M/S ICOMM TELE LTD. versus PUNJAB STATE WATER SUPPLY & SEWERAGE BOARD & ANR. on 11 March 2019

984 SUPREME COURT REPORTS [2019] 2 S.C.R.[2019] 2 S.C.R. 984

AM/S ICOMM TELE LTD.

v.

PUNJAB STATE WATER SUPPLY &SEWERAGE BOARD & ANR.

(Civil Appeal No. 2713 of 2019)

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MARCH 11, 2019

[R. F. NARIMAN AND VINEET SARAN, JJ.]

Arbitration:

Arbitration agreement – Arbitration clause in notice invitingCtender in commercial contracts – Pre-deposit clause-10% “deposit-at-call” of the amount claimed by party invoking arbitration, ifarbitrary or discriminatory and violative of Art. 14 of theConstitution – Held: A pre-deposit of 10% would discourage a partyto an arbitration from invoking this alternative dispute resolutionDprocess, contrary to the object of de-clogging the court system,and would render the arbitral process ineffective and expensive –Thus, the pre deposit clause is struck down – Constitution of India– Art. 14.

Allowing the appeal, the CourtE

HELD: 1.1 The 10% “deposit-at-call” before a party cansuccessfully invoke the arbitration clause is on the basis thatthis is in order to avoid frivolous claims. From clause 25 (xv) ofthe notice inviting tender it also becomes clear that arbitration isconsidered to be an alternative dispute resolution process andFentry to the civil court is sought to be taken away if the disputesbetween the parties are covered by the arbitration clause. Clause25 (viii) cannot be said to be discriminatory in that it appliesequally to both respondent No. 2 and the appellant. However,arbitrariness is a separate and distinct facet of Article 14. Afrivolous claim can be dismissed with exemplary costs. Therefore,Git is always open to the party who has succeeded before thearbitrator to invoke this principle and it is open to the arbitratorto dismiss a claim as frivolous on imposition of exemplary costs.[Paras 7, 8, 17, 20, 21][988-H; 989-B; 995-B-C; 996-C]

1.2 A “deposit-at-call” of 10% of the amount claimed, whichcan amount to large sums of money, is obviously without any directnexus to the filing of frivolous claims, as it applies to all claims(frivolous or otherwise) made at the very threshold. A 10%deposit has to be made beforeany determination that a claimmade by the party invoking arbitration is frivolous. This is alsoone important aspect of the matter to be kept in mind in decidingthat such a clause would be arbitrary in the sense of beingsomething which would be unfair and unjust and which noreasonable man would agree to. Indeed, a claim may be dismissedbut need not be frivolous, as is obvious from the fact that wherethree arbitrators are appointed, there have been known to bemajority and minority awards, making it clear that there may betwo possible or even plausible views which would indicate thatthe claim is dismissed or allowed on merits and not because it isfrivolous. Further, even where a claim is found to be justified andcorrect, the amount that is deposited need not be refunded tothe successful claimant. Take for example a claim based on atermination of a contract being illegal and consequent damagesthereto. If the claim succeeds and the termination is set aside asbeing illegal and a damages claim of one crore is finally grantedby the arbitrator at only ten lakhs, only one tenth of the depositmade will be liable to be returned to the successful party. Theparty who has lost in the arbitration proceedings will be entitledto forfeit nine tenths of the deposit made despite the fact that theaforesaid party has an award against it. This would render theentire clause wholly arbitrary, being not only excessive ordisproportionate but leading to the wholly unjust result of a partywho has lost an arbitration being entitled to forfeit such part ofthe deposit as falls proportionately short of the amount awardedas compared to what is claimed. [Para 23][996-H; 997-A-E]

1.3 Arbitration is an important alternative dispute resolutionprocess which is to be encouraged because of high pendency ofcases in courts and cost of litigation. Any requirement as to depositwould certainly amount to a clog on this process. Also, it is easyto visualize that often a deposit of 10% of a huge claim would beeven greater than court fees that may be charged for filing a suitin a civil court. Deterring a party to an arbitration from invokingthis alternative dispute resolution process by a pre-deposit of10% would discourage arbitration, contrary to the object of

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Ade-clogging the Court system, and would render the arbitralprocess ineffective and expensive. Clause 25(viii) of the noticeinviting tender is struck down. The judgment of the High Courtis set aside. [Paras 24, 27, 28][997-F, G; 999-D, E]

Central Inland Water Transport Corpn. v. Brojo NathBGanguly, (1986) 3 SCC 156 : [1986] 2 SCR 278 –distinguished.

Directorate of Education v. Educomp Datamatics Ltd., (2004)4 SCC 19 : [2004] 2 SCR 1010 ; Global Energy Ltd. v. AdaniExports Ltd., (2005) 4 SCC 435 : [2005] 3 SCR 1108 ; S.K.CJain v. State of Haryana, (2009) 4 SCC 357 : [2009] 2SCR 1080 ; ABL International Ltd. v. Export Credit GuaranteeCorpn. of India Ltd., (2004) 3 SCC 553 ; A.L. Kalra v. TheProject & Equipment Corporation of India Limited, [1984] 3SCR 646 ; Dnyandeo Sabaji Naik v. Pradnya PrakashKhadekar, (2017) 5 SCC 496 : [2017] 2 SCR 95 ; GeneralDMotors (I) (P) Ltd. v. Ashok Ramnik Lal Tolat, (2015) 1 SCC429 : [2014] 11 SCR 16 ; State of J&K v. Dev Dutt Pandit,(1999) 7 SCC 339 : [1999] 2 Suppl. SCR 1 ; CentrotradeMinerals & Metal Inc. v. Hindustan Copper Ltd., (2017) 2SCC 228 : [2016] 9 SCR 83; Union of India v. VarinderaEConstructions Ltd., (2018) 7 SCC 794 : [2018] 5 SCR 587 –referred to.

M/S ICOMM TELE LTD. v. PUNJAB STATE WATER SUPPLY &SEWERAGE BOARD & ANR.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2713of 2019.

From the Judgment and Order dated 09.05.2017 of the HighCourt of Punjab and Haryana at Chandigarh in CWP No. 4882 of 2017.

Karan Mehra, Arjun D. Singh, Sandeep Kumar Jha, Advs. for theAppellant.

Vijay Kumar Kaushal, Vibhuti Sushant Gupta, Ram Naresh Yadav,Advs. for the Respondents.

The Judgment of the Court was delivered by

R. F. NARIMAN, J. 1. Leave granted.

2. In 2008, the Punjab State Water Supply & Sewerage Board,Bhatinda issued notice inviting tender for extension and augmentation ofwater supply, sewerage scheme, pumping station and sewerage treatmentplant for various towns mentioned therein on a turnkey basis. On25.9.2008, the appellant company, which is involved in civil/electricalworks in India, was awarded the said tender after having been found tobe the best suited for the task. On 16.1.2009, a formal contract wasentered into between the appellant and respondent No. 2. It may bementioned that the notice inviting tender formed part and parcel of theformal agreement. Contained in the notice inviting tender is a detailedarbitration clause. In this matter, we are concerned with clause 25(viii)which is set out as follows:- “viii. It shall be an essential term of this contract that in order toavoid frivolous claims the party invoking arbitration shall specifythe dispute based on facts and calculations stating the amountclaimed under each claim and shall furnish a “deposit-at-call” forten percent of the amount claimed, on a schedule bank in thename of the Arbitrator by his official designation who shall keepthe amount in deposit till the announcement of the award. In theevent of an award in favour of the claimant, the deposit shall berefunded to him in proportion to the amount awarded w.r.t theamount claimed and the balance, if any, shall be forfeited and paidto the other party.”

3. The appellant had entered into similar contracts with respondentNo. 2 which contained the same arbitration clause. It had thereforeaddressed letters to respondent No. 2 with regard to appointment of

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Aarbitrator in those matters and sought for waiving the 10% deposit fee.After having received no response, the appellant had filed a writ petition,being Civil Writ Petition No. 18917 of 2016, before the High Court ofPunjab and Haryana. This writ petition was dismissed by a judgmentdated 14.9.2016 stating that such tender condition can in no way be saidto be arbitrary or unreasonable.B

4. On 8.3.2017, the appellant approached the High Court of Punjaband Haryana challenging the validity of this part of the arbitration clauseby filing Civil Writ Petition No. 4882 of 2017. The High Court in theimpugned judgment merely followed its earlier judgment and dismissedthis writ petition as well.C

5. Learned counsel appearing on behalf of the appellant has arguedthat the arbitration clause contained in the tender condition amounts to acontract of adhesion, and since there is unfair bargaining strength betweenrespondent No. 2 and the appellant, this clause ought to be struck downfollowing the judgment in Central Inland Water Transport Corpn. v.DBrojo Nath Ganguly, (1986) 3 SCC 156. He has also argued thatarbitration being an alternative dispute resolution process, a 10% depositwould amount to a clog on entering the aforesaid process. Further, claimsmay ultimately be found to be untenable but need not be frivolous. Also,frivolous claims can be compensated by heavy costs. Further, even inEthe event that the award is in favour of the claimant, what can be refundedto him is only in proportion to the amount awarded and the rest is to beforfeited. This would also be a further arbitrary and highhanded actionon the part of respondent No. 2.

6. Learned counsel appearing on behalf of the respondents hasFargued that there is no infraction of Article 14 in the present case. It isclear that clause 25(viii) would apply to both the parties equally, and asthis is so, the said sub-clause cannot be struck down as beingdiscriminatory. Further, the principle contained in Central Inland WaterTransport Corpn. (supra) cannot possibly be applied to commercialcontracts. Also, in similar cases, this Court has not entertained this kindGof a challenge.

7. Having heard learned counsel for both parties, it will be seenthat the 10% “deposit-at-call” before a party can successfully invokethe arbitration clause is on the basis that this is in order to avoid frivolousclaims. Clause 25(xv) is also material and is set out hereinbelow:

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“xv. No question relating to this contract shall be brought beforeany civil court without first invoking and completing the arbitrationproceedings, if the issue is covered by the scope of arbitrationunder this contract. The pending arbitration proceedings shall notdisentitle the Engineer-in-charge to terminate the contract and tomake alternate arrangements for completion of the works.”

8. From this clause, it also becomes clear that arbitration isconsidered to be an alternative dispute resolution process and entry tothe civil court is sought to be taken away if the disputes between theparties are covered by the arbitration clause.

9. It is well settled that the terms of an invitation to tender are notopen to judicial scrutiny, as they are in the realm of contract, unless theyare arbitrary, discriminatory, or actuated by malice. Thus, in Directorateof Education v. Educomp Datamatics Ltd., (2004) 4 SCC 19, thisCourt held:

“9. It is well settled now that the courts can scrutinise the awardof the contracts by the Government or its agencies in exercise oftheir powers of judicial review to prevent arbitrariness orfavouritism. However, there are inherent limitations in the exerciseof the power of judicial review in such matters. The point as tothe extent of judicial review permissible in contractual matterswhile inviting bids by issuing tenders has been examined in depthby this Court in Tata Cellular v. Union of India [(1994) 6 SCC651]. After examining the entire case-law the following principleshave been deduced:

“94.The principles deducible from the above are:

(1) The modern trend points to judicial restraint inadministrative action.

(2) The court does not sit as a court of appeal but merelyreviews the manner in which the decision was made.

(3) The court does not have the expertise to correct theadministrative decision. If a review of the administrativedecision is permitted it will be substituting its own decision,without the necessary expertise which itself may be fallible.

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(4) The terms of the invitation to tender cannot be opento judicial scrutiny because the invitation to tender is inthe realm of contract. Normally speaking, the decision toaccept the tender or award the contract is reached byprocess of negotiations through several tiers. More oftenthan not, such decisions are made qualitatively by experts.

(5) The Government must have freedom of contract. Inother words, a fair play in the joints is a necessaryconcomitant for an administrative body functioning inan administrative sphere or quasi-administrative sphere.However, the decision must not only be tested by theapplication of Wednesbury principle of reasonableness(including its other facts pointed out above) but must befree from arbitrariness not affected by bias or actuatedby mala fides.

(6) Quashing decisions may impose heavy administrativeburden on the administration and lead to increased andunbudgeted expenditure.””

(emphasis in original)

“12. It has clearly been held in these decisions that the terms ofthe invitation to tender are not open to judicial scrutiny, the samebeing in the realm of contract. That the Government must have afree hand in setting the terms of the tender. It must have reasonableplay in its joints as a necessary concomitant for an administrativebody in an administrative sphere. The courts would interfere withthe administrative policy decision only if it is arbitrary, discriminatory,mala fide or actuated by bias. It is entitled to pragmatic adjustmentswhich may be called for by the particular circumstances. Thecourts cannot strike down the terms of the tender prescribed bythe Government because it feels that some other terms in thetender would have been fair, wiser or logical. The courts caninterfere only if the policy decision is arbitrary, discriminatory ormala fide.”

10. To similar effect is the decision in Global Energy Ltd. v.Adani Exports Ltd., (2005) 4 SCC 435, where this Court held:

“10. The principle is, therefore, well settled that the terms of theinvitation to tender are not open to judicial scrutiny and the courtscannot whittle down the terms of the tender as they are in therealm of contract unless they are wholly arbitrary, discriminatoryor actuated by malice. This being the position of law, settled by acatena of decisions of this Court, it is rather surprising that thelearned Single Judge passed an interim direction on the very firstday of admission hearing of the writ petition and allowed theappellants to deposit the earnest money by furnishing a bankguarantee or a bankers’ cheque till three days after the actualdate of opening of the tender. The order of the learned SingleJudge being wholly illegal, was, therefore, rightly set aside by theDivision Bench.”

11. As has correctly been argued by learned counsel appearingon behalf of the respondents, this court’s judgment in Central InlandWater Transport Corpn. (supra), which lays down that contracts ofadhesion, i.e., contracts in which there is unequal bargaining power,between private persons and the State are liable to be set aside on theground that they are unconscionable, does not apply where both partiesare businessmen and the contract is a commercial transaction (seeparagraph 89 of the said judgment). In this view of the matter, theargument of the appellant based on this judgment must fail.

12. In S.K. Jain v. State of Haryana, (2009) 4 SCC 357, thisCourt dealt with an arbitration clause in an agreement which read asfollows:- “11. Sub-clause (7) of Clause 25-A of the agreement reads asfollows:

“25-A. (7) It is also a term of this contract agreement that wherethe party invoking arbitration is the contractor, no reference forarbitration shall be maintainable unless the contractor furnishesto the satisfaction of the Executive Engineer in charge of thework, a security deposit of a sum determined according to detailsgiven below and the sum so deposited shall, on the terminationof the arbitration proceedings be adjusted against the costs, ifany, awarded by the arbitrator against the claimant party andthe balance remaining after such adjustment in the absence ofany such costs being awarded, the whole of the sum will berefunded to him within one month from the date of the award—

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Amount of claim1. For claims below Rs 10,0002. For claims of Rs 10,000 andabove and below Rs 1,00,000 and3. For claims of Rs 1,00,000 andabove Rate of securitydeposit 2% of amount claimed 5% of amount claimed B

7% of amount claimed.”

13. In upholding such a clause, this Court referred to the judgmentin Central Inland Water Transport Corpn. (supra) and distinguishedthis judgment, stating that the concept of unequal bargaining power hasno application in the case of commercial contracts. It then went on toChold:- “14. It has been submitted by learned counsel for the appellantthat 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 quantumDinvolved. Higher the claim, the higher is the amount of feechargeable. There is a logic in it. It is the balancing factor toprevent frivolous and inflated claims. If the appellants’ plea isaccepted that there should be a cap in the figure, a claimant whois making higher claim stands on a better pedestal than one whomakes a claim of a lesser amount.”E

14. It will be noticed that in this judgment there was no plea thatthe aforesaid condition contained in an arbitration clause was violativeof Article 14 of the Constitution of India as such clause is arbitrary. Theonly pleas taken were that the ratio of Central Inland Water TransportCorpn. (supra) would apply and that there should be a cap in theFquantum payable by way of security deposit, both of which pleas wereturned down by this court. Also, the security deposit made would, on thetermination of the arbitration proceedings, first be adjusted against costsif any awarded by the arbitrator against the claimant party, and the balanceremaining after such adjustment then be refunded to the party makingGthe 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%of the amount claimed and that refund can only be in proportion to theamount awarded with respect to the amount claimed, the balance beingforfeited and paid to the other party, even though that other party mayhave lost the case. This being so, this judgment is wholly distinguishableHand does not apply at all to the facts of the present case.

15. In ABL International Ltd. v. Export Credit GuaranteeCorpn. of India Ltd., (2004) 3 SCC 553, this Court has held that evenwithin the contractual sphere, the requirement of Article 14 to act fairly,justly and reasonably by persons who are “state” authorities orinstrumentalities continues. Thus, this Court held:

“23. It is clear from the above observations of this Court, oncethe State or an instrumentality of the State is a party of the contract,it has an obligation in law to act fairly, justly and reasonably whichis the requirement of Article 14 of the Constitution of India.Therefore, if by the impugned repudiation of the claim of theappellants the first respondent as an instrumentality of the Statehas acted in contravention of the abovesaid requirement of Article14, then we have no hesitation in holding that a writ court canissue suitable directions to set right the arbitrary actions of thefirst respondent…

xxx xxx xxx

27. From the above discussion of ours, the following legal principlesemerge as to the maintainability of a writ petition:

(a) In an appropriate case, a writ petition as against a State oran instrumentality of a State arising out of a contractual obligationis maintainable.

xxx xxx xxx

53. From the above, it is clear that when an instrumentality of theState acts contrary to public good and public interest, unfairly,unjustly and unreasonably, in its contractual, constitutional orstatutory obligations, it really acts contrary to the constitutionalguarantee found in Article 14 of the Constitution…”

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 ofthe Constitution of India.

17. We agree with the learned counsel for the respondents thatthe aforesaid clause cannot be said to be discriminatory in that itapplies equally to both respondent No. 2 and the appellant.However, arbitrariness is a separate and distinct facet of Article14. In A.L. Kalra v. The Project & Equipment Corporationof India Limited, [1984] 3 S.C.R. 646, this Court turned down a

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submission that arbitrariness is only a facet of discrimination. Thecontention of Shri Lal Narain Sinha was recorded thus (at page661):-

“It was urged that in the absence of any specific pleading pointingout whether any one else was either similarly situated as theappellant or dissimilarly treated the charge of discrimination cannotbe entertained and no relief can be claimed on the allegation ofcontravention of Art. 14 or Art. 16 of the Constitution. It wassubmitted that the expression discrimination imports the conceptof comparison between equals and if the resultant inequality ispointed out in the treatment so meted out the charge ofdiscrimination can be entertained and one can say that equalprotection of law has been denied. Expanding the submission, itwas urged that the use of the expression ‘equality’ in Art. 14imports duality and comparison which is predicated upon morethan one person of situation and in the absence of available materialfor comparison, the plea of discrimination must fail. As a corollary,it was urged that in the absence of material for comparativeevaluation not only the charge of discrimination cannot be sustainedbut the executive action cannot be struck down on the groundthat the action is per se arbitrary.”

18. This contention was negatived stating (at pages 662-663):- “It thus appears well settled that Art. 14 strikes at arbitrariness inexecutive/administrative action because any action that is arbitrarymust necessarily involve the negation of equality. One need notconfine the denial of equality to a comparative evaluation betweentwo persons to arrive at a conclusion of discriminatory treatment.An action per se arbitrary itself denies equal of protection by law.The Constitution Bench pertinently observed in Ajay Hasia’s case[[1981] 2 S.C.R. 79] and put the matter beyond controversy whenit said ‘wherever therefore, there is arbitrariness in State actionwhether it be of the legislature or of the executive or of an“authority” under Article 12, Article 14 immediately springs intoaction and strikes down such State action.’ This view was furtherelaborated and affirmed in D.S. Nakara v. Union of India [[1983]1 SCC 305]. In Maneka Gandhi v. Union of India [[1978] 2 S.C.R.621] it was observed that Art. 14 strikes at arbitrariness in Stateaction and ensure fairness and equality of treatment. It is thus too

late in the day to contend that an executive action shown to bearbitrary is not either judicially reviewable or within the reach ofArticle 14.”

19. We have thus to see whether clause 25(viii) can be said to bearbitrary and violative of Article 14 of the Constitution of India.

20. The first important thing to notice is that the 10% “deposit-at-call” of the amount claimed is in order to avoid frivolous claims by theparty invoking arbitration. It is well settled that a frivolous claim can bedismissed with exemplary costs. Thus, in Dnyandeo Sabaji Naik v.Pradnya Prakash Khadekar, (2017) 5 SCC 496, this Court held:

“14. Courts across the legal system—this Court not being anexception—are choked with litigation. Frivolous and groundlessfilings constitute a serious menace to the administration of justice.They consume time and clog the infrastructure. Productiveresources which should be deployed in the handling of genuinecauses are dissipated in attending to cases filed only to benefitfrom delay, by prolonging dead issues and pursuing worthlesscauses. No litigant can have a vested interest in delay.Unfortunately, as the present case exemplifies, the process ofdispensing justice is misused by the unscrupulous to the detrimentof the legitimate. The present case is an illustration of how asimple issue has occupied the time of the courts and of howsuccessive applications have been filed to prolong the inevitable.The person in whose favour the balance of justice lies has in theprocess been left in the lurch by repeated attempts to revive astale issue. This tendency can be curbed only if courts across thesystem adopt an institutional approach which penalises suchbehaviour. Liberal access to justice does not mean access to chaosand indiscipline. A strong message must be conveyed that courtsof justice will not be allowed to be disrupted by litigative strategiesdesigned to profit from the delays of the law. Unless remedialaction is taken by all courts here and now our society will breed alegal culture based on evasion instead of abidance. It is the dutyof every court to firmly deal with such situations. The impositionof exemplary costs is a necessary instrument which has to bedeployed to weed out, as well as to prevent the filing of frivolouscases.It is only then that the courts can set apart time to resolvegenuine causes and answer the concerns of those who are in A

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Aneed of justice. Imposition of real time costs is also necessary toensure that access to courts is available to citizens with genuinegrievances. Otherwise, the doors would be shut to legitimatecauses simply by the weight of undeserving cases which floodthe system. Such a situation cannot be allowed to come to pass.Hence it is not merely a matter of discretion but a duty andBobligation cast upon all courts to ensure that the legal system isnot exploited by those who use the forms of the law to defeat ordelay justice. We commend all courts to deal with frivolous filingsin the same manner.”

(Emphasis supplied)

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21. It is therefore always open to the party who has succeededbefore the arbitrator to invoke this principle and it is open to the arbitratorto dismiss a claim as frivolous on imposition of exemplary costs.

22. We may also notice this Court’s judgment in General MotorsD(I) (P) Ltd. v. Ashok Ramnik Lal Tolat, (2015) 1 SCC 429, thatpunitive damages follow when a court is approached with a frivolouslitigation. This court held:-

“16. We proceed to deal with the issue of correctness of findingrecorded by the National Commission for awarding punitiveEdamages. Before doing so, we may notice that the respondentcomplainant appearing in person, in his written submissions hasraised various questions, including the question that the appellantshould be asked to account for the proceeds of the vehicles soldby it. Admittedly, the vehicle in question has been ordered to behanded back to the appellant against which the respondentFcomplainant has no claim. Thus, the plea raised is without anymerit. The other issue raised for further punitive damages of Rs.100 crores and also damages for dragging him in this Court, meritsno consideration being beyond the claim of the complainant in thecomplaint filed by him. Moreover, no litigant can be punished byGway of punitive damages for merely approaching this Court, unlessits case is found to be frivolous.”

23. The important principle established by this case is that unlessit 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% of the amount claimed, which can amount toH

large sums of money, is obviously without any direct nexus to the filingof frivolous claims, as it applies to all claims (frivolous or otherwise)made at the very threshold. A 10% deposit has to be made beforeanydetermination that a claim made by the party invoking arbitration isfrivolous. This is also one important aspect of the matter to be kept inmind in deciding that such a clause would be arbitrary in the sense ofbeing something which would be unfair and unjust and which noreasonable man would agree to. Indeed, a claim may be dismissed butneed not be frivolous, as is obvious from the fact that where threearbitrators are appointed, there have been known to be majority andminority awards, making it clear that there may be two possible or evenplausible views which would indicate that the claim is dismissed or allowedon merits and not because it is frivolous. Further, even where a claim isfound to be justified and correct, the amount that is deposited need notbe refunded to the successful claimant. Take for example a claim basedon a termination of a contract being illegal and consequent damagesthereto. If the claim succeeds and the termination is set aside as beingillegal and a damages claim of one crore is finally granted by the learnedarbitrator at only ten lakhs, only one tenth of the deposit made will beliable to be returned to the successful party. The party who has lost inthe arbitration proceedings will be entitled to forfeit nine tenths of thedeposit made despite the fact that the aforesaid party has an awardagainst it. This would render the entire clause wholly arbitrary, beingnot only excessive or disproportionate but leading to the wholly unjustresult of a party who has lost an arbitration being entitled to forfeit suchpart of the deposit as falls proportionately short of the amount awardedas compared to what is claimed.

24. Further, it is also settled law that arbitration is an importantalternative dispute resolution process which is to be encouraged becauseof high pendency of cases in courts and cost of litigation. Any requirementas to deposit would certainly amount to a clog on this process. Also, it iseasy to visualize that often a deposit of 10% of a huge claim would beeven greater than court fees that may be charged for filing a suit in acivil court. This Court in State of J&K v. Dev Dutt Pandit, (1999) 7SCC 339, has held:-

“23.Arbitration is considered to be an important alternativedisputes redressal process which is to be encouraged because ofhigh pendency of cases in the courts and cost of litigation.Arbitration has to be looked up to with all earnestness so that the A

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litigant public has faith in the speedy process of resolving theirdisputes by this process. What happened in the present case iscertainly a paradoxical situation which should be avoided. Totalcontract is for Rs. 12,23,500. When the contractor has done lessthan 50% of the work the contract is terminated. He has beenpaid Rs 5,71,900. In a Section 20 petition he makes a claim ofRs. 39,47,000 and before the arbitrator the claim is inflated toRs. 63,61,000. He gets away with Rs. 20,08,000 with interest atthe rate of 10% per annum and penal interest at the rate of 18%per annum. Such type of arbitration becomes subject of witticismand do not help the institution of arbitration. Rather it brings a badname to the arbitration process as a whole. When claims areinflated out of all proportions not only that heavy cost should beawarded to the other party but the party making such inflatedclaims should be deprived of the cost. We, therefore, set aside theaward of cost of Rs. 7500 given in favour of the contractor andagainst the State of Jammu and Kashmir.”

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25. Several judgments of this Court have also reiterated that theprimary object of arbitration is to reach a final disposal of disputes in aspeedy, effective, inexpensive and expeditious manner. Thus, inECentrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd.,(2017) 2 SCC 228, this court held:

“39. In Union of India v. U.P. State Bridge Corpn. Ltd. [(2015)2 SCC 52] this Court accepted the view [O.P. Malhotra on theLaw and Practice of Arbitration and Conciliation (3rd Edn. revisedby Ms Indu Malhotra, Senior Advocate)] that the A&C Act hasfour foundational pillars and then observed in para 16 of the Report[sic] that:

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“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 purposeof arbitration. Interestingly, the second principle which isrecognised in the Act is the party autonomy in the choiceof procedure. This means that if a particular procedure isprescribed in the arbitration agreement which the parties haveagreed to, that has to be generally resorted to.””

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(Emphasis in original)

26. Similarly, in Union of India v. Varindera ConstructionsLtd., (2018) 7 SCC 794, this Court held:- “12. The primary object of the arbitration is to reach a finaldisposition in a speedy, effective, inexpensive and expeditiousmanner. In order to regulate the law regarding arbitration,legislature came up with legislation which is known as Arbitrationand Conciliation Act, 1996. In order to make arbitration processmore effective, the legislature restricted the role of courts in casewhere matter is subject to the arbitration. Section 5 of the Actspecifically restricted the interference of the courts to some extent.In other words, it is only in exceptional circumstances, as providedby this Act, the court is entitled to intervene in the dispute which isthe subject-matter of arbitration. Such intervention may be before,at or after the arbitration proceeding, as the case may be. In short,court shall not intervene with the subject-matter of arbitrationunless injustice is caused to either of the parties.”

27. Deterring a party to an arbitration from invoking this alternativedispute resolution process by a pre-deposit of 10% would discouragearbitration, contrary to the object of de-clogging the Court system, andwould render the arbitral process ineffective and expensive.

28. For all these reasons, we strike down clause 25(viii) of thenotice inviting tender. This clause being severable from the rest of clause25 will not affect the remaining parts of clause 25. The judgment of theHigh Court is set aside and the appeal allowed.

Nidhi Jain

Appeal allowed.

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