doctrines/Principles – Doctrine of unconscionability – Discussed.
[Para 95-101]
946 SUPREME COURT REPORTS [2023] 13 S.C.R.
LIST OF CITATIONS AND OTHER REFERENCES
Perkins Eastman Architects DPC and Another v. HSCC (India) Limited
(2020) 20 SCC 760; ICOMM Tele Limited v. Punjab State Water Supply and
Sewerage Board and Another (2019) 4 SCC 401: [2019] 2 SCR 984; Iron &
Steel Co. Ltd. v. Tiwari Road Lines (2007) 5 SCC 703: [2007] 6 SCR 156;
National Highways Authority of India and Another v. Bumihiway DDB Ltd.
(JV) and Others (2006) 10 SCC 763: [2006] 6 Suppl. SCR 586; Yash with
Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd. and Another
(2006) 6 SCC 204: [2006] 3 Suppl. SCR 96; S.K. Jain v. State of Haryana
and Another (2009) 4 SCC 357: [2009] 2 SCR 1080; State of West Bengal
and Others v. Associated Contractors (2015) 1 SCC 32: [2014] 10 SCR
426; Duro Felguera, S.A. v. Gangavaram Port Limited (2017) 9 SCC 729:
[2017] 10 SCR 285; Vidya Drolia and Others v. Durga Trading Corporation
(2021) 2 SCC 1: [2020] 11 SCR 1001; Pravin Electricals Private Limited
v. Galaxy Infra and Engineering Private Limited (2021) 5 SCC 671: [2021]
1 SCR 1162; Sanjiv Prakash v. Seema Kukreja and Others (2021) 9 SCC
732; Indian Oil Corporation Limited v. NCC Limited (2023) 2 SCC 539;
Bharat Sanchar Nigam Limited and Another v. Nortel Networks India Private
Limited (2021) 5 SCC 738: [2021] 2 SCR 644; Secunderabad Cantonment
Board v. B. Ramachandraiah and Sons (2021) 5 SCC 705: [2021] 3 SCR 68;
B and T AG v. Ministry of Defence 2023 SCC OnLine SC 657; Municipal
Corpn., Jabalpur And Others V. Rajesh Construction Co. (2007) 5 SCC
344: [2007] 5 SCR 137; Lite Bite Foods Pvt. Ltd. v. Airports Authority of
India reported in 2020 SCC OnLine Ker 4736, The Assan Co-Op. L & C
Society v. Haryana Vidyut Prasaran Nigam Ltd., ARB-127-2019 (Section
11 Petition); CWP-13539-2021 (Civil Writ Petition); Garg and Company
v. State of Haryana & Ors., CWP Nos. 21840 of 2020, 21857 of 2020 and
21858 of 2020 (O&M); Brij Gopal Construction Co. Pvt. Ltd. v. Haryana
Shehri Vikas Pradhikaran, CWP-14587-2022 (O&M); Bathinda Railway
Transhipment Cooperative L&C Society Ltd. v. Punjab Mandi Board & Ors.,
Civil Writ Petition No. 28981 of 2019 (O&M); Amazing India Contractors
Pvt. Ltd. v. Airport Authority of India and Others reported in 2023 SCC
OnLine Cal 1704, C.O. 66 of 2022; A.L. Kalra v. Project and Equipment
Corporation of India Ltd. (1984) 3 SCC 316: [1984] 3 SCR 646; TRF Limited
v. Energo Engineering Projects Limited (2017) 8 SCC 377: [2017] 7 SCR
409; Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 947
VIDYUT NIGAM LTD.
(2017) 4 SCC 665: [2017] 1 SCR 798; Squadron Leader H. S. Kulshrestha v
Union of India 1999 SCC OnLine All 270; Abdur Sukur & Another v State
of West Bengal & others 2019 SCC Online Cal 5455; Om Prakash Gupta
v Hindustan Petroleum Corporation Ltd. & Anr. 2009 SCC OnLine Raj
1381; Sunil v State of M. P. & Another reported in 2016 SCC OnLine MP
8551; Government of Andhra Pradesh & Ors vs Smt. P. Laxmi Devi (2008)
4 SCC 720: [2008] 3 SCR 330; Olga Tellis and Others v. Bombay Municipal
Corporation and Others (1985) 3 SCC 545: [1985] 2 Suppl. SCR 51; Datar
Switchgears Ltd. v. Tata Finance Ltd (2000) 8 SCC 151; Punj Lloyd Ltd.
v. Petronet MHB Ltd. (2006) 2 SCC 638; Union of India v. Bharat Battery
Mfg. Co. (P) Ltd. (2007) 7 SCC 684: [2007] 8 SCR 993; Deep Trading Co.
v. Indian Oil Corpn. (2013) 4 SCC 35: [2013] 2 SCR 470; Union of India
v. Singh Builders Syndicate (2009) 4 SCC 523: [2009] 3 SCR 563; North
Eastern Railway v. Tripple Engg. Works (2014) 9 SCC 288: [2014] 6 SCR
1143; Union of India and Others v. Uttar Pradesh State Bridge Corporation
Limited (2015) 2 SCC 52: [2014] 13 SCR 1180 - referred to.
Uber Technologies Inc., Uber Canada, Inc., Uber B.V. and Rasier
Operations B.V. v. David Heller 2020 SCC OnLine Can SC 13; Patterson
v. ITT Consumer Financial Corporation reported in 18 Cal. Rptr. 2d 563
(Cal. Ct. App. 1993); Vegter v. Forecast Financial Corporation reported in
2007 WL 4178947 – referred to.
OTHER CASE DETAILS INCLUDING IMPUGNED
ORDER AND APPEARANCES
CIVIL ORIGINAL JURISDICTION : Arbitration Petition No.43 of
2022.
Petition Under Section 11 (6) read with Section 11 (12) of the
Arbitration and Conciliation Act, 1996.
Appearances:
Sidhant Goel, Mohit Goel, Ms. Garima Bajaj, Shubham Saxena,
Abhishek Kotnala, Karmanya Dev Sharma, Advs. for the Petitioner.
Amit Anand Tiwari, K. K. Sinha, Ms. Devyani Gupta, Ms. Tanvi
Anand, Ms. Saushriya Havelia, Anirudh Singh, Ms. Arjoo Rawat, Advs.
for the Respondent.
948 SUPREME COURT REPORTS [2023] 13 S.C.R.
JUDGMENT / ORDER OF THE SUPREME COURT
JUDGMENT
J. B. PARDIWALA, J.
1. This is a petition under Section 11(6) of the Arbitration and
Conciliation Act, 1996 (for short, “the Act 1996”) filed at the instance of
a company based in Switzerland and engaged in the business of design
consultancy seeking appointment of an arbitrator for the adjudication of
disputes and claims emanating from the Contract dated 25.10.2019 entered
into between the petitioner and respondent i.e., Uttarakhand Vidyut Nigam
Limited (a wholly owned corporation of the Government of Uttarakhand).
FACTUAL MATRIX
2. The petitioner is a design consultancy firm based in Switzerland,
having its registered office at Via Del Tiglio 2, PO Box 934, CH 934, CH
6512, Bellinzona-Guibiasco, Switzerland and local Indian address at B3/61,
1st Floor, Safdarjung Enclave, Delhi – 110029.
3. The respondent is a wholly owned corporation of the Government
of Uttarakhand having its registered office at Maharani Bagh, GMS Road,
Dehradun, Uttarakhand, India and is engaged in the business of operating
hydro power plants in the State of Uttarakhand.
4. The petitioner entered into a contract with the Uttarakhand Project
Development and Construction Corporation Limited (hereinafter referred
to as “UPDCC”) for “Providing consultancy services and preparation
of modified comprehensive and bankable Detailed Project Report of
Arakot Tiuni Hydro Electric Project on river Pabar in district Uttarkashi
of Uttarakhand” dated 25.10. 2019 (Tender Reference No. 01/DGM/
UPDCC/2018-19) (hereinafter referred to as, ‘the Contract’ or ‘the Project’).
The Project was valued at Rs. 1,39,45,000/- (Rupees One Crore Thirty-Nine
Lac Forty-Five Thousand only) (hereinafter referred to as the “Contract
Value”). The petitioner was to commence work on the date of the execution
of the Contract, i.e., 25.10.2019 and complete the work within 24 months,
i.e., by 25.09.2021.
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 949
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
5. The Schedule A to Clause 5 of the Special Conditions of Contract
(SCC) (hereinafter referred to as the “Schedule A”) provided for the
completion period of all works that the petitioner was required to carry out
under the Project. Further, the Schedule B to Clause 5 of the SCC (hereinafter
referred to as the “Schedule B”) provided for the payment that was to be
released to the petitioner upon the completion of each stage of work.
6. The respondent took over the said Project from the UPDCC
pursuant to an order dated 08.05.2020, passed by the Government of
Uttarakhand, which directed that the Project be transferred from UPDCC
to the respondent. The takeover of the Project was done by virtue of a
tripartite agreement dated 06.10.2020 (hereinafter referred to as the
“Tripartite Agreement”), whereby the Contract was novated to the extent
that the respondent stepped into the shoes of UPDCC and took over all
the obligations under the Contract.
7. The Clause 53 read with Clause 55 of the General Conditions of
Contract (hereinafter referred to as “GCC”), which forms part and parcel
of the Contract between the petitioner and the respondent, set out the
Arbitration Agreement. The said clauses are reproduced hereinbelow for
reference:
“CLAUSE-53: PROCEDURE FOR CLAIMS:
53.1 If a dispute of any kind, whatsoever, arises between the Employer
and contractor in connection with or arising out of the contract for
the execution of this works, whether during the execution of the works
or after their completion and whether before or after repudiation or
termination of the contract, including any disagreement by either
party with any action, inaction, opinion, instruction determination,
certificate or valuation of the Engineer, the matter in dispute shall, be
referred to in accordance with the provisions of the Arbitration and
Conciliation Act, 1996 or any statutory modification or re-enactment
thereof and the rules made the under and for the time being in force,
shall apply to the arbitration proceedings.
53.2 The contractor shall submit the details of his claims in writing
including:
950 SUPREME COURT REPORTS [2023] 13 S.C.R.
(i) Particulars concerning the events on which the claim is based;
(ii) the legal basis for the claim, whether based on a term of the
Contract or otherwise, and if based on a term of the Contract, clearly
identifying the specific term;
vii) the facts relied upon in support of the Claim in sufficient detail to
permit verification; and
viii) details of the amount claimed and how it has been calculated.
Xxx xxx xxx
CLAUSE-55: ARBITRATION:
(a) All question and disputes relating to the meaning of the
specification design, drawing and instructions herein and as to
the quality of workmanship or materials used on the work or as
to any other question claim, right, matter or thing, whatsoever
in any way arising out of or relating to the contract, designs,
drawings, specifi cation, estimates instructions, orders or
these condition or otherwise concerning the works or the
execution or failure to execute the same, whether arising
during the progress of the work or after the cancellation,
termination, completion or abandonment thereof, shall be
conducted in accordance with the provisions of the Arbitration
and Conciliation Act, 1996 or any statutory modification or
re-enactment thereof and the rules made the under and for the
time being in force, shall apply to the arbitration proceedings.
However, the Party initiating the arbitration claim shall have
to deposit 7% of the arbitration claim in the shape of Fixed
Deposit Receipt as security deposit.
(b) On submission of claims the Arbitrator shall be appointed as per
the following procedure:
I) For claim amount upto 10.00 Crores, the case shall be referred to
Sole Arbitrator to be appointed by the Principal Secretary/Secretary
(Irrigation), GoU,…”
(Emphasis supplied)
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 951
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
8. In the wake of various disputes that arose between the parties, the
petitioner herein issued a notice of arbitration dated 06.05.2022, calling
upon the respondent to appoint an arbitrator in terms of the arbitration clause
contained in the GCC referred to above. The relevant part of the arbitration
notice reads thus:
“26. The Respondent’s failure to pay the Claimant’s outstanding dues,
therefore, entitles the Claimant to invoke the arbitration clause contained
in 53 and 55 of the GCC for settlement of the Claimant’s claims of a total
of INR 1,04,32.664.86/- (Indian Rupees One Crore Four Lacs Thirty-two
Thousand Six Hundred and Sixty-Four and Eighth-Six Paise only), i.e. INR
32,91,020/- (Indian Rupees Thirty Two Lakh Ninety One Thousand and Twenty
only) towards Invoice dated 27 July 2020 and INR. 71,41,644.86/- (Indian
Rupees Seventy-One Lacs Forty-One Thousand Six Hundred and Forty-
Four and Eighty Six Paise only) for financial loss suffered by the Claimant
on account of abandonment of the Contract by the Respondent. This Notice
is without prejudice to the Claimant’s rights to correct/amend/update/add any
other additional figure/facts that may come to its notice in support of its claim,
which rights are expressly reserved.
27. Since the Claimant’s claim is for an amount less than INR 10 Crores,
under Clause 55(b)(I) of the GCC, a sole arbitrator is to be appointed
by the Principal Secretary/ Secretary (Irrigation), Government of
Uttarakhand. Notwithstanding the foregoing, the Claimant submits that in
light of recent amendments to the Arbitration and Conciliation Act, 1996 and
settled prevalent law laid down by the Hon’ble Supreme Court in the case of
Perkins Eastman Architects DPC and Another v. HSCC (India) Limited
[(2020) 20 SCC 760], the unilateral right of appointment given to the
Respondent under the Contract, is not enforceable as on date. Therefore,
the Claimant will propose the name of an arbitrator in this Notice, for
consideration and appointment by the Respondent. The Claimant proposes
the appointment of Mr. S.K. Sarvaria, District & Sessions Judge (Retired),
Mobile No. 9910384642, as the Sole Arbitrator for the claims raised by
the Claimant. The Respondent is requested to intimate its confirmation for the
aforementioned nominee or provide an alternative name for appointment
of the Ld. Sole Arbitrator, who shall be appointed only by mutual consent
after the Claimant’s written approval.
952 SUPREME COURT REPORTS [2023] 13 S.C.R.
28. The Respondent is requested to intimate its approval to the nominee
proposed by the Claimant, within 15 (fifteen) days of the receipt of this Notice,
failing which the Claimant will exercise all rights under applicable law for
the commencement of arbitration proceedings.”
9. It is the case of the petitioner that instead of appropriately responding
to the aforesaid notice of arbitration, the respondent issued a letter dated
09.05.2022, terminating the Contract alleging non-compliance of work and
non-fulfilment of the contractual obligation.
10. In such circumstances referred to above, the petitioner has preferred
the present application for appointment of an arbitrator invoking Section
11(6) of the Act 1996.
SUBMISSIONS ON BEHALF OF THE PETITIONER
11. Mr. Sidhant Goel, the learned counsel appearing for the petitioner
submitted that the case on hand, is one of “international commercial
arbitration” within the meaning of Section 2(f) of the Act 1996 as his client
is incorporated outside India. He submitted that under Section 11(12)(a)
of the Act 1996, this Court has the requisite jurisdiction to take necessary
measures for the constitution of an arbitral tribunal under Section 11(6)
of the Act 1996 as the case is one of international commercial arbitration.
12. The learned counsel submitted that Clause 55.1(b)(I) of the
Contract which provides for appointment of a sole arbitrator by the Principal
Secretary/Secretary (Irrigation), Government of Uttarakhand is in teeth of
the decision of this Court in Perkins Eastman Architects DPC and Another
v. HSCC (India) Limited reported in (2020) 20 SCC 760. He submitted that
the unilateral right of appointment of the arbitrator given to the respondent
under the Contract is unenforceable as on date.
13. The learned counsel further submitted that the condition for pre-
deposit of 7% of the claimed amount to initiate arbitration in accordance
with Clause 55.1(b)(I) of the Contract is contrary to the decision of this
Court in the case of ICOMM Tele Limited v. Punjab State Water Supply
and Sewerage Board and Another reported in (2019) 4 SCC 401.
14. It was argued that such a clause could be termed as arbitrary being
violative of Article 14 of the Constitution in the sense of being unfair and
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 953
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
unjust. It was also argued that such clauses in the Contract do not have any
nexus in preventing any frivolous or vexatious claims in determination to
such claims.
15. In such circumstances referred to above, the learned counsel prayed
that there being merit in this petition the same may be allowed and a sole
arbitrator be appointed to resolve the disputes between the parties.
SUBMISSIONS ON BEHALF OF THE RESPONDENT
16. Mr. Amit Anand Tiwari, the learned counsel appearing for the
respondent vehemently submitted that the present petition deserves to be
outright rejected as the petitioner has failed to comply with the two pre-
conditions: (i) the pre-deposit of 7% of the claimed amount and (ii) failure
on the part of the petitioner to approach the Principal Secretary/Secretary
(Irrigation), Government of Uttarakhand for appointment of an arbitrator
as provided under Clause 55 of the Contract.
17. In the aforesaid context, he strongly relied upon the decisions of this
Court in the cases of Iron & Steel Co. Ltd. v. Tiwari Road Lines reported
in (2007) 5 SCC 703, National Highways Authority of India and Another
v. Bumihiway DDB Ltd. (JV) and Others reported in (2006) 10 SCC 763
and Yashwith Constructions (P)Ltd. v. Simplex Concrete Piles India Ltd.
and Another reported in (2006) 6 SCC 204.
18. He submitted that the respondent cannot be said to have failed to
act as required under the prescribed procedure. He invited the attention of
a three-Judge Bench of this Court to a decision in the case of S.K. Jain v.
State of Haryana and Another reported in (2009) 4 SCC 357, wherein a
similar clause requiring a security deposit of certain percentage of the claim
amount was held to be valid. He argued that the reliance on the decision
of this Court in the case of ICOMM Tele Limited (supra) by the petitioner
is completely misconceived as the relevant arbitration clause therein was
quite differently worded vis-a-vis the pre-deposit clause provided in the
case of S.K. Jain (supra).
19. He submitted that in the absence of any clause to the contrary, the
security deposit is refundable by virtue of being only a deposit for “security”.
The object of such a clause is to ensure that only valid and bona fide claims
are made by the parties, and that the project is not hindered by frivolous
954 SUPREME COURT REPORTS [2023] 13 S.C.R.
and baseless claims. He submitted that a three-Judge Bench of this Court
in S.K. Jain (supra) found the clause providing for pre-deposit to be logical
and containing a balancing factor to prevent frivolous and inflated claims.
The relevant clause in S.K. Jain (supra) provided that on the termination of
arbitration proceedings, the sum would be adjusted against the costs awarded
by the arbitrator and the balance amount would be refunded. In ICOMM Tele
Limited (supra), the contract expressly provided for forfeiture of the security
deposit, even in the event of the award going in favour of the party which
made the deposit. In such circumstances, this Court held such a clause to
be arbitrary being violative of Article 14 of the Constitution. In the present
case, the Contract does not provide for any such forfeiture under Clause
55 and by virtue of the terminology used, the amount is to be deposited
as a “security”. It was submitted that the same should be understood to be
refundable upon completion of the proceedings between the parties. It was
argued that in any case, Clause 4 of the GCC stipulates that the security
deposit is to be refunded to the contractor on demand, after 14 days of expiry
of Defects Liability Period. It does not exclude the security deposit made
under Clause 55 from its purview.
20. He submitted that as such there is no challenge to the pre-deposit
clause in the petition and the present petition under Section 11(6) of the
Act 1996 is only for appointment of an arbitrator. The judgments in S.K.
Jain (supra) and ICOMM Tele Limited (supra), relied upon on behalf of
the petitioner were delivered in appeals arising out of writ petitions before
the respective High Courts, where substantive challenges were made to the
pre-deposit clause.
21. It was also argued that the petitioner having consented to the pre-
deposit clause cannot be permitted to turn around and question its validity
at the stage when a petition under Section 11(6) of the Act, 1996 is being
considered, thereby circumventing the principle of “party autonomy”.
22. In the last, it was argued that any order passed by this Court under
Section 11(6) of the Act 1996 cannot be treated as a binding precedent in
view of the decision of this Court in State of West Bengal and Others v.
Associated Contractors reported in (2015) 1 SCC 32.
23. In such circumstances referred to above, the learned counsel
appearing for the respondent prayed that there being no merit in the petition,
the same be rejected.
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 955
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
ANAYLSIS
24. Having heard the learned counsel appearing for the parties and
having gone through the materials on record, the following issues fall for
the consideration of this Court:
(i) Whether the dictum as laid down in ICOMM Tele Limited (supra)
can be made applicable to the case in hand more particularly when
Clause 55 of the General Conditions of Contract provides for a
pre-deposit of 7% of the total claim for the purpose of invoking
the arbitration clause?
(ii) Whether there is any direct conflict between the decisions of this
Court in S.K. Jain (supra) and ICOMM Tele Limited (supra)?
(iii) Whether this Court while deciding a petition filed under Section
11(6) of the Act 1996 for appointment of a sole arbitrator can
hold that the condition of pre-deposit stipulated in the arbitration
clause as provided in the Contract is violative of the Article 14
of the Constitution of India being manifestly arbitrary?
(iv) Whether the arbitration Clause No. 55 of the Contract
empowering the Principal Secretary/Secretary (Irrigation), State
of Uttarakhand to appoint an arbitrator of his choice is in conflict
with the decision of this Court in the case of Perkins Eastman
(supra)?
JURISDICTION OF THE COURT UNDER SECTION 11(6) OF
THE ACT 1996
25. In the wake of a few decisions of this Court, the legislature thought
fit to add sub section (6A) to Section 11 of the Act 1996 by way of the
Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter referred
to as “Amendment 2015”). The same reads thus:
“(6A) The Supreme Court or, as the case may be, the High Court,
while considering any application under subsection (4) or sub-section
(5) or sub-section (6), shall, notwithstanding any judgment, decree or
order of any court, confine to the examination of the existence of an
arbitration agreement.”
(Emphasis supplied)
956 SUPREME COURT REPORTS [2023] 13 S.C.R.
26. Taking cognizance of the legislative change, this Court in Duro
Felguera, S.A. v. Gangavaram Port Limited reported in (2017) 9 SCC 729,
noted that post the 2015 Amendment, the jurisdiction of the court under
Section 11(6) of the Act, 1996 is limited to examining whether an arbitration
agreement exists between the parties - “nothing more, nothing less”.
27. The entire case law on the subject was considered by a three-
judge bench of this Court in Vidya Drolia and Others v. Durga Trading
Corporation reported in (2021) 2 SCC 1, and an overarching principle with
respect to the pre-referral jurisdiction under Section 11(6) of the Act was
laid down. The relevant portion of the judgment is as follows:
“153. Accordingly, we hold that the expression “existence of an
arbitration agreement” in Section 11 of the Arbitration Act, would
include aspect of validity of an arbitration agreement, albeit the
court at the referral stage would apply the prima facie test on the
basis of principles set out in this judgment. In cases of debatable and
disputable facts, and good reasonable arguable case, etc., the court
would force the parties to abide by the arbitration agreement as the
Arbitral Tribunal has primary jurisdiction and authority to decide the
disputes including the question of jurisdiction and non-arbitrability.
154. Discussion under the heading “Who Decides Arbitrability?” can
be crystallised as under:
154.1. Ratio of the decision in Patel Engg. Ltd. [SBP & Co. v. Patel
Engg. Ltd., (2005) 8 SCC 618] on the scope of judicial review by
the court while deciding an application under Sections 8 or 11 of
the Arbitration Act, post the amendments by Act 3 of 2016 (with
retrospective effect from 23-10-2015) and even post the amendments
vide Act 33 of 2019 (with effect from 9-8-2019), is no longer applicable.
154.2. Scope of judicial review and jurisdiction of the court under
Sections 8 and 11 of the Arbitration Act is identical but extremely
limited and restricted.
154.3. The general rule and principle, in view of the legislative
mandate clear from Act 3 of 2016 and Act 33 of 2019, and the principle
of severability and competence-competence, is that the Arbitral
Tribunal is the preferred first authority to determine and decide all
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 957
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
questions of non-arbitrability. The court has been conferred power of
“second look” on aspects of non-arbitrability post the award in terms
of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of
Section 34(2)(b) of the Arbitration Act.
154.4. Rarely as a demurrer the court may interfere at Section 8 or
11 stage when it is manifestly and ex facie certain that the arbitration
agreement is non-existent, invalid or the disputes are non-arbitrable,
though the nature and facet of non-arbitrability would, to some extent,
determine the level and nature of judicial scrutiny. The restricted
and limited review is to check and protect parties from being forced
to arbitrate when the matter is demonstrably “non-arbitrable” and
to cut off the deadwood. The court by default would refer the matter
when contentions relating to non-arbitrability are plainly arguable;
when consideration in summary proceedings would be insufficient
and inconclusive; when facts are contested; when the party opposing
arbitration adopts delaying tactics or impairs conduct of arbitration
proceedings. This is not the stage for the court to enter into a mini
trial or elaborate review so as to usurp the jurisdiction of the Arbitral
Tribunal but to affirm and uphold integrity and efficacy of arbitration
as an alternative dispute resolution mechanism.”
(Emphasis supplied)
28. The limited scope of judicial scrutiny at the pre-referral stage is
navigated through the test of a prima facie review. This is explained as under:
“133. Prima facie case in the context of Section 8 is not to be
confused with the merits of the case put up by the parties which has
to be established before the Arbitral Tribunal. It is restricted to the
subject-matter of the suit being prima facie arbitrable under a valid
arbitration agreement. Prima facie case means that the assertions on
these aspects are bona fide. When read with the principles of separation
and competence-competence and Section 34 of the Arbitration Act, the
referral court without getting bogged down would compel the parties
to abide unless there are good and substantial reasons to the contrary.
134. Prima facie examination is not full review but a primary first
review to weed out manifestly and ex facie non-existent and invalid
958 SUPREME COURT REPORTS [2023] 13 S.C.R.
arbitration agreements and non-arbitrable disputes. The prima facie
review at the reference stage is to cut the deadwood and trim off the
side branches in straightforward cases where dismissal is barefaced
and pellucid and when on the facts and law the litigation must stop at
the first stage. Only when the court is certain that no valid arbitration
agreement exists or the disputes/subject-matter are not arbitrable,
the application under Section 8 would be rejected. At this stage, the
court should not get lost in thickets and decide debatable questions
of facts. Referral proceedings are preliminary and summary and not
a mini trial…
xxx xxx xxx
138…On the other hand, issues relating to contract formation,
existence, validity and non-arbitrability would be connected and
intertwined with the issues underlying the merits of the respective
disputes/claims. They would be factual and disputed and for the
Arbitral Tribunal to decide.
139. We would not like to be too prescriptive, albeit observe that
the court may for legitimate reasons, to prevent wastage of public
and private resources, can exercise judicial discretion to conduct an
intense yet summary prima facie review while remaining conscious
that it is to assist the arbitration procedure and not usurp jurisdiction
of the Arbitral Tribunal. Undertaking a detailed full review or a long-
drawn review at the referral stage would obstruct and cause delay
undermining the integrity and efficacy of arbitration as a dispute
resolution mechanism. Conversely, if the court becomes too reluctant
to intervene, it may undermine effectiveness of both the arbitration and
the court. There are certain cases where the prima facie examination
may require a deeper consideration. The court’s challenge is to find
the right amount of and the context when it would examine the prima
facie case or exercise restraint. The legal order needs a right balance
between avoiding arbitration obstructing tactics at referral stage and
protecting parties from being forced to arbitrate when the matter is
clearly non-arbitrable.
140. Accordingly, when it appears that prima facie review would be
inconclusive, or on consideration inadequate as it requires detailed
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 959
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
examination, the matter should be left for final determination by the
Arbitral Tribunal selected by the parties by consent. The underlying
rationale being not to delay or defer and to discourage parties from
using referral proceeding as a ruse to delay and obstruct. In such
cases a full review by the courts at this stage would encroach on the
jurisdiction of the Arbitral Tribunal and violate the legislative scheme
allocating jurisdiction between the courts and the Arbitral Tribunal.
Centralisation of litigation with the Arbitral Tribunal as the primary
and first adjudicator is beneficent as it helps in quicker and efficient
resolution of disputes.”
(Emphasis supplied)
29. Following the general rule and the principle laid down
in Vidya Drolia (supra), this Court has consistently been holding that
the arbitral tribunal is the preferred fi rst authority to determine and
decide all questions of non-arbitrability. In Pravin Electricals Private
Limited v. Galaxy Infra and Engineering Private Limited reported in
(2021) 5 SCC 671, Sanjiv Prakash v. Seema Kukreja and Others reported
in (2021) 9 SCC 732 and Indian Oil Corporation Limited v. NCC Limited
reported in (2023) 2 SCC 539, the parties were referred to arbitration,
as the prima facie review in each of these cases on the objection of non-
arbitrability was found to be inconclusive. Following the exception to
the general principle that the court may not refer parties to arbitration
when it is clear that the case is manifestly and ex facie non-arbitrable,
in Bharat Sanchar Nigam Limited and Another v. Nortel Networks
India Private Limited reported in (2021) 5 SCC 738, Secunderabad
Cantonment Board v. B. Ramachandraiah and Sons reported in (2021)
5 SCC 705 and B and T AG v. Ministry of Defence reported in 2023
SCC OnLine SC 657, arbitration was refused as the claims of the parties
were demonstrably time-barred.
30. In the case on hand, we are not concerned with the issue relating to
the arbitrability of the dispute. It is not even the case of the respondent that
the dispute is ex facie non-arbitrable. The case put up by the respondent is
that there is definitely an arbitrable dispute and the same should be referred
to the arbitral tribunal, however, the petitioner should abide by Clause 55
of the Contract.
960 SUPREME COURT REPORTS [2023] 13 S.C.R.
31. In the case on hand, we are concerned first with the validity of the
arbitration clause which provides for 7% pre-deposit of the total claim for
the purpose of invoking arbitration and secondly, the discretion vested with
the Principal Secretary/Secretary (Irrigation) to appoint a sole arbitrator.
RE: ISSUE NOS. 1 AND 2
32. Before, we proceed to answer the issues framed by us, we must
look into few decisions referred to by us as aforesaid.
S.K. JAIN V. STATE OF HARYANA
33. In S.K. Jain (supra), the challenge was to an order passed in a
writ petition filed by the appellant, wherein it had prayed to quash a memo
directing it to deposit 7% of the claimed amount before the arbitral tribunal.
The civil appeal was dismissed by a three-Judge Bench of this Court and
the memo was accordingly upheld.
34. In S.K. Jain (supra), the relevant arbitration clause reads as under:
“25-A. (7) It is also a term of this contract agreement that where the
party invoking arbitration is the contractor, no reference for arbitration
shall be maintainable unless the contractor furnishes to the satisfaction
of the Executive Engineer in charge of the work, a security deposit
of a sum determined according to details given below and the sum so
deposited shall, on the termination of the arbitration proceedings be
adjusted against the costs, if any, awarded by the arbitrator against
the claimant party and the balance remaining after such adjustment
in the absence of any such costs being awarded, the whole of the sum
will be refunded to him within one month from the date of the award—
Amount of claim Rate of security deposit
1. For claims below Rs 10,000 2% of amount claimed
2. For claims of Rs 10,000 and 5% of amount claimed
above and below Rs 1,00,000
and
3. For claims of Rs 1,00,000 and 7% of amount claimed”
above
(Emphasis supplied)
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 961
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
35. The relevant observations made by the Court in S.K. Jain (supra),
more particularly, para 14 reads thus:
“14. It has been submitted by learned counsel for the appellant that
there should be a cap in the quantum payable in terms of sub-clause
(7) of Clause 25-A. This plea is clearly without substance. It is to
be noted that it is structured on the basis of the quantum involved.
Higher the claim, the higher is the amount of fee chargeable. There is
a logic in it. It is the balancing factor to prevent frivolous and inflated
claims. If the appellants’ plea is accepted that there should be a cap in
the figure, a claimant who is making higher claim stands on a better
pedestal than one who makes a claim of a lesser amount.”
MUNICIPAL CORPN., JABALPUR AND OTHERS V. RAJESH
CONSTRUCTION CO., (2007) 5 SCC 344
36. In the said case, the appellants had floated a notice inviting tender
for construction of a road. Some portion of the work was awarded to the
respondent therein by entering into a contract on the terms and conditions as
contained in the tender. The tender contained various clauses; one amongst
the same being clause 29 which pertained to arbitration in case any dispute
arose between the parties and reads thus:
“29. Except as otherwise provided in this contract all questions and
disputes relating to the meaning of the specifications, drawing and
instructions hereinbefore mentioned and as to thing (sic anything)
whatsoever, in any way arising out or relating to the contract, designs,
drawings, specifications, estimates concerning the works or the
execution or failure to execute the same, whether arising during the
progress of the work or after the completion or abandonment thereof
shall be referred to the City Engineer in writing for his decision, within
a period of 30 days of such occurrence. Thereupon the City Engineer
shall give his written instructions and/or decisions within a period
of 60 days of such request. This period can be extended by mutual
consent of the parties.
Upon receipt of written instructions of decisions, the parties shall
promptly proceed without delay to comply with such instructions or
decisions. If the City Engineer fails to give his instructions or decisions
962 SUPREME COURT REPORTS [2023] 13 S.C.R.
in writing within a period of 60 days or mutually agreed time after
being requested if the parties are aggrieved against the decision of the
CE, the parties may within 30 days prefer an appeal of MPL Com who
shall afford an opportunity to the parties of being heard and to offer
evidence in support of his appeal. MPL Com will give his decision
within 90 days. If any party is not satisfied with the decision of MPL
Com, he can refer such disputes for arbitration to an Arbitration
Board to be constituted by the Corporation, which shall consist of
three members of whom one shall be chosen from among the officers
belonging to the Urban Administration and Development Department
not below the rank of BE, one retired Chief Engineer of any technical
department and City Engineer, Nagar Nigam, Jabalpur.
The following are also the terms of this contract, namely:
(a) No person other than the aforesaid Arbitration Board constituted
by the Corporation (to handle cases of all technical departments)
shall act as arbitrator and if for any reason that is not possible
the matter shall not be referred to arbitration at all.
(b) The Corporation may at any time effect any change in the
personnel of the Board and the new members or members
appointed to the Arbitration Board shall be entitled to proceed
with the reference from the stage it was left by his or their
predecessors.
(c) The party invoking arbitration shall specify the dispute or
disputes to be referred to arbitration under this clause together
with the amount or amounts claimed in respect of each such
dispute(s).
(d) Where the party invoking arbitration is the contractor no
reference for arbitration shall be maintainable, unless the
contractor furnishes a security deposit of a sum determined
according to the table given below, and the sum so deposited
shall on the determination of arbitration proceeding, be adjusted
against the costs, if any awarded by the Board against the party
and the balance remaining after such adjustment or in the
absence of the such costs being awarded the whole of the sum
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 963
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
shall be refunded to him within one month from the date of the
award.
Amount of claim Rate of security deposits
For claim below Rs 10,000 5% of amount claimed
For claim of Rs 10,000 and above 3% of amount claimed
but below Rs 1,00,000 subject to minimum of Rs 500
For claims of Rs 1,00,000 and 2% of the amount claimed
above subject to a minimum of Rs
3000”
(Emphasis supplied)
37. The relevant findings recorded in Rajesh Constructions Co. (supra)
are as under:
“20. Clause 29 specifically stipulates, as indicated herein earlier, that
if any dispute arises between the parties, the party seeking invocation
of the arbitration clause, shall first approach the Chief Engineer and
on his failure to arbitrate the dispute, the party aggrieved may file an
appeal to MPL Com, failing which, the Corporation shall constitute
an Arbitration Board to resolve the disputes in the manner indicated
in clause 29. However, before doing so, the party invoking arbitration
clause is required to furnish security of a sum to be determined by the
Corporation.
21. In this case, admittedly, the security has not been furnished by
the respondent to the Corporation. We, in fact, asked Mr Sharma,
appearing on behalf of the respondent to ascertain on the date of the
hearing of the appeal, whether the security deposit was made or not.
On instruction, Mr Sharma informed us that such security has not
yet been deposited. Such being the position even today, we hold that
the obligation of the Corporation to constitute an Arbitration Board
to resolve disputes between the parties could not arise because of
failure of the respondent to furnish security as envisaged in clause
29(d) of the contract. Therefore, we are of the opinion, that on account
of non-furnishing of security by the respondent, the question of
constituting an Arbitration Board by the Corporation could not arise
at all. Accordingly, we hold that the High Court was not justified in
964 SUPREME COURT REPORTS [2023] 13 S.C.R.
appointing a retired Chief Justice of a High Court as arbitrator by
the impugned order.
22. It is not disputed before us that the learned Arbitrator appointed
by the High Court has already commenced the arbitration proceeding.
Mr Mukherjee, appearing on behalf of the Corporation, on instruction,
had submitted before us that they shall constitute an Arbitration Board
as soon as the respondent furnishes security in terms of clause 29(d)
of the contract and if any direction is given to the Arbitration Board
to proceed from the stage the learned arbitrator had already reached,
that would not be objected to. That is to say, Mr Mukherjee contended
that the Arbitration Board may be directed to take over the arbitration
proceedings from the stage the learned arbitrator had already reached.
23. Such being the stand taken by the Corporation, we direct the
respondent to furnish the security of a sum to be determined by the
Corporation within six weeks from this date and in the event security
determined by the Corporation is furnished within the time mentioned
herein earlier, the Corporation shall constitute an Arbitration Board
in compliance with clause 29 of the contract. It is directed that the
Arbitration Board shall proceed from the stage the learned arbitrator
appointed by the High Court had already reached.
24. That apart, it has to be kept in mind that it is always the duty of
the court to construe the arbitration agreement in a manner so as to
uphold the same. Therefore we must hold that the High Court ought not
to have appointed an arbitrator in a manner, which was inconsistent
with the arbitration agreement.”
(Emphasis supplied)
ICOMM TELE LIMITED V. PUNJAB STATE WATER SUPPLY
AND SEWERAGE BOARD
38. Nature of the Clause: Clause 25(viii) of Notice Inviting Tender
provided that:
“viii. 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
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 965
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
each claim and shall furnish a “deposit-at-call” for ten per cent 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 with reference to the amount claimed and the balance,
if any, shall be forfeited and paid to the other party.”
(Emphasis supplied)
39. In 2008, the Punjab State Water Supply & Sewerage Board,
Bhatinda issued notice inviting tender for extension and augmentation of
water supply, sewerage scheme, pumping station and sewerage treatment
plant for various towns mentioned therein on a turnkey basis. On 25.09.2008,
the appellant company, which was involved in civil/electrical works in India,
was awarded the said tender after having been found to be the best suited
for the task. On 16.01.2009, a formal contract was entered into between the
appellant and respondent No. 2 therein.
40. On 08.03.2017, the appellant approached the High Court of Punjab
and Haryana challenging the validity of this part of the arbitration clause by
filing Civil Writ Petition No. 4882 of 2017. The High Court merely followed
its earlier judgment and dismissed the writ petition as well. The matter was
carried to this Court.
41. The relevant observations made by this Court are as under:
“12. In S.K. Jain v. State of Haryana [(2009) 4 SCC 357 : (2009)
2 SCC (Civ) 163], this Court dealt with an arbitration clause in an
agreement which read as follows:
Xxx xxx xxx
13. In upholding such a clause, this Court referred to the judgment
in Central Inland Water Transport Corpn. [Central Inland Water
Transport Corpn. Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156 :
1986 SCC (L&S) 429] and distinguished this judgment, stating that
the concept of unequal bargaining power has no application in the
case of commercial contracts.
966 SUPREME COURT REPORTS [2023] 13 S.C.R.
14. It will be noticed that in this judgment there was no plea that the
aforesaid condition contained in an arbitration clause was violative of
Article 14 of the Constitution of India as such clause is arbitrary. The
only pleas taken were that the ratio of Central Inland Water Transport
Corpn. [Central Inland Water Transport Corpn. Ltd. v. Brojo Nath
Ganguly, (1986) 3 SCC 156 : 1986 SCC (L&S) 429] would apply and
that there should be a cap in the quantum payable by way of security
deposit, both of which pleas were turned down by this Court. Also,
the security deposit made would, on the termination of the arbitration
proceedings, first be adjusted against costs if any awarded by the
arbitrator against the claimant party, and the balance remaining after
such adjustment then be refunded to the party making the deposit. This
clause is materially different from Clause 25(viii), which, as we have
seen, makes it clear that in all cases the deposit is to be 10 per cent
of the amount claimed and that refund can only be in proportion to
the amount awarded with respect to the amount claimed, the balance
being forfeited and paid to the other party, even though that other
party may have lost the case. This being so, this judgment is wholly
distinguishable and does not apply at all to the facts of the present case.
xxx xxx xxx
20. The first important thing to notice is that the 10 per cent “deposit-
at-call” of the amount claimed is in order to avoid frivolous claims by
the party invoking arbitration. It is well settled that a frivolous claim
can be dismissed with exemplary costs. …
21. 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.
xxx xxx xxx
23. The important principle established by this case is that unless it is
first found that the litigation that has been embarked upon is frivolous,
exemplary costs or punitive damages do not follow. Clearly, therefore,
a “deposit-at-call” of 10 per cent of the amount claimed, which can
amount to large sums of money, is obviously without any direct nexus
to the filing of frivolous claims, as it applies to all claims (frivolous
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 967
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
or otherwise) made at the very threshold. A 10 per cent deposit has
to be made before any determination that a claim made by the party
invoking arbitration is frivolous. This is also one important aspect
of the matter to be kept in mind in deciding that such a clause would
be arbitrary in the sense of being something which would be unfair
and unjust and which no reasonable man would agree to. Indeed, a
claim may be dismissed but need not be frivolous, as is obvious from
the fact that where three arbitrators are appointed, there have been
known to be majority and minority awards, making it clear that there
may be two possible or even plausible views which would indicate
that the claim is dismissed or allowed on merits and not because it
is frivolous. Further, even where a claim is found to be justified and
correct, the amount that is deposited need not be refunded to the
successful claimant. Take for example a claim based on a termination
of a contract being illegal and consequent damages thereto. If the
claim succeeds and the termination is set aside as being illegal and a
damages claim of Rupees One crore is finally granted by the learned
arbitrator at only ten lakhs, only one-tenth of the deposit made will be
liable to be returned to the successful party. The party who has lost in
the arbitration proceedings will be entitled to forfeit nine-tenths of the
deposit made despite the fact that the aforesaid party has an award
against it. This would render the entire clause wholly arbitrary, being
not only excessive or disproportionate but leading to the wholly unjust
result of a party who has lost an arbitration being entitled to forfeit
such part of the deposit as falls proportionately short of the amount
awarded as compared to what is claimed.
xxx xxx xxx
27. Deterring a party to an arbitration from invoking this alternative
dispute resolution process by a pre-deposit of 10 per cent would
discourage arbitration, contrary to the object of de-clogging the
court system, and would render the arbitral process ineffective and
expensive.
28. For all these reasons, we strike down Clause 25(viii) of the notice
inviting tender...”
(Emphasis supplied)
968 SUPREME COURT REPORTS [2023] 13 S.C.R.
42. The principles of law discernible from the aforesaid observations
made by this Court in ICOMM Tele Limited (supra) are as under:
(a) That the pre-deposit condition in an arbitration clause is violative
of Article 14 of the Constitution of India being arbitrary.
(b) Unless it is first found or prima facie established that the litigation
that has been embarked upon is frivolous, the exemplary costs
or punitive damages cannot follow.
(c) Deterring a party to an arbitration from invoking the Alternative
Dispute Resolution Process by pre-deposit of certain percentage
would discourage arbitration. This would run contrary to the
object of de-clogging the court system and would render the
arbitral process ineffective and expensive.
FEW DECISIONS OF THE HIGH COURTS ON THE SUBJECT
43. Lite Bite Foods Pvt. Ltd. v. Airports Authority of India reported
in 2020 SCC OnLine Ker 4736,
Nature of the Clause:
“5.15. Dispute Resolution
….The Concessionaire by means of a written application can seek
appointment of an Arbitrator and Authority would appoint such an
Arbitrator within 30 days of receipt of the application, subject to
fulfilling, the pre-requisites for appointment of the Arbitrator as laid
hereunder:—
i. The case shall be referred to the Sole Arbitrator as per AA1
delegation of powers in vogue subject to the condition that
the Concessionaire shall have to deposit the disputed amount
with AA1 as condition precedent and the consent shall have
to be obtained from the concessionaire for acceptance of the
recommendations of Arbitrator before making reference to the
Arbitrator for adjudication of dispute.”
(Emphasis supplied)
44. The relevant extract from the Judgment reads thus:
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 969
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
“11…the conditions in clause 5.15 of the RFP, that require the
petitioner to choose an Arbitrator from among a panel suggested
by the respondent, as also the condition that requires the petitioner
to make a pre-deposit of amounts as a condition for invoking the
arbitration, would fall foul of the law declared by the Supreme court
in the decisions reported as Perkins Eastman Architects DPC v.
HSCC (India) Ltd. - [2019 SCC OnLine SC 1517] and ICOMM Tele
Ltd. v. Punjab State Water Supply and Sewerage Board - [(2019) 4
SCC 401] respectively. I am not persuaded to accept the contention
of the learned senior counsel for the respondent that it is only in the
event of a challenge to clause 5.15 of the RFP on the ground that it
is violative of the fundamental rights of the petitioner under Article
14 of the Constitution of India, that this Court can hold the said
clause, in the RFP, as illegal. After the amendment of the 1996 Act in
2015, the law must be taken to be that any clause in an agreement,
that requires one of the contracting parties to make a deposit of
amount as a precondition for invoking the arbitration, has to be seen
as rendering the entire clause arbitrary, being not only excessive or
disproportionate but leading to a wholly unjust situation in arbitration
proceedings, that are ordinarily to be encouraged on account of the
high pendency of cases in courts and the ever-increasing cost of
litigation. I am therefore of the opinion that even if the clause in the
RFP is to be treated as supplementing Article 22 of the Concessionaire
Agreement, the offending conditions in the RFP would have to be
ignored in view of the declaration of law by the Supreme Court in
the cases referred above.”
(Emphasis supplied)
45. In the aforesaid decision of the Kerala High Court, the learned
Single Judge after due consideration of the decisions of this Court in Perkins
Eastman (supra) and ICOMM Tele Limited (supra), held that any clause in
the agreement that requires one of the contracting parties to make a deposit
of an amount as a pre-condition for invoking the arbitration should be seen
as one rendering the entire clause arbitrary being not only excessive or
disproportionate but something that may lead to a wholly unjust situation.
Ultimately Article 22 of the concessionaire agreement therein was ignored
while appointing an arbitrator in an application filed under Section 11(6)
of the Act 1996.
970 SUPREME COURT REPORTS [2023] 13 S.C.R.
46. The Assan Co-Op. L & C Society v. Haryana Vidyut Prasaran
Nigam Ltd., ARB-127-2019 (Section 11 Petition) and CWP-13539-2021
(Civil Writ Petition)
Date of Order: 03.112021
Forum: High Court of Punjab and Haryana (Single-Judge)
Nature of the Clause:
“Clause 25A of the Contract (Annexure P-1) reads as under:- “If
any question, dispute, difference of opinions whatsoever arises in
any way connected with or arising out of instrument for meaning
or operation of any part thereof or the rights, duties or liabilities of
either party, including the termination of the contract by either party
and correctness thereof at any stage whatsoever it shall be referred
to arbitration of MD/Chief Engineer of HVPNL or his nominee not
below the rank of Superintending Engineer subject to the following
conditions:-
xxx xxx xxx
7. In case the party invoking the arbitration is the contractor, the
reference for arbitration shall be maintainable only after the contractor
furnishes to the satisfaction of Engineering-In Charge a case security
fee deposited @ 3% of the total amount claimed by him. The sum so
deposited by the contractor shall on the termination of the arbitration
proceedings be adjusted against the cost and any amount awarded
against the contractor. The remaining amount shall be refunded to the
contractor with-in one month from the date of the award.”
(Emphasis supplied)
47. The relevant observations from the Judgment are as under:
“23. Resultantly, the issue of pre-deposit now arises. Counsel for the
petitioner has heavily relied upon the judgment passed in M/s ICOMM
Tele Ltd. (supra), which has been rightly distinguished by the learned
counsel for the respondent …
24. Thereafter, in ‘S.K. Jain Vs. State of Haryana and another’, 2008
AIR (Punjab) 30 the challenge was to the clause of 7% of the total
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 971
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
amount claimed. While placing reliance upon the judgment of the
Apex Court in ‘Municipal Corporation, Jabalpur & others Vs. M/s
Rajesh Construction Co.’, 2007 (5) SCC 344, the writ petition was
dismissed. The said judgment was upheld by the Apex Court in ‘S.K.
Jain Vs. State of Haryana and another’ 2009 (2) SCC (Civil) 163 by
holding that there is logic in providing the said cap. …
25. In M/s ICOMM Tele Ltd. (supra) the objectionable clause 25 (viii)
was struck down which was for 10% deposit. In the event of an award
in favour of the claimant, the deposit was to be refunded to him in
proportion to the amount awarded with regard to the amount claimed
and the balance if any was to be forfeited and paid to the other party.
Resultantly, the Apex Court came to the conclusion that nine times of
the deposit could be forfeited by the parties who lost in the arbitration
proceedings and despite the fact that the party has an award against
it. Thus, the clause was held to be wholly arbitrary …
26. It was on such account the observations were made that the pre-
deposit would discourage arbitration and the said clause as such was
struck down by the distinguishing the judgment passed in S.K. Jain
(supra). …”
(Emphasis supplied)
48. In the aforesaid decision, a learned Single Judge of the Punjab and
Haryana High Court looked into both the decisions of this Court i.e., S.K.
Jain (supra) and ICOMM Tele Limited (supra). The High Court went on
to look into the relevant arbitration clause contained in both the decisions
of this Court referred to above and thought fit to follow the dictum as laid
in S.K. Jain’s case being a decision rendered by a Bench of three Judges.
49. Garg and Company v. State of Haryana & Ors., CWP Nos. 21840
of 2020, 21857 of 2020 and 21858 of 2020 (O&M) (Civil Writ Petitions)
Date of Order : 08.04.2022
Forum: High Court of Punjab and Haryana (Single-Judge Bench)
Nature of the Clause:
“33(7). It is also a term of this arbitration agreement that where the
party invoking arbitration is the contractor, no reference for Arbitrator
972 SUPREME COURT REPORTS [2023] 13 S.C.R.
shall be maintainable unless the contractor furnishes to the satisfaction
of the Executive Engineer of the work, a security deposit of a sum
determined according to details given below and the sum so deposited
shall, on the termination of the arbitration proceedings, be adjusted
against the cost, if any, awarded by the Arbitrator against the claimant
party and the balance remaining after such adjustment, in the absence
of any such cost being awarded the whole of the sum will be refunded
to him within one month from the date of the award:
S r . Amount Claims Rate of Security Deposit
No.
i. For claims below Rs. 10,000/ 2% of amount claimed
ii. For claims of Rs. 10,000/- & 5% of amount claimed
above but below Rs. 1,00,000/-
iii. For claims of Rs. 1,00,000/- and 7.5% of amount claimed”
above
(Emphasis supplied)
50. The relevant observations from the Judgment are as under:
“All the questions and grounds sought to be raised by learned
counsel for the petitioner are succinctly answered by the Hon’ble
Supreme Court in M/s. ICOMM Tele Limited’s case (supra) itself
while discussing S.K. Jain’s case (supra). It is obvious that a clear
cut distinction has been made in respect to the type of pre-deposit
clause. Discussion of the judgment of S.K. Jain’s case (supra) makes it
crystal clear that such like clauses, which provide for adjustment and
refund to the party making the deposit after the passing of the award
are materially different from the clause which was under challenge in
M/s. ICOMM Tele Limited’s case (supra). In case of M/s. ICOMM Tele
Limited’s case (Supra), the objectionable clause 25(viii) was struck
down finding the same to be arbitrary…
It is in the said factual matrix that the observations regarding the clause
of pre-deposit discouraging arbitration was made and the said clause
was struck down while distinguishing the earlier judgment passed by
the Hon’ble Supreme Court in S.K. Jain’s case (supra).
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 973
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
Learned counsel for the petitioner is unable to deny that Clause 33(7)
of the Agreement in the present writ petitions is identical to Clause
25(7) of the Agreement, which was under consideration in S.K. Jain’s
case (supra). Though learned senior counsel for the petitioner/s
was at pains to submit that the ratio of M/s. ICOMM Tele Limited’s
case (supra) suggests that any kind of pre-deposit has to be set aside
as it necessarily leads to deterring a party to an arbitration from
invoking this alternate dispute resolution system and in-fact renders
the entire arbitral process ineffective, however, keeping in view the
specific discussion by the Hon’ble Supreme Court in its decision in
M/s. ICOMM Tele Limited’s case (supra) of S.K. Jain’s case (supra),
I do not find any merit in the argument raised by learned counsel for
the petitioner. The same is accordingly rejected as it is clear that this
Court is bound by the judgment of the Hon’ble Supreme Court in S.K.
Jain’s case (supra), which has not been overruled till date.”
(Emphasis Supplied)
51. In the aforesaid decision of the Punjab and Haryana High Court,
both the decisions of this Court i.e., ICOMM Tele Limited (supra) as well
as S.K. Jain (supra) were looked into and the Court thought fit to follow
the dictum as laid in S.K. Jain (supra).
52. Brij Gopal Construction Co. Pvt. Ltd. v. Haryana Shehri Vikas
Pradhikaran, CWP-14587-2022 (O&M) (Civil Writ Petition)
Date of Order: 02.08.2022
Forum: High Court of Punjab and Haryana (Single-Judge)
Nature of the Clause:
“25(A)(vii) It is also a term of this arbitration agreement that where the
party invoking arbitration is the contractor, no reference for Arbitrator
shall be maintainable unless the contractor, furnishes to the satisfaction
of the Engineer In charge of the work, a security deposit of a sum
determined according to details given below and the sum so deposited
shall, on the termination of the arbitration proceedings, be adjusted
against the cost, if any, awarded by the Arbitrator against the claimant
party and the balance remaining after such adjustment or whole sum
974 SUPREME COURT REPORTS [2023] 13 S.C.R.
in the absence of any such cost being awarded the whole of the sum
will be refunded to him within one month from the date of the award.
AMOUNT OF CLAIMS RATE OF SECURITY DEPOSIT
i) For claims below Rs. 10,000/- 2% of amount claimed
ii) For claims of Rs. 10,000/- & 5% of amount claimed
above & below Rs. 1,00,000/-
iii) For claims of Rs. 1,00,000/- 7.5 % of amount claimed and
above”
53. The relevant observations from the Judgment are as under:
“A similar controversy was sought to be raised in CWP-21840-2020
and other connected writ petitions, which have been dismissed on
08.04.2022. Question raised for adjudication in the said writ petitions
was also whether the clause in question requiring a pre-deposit for
invocation of Arbitration is unreasonable, unconscionable and liable
to set aside. Clause in question in the abovesaid writ petitions was
identical as clause 25(A)(vii) involved in the instant writ petition.
Reliance had been placed on M/s ICOMM Tele Limited (supra) as is
the case in the present writ petition. However, while dealing with the
contentions as raised and dismissing the said writ petitions, judgment
of the Three Judge Bench of the Hon’ble Supreme Court in S.K. Jain v.
State of Haryana, (2009) 4 SCC 357 was duly considered. It was also
noticed that Hon’ble Supreme Court itself in the case of M/s ICOMM
Tele Limited (supra) referred to the case of S.K. Jain (supra) and infact
upheld the clause regarding pre-deposit in S.K. Jain’s case (supra).”
xxx xxx xxx
Similar view in regard to such a pre-deposit clause has also been taken
by a Co-ordinate Bench in decision dated 03.11.2020 passed in ARB-
127- 2019 and in CWP No. 13539 of 2021, titled as M/s The Assan
Co-op L&C Society, Bahadurgarh, District Jhajjar Vs. Haryana Vidyut
Prasaran Nigam Limited (HVPNL). Thus, in view of judgment of the
Hon’ble Supreme Court in S.K. Jain vs. State of Haryana, 2009(2) RCR
(Civil) 202 as discussed in M/s ICOMM Tele Limited(supra), order
dated 15.01.2022 (Annexure P9) and dated 02.04.2022 (Annexure
P11) have been correctly passed. This Court is clearly bound by the
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 975
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
judgment of the Hon’ble Supreme in the case of S.K. Jain (supra)
which has admittedly not been over ruled till date.”
(Emphasis supplied)
54. In the aforesaid decision of the Punjab and Haryana High Court,
both the decisions of this Court i.e., ICOMM Tele Limited (supra) and S.K.
Jain (supra) were taken into consideration and ultimately, the Court followed
the dictum as laid down in S.K. Jain (supra).
55. Bathinda Railway Transhipment Cooperative L&C Society Ltd. v.
Punjab Mandi Board & Ors., Civil Writ Petition No. 28981 of 2019 (O&M)
Date of Order : 27.03.2023
Forum: High Court of Punjab and Haryana (Division Bench)
Nature of Clause:
“8. … 25(viii) It shall be an essential term of this contract that in order
to avoid frivolous claims, the party invoking arbitration shall specify
the disputes based upon 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/Chairman of the Arbitral Tribunal, 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
with respect to the amount claimed and the balance, if any, shall be
forfeited and paid to the other party.”
(Emphasis supplied)
56. The relevant observations from the Judgment are as under:
“10. From a perusal of the aforesaid two clauses (supra) i.e. one that
has been assailed by the petitioner and the other that has been quashed
by the Supreme Court in juxta position makes it absolutely clear that
they are identical containing the same stipulations. The Supreme
Court in the case of M/s Icomm Tele Ltd. (supra) after considering
the validity of the said clause has held as under:-
976 SUPREME COURT REPORTS [2023] 13 S.C.R.
“28. For all these reasons, we strike down clause 25(viii) of the
notice inviting tender. This clause being severable from the rest
of clause 25 will not affect the remaining parts of Clause 25. The
judgment of the High Court is set aside and the appeal allowed.”
11. In the light of the aforesaid decision rendered by the Supreme Court
in M/s Icomm Tele Ltd. (supra), which has considered absolutely an
identical clause contained in the agreement between the parties and
after doing so has struck down the said clause, it is not for this Court
i.e. the High Court to consider the contention of the respondent and
take a different view as that would be not just beyond the authority of
this Court but would also be an act of impropriety. This Court being
bound by the decision rendered by the Supreme Court in M/s Icomm
Tele Ltd. (supra) allowed the present petition filed by the petitioner
and declares the arbitration clause 25(viii) of the tender conditions,
quoted above, as unconstitutional and passes the same orders in similar
terms as were passed by the Supreme Court in paragraph-28 of the
decision rendered in M/s Icomm Tele Ltd. (supra).”
(Emphasis supplied)
57. In the aforesaid decision of the Punjab and Haryana High Court,
the decisions of this Court in the case of ICOMM Tele Limited (supra) as
well as S.K. Jain (supra) were taken into consideration and ultimately, the
Court followed the dictum as laid in ICOMM Tele Limited (supra), as the
relevant arbitration clause in the said matter was almost identical to the one
in ICOMM Tele Limited (supra).
58. Amazing India Contractors Pvt. Ltd. v. Airport Authority of
India and Others reported in 2023 SCC OnLine Cal 1704, C.O. 66 of 2022
(Section 11 Petition)
High Court of Calcutta (Single Judge)
Nature of the Clause:
“33(iii). All disputes and differences arising out of or in any way
touching or concerning this Agreement (except those the decision
whereof is otherwise herein before expressly provided for or to which
the public premises [Eviction of Unauthorized Occupants] Act and
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 977
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
the rules framed there under which are now enforced or which may
hereafter come into force are applicable), shall, in the first instance,
be referred to a Dispute Resolution Committee (DRC) setup at the
airports, for which a written application should be obtained from the
party and the points clearly spelt out. In case the dispute is not resolved
within 45 days of reference, then the case shall be referred to sole
arbitration of a person to be appointed by the Chairman/Member of the
Authority. The award of the arbitrator so appointed shall be final and
binding on the parties. The Arbitration & Conciliation Act, 1996 shall
be applicable. Once the arbitration clause has been invoked, the DRC
process will cease to be operative. It will be no bar that the Arbitrator
appointed as aforesaid is or has been an employee of the Authority
and the appointment of the Arbitrator will not be challenged; or be
open to Question in any Court of Law, on this account.”
59. The relevant observations from the Judgment are as under:
“25. …
That part of Clause 33 of the agreement between the parties
providing for constitution of a Dispute Resolution Committee with
a stipulation that before availing of dispute resolution, the disputed
amount has to be deposited, is invalid and contrary to law for more
than one reason. The first and foremost is that it fetters the right of the
petitioner, a party to the arbitration agreement to avail of arbitration
which is a statutory right. [ICOMM Tele Ltd. v. Punjab State Water
Supply and Sewerage Board reported in (2019) 4 SCC 401]. Secondly,
it is most ambiguous. If the petitioner is making a claim which is
then and there disputed by the respondent, why should the petitioner,
being the claimant be asked to deposit the disputed amount? When
the petitioner is making a claim against the respondent, it is unable,
at that point of time, to know whether the whole claim or part of it
would be admitted, or the whole of it denied by the latter. Hence, it
is unable to gauge the disputed amount. Even if it were possible for
the respondent to notify the disputed amount immediately, the clause
would only be operative if the respondent was simultaneously making a
counter claim more than the petitioner’s claim which was being denied
by the petitioner, by seeking reference of the dispute to arbitration. If
978 SUPREME COURT REPORTS [2023] 13 S.C.R.
the respondent was first making the claim which was disputed by the
petitioner, still the matter could not be referred to the Committee in
as much as the clause suggests an application for dispute resolution
by the petitioner only. For all these reasons, this clause itself is vague
for uncertainty and invalid.”
(Emphasis supplied)
60. In the aforesaid decision of the Calcutta High Court, ICOMM
Tele Limited (supra) and Perkins Eastman (supra) were relied upon and
ultimately, it was held that Clause 33 of the agreement therein between the
parties providing for constitution of a “Dispute Resolution Committee” with
a stipulation that before availing of dispute resolution clause, the disputed
amount has to be deposited, was held to be invalid and contrary to law.
61. We are of the view that as such there is no conflict between S.K.
Jain (supra) and ICOMM Tele Limited (supra), as the relevant arbitration
clauses that fell for the consideration of this Court in both the cases stood
completely on a different footing. What is relevant to note are the points of
law on which S.K. Jain (supra) was distinguished and explained in ICOMM
Tele Limited (supra).
62. The Court while distinguishing S.K. Jain (supra) in ICOMM Tele
Limited (supra) made some relevant observations in para 14 of the Judgment.
Para 14 reads thus:
“14. It will be noticed that in this judgment there was no plea that the
aforesaid condition contained in an arbitration clause was violative of
Article 14 of the Constitution of India as such clause is arbitrary. The
only pleas taken were that the ratio of Central Inland Water Transport
Corpn. [Central Inland Water Transport Corpn. Ltd. v. Brojo Nath
Ganguly, (1986) 3 SCC 156 : 1986 SCC (L&S) 429] would apply and
that there should be a cap in the quantum payable by way of security
deposit, both of which pleas were turned down by this Court. Also,
the security deposit made would, on the termination of the arbitration
proceedings, first be adjusted against costs if any awarded by the
arbitrator against the claimant party, and the balance remaining after
such adjustment then be refunded to the party making the deposit. This
clause is materially different from Clause 25(viii), which, as we have
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 979
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
seen, makes it clear that in all cases the deposit is to be 10 per cent
of the amount claimed and that refund can only be in proportion to
the amount awarded with respect to the amount claimed, the balance
being forfeited and paid to the other party, even though that other
party may have lost the case. This being so, this judgment is wholly
distinguishable and does not apply at all to the facts of the present
case.”
(Emphasis supplied)
63. In para 16 of ICOMM Tele Limited (supra), the court ultimately
considered whether Clause 25(viii) could be said to be arbitrary and violative
of Article 14 of the Constitution of India. Para 16 reads thus:
“16. Thus, it must be seen as to whether the aforesaid Clause 25(viii)
can be said to be arbitrary or discriminatory and violative of Article
14 of the Constitution of India.”
64. Thereafter, the Court proceeded to observe that Clause 25(viii)
therein could not be said to be discriminatory as the same applied equally
to both the parties, however, arbitrariness could be said to be a separate and
distinct facet of Article 14 of the Constitution. Saying so, the Court referred
to and relied upon para 19 of this Court’s decision in A.L. Kalra v. Project
and Equipment Corporation of India Ltd. reported in (1984) 3 SCC 316.
Para 19 reads thus:
“19. The scope and ambit of Article 14 have been the subject-matter of
a catena of decisions. One facet of Article 14 which has been noticed
in E.P. Royappa v. State of Tamil Nadu [(1974) 2 SCR 348 : (1974)
4 SCC 3 : 1974 SCC (L&S) 165 : AIR 1974 SC 555 : (1974) 1 LLJ
172] deserves special mention because that effectively answers the
contention of Mr Sinha. The Constitution Bench speaking through
Bhagwati, J. in a concurring judgment in Royappa case [(1974) 2
SCR 348 : (1974) 4 SCC 3 : 1974 SCC (L&S) 165 : AIR 1974 SC 555
: (1974) 1 LLJ 172] observed as under: [SCC para 85, p. 38: SCC
(L&S) p. 200]
“The basic principle which, therefore, informs both Articles 14
and 16 is equality and inhibition against discrimination. Now,
what is the content and reach of this great equalising principle?
980 SUPREME COURT REPORTS [2023] 13 S.C.R.
It is a founding faith, to use the words of Bose, J., “a way of life”,
and it must not be subjected to a narrow pedantic or lexicographic
approach. We cannot countenance any attempt to truncate its all-
embracing scope and meaning, for to do so would be to violate
its activist magnitude. Equality is a dynamic concept with many
aspects and dimensions and it cannot be “cribbed, cabined
and confined” within traditional and doctrinaire limits. From a
positivistic point of view, equality is antithetic to arbitrariness. In
fact equality and arbitrariness are sworn enemies; one belongs
to the rule of law in a republic while the other, to the whim and
caprice of an absolute monarch. Where an act is arbitrary, it is
implicit in it that it is unequal both according to political logic
and constitutional law and is therefore violative of Article 14, and
if it affects any matter relating to public employment, it is also
violative of Article 16. Articles 14 and 16 strike at arbitrariness
in State action and ensure fairness and equality of treatment.”
This view was approved by the Constitution Bench in Ajay Hasia
case [(1981) 2 SCR 79 : (1981) 1 SCC 722 : 1981 SCC (L&S) 258
: AIR 1981 SC 487 : (1981) 1 LLJ 103]. It thus appears well-settled
that Article 14 strikes at arbitrariness in executive/administrative
action because any action that is arbitrary must necessarily involve
the negation of equality. One need not confine the denial of equality
to a comparative evaluation between two persons to arrive at a
conclusion of discriminatory treatment. An action per se arbitrary
itself denies equal of (sic) protection by law. The Constitution Bench
pertinently observed in Ajay Hasia case [(1981) 2 SCR 79 : (1981) 1
SCC 722 : 1981 SCC (L&S) 258 : AIR 1981 SC 487 : (1981) 1 LLJ
103] and put the matter beyond controversy when it said “wherever
therefore, there is arbitrariness in State action whether it be of the
Legislature or of the executive or of an ‘authority’ under Article 12,
Article 14 immediately springs into action and strikes down such
State action”. This view was further elaborated and affirmed in D.S.
Nakara v. Union of India [(1983) 1 SCC 305 : 1983 SCC (L&S) 145
: (1983) UPSC 263 : AIR 1983 SC 130]. In Maneka Gandhi v. Union
of India [ (1978) 2 SCR 621 : (1978) 1 SCC 248 : AIR 1978 SC 597]
it was observed that Article 14 strikes at arbitrariness in State action
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 981
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
and ensures fairness and equality of treatment. It is thus too late in
the day to contend that an executive action shown to be arbitrary is
not either judicially reviewable or within the reach of Article 14. The
contention as formulated by Mr Sinha must accordingly be negatived. ”
(Emphasis supplied)
65. The Court thereafter, took notice of the fact that the 10 % “deposit-
at-call” of the amount claimed therein was to avoid frivolous claims by the
party invoking arbitration. This Court went on to say that a frivolous claim
can always be dismissed with exemplary costs.
66. Keeping the aforesaid in mind, if we look into the 7% pre-deposit
condition in the case on hand, as contained in Clause 55 of the GCC it is
evident that nothing has been provided as to how this amount of 7% is to
be ultimately adjusted at the end of the arbitral proceedings. With a view
to salvage this situation, the learned counsel appearing for the respondent
invited the attention of this Court to Clause 3 of the GCC, which relates to
the security deposit for performance. Clause 3 reads thus:
“CLAUSE-3: SECURITY DEPOSIT FOR PERFORMANCE:
3.1 The Security Deposit shall comprise of following:
(i) Performance Security Deposit/Performance Guarantee to be
furnished by the Contractor at the time of Award of Work.
(ii) Retention Money/Security Deposit to be recovered from Interim
bills of the Contractor.
3.2 The Contractor within 28 (Twenty Eight) days from the date of issue
of Letter of Acceptance, shall furnish a Performance security deposit
of 10% (Ten percent) of the Contract Price for due performance of
contract, in any one of the following forms:
(a) Demand draft on any Nationalized/scheduled Bank of India in
the name of Employer; or FDR/CDR in the manner as specified in
Section-I.
(b) Bank Guarantee from an Indian Nationalized/Scheduled Bank of
India or a foreign bank through its branch located in India acceptable
to Employer in the prescribed proforma.”
982 SUPREME COURT REPORTS [2023] 13 S.C.R.
67. Thereafter our attention was drawn to Clause 4 which provides for
refund of security deposit. Clause 4 reads thus:
“CLAUSE-4: REFUND OF SECURITY DEPOSIT:
The Security Deposit less any amount due shall, on demand, be
returned to the contractor after 14 days of expiry of Defects Liability
Period (referred in Clause 43 hereof). No interest on the amount of
Security Deposit shall be paid to the Contractor at the time of release
of Security Deposit as stated above.”
68. We are of the view that Clauses 3 and 4 respectively as above
relating to security deposit for performance and refund of the same has no
nexus at all with the pre-deposit amount of 7% as stipulated in Clause 55
of the GCC. Such vague and ambiguous condition of 7% pre-deposit of the
total claim makes the same more vulnerable to arbitrariness thereby violating
Article 14 of the Constitution. Even otherwise, as explained in ICOMM
Tele Limited (supra) if the claim of the petitioner herein is ultimately found
to be frivolous the arbitral tribunal can always award costs in accordance
with Section 31A of the Act 1996, which reads thus:
“31A. Regime for costs.— (1) In relation to any arbitration proceeding
or a proceeding under any of the provisions of this Act pertaining to the
arbitration, the Court or arbitral tribunal, notwithstanding anything
contained in the Code of Civil Procedure, 1908 (5 of 1908), shall have
the discretion to determine—
(a) whether costs are payable by one party to another;
(b) the amount of such costs; and
(c) when such costs are to be paid.
Explanation.—For the purpose of this sub-section, “costs” means
reasonable costs relating to—
(i) the fees and expenses of the arbitrators, Courts and witnesses;
(ii) legal fees and expenses;
(iii) any administration fees of the institution supervising the
arbitration; and
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 983
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
(iv) any other expenses incurred in connection with the arbitral or
Court proceedings and the arbitral award.
(2) If the Court or arbitral tribunal decides to make an order as to
payment of costs,-
(a) the general rule is that the unsuccessful party shall be ordered to
pay the costs of the successful party; or
(b) the Court or arbitral tribunal may make a different order for reasons
to be recorded in writing.
(3) In determining the costs, the Court or arbitral tribunal shall have
regard to all the circumstances, including-
(a) the conduct of all the parties;
(b) whether a party has succeeded partly in the case;
(c) whether the party had made a frivolous counterclaim leading to
delay in the disposal of the arbitral proceedings; and
(d) whether any reasonable offer to settle the dispute is made by a
party and refused by the other party.
(4) The Court or arbitral tribunal may make any order under this
section including the order that a party shall pay-
(a) a proportion of another party’s costs;
(b) a stated amount in respect of another party’s costs;
(c) costs from or until a certain date only;
(d) costs incurred before proceedings have begun;
(e) costs relating to particular steps taken in the proceedings;
(f) costs relating only to a distinct part of the proceedings; and
(g) interest on costs from or until a certain date.
(5) An agreement which has the effect that a party is to pay the whole
or part of the costs of the arbitration in any event shall be only valid
if such agreement is made after the dispute in question has arisen.”
984 SUPREME COURT REPORTS [2023] 13 S.C.R.
69. In the aforesaid context, we may refer to and rely upon a nine-
Judge Bench decision of the Supreme Court of Canada in the case of Uber
Technologies Inc., Uber Canada, Inc., Uber B.V. and Rasier Operations
B.V. v. David Heller reported in 2020 SCC OnLine Can SC 13. We quote
the relevant observations as under:
“42. In our view, there are ways to mitigate this concern that make the
overall calculus favour departing from the general rule of referring
the matter to the arbitrator in these situations. Courts have many
ways of preventing the misuse of court processes for improper ends.
Proceedings that appear vexatious can be handled by requiring
security for costs and by suitable awards of costs. In England, courts
have awarded full indemnity costs where a party improperly ignored
arbitral jurisdiction (Hugh Beale, ed., Chitty on Contracts (33rd ed.
2018), vol. II, Specific Contracts, at para. 32-065; A. v. B. (No. 2),
[2007] EWHC 54 (Comm.) : [2007] 1 All ER 633 (Comm.), at para.
15; Kyrgyz Mobil Tel Limited v. Fellowes International Holdings
Limited, [2005] EWHC 1329 : 2005 WL 6514129 (Q.B.), at paras.
43-44). Further, if the party who successfully enforced an arbitration
agreement were to bring an action, depending on the circumstances
they might be able to recover damages for breach of contract, that
contract being the agreement to arbitrate (Beale, at para. 32-052; West
Tankers Inc. v. Allianz SpA, [2012] EWHC 854 (Comm.) : [2012] 2
All ER 395 (Comm.), at para. 77).”
(Emphasis supplied)
RE: ISSUE NO. 3
WHETHER THE VALIDITY OF THE PRE-DEPOSIT
CONDITION AS CONTAINED IN CLAUSE 55 OF THE AGREEMENT
CAN BE LOOKED INTO AND DECIDED ON THE ANVIL OF
ARTICLE 14 OF THE CONSTITUTION IN A PETITION UNDER
SECTION 11(6) OF THE ACT 1996?
70. The vociferous submission on the part of the learned counsel
appearing for the respondent, that this Court while considering an application
under Section 11(6) of the Act 1996 for the appointment of arbitrator should
not test the validity or reasonableness of the conditions stipulated in the
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 985
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
arbitration clause on the touchstone or anvil of Article 14 of the Constitution,
is without any merit or substance.
71. It would be too much for the respondent to say that it is only the
writ court in a petition under Article 226 of the Constitution that can consider
whether a particular condition in the arbitration clause is arbitrary.
72. It is not for the first time that this Court is looking into the arbitration
clause falling foul of Article 14 of the Constitution while deciding Section
11(6) application.
73. In the case of TRF Limited v. Energo Engineering Projects
Limited reported in (2017) 8 SCC 377, this Court observed as under: -
“In this batch of appeals, by special leave, the seminal issues that
emanate for consideration are; whether the High Court [TRF
Ltd. v. Energo Engg. Projects Ltd., 2016 SCC OnLine Del 2532] , while
dealing with the applications under Section 11(6) of the Arbitration and
Conciliation Act, 1996 (for brevity, “the Act”), is justified to repel the
submissions of the appellants that once the person who was required
to arbitrate upon the disputes arisen under the terms and conditions
of the contract becomes ineligible by operation of law, he would not
be eligible to nominate a person as an arbitrator, and second, a plea
that pertains to statutory disqualification of the nominated arbitrator
can be raised before the court in application preferred under Section
11(6) of the Act, for such an application is not incompetent. For the
sake of clarity, convenience and apposite appreciation, we shall state
the facts from Civil Appeal No. 5306 of 2017.”
xxx xxx xxx
54. In such a context, the fulcrum of the controversy would be, can
an ineligible arbitrator, like the Managing Director, nominate an
arbitrator, who may be otherwise eligible and a respectable person.
As stated earlier, we are neither concerned with the objectivity nor
the individual respectability. We are only concerned with the authority
or the power of the Managing Director. By our analysis, we are
obligated to arrive at the conclusion that once the arbitrator has
become ineligible by operation of law, he cannot nominate another
as an arbitrator. The arbitrator becomes ineligible as per prescription
986 SUPREME COURT REPORTS [2023] 13 S.C.R.
contained in Section 12(5) of the Act. It is inconceivable in law that
person who is statutorily ineligible can nominate a person. Needless
to say, once the infrastructure collapses, the superstructure is bound
to collapse. One cannot have a building without the plinth. Or to put
it differently, once the identity of the Managing Director as the sole
arbitrator is lost, the power to nominate someone else as an arbitrator
is obliterated. Therefore, the view expressed by the High Court is not
sustainable and we say so.”
(Emphasis supplied)
74. In Perkins Eastman (supra), this Court held as under:
“This application under Section 11(6) read with Section 11(12)(a) of
the Arbitration and Conciliation Act, 1996 (“the Act”) and under the
Appointment of Arbitrators by the Chief Justice of India Scheme, 1996
(“the Scheme”) prays for the following principal relief:
“(a) appoint a sole arbitrator, in accordance with Clause 24 of the
contract dated 22-5-2017 executed between the parties and the sole
arbitrator so appointed may adjudicate the disputes and differences
between the parties arising from the said contract.”
xxx xxx xxx
21. But, in our view that has to be the logical deduction from TRF
Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 :
(2017) 4 SCC (Civ) 72] Para 50 of the decision shows that this Court
was concerned with the issue, “whether the Managing Director, after
becoming ineligible by operation of law, is he still eligible to nominate
an arbitrator” The ineligibility referred to therein, was as a result of
operation of law, in that a person having an interest in the dispute
or in the outcome or decision thereof, must not only be ineligible to
act as an arbitrator but must also not be eligible to appoint anyone
else as an arbitrator and that such person cannot and should not
have any role in charting out any course to the dispute resolution
by having the power to appoint an arbitrator. The next sentences
in the paragraph, further show that cases where both the parties
could nominate respective arbitrators of their choice were found to
be completely a different situation. The reason is clear that whatever
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 987
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
advantage a party may derive by nominating an arbitrator of its choice
would get counter-balanced by equal power with the other party. But,
in a case where only one party has a right to appoint a sole arbitrator,
its choice will always have an element of exclusivity in determining
or charting the course for dispute resolution. Naturally, the person
who has an interest in the outcome or decision of the dispute must
not have the power to appoint a sole arbitrator. That has to be taken
as the essence of the amendments brought in by the Arbitration and
Conciliation (Amendment) Act, 2015 (3 of 2016) and recognised by the
decision of this Court in TRF Ltd. [TRF Ltd. v. Energo Engg. Projects
Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72]”
(Emphasis supplied)
75. In Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation
Limited reported in (2017) 4 SCC 665, this Court held as under:
“28. Before we part with, we deem it necessary to make certain
comments on the procedure contained in the arbitration agreement
for constituting the Arbitral Tribunal. Even when there are a number
of persons empanelled, discretion is with DMRC to pick five persons
therefrom and forward their names to the other side which is to
select one of these fi ve persons as its nominee (though in this case,
it is now done away with). Not only this, DMRC is also to nominate
its arbitrator from the said list. Above all, the two arbitrators have
also limited choice of picking upon the third arbitrator from the
very same list i.e. from remaining three persons. This procedure
has two adverse consequences. In the first place, the choice given
to the opposite party is limited as it has to choose one out of the
five names that are forwarded by the other side. There is no free
choice to nominate a person out of the entire panel prepared by
DMRC. Secondly, with the discretion given to DMRC to choose five
persons, a room for suspicion is created in the mind of the other
side that DMRC may have picked up its own favourites. Such a
situation has to be countenanced. We are, therefore, of the opinion
that sub-clauses (b) & (c) of Clause 9.2 of SCC need to be deleted
and instead choice should be given to the parties to nominate
any person from the entire panel of arbitrators. Likewise, the two
988 SUPREME COURT REPORTS [2023] 13 S.C.R.
arbitrators nominated by the parties should be given full freedom
to choose the third arbitrator from the whole panel.”
(Emphasis supplied)
76. What is relevant to note in all the above referred decisions of this
Court is the phrase “operation of law”. This phrase is of wider connotation
and covers the Act 1996 as well as the Constitution of India and any other
Central or State Law.
77. In the aforesaid context, we should look into and discuss the
Kelson’s Pure Theory of Law on the basic norm that he called “Grundnorm”.
78. Kelson’s pure theory of law has its pyramidical structure of
hierarchy based on the basic norm of Grundnorm. The word ‘Grundnorm’
is a German word meaning fundamental norm. He has defined it as ‘the
postulated ultimate rule according to which the norms of this order are
established and annulled, receive or lose their validity’. It is the Grundnorm
which determines the content and validates the other norms derived from
it. But from where it derives its validity, was a question which Kelson
did not answer, stating it to be a meta-physical question. Grundnorm is a
fiction, rather than a hypothesis as proposed by the jurist. The Grundnorm
is the starting point in a legal system and from this base; a legal system
broadens down in gradation becoming more and more detailed and specific
as it progresses. This is a dynamic process. At the top of the pyramid is the
Grundnorm, which is independent. The subordinate norms are controlled by
norms superior to them in hierarchical order. The system of norms proceeds
from downwards to upwards and finally closes at Grundnorm. (Reference:
Application of Grundnorm in India, Zainab Arif Khan, Aligarh Muslim
University)
79. Our Constitution is the paramount source of law in our country.
All other laws assume validity because they are in conformity with the
Constitution. The Constitution itself contain provisions that clearly provide
that any law which is in violation of its provisions is unlawful and is liable
to be struck down. As contained in Article 13, which provides that all laws
which were made either before the commencement of the Constitution, or
are made after it, by any competent authority, which are inconsistent with
the fundamental rights enshrined in the Constitution, are, to the extent of
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 989
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
inconsistency, void. This again unveils the principle of Grundnorm which
says there has to be a basic rule. The Constitution is the basic and the
ultimate source of law.
80. In the aforesaid context, we must look into view decisions of the
High Courts explaining the theory of Grundnorm.
(i) In the case of Squadron Leader H. S. Kulshrestha v Union of
India reported in 1999 SCC OnLine All 270, the court held that
‘According to the theory of the eminent jurist Kelson, in every
country there is a hierarchy of laws, and the highest law is known
as the grundnorm of law. In our country the grundnorm is the
Constitution.’
(ii) In another case of Abdur Sukur & Another v State of West
Bengal & others reported in 2019 SCC Online Cal 5455, the
court held that ‘…enshrined in the Constitution of India, which
is the grundnorm of all Indian statutes.’
(iii) In another case of Om Prakash Gupta v Hindustan Petroleum
Corporation Ltd. & Anr. reported in 2009 SCC OnLine
Raj 1381, it was again held that ‘Since the limits have been
defined by the Constitution, they are, in jurisprudential term,
‘the grundnorm’.’
(iv) In another case of Sunil v State of M. P. & Another reported
in 2016 SCC OnLine MP 8551, it was again mentioned that,
‘The Constitution of India is the grundnorm – the paramount
law of the country. All other laws derive their origin and are
supplementary and incidental to the principles laid down in
the Constitution.’
(v) In the case of Government of Andhra Pradesh & Ors vs Smt. P.
Laxmi Devi reported in (2008) 4 SCC 720, this Court observed,
‘According to Kelson, in every country there is a hierarchy of
legal norms, headed by what he calls as the ‘grundnorm’. If a
legal norm in a higher layer of this hierarchy conflicts with a
legal norm in a lower layer the former will prevail. In India the
Grundnorm is the Indian Constitution.’
990 SUPREME COURT REPORTS [2023] 13 S.C.R.
81. Thus, in the context of the Arbitration Agreement, the layers of
the Grundnorm as per Kelsen’s theory would be in the following hierarchy:
(i) Constitution of India, 1950;
(ii) Arbitration and Conciliation Act, 1996 & any other Central/State
Law;
(iii) Arbitration Agreement entered into by the parties in light of s. 7
of the Arbitration and Conciliation Act, 1996.
82. Thus, the Arbitration Agreement, has to comply with the
requirements of the following and cannot fall foul of:
(i) Section 7 of the Arbitration and Conciliation Act;
(ii) any other provisions of the Arbitration and Conciliation Act,
1996 & Central/State Law;
(iii) Constitution of India, 1950.
83. The observations of this Court in para 236 of Vidya Drolia (supra)
should clinch the issue. Para 236 reads thus:
“236. Having established the threshold standard for the court to
examine the extent of validity of the arbitration agreement, as a starting
point, it is necessary to go back to Duro Felguera [Duro Felguera,
S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 : (2017) 4 SCC (Civ)
764], which laid down : (SCC p. 759, para 48)
“48. … From a reading of Section 11(6-A), the intention of the
legislature is crystal clear i.e. the court should and need only
look into one aspect—the existence of an arbitration agreement.
What are the factors for deciding as to whether there is an
arbitration agreement is the next question. The resolution to that
is simple—it needs to be seen if the agreement contains a clause
which provides for arbitration pertaining to the disputes which
have arisen between the parties to the agreement.”
At first blush, the Court seems to have read the existence of the
arbitration agreement by limiting the examination to an examination
of its factual existence. However, that is not so, as the existence of
arbitration agreement does not mean anything unless such agreement
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 991
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
is contractually valid. This view is confirmed by Duro Felguera
case [Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729
: (2017) 4 SCC (Civ) 764], wherein the reference to the contractual
aspect of arbitration agreement is ingrained under Section 7 analysis.
A mere agreement is not legally binding, unless it satisfies the core
contractual requirements, concerning consent, consideration, legal
relationship, etc.”
(Emphasis supplied)
84. The concept of “party autonomy” as pressed into service by the
respondent cannot be stretched to an extent where it violates the fundamental
rights under the Constitution. For an arbitration clause to be legally binding
it has to be in consonance with the “operation of law” which includes the
Grundnorm i.e. the Constitution. It is the rule of law which is supreme and
forms parts of the basic structure. The argument canvassed on behalf of the
respondent that the petitioner having consented to the pre-deposit clause
at the time of execution of the agreement, cannot turn around and tell the
court in a Section 11(6) petition that the same is arbitrary and falling foul
of Article 14 of the Constitution is without any merit.
85. It is a settled position of law that there can be no consent against
the law and there can be no waiver of fundamental rights. The Constitution
Bench of this Court speaking through Chief Justice Y.V. Chandrachud (as
His Lordship then was) in Olga Tellis and Others v. Bombay Municipal
Corporation and Others reported in (1985) 3 SCC 545 observed something
very illuminating on the said aspect:
“28. It is not possible to accept the contention that the petitioners
are estopped from setting up their fundamental rights as a defence
to the demolition of the huts put up by them on pavements or parts of
public roads. There can be no estoppel against the Constitution. The
Constitution is not only the paramount law of the land but, it is the
source and sustenance of all laws. Its provisions are conceived in public
interest and are intended to serve a public purpose. The doctrine of
estoppel is based on the principle that consistency in word and action
imparts certainty and honesty to human affairs. If a person makes a
representation to another, on the faith of which the latter acts to his
992 SUPREME COURT REPORTS [2023] 13 S.C.R.
prejudice, the former cannot resile from the representation made by
him. He must make it good. This principle can have no application
to representations made regarding the assertion or enforcement of
fundamental rights. For example, the concession made by a person
that he does not possess and would not exercise his right to free speech
and expression or the right to move freely throughout the territory of
India cannot deprive him of those constitutional rights, any more than
a concession that a person has no right of personal liberty can justify
his detention contrary to the terms of Article 22 of the Constitution.
Fundamental rights are undoubtedly conferred by the Constitution
upon individuals which have to be asserted and enforced by them, if
those rights are violated. But, the high purpose which the Constitution
seeks to achieve by conferment of fundamental rights is not only to
benefit individuals but to secure the larger interests of the community.
The Preamble of the Constitution says that India is a democratic
Republic. It is in order to fulfil the promise of the Preamble that
fundamental rights are conferred by the Constitution, some on citizens
like those guaranteed by Articles 15, 16, 19, 21 and 29 and, some on
citizens and non-citizens alike, like those guaranteed by Articles 14,
21, 22 and 25 of the Constitution. No individual can barter away the
freedoms conferred upon him by the Constitution. A concession made
by him in a proceeding, whether under a mistake of law or otherwise,
that he does not possess or will not enforce any particular fundamental
right, cannot create an estoppel against him in that or any subsequent
proceeding. Such a concession, if enforced, would defeat the purpose of
the Constitution. Were the argument of estoppel valid, an all-powerful
State could easily tempt an individual to forego his precious personal
freedoms on promise of transitory, immediate benefits. Therefore,
notwithstanding the fact that the petitioners had conceded in the
Bombay High Court that they have no fundamental right to construct
hutments on pavements and that they will not object to their demolition
after October 15, 1981, they are entitled to assert that any such action
on the part of public authorities will be in violation of their fundamental
rights. How far the argument regarding the existence and scope of the
right claimed by the petitioners is well-founded is another matter. But,
the argument has to be examined despite the concession.
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 993
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
29. The plea of estoppel is closely connected with the plea of
waiver, the object of both being to ensure bona fides in day-to-day
transactions. In Basheshar Nath v. CIT [1959 Supp 1 SCR 528
: AIR 1959 SC 149 : (1959) 35 ITR 190], a Constitution Bench
of this Court considered the question whether the fundamental
rights conferred by the Constitution can be waived. Two members
of the Bench (Das, C.J. and Kapoor, J.) held that there can be
no waiver of the fundamental right founded on Article 14 of the
Constitution. Two others (N.H. Bhagwati and Subba Rao, JJ.) held
that not only could there be no waiver of the right conferred by
Article 14, but there could be no waiver of any other fundamental
right guaranteed by Part III of the Constitution. The Constitution
makes no distinction, according to the learned Judges, between
fundamental rights enacted for the benefit of an individual and
those enacted in public interest or on grounds of public policy.”
(Emphasis supplied)
Issue No. IV
86. The issue as regards, the validity of arbitration clause empowering
the Principal Secretary/Secretary (Irrigation), Government of Uttarakhand
to appoint an arbitrator of his choice is concerned, the same could be said
to be covered by the decision of this Court in Perkins Eastman (supra):
87. If circumstances exist giving rise to justifiable doubts as to
the independence and impartiality of the person nominated or if other
circumstances warrant appointment of an independent arbitrator by ignoring
the procedure prescribed, the Chief Justice or his designate may, for reasons
to be recorded ignore the designated arbitrator and appoint someone else.
[See: IOC v. Raja Transport Pvt. Ltd, (2009) 8 SCC 520]
88. In the aforesaid context, we must look into the amended Section
12 of the 1996 Act. Section 12 reads thus:
“12. Grounds for challenge.
(1) When a person is approached in connection with his possible
appointment as an arbitrator, he shall disclose in writing any
circumstances,—
994 SUPREME COURT REPORTS [2023] 13 S.C.R.
(a) such as the existence either direct or indirect, of any past or present
relationship with or interest in any of the parties or in relation to the
subject-matter in dispute, whether financial, business, professional or
other kind, which is likely to give rise to justifiable doubts as to his
independence or impartiality; and
(b) which are likely to affect his ability to devote sufficient time to
the arbitration and in particular his ability to complete the entire
arbitration within a period of twelve months.
Explanation 1.—The grounds stated in the Fifth Schedule shall guide in
determining whether circumstances exist which give rise to justifiable
doubts as to the independence or impartiality of an arbitrator.
Explanation 2.—The disclosure shall be made by such person in the
form specified in the Sixth Schedule.]
(3) An arbitrator may be challenged only if—
(a) circumstances exist that give rise to justifiable doubts as to his
independence or impartiality, or
(b) he does not possess the qualifications agreed to by the parties.
(4) A party may challenge an arbitrator appointed by him, or in whose
appointment he has participated, only for reasons of which he becomes
aware after the appointment has been made.
(5) Notwithstanding any prior agreement to the contrary, any person
whose relationship, with the parties or counsel or the subject-matter
of the dispute, falls under any of the categories specified in the Seventh
Schedule shall be ineligible to be appointed as an arbitrator:
Provided that parties may, subsequent to disputes having arisen
between them, waive the applicability of this sub-section by an express
agreement in writing.”
89. The Amendment 2015 is also based on the recommendation of the
Law Commission which specifically dealt with the issue of “Neutrality of
Arbitrators” and a discussion in this behalf is contained in paras 53 to 60
of the Law Commission’s Report No. 246 published in the August 2004.
We reproduce the entire discussion hereinbelow:
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 995
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
“Nਅਕਔਁਉਔਙ ਏਆ Aਂਉਔਁਔਏਓ
53. It is universally accepted that any quasi-judicial process, including
the arbitration process, must be in accordance with principles of
natural justice. In the context of arbitration, neutrality of arbitrators
viz. their independence and impartiality, is critical to the entire process.
54. In the Act, the test for neutrality is set out in Section 12(3) which
provides—
‘12. (3) An arbitrator may be challenged only if—
(a) circumstances exist that give rise to justifiable doubts as to
his independence or impartiality.…’
55. The Act does not lay down any other conditions to identify the
“circumstances” which give rise to “justifiable doubts”, and it is clear
that there can be many such circumstances and situations. The test is
not whether, given the circumstances, there is any actual bias for that
is setting the bar too high; but, whether the circumstances in question
give rise to any justifiable apprehensions of bias.
56. The limits of this provision has been tested in the Indian Supreme
Court in the context of contracts with State entities naming particular
persons/designations (associated with that entity) as a potential
arbitrator. It appears to be settled by a series of decisions of the Supreme
Court (see Executive Engineer, Irrigation Division v. Gangaram
Chhapolia [Executive Engineer, Irrigation Division v. Gangaram
Chhapolia, (1984) 3 SCC 627] , Transport Deptt. v. Munuswamy
Mudaliar [Transport Deptt. v. Munuswamy Mudaliar, 1988 Supp SCC
651] , International Airports Authority v. K.D. Bali [International
Airports Authority v. K.D. Bali, (1988) 2 SCC 360] , S. Rajan v. State
of Kerala [S. Rajan v. State of Kerala, (1992) 3 SCC 608] , Indian
Drugs & Pharmaceuticals Ltd. v. Indo Swiss Synthetics Gem Mfg. Co.
Ltd. [Indian Drugs & Pharmaceuticals Ltd. v. Indo Swiss Synthetics
Gem Mfg. Co. Ltd., (1996) 1 SCC 54] , Union of India v. M.P.
Gupta [Union of India v. M.P. Gupta, (2004) 10 SCC 504] and ACE
Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd. [ACE
Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd., (2007)
5 SCC 304] that arbitration agreements in government contracts
996 SUPREME COURT REPORTS [2023] 13 S.C.R.
which provide for arbitration by a serving employee of the department,
are valid and enforceable. While the Supreme Court, in Indian Oil
Corpn. Ltd. v. Raja Transport (P) Ltd. [Indian Oil Corpn. Ltd. v. Raja
Transport (P) Ltd., (2009) 8 SCC 520 : (2009) 3 SCC (Civ) 460] ,
carved out a minor exception in situations when the arbitrator‘was the
controlling or dealing authority in regard to the subject contract or if
he is a direct subordinate (as contrasted from an officer of an inferior
rank in some other department) to the officer whose decision is the
subject-matter of the dispute’ (SCC p. 533, para 34) and this exception
was used by the Supreme Court in Denel (Proprietary) Ltd. v. Ministry
of Defence [Denel (Proprietary) Ltd. v. Ministry of Defence, (2012) 2
SCC 759 : (2012) 2 SCC (Civ) 37 : AIR 2012 SC 817] and Bipromasz
Bipron Trading Sa v. Bharat Electronics Ltd. [Bipromasz Bipron
Trading Sa v. Bharat Electronics Ltd., (2012) 6 SCC 384 : (2012) 3
SCC (Civ) 702] , to appoint an independent arbitrator under Section
11, this is not enough.
57. The balance between procedural fairness and binding nature of
these contracts, appears to have been tilted in favour of the latter by
the Supreme Court, and the Commission believes the present position
of law is far from satisfactory. Since the principles of impartiality and
independence cannot be discarded at any stage of the proceedings,
specifically at the stage of constitution of the Arbitral Tribunal, it
would be incongruous to say that party autonomy can be exercised in
complete disregard of these principles — even if the same has been
agreed prior to the disputes having arisen between the parties. There
are certain minimum levels of independence and impartiality that
should be required of the arbitral process regardless of the parties’
apparent agreement. A sensible law cannot, for instance, permit
appointment of an arbitrator who is himself a party to the dispute,
or who is employed by (or similarly dependent on) one party, even if
this is what the parties agreed. The Commission hastens to add that
Mr P.K. Malhotra, the ex officio member of the Law Commission
suggested having an exception for the State, and allow State parties
to appoint employee arbitrators. The Commission is of the opinion
that, on this issue, there cannot be any distinction between State and
non-State parties. The concept of party autonomy cannot be stretched
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 997
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
to a point where it negates the very basis of having impartial and
independent adjudicators for resolution of disputes. In fact, when the
party appointing an adjudicator is the State, the duty to appoint an
impartial and independent adjudicator is that much more onerous —
and the right to natural justice cannot be said to have been waived
only on the basis of a “prior” agreement between the parties at the
time of the contract and before arising of the disputes.
58. Large-scale amendments have been suggested to address this
fundamental issue of neutrality of arbitrators, which the Commission
believes is critical to the functioning of the arbitration process in
India. In particular, amendments have been proposed to Sections 11,
12 and 14 of the Act.
59. The Commission has proposed the requirement of having specific
disclosures by the arbitrator, at the stage of his possible appointment,
regarding existence of any relationship or interest of any kind which
is likely to give rise to justifiable doubts. The Commission has
proposed the incorporation of the Fourth Schedule, which has drawn
from the red and orange lists of the IBA Guidelines on Conflicts of
Interest in International Arbitration, and which would be treated as a
“guide” to determine whether circumstances exist which give rise to
such justifiable doubts. On the other hand, in terms of the proposed
Section 12(5) of the Act and the Fifth Schedule which incorporates
the categories from the red list of the IBA Guidelines (as above), the
person proposed to be appointed as an arbitrator shall be ineligible to
be so appointed, notwithstanding any prior agreement to the contrary.
In the event such an ineligible person is purported to be appointed
as an arbitrator, he shall be de jure deemed to be unable to perform
his functions, in terms of the proposed Explanation to Section 14.
Therefore, while the disclosure is required with respect to a broader
list of categories (as set out in the Fourth Schedule, and as based on
the red and orange lists of the IBA Guidelines), the ineligibility to be
appointed as an arbitrator (and the consequent de jure inability to
so act) follows from a smaller and more serious sub-set of situations
(as set out in the Fifth Schedule, and as based on the red list of the
IBA Guidelines).
998 SUPREME COURT REPORTS [2023] 13 S.C.R.
60. The Commission, however, feels that real and genuine party
autonomy must be respected, and, in certain situations, parties
should be allowed to waive even the categories of ineligibility as set
in the proposed Fifth Schedule. This could be in situations of family
arbitrations or other arbitrations where a person commands the
blind faith and trust of the parties to the dispute, despite the existence
of objective “justifiable doubts” regarding his independence and
impartiality. To deal with such situations, the Commission has proposed
the proviso to Section 12(5), where parties may, subsequent to disputes
having arisen between them, waive the applicability of the proposed
Section 12(5) by an express agreement in writing. In all other cases,
the general rule in the proposed Section 12(5) must be followed. In the
event the High Court is approached in connection with appointment
of an arbitrator, the Commission has proposed seeking the disclosure
in terms of Section 12(1) and in which context the High Court or the
designate is to have “due regard” to the contents of such disclosure
in appointing the arbitrator.”
(Emphasis supplied)
90. Although, the Law Commission discussed the aforesaid aspect
under the heading “Neutrality of Arbitrators”, yet the focus of discussion
was on impartiality and independence of the arbitrators which has relation
to or bias towards one of the parties. In the field of international arbitration,
neutrality is generally related to the nationality of the arbitrator. In the
international sphere, the “appearance of neutrality” is considered equally
important, which means that an arbitrator is neutral if his nationality is
different from that of the parties. However, that is not the aspect which is
being considered and the term “neutrality” used is relatable to impartiality
and independence of the arbitrators, without any bias towards any of the
parties. In fact, the term “neutrality of arbitrators” is commonly used in this
context as well. (See: Voestalpine Schienen GMBH (supra))
91. Keeping in mind the aforequoted recommendation of the Law
Commission, with which spirit, Section 12 has been amended by the
Amendment Act, 2015, it is manifest that the main purpose for amending
the provision was to provide for neutrality of arbitrators. In order to achieve
this, sub-section (5) of Section 12 lays down that notwithstanding any prior
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agreement to the contrary, any person whose relationship with the parties or
counsel or the subject-matter of the dispute falls under any of the categories
specified in the Seventh Schedule, he shall be ineligible to be appointed as
an arbitrator. In such an eventuality i.e. when the arbitration clause finds
foul with the amended provisions extracted above, the appointment of an
arbitrator would be beyond pale of the arbitration agreement, empowering
the court to appoint such arbitrator(s) as may be permissible. That would be
the effect of the non obstante clause contained in sub-section (5) of Section
12 and the other party cannot insist on appointment of the arbitrator in terms
of the arbitration agreement. (See: Voestalpine Schienen GMBH (supra))
92. There are a plethora of judgments of this Court even prior to the
amendment of Section 12, where courts have appointed the arbitrators,
giving a go-by to the agreed arbitration clause in certain contingencies and
situations, having regard to the provisions of unamended Section 11(8)
of the Act which, inter alia, provided that while appointing the arbitrator,
Chief Justice, or the person or the institution designated by him, shall have
regard to the other conditions as are likely to secure the appointment of an
independent and impartial arbitrator. See Datar Switchgears Ltd. v. Tata
Finance Ltd reported in (2000) 8 SCC 151, Punj Lloyd Ltd. v. Petronet
MHB Ltd. reported in (2006) 2 SCC 638, Union of India v. Bharat Battery
Mfg. Co. (P) Ltd. reported in (2007) 7 SCC 684, Deep Trading Co. v. Indian
Oil Corpn. reported in (2013) 4 SCC 35, Union of India v. Singh
Builders Syndicate reported in (2009) 4 SCC 523 and North Eastern
Railway v. Tripple Engg. Works reported in (2014) 9 SCC 288.
93. Taking note of the aforesaid judgments, this Court in Union
of India and Others v. Uttar Pradesh State Bridge Corporation
Limited reported in (2015) 2 SCC 52 summed up the position in the
following manner:
“13. No doubt, ordinarily that would be the position. The moot
question, however, is as to whether such a course of action has to be
necessarily adopted by the High Court in all cases, while dealing with
an application under Section 11 of the Act or is there room for play in
the joints and the High Court is not divested of exercising discretion
under some circumstances? If yes, what are those circumstances?
It is this very aspect which was specifically dealt with by this Court
1000 SUPREME COURT REPORTS [2023] 13 S.C.R.
in Tripple Engg. Works [North Eastern Railway v. Tripple Engg. Works,
(2014) 9 SCC 288 : (2014) 5 SCC (Civ) 30]. Taking note of various
judgments, the Court pointed out that the notion that the High Court
was bound to appoint the arbitrator as per the contract between the
parties has seen a significant erosion in recent past. In paras 6 and
7 of the said decision, those judgments wherein departure from the
aforesaid “classical notion” has been made are taken note of. It would,
therefore, be useful to reproduce the said paragraph along with paras
8 and 9 hereinbelow: (SCC pp. 291-93)
“6. The ‘classical notion’ that the High Court while exercising its
power under Section 11 of the Arbitration and Conciliation Act,
1996 (hereinafter for short ‘the Act’) must appoint the arbitrator
as per the contract between the parties saw a significant erosion
in ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn.
Ltd. [(2007) 5 SCC 304], wherein this Court had taken the view
that though the contract between the parties must be adhered
to, deviations therefrom in exceptional circumstances would
be permissible. A more significant development had come in a
decision that followed soon thereafter in Union of India v. Bharat
Battery Mfg. Co. (P) Ltd. [(2007) 7 SCC 684] wherein following
a three-Judge Bench decision in Punj Lloyd Ltd. v. Petronet MHB
Ltd. [(2006) 2 SCC 638], it was held that once an aggrieved party
files an application under Section 11(6) of the Act to the High
Court, the opposite party would lose its right of appointment of
the arbitrator(s) as per the terms of the contract. The implication
that the Court would be free to deviate from the terms of the
contract is obvious.
7. The apparent dichotomy in ACE Pipeline [(2007) 5 SCC
304]and Bharat Battery Mfg. Co. (P) Ltd. [(2007) 7 SCC
684] was reconciled by a three-Judge Bench of this Court
in Northern Railway Admn., Ministry of Railway v. Patel Engg.
Co. Ltd. [(2008) 10 SCC 240], wherein the jurisdiction of the
High Court under Section 11(6) of the Act was sought to be
emphasised by taking into account the expression ‘to take the
necessary measure’ appearing in sub-section (6) of Section 11
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and by further laying down that the said expression has to be
read along with the requirement of sub-section (8) of Section 11
of the Act. The position was further clarified in Indian Oil Corpn.
Ltd. v. Raja Transport (P) Ltd. [(2009) 8 SCC 520 : (2009) 3 SCC
(Civ) 460]. Para 48 of the Report wherein the scope of Section
11 of the Act was summarised may be quoted by reproducing
sub-paras (vi) and (vii) hereinbelow: (Indian Oil case [(2009)
8 SCC 520 : (2009) 3 SCC (Civ) 460], SCC p. 537)
‘48.(vi) The Chief Justice or his designate while exercising
power under sub-section (6) of Section 11 shall endeavour
to give effect to the appointment procedure prescribed in
the arbitration clause.
(vii) If circumstances exist, giving rise to justifiable doubts
as to the independence and impartiality of the person
nominated, or if other circumstances warrant appointment
of an independent arbitrator by ignoring the procedure
prescribed, the Chief Justice or his designate may, for
reasons to be recorded, ignore the designated arbitrator
and appoint someone else.”
8. The above discussion will not be complete without reference
to the view of this Court expressed in Union of India v. Singh
Builders Syndicate [(2009) 4 SCC 523 : (2009) 2 SCC (Civ)
246], wherein the appointment of a retired Judge contrary to the
agreement requiring appointment of specified officers was held to
be valid on the ground that the arbitration proceedings had not
concluded for over a decade making a mockery of the process. In
fact, in para 25 of the Report in Singh Builders Syndicate [(2009)
4 SCC 523 : (2009) 2 SCC (Civ) 246] this Court had suggested
that the Government, statutory authorities and government
companies should consider phasing out arbitration clauses
providing for appointment of serving officers and encourage
professionalism in arbitration.
9. A pronouncement of late in Deep Trading Co. v. Indian Oil
Corpn. [(2013) 4 SCC 35 : (2013) 2 SCC (Civ) 449] followed
the legal position laid down in Punj Lloyd Ltd. [Punj Lloyd
1002 SUPREME COURT REPORTS [2023] 13 S.C.R.
Ltd. v. Petronet MHB Ltd., (2006) 2 SCC 638] which in turn
had followed a two-Judge Bench decision in Datar Switchgears
Ltd. v. Tata Finance Ltd. [(2000) 8 SCC 151]. The theory of
forfeiture of the rights of a party under the agreement to appoint
its arbitrator once the proceedings under Section 11(6) of the
Act had commenced came to be even more formally embedded
in Deep Trading Co. [(2013) 4 SCC 35 : (2013) 2 SCC (Civ)
449] subject, of course, to the provisions of Section 11(8), which
provision in any event, had been held in Northern Railway
Admn. [(2008) 10 SCC 240] not to be mandatory, but only
embodying a requirement of keeping the same in view at the
time of exercise of jurisdiction under Section 11(6) of the Act.”
(emphasis in original)
14. Speedy conclusion of arbitration proceedings hardly needs to be
emphasised. It would be of some interest to note that in England also,
Modern Arbitration Law on the lines of Uਃਉਔਁ Model Law, came
to be enacted in the same year as the Indian law which is known as
the English Arbitration Act, 1996 and it became effective from 31-1-
1997. It is treated as the most extensive statutory reform of the English
arbitration law. Commenting upon the structure of this Act, Mustill
and Boyd in their Commercial Arbitration, 2001 companion volume to
the 2nd Edn., have commented that this Act is founded on four pillars.
These pillars are described as:
(a) The first pillar: Three general principles.
(b) The second pillar: The general duty of the Tribunal.
(c) The third pillar: The general duty of the parties.
(d) The fourth pillar: Mandatory and semi-mandatory provisions.
Insofar as the first pillar is concerned, it contains three general
principles on which the entire edifice of the said Act is structured.
These principles are mentioned by an English Court in its judgment
in Deptt. of Economics, Policy and Development of the City of
Moscow v. Bankers Trust Co. [2005 QB 207 : (2004) 3 WLR 533 :
(2004) 4 All ER 746 : 2004 EWCA Civ 314]. In that case, Mance, L.J.
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succinctly summed up the objective of this Act in the following words:
(QB p. 228, para 31)
“31. … Parliament has set out, in the Arbitration Act, 1996, to
encourage and facilitate a reformed and more independent, as
well as private and confidential, system of consensual dispute
resolution, with only limited possibilities of court involvement
where necessary in the interests of the public and of basic
fairness.”
Section 1 of the Act sets forth the three main principles of arbitration
law viz. (i) speedy, inexpensive and fair trial by an impartial tribunal;
(ii) party autonomy; and (iii) minimum court intervention. This
provision has to be applied purposively. In case of doubt as to the
meaning of any provision of this Act, regard should be had to these
principles.
15. In the book O.P. Malhotra on the Law and Practice of Arbitration
and Conciliation (3rd Edn. revised by Ms Indu Malhotra), it is rightly
observed that the Indian Arbitration Act is also based on the aforesaid
four foundational pillars.
16. First and paramount principle of the first pillar is “fair, speedy
and inexpensive trial by an Arbitral Tribunal”. Unnecessary delay or
expense would frustrate the very purpose of arbitration. Interestingly,
the second principle which is recognised in the Act is the party
autonomy in the choice of procedure. This means that if a particular
procedure is prescribed in the arbitration agreement which the parties
have agreed to, that has to be generally resorted to. It is because of
this reason, as a normal practice, the court will insist the parties to
adhere to the procedure to which they have agreed upon. This would
apply even while making the appointment of substitute arbitrator and
the general rule is that such an appointment of a substitute arbitrator
should also be done in accordance with the provisions of the original
agreement applicable to the appointment of the arbitrator at the initial
stage. [See Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles
India Ltd. [ (2006) 6 SCC 204]. However, this principle of party
autonomy in the choice of procedure has been deviated from in those
cases where one of the parties have committed default by not acting in
1004 SUPREME COURT REPORTS [2023] 13 S.C.R.
accordance with the procedure prescribed. Many such instances where
this course of action is taken and the Court appoint the arbitrator when
the persona designata has failed to act, are taken note of in paras
6 and 7 of Tripple Engg. Works [North Eastern Railway v. Tripple
Engg. Works, (2014) 9 SCC 288 : (2014) 5 SCC (Civ) 30]. We are
conscious of the fact that these were the cases where appointment of the
independent arbitrator made by the Court in exercise of powers under
Section 11 of account of “default procedure”. We are, in the present
case, concerned with the constitution of substitute Arbitral Tribunal
where earlier Arbitral Tribunal has failed to perform. However, the
above principle of default procedure is extended by this Court in
such cases as well as is clear from the judgment in Singh Builders
Syndicate [Union of India v. Singh Builders Syndicate, (2009) 4 SCC
523 : (2009) 2 SCC (Civ) 246].
17. In the case of contracts between government corporations/
State-owned companies with private parties/contractors, the terms
of the agreement are usually drawn by the government company or
public sector undertakings. Government contracts have broadly two
kinds of arbitration clauses, first where a named officer is to act as
sole arbitrator; and second, where a senior officer like a Managing
Director, nominates a designated officer to act as the sole arbitrator.
No doubt, such clauses which give the Government a dominant position
to constitute the Arbitral Tribunal are held to be valid. At the same
time, it also casts an onerous and responsible duty upon the persona
designata to appoint such persons/officers as the arbitrators who
are not only able to function independently and impartially, but are
in a position to devote adequate time in conducting the arbitration.
If the Government has nominated those officers as arbitrators who
are not able to devote time to the arbitration proceedings or become
incapable of acting as arbitrators because of frequent transfers, etc.,
then the principle of “default procedure” at least in the cases where
Government has assumed the role of appointment of arbitrators to
itself, has to be applied in the case of substitute arbitrators as well
and the Court will step in to appoint the arbitrator by keeping aside
the procedure which is agreed to between the parties. However, it will
depend upon the facts of a particular case as to whether such a course
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of action should be taken or not. What we emphasise is that Court is
not powerless in this regard.”
(Emphasis supplied)
94. In the context of independence and impartiality of the arbitrator
more particularly keeping in mind the amended Section 12 of the Act 1996,
we must refer to and rely upon the observations made by this Court in paras
20 to 25 of the decision in the case of Voestalpine Schienen (supra):
“20. Independence and impartiality of the arbitrator are the
hallmarks of any arbitration proceedings. Rule against bias is one
of the fundamental principles of natural justice which applied to
all judicial and quasi-judicial proceedings. It is for this reason that
notwithstanding the fact that relationship between the parties to the
arbitration and the arbitrators themselves are contractual in nature
and the source of an arbitrator›s appointment is deduced from the
agreement entered into between the parties, notwithstanding the same
non-independence and non-impartiality of such arbitrator (though
contractually agreed upon) would render him ineligible to conduct
the arbitration. The genesis behind this rational is that even when an
arbitrator is appointed in terms of contract and by the parties to the
contract, he is independent of the parties. Functions and duties require
him to rise above the partisan interest of the parties and not to act
in, or so as to further, the particular interest of either parties. After
all, the arbitrator has adjudicatory role to perform and, therefore,
he must be independent of parties as well as impartial. The United
Kingdom Supreme Court has beautifully highlighted this aspect
in Hashwani v. Jivraj [(2011) 1 WLR 1872 : 2011 UKSC 40] in the
following words: (WLR p. 1889, para 45)
“45. … the dominant purpose of appointing an arbitrator or
arbitrators is the impartial resolution of the dispute between
the parties in accordance with the terms of the agreement and,
although the contract between the parties and the arbitrators
would be a contract for the provision of personal services, they
were not personal services under the direction of the parties.”
21. Similarly, Cour de Cassation, France, in a judgment delivered in
1972 in Consorts Ury [Fouchard, Gaillard, Goldman on International
1006 SUPREME COURT REPORTS [2023] 13 S.C.R.
Commercial Arbitration 562 (Emmanuel Gaillard & John Savage eds.,
1999) {quoting Cour de cassation [Cass.] [Supreme Court for judicial
matters] Consorts Ury v. S.A. des Galeries Lafayette, Cass. 2e civ.,
13-4-1972, JCP, Pt. II, No. 17189 (1972) (France)}.] , underlined that:
“an independent mind is indispensable in the exercise of judicial
power, whatever the source of that power may be, and it is one of the
essential qualities of an arbitrator.”
22. Independence and impartiality are two different concepts. An
arbitrator may be independent and yet, lack impartiality, or vice
versa. Impartiality, as is well accepted, is a more subjective concept
as compared to independence. Independence, which is more an
objective concept, may, thus, be more straightforwardly ascertained
by the parties at the outset of the arbitration proceedings in light of the
circumstances disclosed by the arbitrator, while partiality will more
likely surface during the arbitration proceedings.
23. It also cannot be denied that the Seventh Schedule is based on
IBA guidelines which are clearly regarded as a representation of
international based practices and are based on statutes, case law and
juristic opinion from a cross-section on jurisdiction. It is so mentioned
in the guidelines itself.
24. Keeping in view the aforesaid parameters, we advert to the facts
of this case. Various contingencies mentioned in the Seventh Schedule
render a person ineligible to act as an arbitrator. Entry 1 is highlighted
by the learned counsel for the petitioner which provides that where
the arbitrator is an employee, consultant, advisor or has any other
past or present business relationship with the party, would not act as
an arbitrator. What was argued by the learned Senior Counsel for the
petitioner was that the panel of arbitrators drawn by the respondent
consists of those persons who are government employees or ex-
government employees. However, that by itself may not make such
persons ineligible as the panel indicates that these are the persons
who have worked in the Railways under the Central Government or
the Central Public Works Department or public sector undertakings.
They cannot be treated as employee or consultant or advisor of the
respondent DMRC. If this contention of the petitioner is accepted, then
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no person who had earlier worked in any capacity with the Central
Government or other autonomous or public sector undertakings,
would be eligible to act as an arbitrator even when he is not even
remotely connected with the party in question, like DMRC in this
case. The amended provision puts an embargo on a person to act as
an arbitrator, who is the employee of the party to the dispute. It also
deprives a person to act as an arbitrator if he had been the consultant
or the advisor or had any past or present business relationship with
DMRC. No such case is made out by the petitioner.
25. Section 12 has been amended with the objective to induce neutrality
of arbitrators viz. their independence and impartiality. The amended
provision is enacted to identify the “circumstances” which give rise
to “justifiable doubts” about the independence or impartiality of the
arbitrator. If any of those circumstances as mentioned therein exists,
it will give rise to justifiable apprehension of bias. The Fifth Schedule
to the Act enumerates the grounds which may give rise to justifiable
doubts of this nature. Likewise, the Seventh Schedule mentions those
circumstances which would attract the provisions of sub-section (5)
of Section 12 and nullify any prior agreement to the contrary. In the
context of this case, it is relevant to mention that only if an arbitrator
is an employee, a consultant, an advisor or has any past or present
business relationship with a party, he is rendered ineligible to act
as an arbitrator. Likewise, that person is treated as incompetent to
perform the role of arbitrator, who is a manager, director or part of
the management or has a single controlling influence in an affiliate of
one of the parties if the affiliate is directly involved in the matters in
dispute in the arbitration. Likewise, persons who regularly advised the
appointing party or affiliate of the appointing party are incapacitated.
A comprehensive list is enumerated in Schedule 5 and Schedule 7 and
admittedly the persons empanelled by the respondent are not covered
by any of the items in the said list.”
(Emphasis supplied)
FEW FOREIGN COURT JUDGMENTS ON THE SUBJECT
95. We also looked into a very lucid and erudite judgement on the
issue of unconscionable pre-condition in the arbitration agreement delivered
1008 SUPREME COURT REPORTS [2023] 13 S.C.R.
by a 9 Judge Bench of the Supreme Court of Canada in the case of Uber
Technologies v. Heller (supra).
96. In the aforesaid case, Mr. Heller (driver) was required to accept the
terms of Uber’s standard form service agreement, which stipulated that to
resolve any dispute through arbitration or mediation with Uber, the claimant
would have to pay an up-front administrative and filing fee of USD 14,500.
97. The Supreme Court of Canada held the aforesaid pre-condition to
be unconscionable and unenforceable by a majority of 8:1. The majority
speaking through Abella and Rowe JJ., while explaining the doctrine of
unconscionability held as under:
“53. We agree with Mr. Heller that the arbitration agreement is
unconscionable. The parties and interveners focused their submissions
on unconscionability in accordance with this Court›s direction
in TELUS Communications Inc. v. Wellman, [2019] 2 SCR 144, at
para. 85, that “arguments over any potential unfairness resulting
from the enforcement of arbitration clauses contained in standard
form contracts are better dealt with directly through the doctrine of
unconscionability”.
54. Unconscionability is an equitable doctrine that is used to set aside
“unfair agreements [that] resulted from an inequality of bargaining
power” (John D. McCamus, The Law of Contracts (2nd ed. 2012),
at p. 424). Initially applied to protect young heirs and the “poor and
ignorant” from one-sided agreements, unconscionability evolved to
cover any contract with the combination of inequality of bargaining
power and improvidence (Mitchell McInnes, The Canadian Law of
Unjust Enrichment and Restitution (2014), at p. 521; see also pp. 520-
24; Bradley E. Crawford, “Restitution — Unconscionable Transaction
— Undue Advantage Taken of Inequality Between Parties” (1966) 44
Can. Bar Rev. 142, at p. 143). This development has been described
as “one of the signal accomplishments of modern contract law,
representing a renaissance in the doctrinal treatment of contractual
fairness” (Peter Benson, Justice in Transactions : A Theory of Contract
Law (2019), at p. 165; see also Angela Swan, Jakub Adamski and Annie
Y. Na, Canadian Contract Law (4th ed. 2018), at p. 925).
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55. Unconscionability is widely accepted in Canadian contract law,
but some questions remain about the content of the doctrine, and
it has been applied inconsistently by the lower courts (see, among
others, Morrison v. Coast Finance Ltd., (1965) 55 DLR 710 (2d)
(B.C.C.A.); Harry v. Kreutziger, (1978) 9 B.C.L.R. 166 (C.A.), at p.
177, per Lambert J.A.; Downer v. Pitcher, 2017 NLCA 13 : 409 DLR
542 (4th), at para. 20; Input Capital Corp. v. Gustafson, 2019 SKCA
78 : 438 DLR 387 (4th); Cain v. Clarica Life Insurance Co., 2005
ABCA 437 : 263 DLR 368 (4th); Titus v. William F. Cooke Enterprises
Inc., 2007 ONCA 573 : 284 DLR 734 (4th); Birch v. Union of Taxation
Employees, Local 70030, 2008 ONCA 809 : 305 DLR 64 (4th); see
also Swan, Adamski and Na, at p. 982; McInnes, at pp. 518-19). These
questions require examining underlying contractual theory (Rick
Bigwood, “Antipodean Reflections on the Canadian Unconscionability
Doctrine” (2005) 84 Can. Bar Rev. 171, at p. 173).
56. The classic paradigm underlying freedom of contract is the
“freely negotiated bargain or exchange” between “autonomous and
self-interested parties” (McCamus, at p. 24; see also Swan, Adamski
and Na, at pp. 922-23; P.S. Atiyah, Essays on Contract (1986), at p.
140). At the heart of this theory is the belief that contracting parties
are best-placed to judge and protect their interests in the bargaining
process (Atiyah, at pp. 146-48; Bigwood, at pp. 199-200; Alan Brudner,
“Reconstructing contracts” (1993) 43 U.T.L.J. 1, at pp. 2-3). It also
presumes equality between the contracting parties and that “the
contract is negotiated, freely agreed, and therefore fair” (Mindy Chen-
Wishart, Contract Law (6th ed. 2018), at p. 12)
(emphasis in original).
57. In cases where these assumptions align with reality, the arguments
for enforcing contracts carry their greatest weight (Melvin Aron
Eisenberg, “The Bargain Principle and Its Limits” (1982) 95 Harv.
L. Rev. 741, at pp. 746-48). But these arguments “may speak more
or less forcefully depending on the context” (Wellman, at para. 53;
see also B.J. Reiter, “Unconscionability : Is There a Choice? A Reply
to Professor Hasson” (1980) 4 Can. Bus. L.J. 403, at pp. 405-6). As
Professor Atiyah has noted:
1010 SUPREME COURT REPORTS [2023] 13 S.C.R.
The proposition that a person is always the best judge of his
own interests is a good starting-point for laws and institutional
arrangements, but as an infallible empirical proposition it is an outrage
to human experience. The parallel moral argument, that to prevent
a person, even in his own interests, from binding himself is to show
disrespect for his moral autonomy, can ring very hollow when used
to defend a grossly unfair contract secured at the expense of a person
of little understanding or bargaining skill.
[Emphasis added; p. 148]
58. Courts have never been required to take the ideal assumptions of
contract theory as “infallible empirical proposition[s]”. Equitable
doctrines have long allowed judges to “respond to the individual
requirements of particular circumstances …. humaniz[ing] and
contextualiz[ing] the law›s otherwise antiseptic nature” (Leonard I.
Rotman, “The ‘Fusion’ of Law and Equity? : A Canadian Perspective
on the Substantive, Jurisdictional, or Non-Fusion of Legal and
Equitable Matters” (2016) 2 C.J.C.C.L. 497, at pp. 503-4). Courts,
as a result, do not ignore serious flaws in the contracting process that
challenge the traditional paradigms of the common law of contract,
such as faith in the capacity of the contracting parties to protect their
own interests. The elderly person with cognitive impairment who
sells assets for a fraction of their value (Ayres v. Hazelgrove, Q.B.
England, February 9, 1984); the ship captain stranded at sea who
pays an extortionate price for rescue (The Mark Lane, [L.R.] 15 P.D.
135); the vulnerable couple who signs an improvident mortgage with
no understanding of its terms or financial implications (Commercial
Bank of Australia Ltd. v. Amadio, [1983] HCA 14 : 151 CLR 447) —
these and similar scenarios bear little resemblance to the operative
assumptions on which the classic contract model is constructed.
59. In these kinds of circumstances, where the traditional assumptions
underlying contract enforcement lose their justificatory authority,
the doctrine of unconscionability provides relief from improvident
contracts. When unfair bargains cannot be linked to fair bargaining
— when they cannot be attributed to one party’s “donative intent or
assumed risk”, as Professor Benson puts it — courts can avoid the
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inequitable effects of enforcement without endangering the core values
on which freedom of contract is based (p. 182; see also Eisenberg,
at pp. 799-801; S.M. Waddams, “Good Faith, Unconscionability and
Reasonable Expectations” (1995) 9 J.C.L. 55, at p. 60). This explains
how unconscionability lines up with traditional accounts of contract
theory while recognizing the doctrine’s historical roots in equity, which
has long operated as a “corrective to the harshness of the common
law” (McCamus, at p. 10; see also Rotman, at pp. 503-4).
60. This Court has often described the purpose of unconscionability
as the protection of vulnerable persons in transactions with others
(Hodgkinson v. Simms, [1994] 3 SCR 377, at pp. 405 and 412; Hunter
Engineering Co. v. Syncrude Canada Ltd., [1989] 1 SCR 426, at p. 462,
per Dickson C.J., and p. 516, per Wilson J.; Norberg v. Wynrib, [1992]
2 SCR 226, at p. 247; see also Bhasin v. Hrynew, [2014] 3 SCR 494,
at para. 43). We agree. Unconscionability, in our view, is meant to
protect those who are vulnerable in the contracting process from
loss or improvidence to that party in the bargain that was made (see
Mindy Chen-Wishart, Unconscionable Bargains (1989), at p. 109; see
also James Gordley, “Equality in Exchange” (1981) 69 Cal. L. Rev.
1587, at pp. 1629-34; Birch, at para. 44). Although other doctrines
can provide relief from specific types of oppressive contractual terms,
unconscionability allows courts to fill in gaps between the existing
“islands of intervention” so that the “clause that is not quite a penalty
clause or not quite an exemption clause or just outside the provisions
of a statutory power to relieve will fall under the general power, and
anomalous distinctions … will disappear” (S.M. Waddams, The Law
of Contracts (7th ed. 2017), at p. 378).
Xxx xxx xxx
70. The classic example of a “necessity” case is a rescue at sea
scenario (see The Medina, [L.R.] 1 P.D. 272). The circumstances
under which such agreements are made indicate the weaker party did
not freely enter into the contract, as it was the product of his “extreme
need … to relieve the straits in which he finds himself” (Bundy, at p.
339). Other situations of dependence also fit this mould, including
those where a party is vulnerable due to financial desperation, or where
1012 SUPREME COURT REPORTS [2023] 13 S.C.R.
there is “a special relationship in which trust and confidence has been
reposed in the other party” (Norberg, at p. 250, quoting Christine Boyle
and David R. Percy, Contracts : Cases and Commentaries (4th ed.
1989), at pp. 637-38). Unequal bargaining power can be established
in these scenarios even if duress and undue influence have not been
demonstrated (see Norberg, at pp. 247-48; see also McInnes, at p. 543).
71. The second common example of an inequality of bargaining power
is where, as a practical matter, only one party could understand and
appreciate the full import of the contractual terms, creating a type of
“cognitive asymmetry” (see Smith, at pp. 343-44). This may occur
because of personal vulnerability or because of disadvantages specific
to the contracting process, such as the presence of dense or difficult to
understand terms in the parties› agreement. In these cases, the law›s
assumption about self-interested bargaining loses much of its force.
Unequal bargaining power can be established in these scenarios
even if the legal requirements of contract formation have otherwise
been met (see Sebastien Grammond, “The Regulation of Abusive or
Unconscionable Clauses from a Comparative Law Perspective” (2010)
49 Can. Bus. L.J. 345, at pp. 353-54).
Xxx xxx xxx
84. Unconscionability, moreover, can be established without proof
that the stronger party knowingly took advantage of the weaker. Such
a requirement is closely associated with theories of unconscionability
that focus on wrongdoing by the defendant (see Boustany, at p. 6). But
unconscionability can be triggered without wrongdoing. As Professor
Waddams compellingly argues:
The phrases ‘unconscionable conduct’, ‘unconscionable
behaviour’ and ‘unconscionable dealing’ lack clarity, are
unhistorical insofar as they imply the need for proof of
wrongdoing, and have been unduly restrictive.
(Waddams (2019), at pp. 118-19; see also Benson, at p. 188; Smith,
at pp. 360-62.)
85. We agree. One party knowingly or deliberately taking advantage
of another›s vulnerability may provide strong evidence of inequality of
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bargaining power, but it is not essential for a finding of unconscionability.
Such a requirement improperly emphasizes the state of mind of the
stronger party, rather than the protection of the more vulnerable. This
Court›s decisions leave no doubt that unconscionability focuses on the
latter purpose. Parties cannot expect courts to enforce improvident
bargains formed in situations of inequality of bargaining power; a
weaker party, after all, is as disadvantaged by inadvertent exploitation
as by deliberate exploitation. A rigid requirement based on the
stronger party›s state of mind would also erode the modern relevance
of the unconscionability doctrine, effectively shielding from its reach
improvident contracts of adhesion where the parties did not interact
or negotiate.
86. In our view, the requirements of inequality and improvidence,
properly applied, strike the proper balance between fairness and
commercial certainty. Freedom of contract remains the general rule.
It is precisely because the law›s ordinary assumptions about the
bargaining process do not apply that relief against an improvident
bargain is justified.
87. Respecting the doctrine of unconscionability has implications for
boiler plate or standard form contracts. As Karl N. Llewellyn, the
primary drafter of the Uniform Commercial Code, explained:
Instead of thinking about “assent” to boiler-plate clauses, we can
recognize that so far as concerns the specific, there is no assent at all.
What has in fact been assented to, specifically, are the few dickered
terms, and the broad type of the transaction, and but one thing more.
That one thing more is a blanket assent (not a specific assent) to any
not unreasonable or indecent terms the seller may have on his form,
which do not alter or eviscerate the reasonable meaning of the dickered
terms. The fine print which has not been read has no business to cut
under the reasonable meaning of those dickered terms which constitute
the dominant and only real expression of agreement, but much of it
commonly belongs in.
There has been an arm’s-length deal, with dickered terms. There
has been accompanying that basic deal another which … at least
involves a plain expression of confidence, asked and accepted, with a
1014 SUPREME COURT REPORTS [2023] 13 S.C.R.
corresponding limit on the powers granted : the boiler-plate is assented
to en bloc, “unsight, unseen,” on the implicit assumption and to the
full extent that (1) it does not alter or impair the fair meaning of the
dickered terms when read alone, and (2) that its terms are neither in
the particular nor in the net manifestly unreasonable and unfair.
(The Common Law Tradition : Deciding Appeals (1960), pp. 370-71)
88. We do not mean to suggest that a standard form contract, by itself,
establishes an inequality of bargaining power (Waddams (2017), at p.
240). Standard form contracts are in many instances both necessary
and useful. Sophisticated commercial parties, for example, may be
familiar with contracts of adhesion commonly used within an industry.
Sufficient explanations or advice may offset uncertainty about the
terms of a standard form agreement. Some standard form contracts
may clearly and effectively communicate the meaning of clauses with
unusual or onerous effects (Benson, at p. 234).
89. Our point is simply that unconscionability has a meaningful
role to play in examining the conditions behind consent to contracts
of adhesion, as it does with any contract. The many ways in which
standard form contracts can impair a party›s ability to protect
their interests in the contracting process and make them more
vulnerable, are well-documented. For example, they are drafted
by one party without input from the other and they may contain
provisions that are difficult to read or understand (see Margaret
Jane Radin, “Access to Justice and Abuses of Contract” (2016)
33 Windsor Y.B. Access Just. 177, at p. 179; Stephen Waddams,
“Review Essay : The Problem of Standard Form Contracts : A
Retreat to Formalism” (2013) 53 Can. Bus. L.J. 475, at pp. 475-
476; Thal, at pp. 27-28; William J. Woodward, Jr., “Finding the
Contract in Contracts for Law, Forum and Arbitration” (2006) 2
Hastings Bus. L.J. 1, at p. 46). The potential for such contracts to
create an inequality of bargaining power is clear. So too is their
potential to enhance the advantage of the stronger party at the
expense of the more vulnerable one, particularly through choice
of law, forum selection, and arbitration clauses that violate the
adhering party’s reasonable expectations by depriving them of
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remedies. This is precisely the kind of situation in which the
unconscionability doctrine is meant to apply.
90. This development of the law of unconscionability in connection with
standard form contracts is not radical. On the contrary, it is a modern
application of the doctrine to situations where “the normative rationale
for contract enforcement … [is] stretched beyond the breaking
point” (Radin, at p. 179). The link between standard form contracts
and unconscionability has been suggested in judicial decisions,
textbooks, and academic articles for years (see, e.g., Douez, at para.
114; Davidson v. Three Spruces Realty Ltd., (1977) 79 DLR 481 (3d)
(B.C.S.C.); Hunter, at p. 513; Swan, Adamski and Na, at pp. 992-93;
McCamus, at p. 444; Jean Braucher, “Unconscionability in the Age
of Sophisticated Mass-Market Framing Strategies and the Modern
Administrative State” (2007) 45 Can. Bus. L.J. 382, at p. 396). It has
also been present in the American jurisprudence for more than half
a century (see Williams v. Walker-Thomas Furniture Company, 350
F.2d 445 (1965), at pp. 449-50).
91. Applying the unconscionability doctrine to standard form contracts
also encourages those drafting such contracts to make them more
accessible to the other party or to ensure that they are not so lop-
sided as to be improvident, or both. The virtues of fair dealing were
explained by Jean Braucher as follows:
Businesses are driven to behave competitively in their framing of
market situations or otherwise they lose to those who do. Only if
there are meaningful checks on what might be considered immoral
behavior will persons in business have the freedom to act on their
moral impulses. An implication of this point is that, absent regulation,
business culture will become ever more ruthless, so that the distinctions
between “reputable businesses” and fringe marketers gradually wither
away…. [p. 390]
92. This brings us to the appeal before us and whether Mr. Heller›s
arbitration clause with Uber is unconscionable.
93. There was clearly inequality of bargaining power between Uber
and Mr. Heller. The arbitration agreement was part of a standard
1016 SUPREME COURT REPORTS [2023] 13 S.C.R.
form contract. Mr. Heller was powerless to negotiate any of its
terms. His only contractual option was to accept or reject it. There
was a significant gulf in sophistication between Mr. Heller, a food
deliveryman in Toronto, and Uber, a large multinational corporation.
The arbitration agreement, moreover, contains no information about
the costs of mediation and arbitration in the Netherlands. A person in
Mr. Heller›s position could not be expected to appreciate the financial
and legal implications of agreeing to arbitrate under ICC Rules or
under Dutch law. Even assuming that Mr. Heller was the rare fellow
who would have read through the contract in its entirety before signing
it, he would have had no reason to suspect that behind an innocuous
reference to mandatory mediation “under the International Chamber
of Commerce Mediation Rules” that could be followed by “arbitration
under the Rules of Arbitration of the International Chamber of
Commerce”, there lay a US$14,500 hurdle to relief. Exacerbating this
situation is that these Rules were not attached to the contract, and so
Mr. Heller would have had to search them out himself.
94. The improvidence of the arbitration clause is also clear. The
mediation and arbitration processes require US$14,500 in up-front
administrative fees. This amount is close to Mr. Heller›s annual income
and does not include the potential costs of travel, accommodation,
legal representation or lost wages. The costs are disproportionate
to the size of an arbitration award that could reasonably have been
foreseen when the contract was entered into. The arbitration agreement
also designates the law of the Netherlands as the governing law and
Amsterdam as the “place” of the arbitration. This gives Mr. Heller
and other Uber drivers in Ontario the clear impression that they have
little choice but to travel at their own expense to the Netherlands to
individually pursue claims against Uber through mandatory mediation
and arbitration in Uber›s home jurisdiction. Any representations to
the arbitrator, including about the location of the hearing, can only
be made after the fees have been paid.
95. The arbitration clause, in effect, modifies every other substantive
right in the contract such that all rights that Mr. Heller enjoys are subject
to the apparent precondition that he travel to Amsterdam,7 initiate
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 1017
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
an arbitration by paying the required fees and receive an arbitral
award that establishes a violation of this right. It is only once these
preconditions are met that Mr. Heller can get a court order to enforce
his substantive rights under the contract. Effectively, the arbitration
clause makes the substantive rights given by the contract unenforceable
by a driver against Uber. No reasonable person who had understood
and appreciated the implications of the arbitration clause would have
agreed to it.
96. We add that the unconscionability of the arbitration clause can be
considered separately from that of the contract as a whole. As explained
in Bremer Vulkan Schiffbau und Maschinenfabrik v. South India
Shipping Corporation Ltd., [1981] A.C. 909 (H.L.), an arbitration
agreement “constitutes a self-contained contract collateral or ancillary
to the [main] agreement” (p. 980; see also p. 998, per Lord Scarman).
Further support comes from the severability clause of the Uber Rasier
and Uber Portier agreements, and s. 17(2) of the AA.”
(Emphasis supplied)
98. Brown J. in his separate but concurring opinion held that such a
pre-condition as mentioned in the agreement was opposed to public policy as
it impeded the claimant from resolving his dispute effectively. The relevant
observations are as under:
“110. The ground upon which I proceed is that which precludes
an ouster of court jurisdiction or, more broadly, which protects the
integrity of the justice system. As Lord Atkin stated in Fender v. St.
John-Mildmay, [1938] A.C. 1 (H.L.), at p. 12, ousting the jurisdiction
of the courts is harmful in itself and “injurious to public interests”
(see also Kain and Yoshida, at pp. 20-23). A provision that penalizes
or prohibits one party from enforcing the terms of their agreement
directly undermines the administration of justice. There is nothing
novel about the proposition that contracting parties, as a matter
of public policy, cannot oust the court’s supervisory jurisdiction to
resolve contractual disputes (see e.g. Kill v. Hollister, (1746) 1 Wils.
K.B. 129 : 95 E.R. 532; Scott v. Avery, (1856) 5 H.L.C. 811 : 10 E.R.
1121; Deuterium of Canada Ltd. v. Burns & Roe Inc., [1975] 2 SCR
124). Indeed, irrespective of the value placed on freedom of contract,
1018 SUPREME COURT REPORTS [2023] 13 S.C.R.
courts have consistently held that a contracting party’s right to legal
recourse is “a right inalienable even by the concurrent will of the
parties” (Scott, at p. 1133).
111. This head of public policy serves to uphold the rule of law,
which, at a minimum, guarantees Canadian citizens and residents
“a stable, predictable and ordered society in which to conduct their
affairs” (Reference re Secession of Quebec, [1998] 2 SCR 217, at
para. 70). Such a guarantee is meaningless without access to an
independent judiciary that can vindicate legal rights. The rule of
law, accordingly, requires that citizens have access to a venue where
they can hold one another to account (Jonsson v. Lymer, 2020 ABCA
167, at para. 10 (CanLII)). Indeed, “[t]here cannot be a rule of law
without access, otherwise the rule of law is replaced by a rule of men
and women who decide who shall and who shall not have access to
justice” (B.C.G.E.U. v. British Columbia (Attorney General), [1988]
2 SCR 214, at p. 230). Unless private parties can enforce their legal
rights and publicly adjudicate their disputes, “the rule of law is
threatened and the development of the common law undermined”
(Hryniak v. Mauldin, 2014 SCC 7 : [2014] 1 SCR 87, at para. 26).
Access to civil justice is paramount to the public legitimacy of the law
and the legitimacy of the judiciary as the institution of the state that
expounds and applies the law.
112. Access to civil justice is a precondition not only to a functioning
democracy but also to a vibrant economy, in part because access
to justice allows contracting parties to enforce their agreements. A
contract that denies one party the right to enforce its terms undermines
both the rule of law and commercial certainty. That such an agreement
is contrary to public policy is not a manifestation of judicial
idiosyncrasies, but rather an instance of the self-evident proposition
that there is no value in a contract that cannot be enforced. Thus, the
harm to the public that would result from holding contracting parties
to a bargain they cannot enforce is “substantially incontestable”
(Millar Estate, at p. 7, quoting Fender, at p. 12). It really is this simple
: unless everyone has reasonable access to the law and its processes
where necessary to vindicate legal rights, we will live in a society
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 1019
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where the strong and well-resourced will always prevail over the
weak. Or, as Frederick Wilmot-Smith puts it, “[l]egal structures that
make enforcement of the law practically impossible will leave weaker
members of society open to exploitation at the hands of, for example,
unscrupulous employers or spouses.” (Equal Justice : Fair Legal
Systems in an Unfair World (2019), at pp. 1-2).
113. The reference to making enforcement of the law practically impossible
leads to a further, related point : there is no good reason to distinguish
between a clause that expressly blocks access to a legally determined
resolution and one that has the ultimate effect of doing so. That this
is so is illustrated by the judgment of Drummond J. in Novamaze
Pty Ltd. v. Cut Price Deli Pty Ltd., (1995) 128 ALR 540 (F.C.A.).
In Novamaze, the terms of a franchise agreement permitted the
franchisor to take control of the franchisee›s business if either party
threatened to commence, or commenced, legal proceedings against the
other. This clause, Drummond J. explained, was “capable of operating
as a powerful disincentive to the franchisee to take proceedings of
any kind against [the franchisor], no matter how strong a case the
franchisee may have that it has suffered wrong” (p. 548). Summarizing
the relevant principle, Drummond J. continued:
… the citizen is entitled to have recourse to the court for an
adjudication on his legal rights. A contractual agreement to deny
a person that “inalienable right” contravenes this public policy
and is void. A disincentive to a person to exercise this right of
recourse to the court can, depending upon how powerfully it
operates to discourage litigation, amount to a denial of this right
just as complete as an express contractual prohibition against
litigation. [pp. 548-49]
xxx xxx xxx
117. Uber›s position requires this Court to accept that the change
in judicial posture following the enactment of modern arbitration
legislation leaves no room for the operation of public policy. But curial
respect for arbitration, and for parties› choices to refer disputes to
arbitration, is premised upon two considerations. First, the purpose
of arbitration is to ensure that contracting parties have access to “a
1020 SUPREME COURT REPORTS [2023] 13 S.C.R.
‘good and accessible method of seeking resolution for many kinds
of disputes’ that ‘can be more expedient and less costly than going
to court’” (Wellman, at para. 83, quoting Legislative Assembly of
Ontario, March 27, 1991, at p. 245). Second, courts have accepted
arbitration as an acceptable alternative to civil litigation because it
can provide a resolution according to law. As this Court observed
in Sport Maska Inc. v. Zittrer, [1988] 1 SCR 564, at p. 581:
The legislator left … various procedures for settling disputes to
be resolved freely by litigants when recourse to the courts was
still possible. If judicial intervention was ruled out, however, the
legislator had to ensure that the process would guarantee
litigants the same measure of justice as that provided by the
courts, and for this reason, rules of procedure were developed
to ensure that the arbitrator is impartial and that the rules of
fundamental justice … are observed. The arbitrator will make an
award which becomes executory by homologation. This indicates
the similarity between the arbitrator’s real function and that of
a judge who has to decide a case.
[Emphasis added.]
In other words, any means of dispute resolution that serves as a final
resort for contracting parties must be just. This is important because,
unlike the submission of existing disputes to arbitration, and contrary
to my colleague Côté J.’s assertion, an agreement to submit all future
unknown disputes to arbitration is not simply a substitute for the
parties’ negotiations (para. 250). Rather, it serves as a transfer of
dispute resolution authority away from public adjudicators (W.G.
Horton, “A Brief History of Arbitration” (2017) 47 Adv. Q. 12, at p.
14; Sport Maska, at p. 581; Wellman, at para. 48; Desputeaux, [2003]
1 SCR 178, at para. 40). The legitimacy of such a transfer rests upon
whether it can provide a comparable measure of justice.
xxx xxx xxx
121. In sum, applying public policy to determine whether an arbitration
agreement prohibits access to justice is neither stating a “new common
law rule” as my colleague Côté J. characterizes it, nor an expansion
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VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
of the grounds for judicial intervention in arbitration proceedings
(paras. 307, 312 and 316). Common law courts have long recognized
the right to resolve disputes according to law. The law has simply
evolved to embrace arbitration as means of achieving that resolution.
Contractual stipulations that prohibit such resolution altogether,
whether by express prohibition or simply by effect, continue to be
unenforceable as a matter of public policy.”
(Emphasis supplied)
99. The Majority ultimately concluded observing the following in
paragraphs 97 and 98 respectively of the judgement as under:
“97. Respect for arbitration is based on it being a cost-effective and
efficient method of resolving disputes. When arbitration is realistically
unattainable, it amounts to no dispute resolution mechanism at all.
As our colleague Justice Brown notes, under the arbitration clause,
“Mr. Heller, and only Mr. Heller, would experience undue hardship in
attempting to advance a claim against Uber, regardless of the claim’s
legal merit” (para. 136). The arbitration clause is the only way Mr.
Heller can vindicate his rights under the contract, but arbitration is
out of reach for him and other drivers in his position. His contractual
rights are, as a result, illusory.
98. Based on both the disadvantages faced by Mr. Heller in his ability
to protect his bargaining interests and on the unfair terms that resulted,
the arbitration clause is unconscionable and therefore invalid.”
(Emphasis supplied)
100. The courts in the United States of America have also deliberated
upon the doctrine of unconscionability on numerous occasions. The Court
of Appeal of California in the case of Patterson v. ITT Consumer Financial
Corporation reported in 18 Cal. Rptr. 2d 563 (Cal. Ct. App. 1993), had the
occasion to consider whether the requirement for the claimants to pay a
filing fee along with hearing fees for the purpose of resolving the matter
could be said to be unconscionable. The Court of Appeals held that such
a condition was “incomprehensible” and discouraged the borrowers from
pursuing their claims. The relevant observations are as under:
1022 SUPREME COURT REPORTS [2023] 13 S.C.R.
“B. Unconscionability
2. Two alternative analyses exist under California law for determining
whether a contractual provision will be unenforceable because it is
unconscionable. (Perdue v. Crocker National Bank (1985) 38 Cal.3d
913, 925, fn. [216 Cal. Rptr. 345, 702 P.2d 503] [“Both analytical
pathways should lead to the same result.”].) The first model set
out in Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807 [171 Cal.
Rptr. 604, 623 P.2d 165] asks initially whether the contract is one of
adhesion. (Id. at p. 819.) Since a contract of adhesion is still fully
enforceable, the inquiry then turns to whether enforcement should be
denied. First, enforcement will be denied if the contract or provision
falls outside the reasonable expectations of the weaker party. (Id. at
p. 820.) Second, enforcement will be denied even if it does fall within
the reasonable expectations of the parties, but it is unduly oppressive
or unconscionable. (Ibid.)
The alternative analytical model was set out in A M Produce Co.
v. FMC Corp., supra, 135 Cal.App.3d 473. It sought to define what
rendered a contract or a contractual provision unconscionable and
hence unenforceable under Civil Code section 1670.5 (135 Cal.App.3d
at p. 485.) A M concluded that unconscionability has a procedural and
a substantive component. (Id. at p. 486.) The procedural component
focuses on the factors of oppression and surprise. (Ibid.) Oppression
results where there is no real negotiation of contract terms because
of unequal bargaining power. (Ibid.) “`Surprise’ involves the extent to
which the supposedly agreed-upon terms of the bargain are hidden in a
prolix printed form drafted by the party seeking to enforce the disputed
terms.” (Ibid.) The substantive component of unconscionability
looks to whether the contract allocates the risks of the bargain in
an objectively unreasonable or unexpected manner. (Id. at p. 487.)
To be unenforceable there must be both substantive and procedural
unconscionability, though there may be an inverse relation between
the two elements. (Ibid.)
3. A contract of adhesion is “a standardized contract, which, imposed
and drafted by the party of superior bargaining strength, relegates to
the subscribing party only the opportunity to adhere to the contract or
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 1023
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
reject it.” (Neal v. State Farm Ins. Cos. (1961) 188 Cal.App.2d 690,
694 [10 Cal.Rptr. 781].)
4. The record before us indicates that plaintiffs are individuals of
modest means, some self-employed or temporarily jobless, who
borrowed relatively small amounts of money, often in response to
advertising promising “guaranteed loans.” The loan agreement which
they signed included a preprinted form containing an arbitration
clause either as the final paragraph on a page entitled “Agreement for
Dispute Resolution” or at midpage on a sheet of text, but set apart by
the use of boldface type. On both versions of the form the provision was
clearly titled “Arbitration.” None of the preprinted clauses had been
modified in any manner, which suggests that they were nonnegotiable.
Several of the borrowers stated that they believed they would not have
been able to obtain a bank loan. In these circumstances we think it
indisputable that the contract was one of adhesion.
ITT argues that arbitration has become such a common means of
dispute resolution that it must be considered within the reasonable
expectation of the borrowers. While arbitration per se may be within
the reasonable expectation of most consumers, it is much more difficult
to believe that arbitration in Minnesota would be within the reasonable
expectation of California consumers. The arbitration clause says only
that the dispute will be “resolved by binding arbitration by the National
Arbitration Forum, Minneapolis, Minnesota.”
xxx xxx xxx
In order to obtain a participatory hearing, however, the responding
party must make a prompt demand for one and accompany it with
prepayment of fees. Prepayment of hearing fees can be waived for
individuals, but only after filing an affidavit of indigency. However,
the rule explaining the fee waiver process is, as the trial court aptly
noted, “incomprehensible,” since it requires compliance with rules
concerning involuntary dismissals.
The likely effect of these procedures is to deny a borrower against
whom a claim has been brought any opportunity to a hearing, much
less a hearing held where the contract was signed, unless the borrower
1024 SUPREME COURT REPORTS [2023] 13 S.C.R.
has considerable legal expertise or the money to hire a lawyer and/
or prepay substantial hearing fees. The latter is especially unlikely
given the small dollar amounts at issue. In a dispute over a loan of
$2,000 it would scarcely make sense to spend a minimum of $850
just to obtain a participatory hearing. In short the procedure seems
designed to discourage borrowers from responding at all. In the event
that they do not respond, an award may be entered against them if the
documents submitted by ITT support its claim.”
(Emphasis supplied)
101. Similarly, the United States District Court, W.D. Michigan in
the case of Vegter v. Forecast Financial Corporation reported in 2007
WL 4178947, while discussing the principle of procedural and substantive
unconscionability in arbitration agreements, held as under:
“B. Unconscionability
Generally applicable contract defenses, such as unconscionability,
can invalidate an arbitration agreement consistent with the FAA.
Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996). Whether
an arbitration clause is unconscionable is governed by state law.
Stutler v. T.K. Constructors, Inc., 448 F.3d 343, 345 (6th Cir. 2006).
Under Michigan law, in order to invalidate a contract provision
for unconscionability, the Court must find the provision is both
procedurally and substantively unconscionable. Pichey v. Ameritech
Interactive Media Servs., Inc., 421 F. Supp. 2d 1038, 1044-45 (W.D.
Mich. 2006) (Bell, C.J.). The inquiries for finding procedural and
substantive unconscionability have been phrased as: “(1) What is
the relative bargaining power of the parties, their relative economic
strength, the alternative sources of supply, in a word, what are their
options?; (2) Is the challenged term substantively reasonable?” Id. at
1045 (quoting Allen v. Mich. Bell. Tel. Co., 18 Mich. App. 632, 637,
171 N.W.2d 689 (1969)).
As to procedural unconscionability, the Court finds that this
was a contract of adhesion. The terms of the contract were not
negotiated and Plaintiff had relatively little economic strength in
the transaction.
LOMBARDI ENGINEERING LTD. v. UTTARAKHAND JAL 1025
VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]
As to substantive unconscionability, the arbitration clause is
unreasonable insofar as it requires Plaintiff to travel to Okaloosa
County, Florida for the arbitration. In many circumstances
requiring a consumer to travel a substantial distance to arbitrate
a claim has been found to be unreasonable. DeOrnellas v. Aspen
Square Mgmt., Inc., 295 F. Supp. 2d 753, 765-66 (E.D. Mich. 2003);
Garrett v. Hooters-Toledo, 295 F. Supp. 2d 774, 783 (N.D. Ohio
2003); Comb v. PayPal, Inc., 218 F. Supp. 2d 1165, 1176-77 (N.D.
Cal. 2002). In determining whether requiring the arbitration to be
held in Florida is unreasonable, the Court must ask whether the
“provision would deter a substantial number of similarly situated
potential litigants. . . .”Morrison, 317 F.3d at 663. See Stutler, 448
F.3d at 346 (indicating that the test from Morrison is applicable “to
the question of whether an arbitration clause is enforceable where
federal statutorily provided rights are affected.”). Requiring a
consumer who is experiencing financial distress to travel to Florida
would effectively deter such a consumer from pursuing arbitration.
At the time the contract was signed Defendants knew that Plaintiff
was experiencing financial difficulty and presumably knew that it
would be difficult for Plaintiff to arbitrate in Florida. Given those
circumstances, the Court finds that requiring Plaintiff to arbitrate
in Florida would effectively bar Plaintiff from brining a claim and
is substantively unreasonable.
The Court finds that the provision in the arbitration clause that
designates Okaloosa County, Florida as the site of the arbitration is
both procedurally and substantively unconscionable under Michigan
law. Therefore, the Court severs and declares unenforceable the
provision in the arbitration clause that designates Okaloosa, Florida
as the site of the arbitration.”
102. In view of the aforesaid discussion, we have reached to the
conclusion that we should ignore the two conditions contained in Clause
55 of the GCC, one relating to 7% deposit of the total amount claimed
and the second one relating to the stipulation empowering the Principal
Secretary (Irrigation) Government of Uttarakhand to appoint a sole
arbitrator.
1026 SUPREME COURT REPORTS [2023] 13 S.C.R.
103. In the result, this application stands allowed.
104. We appoint Mr. V.K. Bist, the Former Chief Justice of the High
Court of Sikkim to act as the sole arbitrator. The fees of the arbitrator
including other modalities shall be fixed in consultation with the parties.
Headnotes prepared by: Application allowed.
Nidhi Jain
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