Arbitration Clause- Condition to furnish Pre-Deposit for invoking Arbitration
INTRODUCTION
It is the speedy and effective settlements of dispute which are the two
most important attributes for the proper functioning of the justice delivery
system and also important with respect to the faith of the business entities
upon such system. Considering such a scenario, arbitration has emerged as an
efficient alternative to the public justice delivery system. However,
considering the number of legal issues involved in the arbitration system as
well the moot point of discussion in the present article is that
a clause in the arbitration agreement entrusting either of the party, invoking
the arbitration upon arising of a dispute inter se the parties, to deposit a
particular amount as “pre-deposit” before invoking the arbitration is
reasonable or unreasonable.
PRE-DEPOSIT CLAUSE
In number of contracts containing the
arbitration clause, it is often found that there is a pre-condition of
depositing of certain percentage of the claimed amount for invoking the
arbitration clause and appointment of arbitrator. For reference of the readers,
few of such pre-deposit clauses are reproduced as under:-
“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
Engineer- 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 award.”
“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 scheduled 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.”
An argument in favour of the said pre-deposit
clauses could be raised that the said clauses are entered into between the
parties by signing the contract. Another argument could be raised in favor of
such clauses is that the said clauses are put in force in the arbitration
agreement in order to deter frivolous claims being raised by either of the
parties. But the basic question which needs to be answered is that whether such
clauses would defeat the very object of the arbitration and whether such
clauses are arbitrary to the principles enshrined in the Indian Contract Act.
PRE-DEPOSIT CLAUSE AND OBJECT OF
ARBITRATION
The first and the paramount principle of the
arbitration is ‘fair’, ‘speedy’ and ‘inexpensive’ trial. Unnecessary delay or
expense would frustrate the very purpose of the Arbitration. The primary object
of the arbitration is to reach a final disposition in a speedy, effective,
inexpensive and expeditious manner. In order to regulate the law regarding
arbitration, legislature came up with the legislation i.e. the Arbitration and
Conciliation Act, 1996. In order to make arbitration process more effective,
the legislature restricted the role of courts in case where matter is subject
to the arbitration. Section 5 of the Act specifically restricted the
interference of the courts to some extent. Second most important object of the
arbitration is the settlement of the disputes outside the court without the
payment of the heavy usual court fee amount for invoking remedy before the
trial courts. As such, if party to a arbitration dispute has to pay a fixed
amount as pre-deposit before invoking the arbitration clause, the same would
not only defeat the very object of the arbitration process but would also
create another forum where heavy court fee amount would be required to be
deposited in case a party wishes to invoke the arbitration.
PRE-DEPOSIT CLAUSE AND FRIVILOUS CLAIMS
There is no exception to the fact that the
courts across the legal system are choked with litigation. Frivolous and groundless filings constitute a
serious menace to the administration of the justice system. Such a tendency can
be curbed by the courts by adopting an institutional approach which penalizes
such behavior. A strong message can be conveyed by imposing heavy costs where
such frivolous and groundless filings are being made. Thus, in the present
context of the issue, it also open for the arbitrator to dismiss a frivolous
claim alongwith imposition of exemplary costs. As such, it can be rightly said
that the imposition of pre-deposit clause has no nexus to the filing of the
frivolous claims. If the claim succeeds the claimant would get its amount and
if he does not succeed the same can be dismissed and further cost can be
imposed if the claim if found to be frivolous.
PRE-DEPOSIT CLAUSE AND CONTRACT OF
ADHESION
It is the settled preposition of law that a standardized
contract offered to the other party by the state or its instrumentality on
essentially “take it or leave it” basis without affording realistic opportunity
to bargain and on which the other party has to sign on the dotted lines of the
contract is nothing less than a contract of adhesion and is not binding inter
se the parties. Such a contact is against the principles of equal bargain and
meeting of minds as are enshrined under the Contractual law jurisprudence. Such
types of contractual terms are unfair and unreasonable that shocks the
conscience of the court. They are opposed to public policy and requires to be
adjudged void. As such, in case of contracts which have pre fixed formats and
the other party only has to sign on the dotted lines of such pre fixed formats,
such clauses would certainly amount to a contract of adhesion and by applying
the doctrine of severability, the said pre-deposit clauses can be declared as
void being beyond the scope of the object to be achieved under the Arbitration
principles.
PRE-DEPOSIT CLAUSE AND SUPREME COURT
The Hon’ble Supreme Court recently in M/S Icomm Tele Ltd. v. Punjab State Water Supply & Sewerage
Board & Another, 2019 (4) SCC 401 struck down the validity of a
pre-deposit clause on the ground that usage of such clauses to invoke the
arbitration clause makes the arbitral process ineffective and onerous. The
Hon’ble Supreme Court while relying on number of judgments however did not agree
on the argument pertaining to the contract of adhesion, however in clear words
held such clauses to be defeating the very object of the principles upon which
the whole system of arbitration and conciliation was termed upon. The Hon’ble
Court further held that alternative dispute resolution needs to be encouraged
because of high pendency of cases in courts and cost of litigation. Any
requirement to deposit a certain sum would be clog on the process of
Alternative Dispute Resolution as it would make the arbitration process
expensive.
CONCLUSION
In my view,
such clauses are totally arbitrary in nature. The whole principle upon which
the concept of arbitration was made was to provide an alternate forum from the
usual forums available to a claimant for settling the disputes. It is not only
the alternate forum which was created by the process of arbitration but also a
go bye was given to the usual lengthy process in terms of time consumed in the
court, pendency of cases, heavy court fee amount etc. Such clauses would not
only discourage the claimant to file their genuine claims but will also defeat
the justice delivery system as regards the commercial contracts are concerned.
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