Supreme Court of India: Validity of An Arbitration Clause Contained in Contract of Adhesion, Validity of an Arbitrary Arbitration Clause

Supreme-Court-of-India-1_85138_730x419

In M/s ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board & Anr. decided on 11 March 2019, the Supreme Court dealt with an arbitration clause contained in an alleged contract of adhesion which stipulated an arbitrary pre-condition for successful invocation of arbitration. As per the clause, a party seeking invocation of arbitration has to make a deposit of 10% of the amount in claimed in the name of the arbitrator before any determination of such claim. Further, in terms of this clause, in the event that the award is in favour of the claimant, what can be refunded to him is only in proportion to the amount awarded and the rest is to be forfeited. The Court struck down this clause holding it to being arbitrary and remarking that such clause would discourage arbitration. Read the case analysis below:-

Factual Matrix

The Appellant was awarded a tender for augmentation of a sewerage treatment plant by the Respondent. Later, the parties entered into a formal contract and the tender formed part and parcel of the formal agreement. The tender contained a detailed arbitration clause. As mentioned above, in terms of arbitration clause, the Appellant wrote a letter to the Respondent for appointment of an arbitrator and sought for waiving the 10% deposit fee. The Respondent paid no heed and therefore, the Appellant filed a petition before the High Court urging that the arbitration clause is arbitrary or unreasonable which was dismissed.  The decision of the High Court was assailed before the Supreme Court in the present proceedings.

Arbitration Clause

Thea arbitration clause contained in clause 25(viii) of the tender is reproduced below:-

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.

Parties Contentions

The Appellant contended as under:-

  • that the arbitration clause contained in the tender condition amounts to a contract of adhesion and since there is unfair bargaining strength between Respondent and the Appellant (since Appellant was a government entity), this clause ought to be struck down following the judgment in Central Inland Water Transport Corpn. v. Brojo Nath Ganguly (1986) 3 SCC 156.
  • that arbitration being an alternative dispute resolution process, a 10% deposit would amount to a clog on entering the aforesaid process;
  • that in the event that the award is in favour of the claimant, what can be refunded to him is only in proportion to the amount awarded and the rest is to be forfeited. This would also be a further arbitrary and highhanded action on the part of Respondent.

The Respondent countered as under:-

  • that there is no infraction of Article 14 (right to equality) of the Constitution of India in the present case since it is clear that arbitration clause in question would apply to both the parties equally, and as this is so, the said sub-clause cannot be struck down as being discriminatory;
  • that the principle contained in Central Inland Water Transport Corpn. (supra) cannot possibly be applied to commercial contract;

Verdict of the Supreme Court in Central Inland Water Transport Corpn.

In this case, the Court discussed at length the concept of coercive bargaining and held that where a man has no choice, or rather no meaningful choice, but to give his consent to a contract or to sign on the dotted line in a prescribed or other form or to accept a set of rules as part of contract, however unfair, unreasonable and unconscionable a clause in that contract may be the Courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract or an unfair or unreasonable clause in a contract entered into between the parties who are not equal in bargaining power. The Court visualised different situations such as where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties or the inequality may be the result of circumstances whether of the creation of the parties or not. Or a situation in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them.

The Supreme Court has further held that the concept of unequal bargaining power may not apply where both parties are businessmen and the contract is a commercial transaction. Thus, the aforesaid decision clearly held that the concept of unequal bargaining power will not be applicable to the commercial transaction.

The Court relied on the definition of “adhesion contract” in Black’s Law Dictionary, Fifth Edition, at page 38, which reads as follows:

“Adhesion contract.- Standardized contract form offered to consumers of goods and services on essentially ‘take it or leave it’ basis without affording consumer realistic opportunity to bargain and under such conditions that consumer cannot obtain desired product or services except by acquiescing in form contract. Distinctive feature of adhesion contract is that weaker party has no realistic choice as to its terms. Not every such contract is unconscionable.”

The Court set out inter-alia what are called “adhesion contracts” between parties not on par setting out unconscionable contracts which one party is constrained to accept leading another party to claim damages caused by such party which are not accepted and enforced by Courts on the ground of they being unconscionable and are consequently held to be void as against public policy.

Judgement

The Court held as under:-

  • that as per the law settled by the Supreme Court of India in catena of cases (Directorate of Education v. Educomp Datamatics Ltd., (2004) 4 SCC 19, Global Energy Ltd. v. Adani Exports Ltd., (2005) 4 SCC 435), the terms of an invitation to tender are not open to judicial scrutiny, as they are in the realm of contract, unless they are arbitrary, discriminatory, or actuated by malice;
  • that Central Inland Water Transport Corpn. lays down that contracts of adhesion, i.e., contracts in which there is unequal bargaining power, between private persons and the State are liable to be set aside on the ground that they are unconscionable, does not apply where both parties are businessmen and the contract is a commercial transaction. Therefore, it cannot be said that there is unfair bargaining strength between Respondent and the Appellant;
  • that the case of K. Jain v. State of Haryana (2009) 4 SCC 357, is wholly distinguishable and does not apply at all to the facts of the present case.

Note: In S.K. Jain v. State of Haryana (2009) 4 SCC 357, the Supreme Court considered whether a clause in an agreement which required the Claimant to deposit before the Arbitral Tribunal 7% of the total claim made as a pre-condition to the claim being considered was opposed to public policy. The Supreme Court referred to its earlier decision in Assistant Excise Commissioner v. Issac Peter (1994) 4 SCC 104 and negatived the plea of the Claimant. The Clause in question reads as under:-

(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 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-

            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

  1. For claims of Rs.1,00,000/- and               7%    of   amount

      claimed.

The Court noted that the above clause in S.K. Jain v. State of Haryana is materially different from the clause in the present case, which, in view of the Court, 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 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.

  • that the arbitration clause in this case cannot be said to be discriminatory in that it applies equally to both Respondent and the Appellant;
  • that deterring a party to an arbitration from invoking this alternative dispute resolution process by a pre-deposit of 10% would discourage arbitration, contrary to the object of de-clogging the Court system and would render the arbitral process ineffective and expensive.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s