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ARBITRAL PROCESS INEFFECTIVE AND EXPENSIVE WHEN PRE-DEPOSIT CLAUSES ARE INTRODUCED: SUPREME COURT

Team SoOLEGAL 12 Mar 2019 2:07pm

ARBITRAL PROCESS INEFFECTIVE AND EXPENSIVE WHEN PRE-DEPOSIT CLAUSES ARE INTRODUCED: SUPREME COURT

ICOMM Tele Ltd. was awarded a tender. The arbitration clause in the tender condition amounted to a contract of adhesion and arbitration being an alternative dispute resolution process, a 10% deposit would amount to a clog on entering the system. The clause 25(viii) read as under

"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 each claim and shall furnish a "deposit-at-call" for ten percent of the amount claimed, on a schedule bank in the name of the Arbitrator by his official designation who shall keep the amount in deposit till the announcement of the award. In the event of an award in favour of the claimant, the deposit shall be refunded to him in proportion to the amount awarded w.r.t the amount claimed and the balance, if any, shall be forfeited and paid to the other party."

The High Court had dismissed this clause being challenged. Hence, the appellants approached the Supreme Court.

The Supreme Court bench observed that the 10% "deposit-at-call" before a party can successfully invoke the arbitration clause is on the basis that this is in order to avoid frivolous claims.

The bench also observed that a frivolous claim can also be dismissed with exemplary costs. Hence it would be 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. The court also added and said that:

"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% 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 or otherwise) made at the very threshold. A 10% 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."

The bench comprising Justice Rohinton Fali Nariman and Justice Vineet Saran had struck down the said clause in a notice inviting tender by Punjab State Water Supply & Sewerage Board and observed that pre-deposit clauses to invoke arbitration would render the arbitral process ineffective and expensive.

Tagged: Arbitration   JusticeRohintonFaliNariman   JusticeVineetSaran  
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