Holding

Sections 31(8) and 38 of the Arbitration and Conciliation Act, 1996 apply only in the absence of an agreement on costs and cannot be invoked to invalidate a contractual security‑deposit clause; therefore the deposit requirement is valid.

Summary

The appellant, a contractor, entered into a contract with the State of Haryana to construct an office building, which contained an arbitration clause and a sub‑clause requiring the contractor to deposit a security of 7% of the claim amount before arbitration could commence. A dispute arose, the contractor filed a claim before the arbitral tribunal, and the State objected, invoking the deposit requirement; the tribunal upheld the objection. The contractor challenged the deposit clause, arguing it was unconscionable, resulted from unequal bargaining power, and conflicted with Sections 31(8) and 38 of the Arbitration and Conciliation Act, 1996, which deal with costs and deposits in the absence of agreement. The Punjab & Haryana High Court dismissed the writ petition, holding the clause valid. On appeal, the Supreme Court held that Sections 31(8) and 38 operate only when the parties have not agreed on costs, and cannot be used to override a contractual security‑deposit provision; the doctrine of fairness or unequal bargaining power does not apply to a freely entered commercial contract with the State. Consequently, the appeal was dismissed.

Issues considered

The requirement of a 7% security deposit in the arbitration agreement conflicts with Sections 31(8) and 38 of the Arbitration and Conciliation Act, 1996.
Whether the doctrine of unfairness or unequal bargaining power can invalidate the deposit clause in a contract with the State.
Whether a cap should be placed on the quantum of the security deposit.

Legislation cited

Arbitration and Conciliation Act, 1996s. 31(8), s. 38
Indian Contract Act, 1872s. 23, s. 28

Subjects

ArbitrationSecurity depositArbitration costsContractual fairnessUnequal bargaining powerSection 31(8)Section 38Arbitration agreement

Judgment

[2009f2 S.C.R. 1080
r
A S.K. JAIN. t
)r- .... J
v
STATE OF HARYANA AND ANR. }
Civil appeal No .. 1156 of 2009
FEBRUARY 23, 2009·
B ')
(DR. ARIJIT PASAYAT, V.S. SIRPURKAR AND ASOK
. KUMAR GANGULY, :JJ)
Arbitration and Conciliation Act, 1996 : +-
c ss. 31 (8) and 38 - Arbitration agreement requiring the
contractor to deposit, as security, 7% of amount claimed . . ;,
HELD: Provisions of ss. 31(8) and 38 would operate in absence
of agreement with regard to cost, but cannot be pressed into
service to get over the agreement - High Court rightly held .
~

D that contractor was required to make the deposit. _.:

The respondent-Government allotted to the appellant
).
"~
contractor the work of constructing its office building.The I
l-
dispute having arisen between the parties, the appellant
'
lo-
inv.pked the arbitration clause of the agreement. The
E respondent raised objection to maintainability· of
arbitration proceedings for failure of the appellant to
deposit 7% of the amount claimed, in terms of the
arbitration clause. The arbitration tribunal sustained the }
objection. The appellant approached the High Court ~
..
F contending that the arbitration clause with a requirement
of security deposit on the part of the contractor was in ~
conflict with the provisions. of ss. 31 (8) and 38 of the
Arbitration and Conciliation Act, 1996. The High Court
dismissed the writ petition.
r
G In the appeal filed by the contractor, it was contended
for the appellant that the relevant arbitration clause of the
agreement requiring the contractor to make the deposit "'--
was a result of unequal bargaining power of the parties
and since the Government was not to make the deposit, it
H 1080
S.K. JAIN V. STATE ·OF HARYANA AND ANR. 1081

.,.. •Ji\
was unconscionable and as such the High Court erred in A
dismissing the writ petition. It was alternatively contended
that. there ought to be a cap as regards the quantum of
the deposit.
Dismissing the appeal, the Court
B
HELD : 1.1 A bare perusal of ss.31 (8) and 38 of the
Arbitration and Conciliation Act, 1996 clearly shows that
the provision is to operate in the absence of agreement
~
-.J
with regard to cost. It cannot be pressed into service to
get over the arbitration clause of the agreement. [para 10) c
[1088-G]
Assistant Excise Commissioner and ors. Vs. Issac Peter
and Ors. 1994(4) sec 104 - relied on.

..
~
~
Central Inland Water Transport Corporation Ltd. And Anr.
Vs. Brojo Nath Ganguly and Anr. (1986) 3 SCC 156 - held
inapplicable.
D

Central Bank of India Ltd. Vs. Hartfor Fire Insurance Co.
Ltd. AIR 1965SC1288; and General Assurance Society Ltd.
Vs. Chandmull Jain and Anr. AIR 1966 SC 1644 - referred to. E
1.2 The requirement of deposit is rightly structured
on ~he 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. [para 12] [1091-F] F
Case Law Reference
(1986) 3 sec 156 held inapplicable para 6
AIR 1965 SC 1288 referred to para 7
G
.or f, AIR 1966 SC 1644 referred to para 8 ·
1994(4) sec 104 relied on para 11
CIVllL APPELLATE JURISDICTION : Civil Appeal No.
1156 of 2009
H
1082 SUPREME COURT REPORTS [2009] 2 S.C.R.

A From the Judgement and Order dated 17.08.2007 of the .,., ~-
High Court of Punjab & Haryana in Civil Writ Petition No. 12719
of 2007.
Puneet Bali, Rohit Sharma, Jagjit Singh Chhabra, for the
Appellant.
B
An up. G. Chaudhary, June Chaudhary, Manjit Singh,
Harikesh Singh, T.V. George, for the Respondents.
..;,
The Judgement of the Court was delivered by ~

c DR. ARIJIT PASAYAT, J.
1. Leave granted.
2. Challenge in this appeal is to the order passed by a
Division Bench of the Punjab and Haryana High Court
D dismissing the writ petition filed by the appellant under Section
226 of the Constitution of India, 1950 (in short the 'Constitution'). ~-
... ~
Prayer was to quash the Memo No.428 dated 10.1.2007
directing the appellant to deposit the amount of about Rs.1.81
crores which. is ·7% of the total amount claimed by the appellant
before the Arbiral Tribunal (hereinafter referred to as the
E
'Tribunal').
' ~ J~.

3. Background facts in a nutshell are as follows:

F
·The appellant is a contractor; who was allotted work of
constructing Haryana Go_vernment office building in Sector 17,
Chandigarh. On 4-3-1992 an agreement was entered into
J
-
between the parties, which incorporated sub-clause (7) of clause
25-A provi~ing for arbitration in case of any dispute. Some
differe'flces between the parties regarding payment in respect
of allotteq work had arisen which resulted in referring the dispute
G to the three members Tribunal. The appellant filed his claim
A-,, '
before the Tribunal. The respondent-State filed its objection to
the claim by principally submitting that the contractor has to
comply with the mandatory requirements of sub-clause (7) of
Clause 25-A of the agreement dated 4.3.1992- which obliged
H the appellant to deposit 7% of the total claim made. The amount lo.-
S.K. JAIN V. STATE OF HARYANAAND ANR. 1083
[DR. ARIJIT PASAYAT, J.. ]

·~ ~
so calculated comes to Rs.1,81, 14,845/-. The Tribunal sustained A
the objection and after placing reliance on a judgment of this
Court in Municipal Corporation, Jabalpur v. M/s Rajesh ·
Construction Company (JT (2007 (5) SC 450) has opined as
follows:
"In view of the decision of the Supreme Court, referred to
B
above, as suggested on behalf of the respondent, the

... claimant is directed to deposit Rs. 1,81, 14,815/- i.e 7% of
the amount claimed in the statement of claim with the
respondent and further arbitration proceedings would
proceed only thereafter. The claimant was to comply with c
the above condition in agreement before steps could be
taken to start arbitration proceedings. Hence, at this stage
Arbitrators cannot assume jurisdiction to proceed with th~
arbitration. While allowing objection petition filed under
....,
..; Section 16 of the Arbitration and Conciliation Act, it is so D
ordered as above, accordingly.
Challenge before the High Court was that the Arbitration
and Conciliation Act, 1996 (in short the 'Act') does not permit
the parties to contract out of the provisions of the Act, and
E
therefore the prescription under Sub-Clause (7) of Clause 25-A
of the agreement was in conflict with the provisions of Section
31 (8) read with Section 38 of the Act. It was submitted that the
• costs involved cannot be more than Rs.20 crores and, therefore,
the demand of Rs.1.81 crores which is 7% of the total amount
claimed is wholly arbitrary, unreasonable and capricious. The F
High Court did not find any substance in the plea and held that
the challenge to the legality of Sub-Clause (7) of Clause 25-A of
the agreement is without any substance. Accordingly, the writ
petition was dismissed.
G
.~ 4. It is submitted by learned counsel for the appellant that
Sub-clause (7) of Clause 25-A incorporated in the agreement
was a result of the unequal bargaining power of the parties and
since the Government is not required to make the deposit, it is
unconscionable and, therefore, the High Court has erroneously
H
1084 SUPREME COURT REPORTS [2009] 2 S.C.R.

A dismissed the writ petition. Additionally, it is submitted that the
true effect of Sections 31 (8) and 38 of the Act has not been
kept in view. It is also submitted that the contract is in conflict
.with Sections 23 and 28 of the Indian Contract Act, 1872 (in
short the 'Contract Act').
B 5. Learned counsel for the respondents on the other hand
supported the.judgment of the High Cc:>urt.
6. It is to be noted that the plea relating to unequal
bargaining power was made with great emphasis based on
c certain observations made by this Court in Central Inland Water
Transport Corporation Ltd. and Anr. v. Brojo Nath Ganguly and
Anr. (1986 (3) SCC 156). The said decision does not in any
way assist the appellant, because at para 89 it has been clearly
stated that the concept of unequal bargaining power has no
0 application in case of commercial contracts.
7. Jn Central Bank of India Ltd. v. Hartford Fire Insurance
Co. Ltd. (AIR 1965 SC 1288) it was observed at para 5 as
follows:
· "5. The contention of the appellant is based on the
E
interpretation of clause 10. Now it is commonplace that it
is the court's duty to give effect to the bargain of the parties
according to their intention and when that bargain is in
writing the intention is to be looked for in the words used
unless they are such that one may suspect that they do not
F convey the intention correctly. If those words are clear,
there is very little that the court has to do. The court must
give effect to the plain meaning o.f the words however it
may dislike the result. We have earlier set out clause 10
and we find no difficulty or doubt as to the meaning of the
G language there used. Indeed the language is the plainest.
The clause says "This Insurance may be terminated at any
time at the request of the Insured", and "The Insurance
may also .at any time be terminated at the instance of the
Company." These are all the words of the clause that matter
H for the present purpose. The words "at any time" can only
S.K. JAIN V. STATE OF HARYANAAND ANR. . 1085
[DR. ARIJIT PASAYAT, J .. ]

mean "at any time the party concerned likes". Shortly pu~ A
clause 10 says "Either party may at its will terminate the
policy." No other meaning of the words used is conceivable."
8. In General Assurance Society Ltd. v. Chandmu/I Jain
- and Anr. (Al R 1966 SC 1644 at para 11) the decision was re-
8
iterated as follows :
"11. A contract of insurance is a species of commercial
transactions. and there is a well established commercial
practice to send cover notes even prior to the completion
of a proper proposal or while the proposal is being c
considered or a policy is in preparation for delivery. A
cover note is a temporary and limited agreement. It may
be self-contained or it may incorporate by reference the

..
r
terms and conditions of the future policy. When the cover
note incorporates the policy in this manner, it does not
have to recite the term and conditions, but merely to refer
D

to a particular standard policy. If the proposal is for a
standard policy and the cover note refers to it, the assured
is taken to have accepted the terms of that policy. The
reference to the policy and its terms and conditions may E
be expressed in the proposal or the cover riote or even in
the letter of acceptance including the cover note. The
incorporation of the terms and conditions of the policy
may also arise from a combination of references in two or
more documents passing between the parties. Documents
like the proposal, cover note and the policy are commercial F
documents and to interpret them commercial habits and
practice cannot altogether be ignored. During the time the
cover note operates, the relations of the parties are
governed by its terms and conditions, if any, but more
usually by the terms and conditions of the policy bargained G
for and to be issued. When this happens the terms of the
policy are incipient but after the period of temporary cover,
the relations are governed only by the terms and conditions
of the policy unless insurance is declined in the meantime.
Delay in issuing the policy makes no difference. The H
1086 SUPREME COURT REPORTS [2009] 2 S.C.R.

A relations even then are governed by the future policy if the 'L
a.: --r-
cover notes give sufficient indication that it would be so.
In other respects there is no difference between a contract
of insurance and any other contract except that in a
contract of insurance there is a requirement of uberrima
B tides i.e. good faith on the part of the assured. and the
contract is likely to be construed contra proferentem that
is against the company in case of ambiguity or doubt. A
contract is formed when there is an unqu_alified acceptance
~-
of the proposal. Acceptance may be expressed in writing
c or it may even be implied if the insurer accepts the
premium and retains it. In the case of the assured, a
positive act on his pa.rt by which he recognises or seeks
to enforce the policy amounts to an affirmation of it. This
position was clearly recognised by the assured himself,
D
because he wrote, close upon the expiry of the time of the
cover notes, that either a policy should be issued to him ~-
....
I

before that period had expired or the cover note extended
in time. In interpreting documents relating to a contract of
insurance, the duty of the court is to interpret the words in
which the contract is expressed by the parties, because
E
it is not for the court to make a new contract, however
reasonable, if the parties have not made it themselves.
Looking at the proposal, the letter of acceptance and the
cover notes, it is clear that a contract of insurance under
the standard policy for fire and extended to cover flood,
F cyclone etc. had come into being."
Sub-Clause (7) of Clause 25-A of the agreement reads
as follows:
"(7) It is also a term of this contract agreement that where
G 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
H shall, on the termination of the arbitration proceedings be
S.K. JAIN V. STATE OF HARYANAAND ANR. 1087
[DR ARIJIT PASAYAT, J .. )

adjusted against the cost, if any, awarded by the arbitrator A
against the claimant party and the balance remaining aft_er
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-
Amount of claim Rate of Security deposit
B

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/- c
and
3. For claims of Rs.1,00,000/- and 7% of amount claimed.
above
D
9. So far as the plea relating to Sub-Section (8) of Section
31 and Section 38 are concerned they read as follows:
"31-Form and contents of arbitral award:-
xx xx xx E
(8) Unless otherwise agreed by the parties-

.. (a) the costs of an arbitration shall be fixed by the arbitral
tribunal;

(b) the arbitral tribunal shall specify- F
(i) the party entitled to costs,
(ii) the party who shall pay the costs,
(iii) the amount of costs or method of determining
that amount, and G

(iv) the manner in which the costs shall be paid.
Explanation : For the purpose of clause (a), "costs" means
reasonable costs relating to-
H
1088 SUPREME COURT REPORTS [2009] 2 S.C.R.

A (i) the fees and expenses of the arbitrators and .j;,
~
witnesses, •
(ii) legal fees and expenses,
(iii) any administration fees of the institution
supervising the arbitration, and
B
(iv) any other expenses incurred in connection with
the arbitral proceedings and the arbitral award.
38. Deposits- (1) The arbitral tribunal may fix the amount t
of the deposit or supplementary deposit, as the case may
c be, as an advance for the costs referred to in sub-section
(8) of Section 31, which it expects will be incurred in respect
of the claim submitted to it.
Provided that where apart from the claim a counter claim
has been submitted to the arbitral tribunal, it may fix
D separate amount of deposit for the claim and counter claim. 1'
'r
(2) The deposit referred to in sub-section (1) shall be
payable in equal shares by the parties.
Provided that where one party fails to pay his share of the
deposit, the other party may pay that share:
E
Provided further that where the other party also does not
pay the aforesaid share in respect of the claim or the

F
counter claim, the arbitral tribunal may suspend or
terminate the arbitral proceedings in respect of such claim
or counter claim as the case may be.
(3) Upon termination of the arbitral proceedings, the arbitral
lo

- '

tribunal shall render an accounting to the parties of the
deposits received and shall return any unexpended
balance to the party or parties, as the case may be."
G 10. A bare perusal of the aforesaid provisions clearly shows
that the provision is to operate in the absence of agreement A--;.
with regard to cost. It cannot be pressed into service to get over
sub-clause (7) of Clause 25-A.

H
11. In addition to the various pleas, the stand taken by the ...
S.K. JAIN V. STATE OF HARYANAAND ANR. 1089
[DR. ARIJIT PASAYAT, J .. ]

appellant is squarely answered by what has been stated by this A
~
"' Court in Assistant Excise Commissioner and Ors. v. Issac Peter
and Ors. (1994 (4) SCC 104). At para 26 it has been stated as
follows:
"26. Learned counsel for respondents then submitted that
B
doctrine of fairness and reasonableness must be read
into contracts to which State is a party. It is submitted that
the State cannot act unreasonably or unfairly even while
acting under a contract involving State power. Now, let us
see, what is the purpose for which this argument is
addressed and what is the implication? The purpose, as c
we can see, is that though the contract says that supply of
additional qtJota is discretionary, it must be read as
obligatory - at least to the extent of previous year's
supplies - by applying the said doctrine. It is submitted
-. that if this is not done, the licensees would suffer monetarily. D
"' The other purpose is to say that if the State is not able to
so supply, it would be unreasonable on its part to demand
the full amount due to it under the contract. In short, the
duty to act fairly is sought to be imported into the contract
to modify and alter its terms and to create an obligation E
upon the State which is not there in the contract. We must
confess, we are not aware of any such doctrine of fairness
or reasonableness. Nor could the learned counsel bring
!>
to our notice any decision laying down such a proposition.
Doctrine of fairness or the duty to act fairly and reasonably F
is a doctrine developed in the administrative law field to
ensure the rule of law and to prevent failure of justice where
the action is administrative in nature. Just as principles of
natural justice ensure fair decision where the function is
quasi-judicial, the doctrine of fairness is evolved to ensure
G
fair action where the function is administrative. But it can
..... ).
certainly not be invoked to amend, alter or vary the express
terms of the contract between the parties. This is so, even
if the contract is governed by statutory provisions, i.e.,
where it is a statutory contract - or rather more. so. It is
.... H

. .~' \
1Q90 SUPREME COURT REPORTS [2009] 2 S.C.R.

A one thing to say that a contract - every contract - must )';: ~'
be construed reasonably having regard to its language.
But this is not what the licensees say. They seek to create
an obligation on the other party to the contract, just because
it happens to be the State. They are not prepared to apply
B the very same rule in converse case, i.e., where the State
has abundant supplies and wants the licensees to lift all
the stocks. The licensees will undertake no obligation to
lift all those stocks even if the State suffers loss. This one-
t
sided obligation, in modification of express terms of the
c contract, in the name of duty to act fairly, is what we are
unable to appreciate. The decisions cited by the learned
counsel for the licensees do not support their proposition.
In Dwarkadas Marfatia v. Board of Trustees of the Port of
Bombay it was held that where a public authority is
D exempted from the operation of a statute like Rent Control
Act, it must be presumed that such exemption from the \-
statute is coupled with the duty to act fairly and reasonably.
The decision does not say that the terms and conditions
of contract can be varied, added or altered by importing
the said doctrine. It may be noted that though the said
E
principle was affirmed, no relief was given to the appellant
in that case. Shrilekha Vidyarthi v. State of U.P. was a
case of mass termination of District Government Counsel
in the State of U.P. It was a case of termination from a post ~ ..;
involving public element. It was a case of non-government
F servant holding a public office, on accou.nt of which it was
held to be a matter within the public law field. This decision
too does not affirm the principle now canvassed by the
learned counsel. We are, therefore, of the opinion that in
case of contracts freely entered into with the State, like the
G present ones, there is no room for invoking the doctrine of
fairness and reasonableness against one party to the .._ ~ I

contract (State), for the purpose of altering or adding to
the terms and conditions of the contract, merely because
it happens to be the State. In such cases, the mutual rights
,.;.
H and liabilities of the parties are governed by the terms of
S.K. JAIN V STATE OF HARYANAAND ANR. 1091
[DR. ARIJIT PASAYAT, J .. ]

the contracts (which may be statutory in some cases) and A
It ;41,
the laws relating to contracts. It must be remembered that
these contracts are entered into pursuant to public auction,
floating of tenders or by negotiation. There is no
compulsion on anyone to enter into these contracts. It is
voluntary on both sides. There can be no question of the B
State power being involved in such contracts. It bears
repetition to say that the State does not guarantee profit
to the licensees in such contracts. There is no warranty
against incurring losses. It is a business for the licensees;
Whether they make profit or incur loss is no concern of the c
State. In law, it is entitled to its money under the contract.
It is not as if the licensees are going to pay more to the
State in case they make substantial profits. We reiterate
that what we have said hereinabove is in the context of
contracts entered into between the State and its citizens
,,..... D
"! pursuant to public auction, floating of tenders or by'
negotiation. It is not necessary to say more than this for
the purpose of these cases. What would be the position
in the case of contracts entered into otherwise than by
public auction, floating of tenders or negotiation, we need
E
not express any opinion herein."
12. It has been submitted by learned counsei 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. ft is to be noted that it is structured on the F
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 G
pedestal than one who makes a claim of a lesser amount.
.- ,~
13. Above being the position, the appeal is clearly without
merit, deserves dismissal which we direct.

R.P. Appeal dismissed.