CORAM:
Hon ble
Chief Justice Dr. Dhananjaya Y. Chandrachud, Hon ble Justice J.B. Pardiwala and
Hon ble Justice Manoj Misra.
INTRODUCTION
The case of
Lombardi Engineering Ltd. v.
Uttarakhand Jal Vidyut Nigam Limited
[i]
outlined the basic fundamental principles forming a part of a binding
arbitration agreement. The present case is arising out of a petitionunder Section
11(6) of the Arbitration and Conciliation Act, 1996 ( Arbitration Act ) before
the Hon ble Supreme Court for the appointment of an arbitrator for the
adjudication of a dispute arising out of a contract dated October 25, 2019
between Lombardi Engineering Ltd. (the Petitioner ) and Uttarakhand Jal
Vidyut Nigam Limited (the Respondent ).
FACTS
The facts leading to the present caseare as follows:
The
Petitioner
being a design consultancy
firm entered into a contract dated October 25,2019, with the Uttarakhand Project
Development and Construction Corporation Limited ( UPDCC )for providing
certain consultancy services in relation to a hydro electric project.The
Petitioner was to complete the work within a period of 24 (twenty-four) months
of commencement, that is, September 25, 2021. Subsequently,a government order
dated May 8,2020 was issued, directing the transfer of the hydro-electric
project to the
Respondent.
The transfer of
the project was done through a tripartite agreement dated October 6, 2020,
which novated the original contract to the extent that the Respondent replaced
UPDCC and took over the responsibilities, rights and duties therein. Clause 53
read with Clause 55 of thegeneral conditions of the contract ( GCC ) set
out the dispute resolution clause which formed the arbitration agreement.Clause
55 (a) of the GCC specifically provided that the
the party initiating
arbitration
claim shall have to deposit 7% of
the arbitration claim in the shape of Fixed Deposit Receipt as security deposit.
In terms of the
appointment of arbitrator, Clause 55(b) of the GCC specifically provided that
For
claim amount upto 10.00 Crores, the case shall be referred to Sole Arbitrator
to be appointed by the Principal Secretary/Secretary (Irrigation), GoU .
As a result of
disputes arising among the parties in relation to payment of dues of amount INR
1,04,32,664 (Rupees One Crore Four Lakhs Thirty-Two Thousand Six Hundred and Sixty-Four
Only) by the Respondent,the Petitioner invoked the arbitration clause. A notice
of arbitration dated May 6, 2022 was issued to the Respondent,calling upon the Respondent
for appointment of anarbitrator in accordance with the arbitration clause.
Further, the notice provided
that
since
the
amount involved in the dispute is less than INR 10,00,00,000 (Rupees Ten Crores
Only),
a sole arbitrator is to be appointed in terms of
Clause 55(b) of the GCC.The notice further read that due to the settlement of
position of law by the
Hon ble Supreme
Court
in the case of
Perkins Eastman DPC and Another v. HSCC
(India) Limited
[ii]
that unilateral appointment of arbitrator is not legal
, the name of the arbitrator shall be
proposed by the Petitioner for the consideration and appointment by the
Respondent.
Instead ofrespondingto the notice, the Respondentissued
a
letter dated May
9, 2022
fortermination ofthe contracton the grounds of
non-fulfillment of contractual obligation.
Thus, in light
of the above facts, the Petitioner
preferred the
present application for appointment of an arbitrator invoking Section 11(6) of
the Act 1996.
ISSUES
The issues in the present case may be broadly
understood as follows:
(i)
Whether Clause
55(a) of the GCC containing the pre-deposit amount prior to initiation of
arbitration isvalid?
(ii)
Whether the
present appointment clause stipulated in Clause 55(b) of the GCC is in
violation of the principle laid down in the case of
Perkins Eastman
[iii]
.
SUBMISSION OF THE PARTIES
Submissions of the Petitioner
The Petitioner
submitted that this Court has the jurisdiction to take measures for
constituting an arbitral tribunal as per Section 11(6) of the Arbitration Act
since the case is an international commercial arbitration under Section 2(g)
of the Arbitration Act.
Further, it was
submitted that the right of appointment of arbitrator given to the respondent
under Clause 55(b)(I) of the GCC is a unilateral right, which is unenforceable
as on date and in violation of the principles laid down in the case of
Perkins
Eastman
[iv]
.
The counsel
further submitted that the pre-deposit amount of 7% (seven percent) prior to
the initiation of arbitration under Clause 55(b)(I) of the GCC is also bad in
law as it contradicts the decision of the Hon ble Supreme Court in
ICOMM
Tele Limited v. Punjab State Water Supply and Sewerage Board and Another
[v]
,
which deals with the concept of
pre-deposit prior to the initiation of arbitration proceedings and held that
such conditions are in violation of Article 14 of the Constitution of India,
1950 ( Constitution ).
It was further argued
that such an arbitration clause is arbitrary, unfair andviolative of the right
to equality prescribed under Article14 of the Constitution.
In view of the above
submissions, the counsel prayed that sole arbitrator be appointed for resolving
the dispute at hand and the petition be considered on merits.
Submissions of the Respondent
The counsel for the
Respondent submitted that the GCC prescribes for a specific procedure which
ought to be adhered to by the Petitioner.In the instant case, the Petitioner
has failed to comply with the two conditions laid down under the GCC, being the
pre-deposit of 7% (seven percent) of the amount claimed and failure of the
Petitioner to approach Principal Secretary/Secretary (Irrigation), Government
ofUttarakhand for appointment of an arbitrator.
[vi]
The counsel
relied upon the case of SK Jain v. State of Haryana and Another
[vii]
wherein the three-judge bench of the
Hon ble
Supreme Court
had upheld the pre-condition
of deposit prior to initiation of arbitration proceedings. The Petitioner
agreed to the pre-deposit clause and cannot question the legality of such a
clause in a petition for the appointment of arbitrator violating the principle
of
party autonomy
.
He further contended
that the pre-condition of deposit of 7% (seven percent) is refundable upon the
completion of the proceedings amongst the parties, sinceit is in the nature of
a security
deposit
.
The main object of such a clause is to ensure
that only valid and bona fide claims are made by the parties, and that the
project is not hindered by frivolous and baseless claims.
The casescited by the
Petitioner namely
SK Jain
[viii]
and
ICOMM Tele
Limited
[ix]
were a substantive challenge to the pre-deposit clause whereas the present
petition is under Section 11(6) of the Arbitration Act mainly for the
appointment of the arbitrator. Thus, the present Petition ought to be rejected
as it is devoid of merits.
ANALYSIS AND JUDGMENT
Pursuant to the
analysis of the contentions and submissions of both the parties, the Hon ble
Court held that the issue in the present case is not related to the dispute
beingnon-arbitrable. It is settled and agreed by both the parties that the
dispute is arbitrable. The central issue in the instant case pertains to the
validity of the appointment clause under Clause 55(b) of the GCC.
The court analysed the
cases of
SK Jain
[x]
,
Municipal Corporation Jabalpur and Other v. Rajest Construction Co
[xi]
and
ICOMM Tele
Limited
[xii]
to
ascertain the established principles on the issue of the first issue pertaining
to the
validity of the pre-condition
of deposit
.
It
was concluded by the Apex Court in this regard that the clauses relating to the
pre-conditions to arbitration in SK Jain
and
ICOMM Tele Limited
were
materially different. In the case of SK Jain, the clause provided for a
clear refund and the intention of such a clause was to prevent frivolous claims
whereas in ICOMM Tele Limited, the clause prescribed a 10% (ten percent)
deposit prior to initiation of the arbitration proceedings which was not
accounted for, as it would not be fully refunded to the claimant.
Following the same principle,
the Hon ble Supreme Court held in the instant case, that there is nothing in
Clause 55 of the GCC which provides for the utilisation of the pre-deposit. The
contract specifically provides for the accounting of security deposit for
performance, but nothing in those clauses of the GCC talk about the pre-deposit
of 7% (seven percent). The Apex Court in this regard, held that
Such vague
and ambiguous condition of 7% pre-deposit of the total claim makes the same
more vulnerable to arbitrariness thereby violating Article 14 of the
Constitution.
.
The Hon ble Supreme Court
rejected the submissionof the Respondent that sincethis is a petition for
appointment, the validity of the pre-deposit clause cannot be considered.It
cannot be said that only a writ petition under Article 226 of the Constitution
can decide upon the validity of the pre-condition in the present case.
It further analysed the Hans
Kelsen s
Pure Theory of Law and compared the Constitution to Kelson s grundnorm. The
Hon ble
Supreme Court
stated as follows,
At the top of the pyramid is the Grundnorm,
which is independent. The subordinate norms are controlled by norms superior to
them in hierarchical order. The system of norms proceeds from downwards to
upwards and finally closes at Grundnorm
.
.
The other laws have to be in consonance to the
grundnorm. Thus,
in the instant case, the layers of the
grundnorm
as per Kelsen s theory would be in
the
following
hierarchy:
(i)
the Constitution;
(ii)
the Arbitration Act and
any other Central/State law;
(iii)
the Arbitration
Agreement entered into by the parties.
Thus, the arbitration agreement being subservient to
the Arbitration Act, cannot be in violation of the fundamental rights enshrined
in Part III of the Constitution and has to comply with the requirements of the
Arbitration Act.The concept of party autonomy can thus, not be stretched to
an extent where it violates the fundamentalrights provided for under the
Constitution. Thus, the Apex Court struck down the argument of the Respondentthat
since the Petitioner has agreed to the pre-deposit clause during the signing of
the agreement, the Petitioner cannot laterclaim through a petition under
Section11(6) of the Arbitration Act that the same is arbitrary and violative of
Article 14 of theConstitution, is without any merit.
The Apex Court further,analysed
the decision of the Hon ble Supreme Court of Cannada in
Uber Technologies etc
v. David Heller
[xiii]
to
rely upon the doctrine of
unconscionability
of pre-conditions
.
According to this doctrine, any agreement which leads to an inequality of
bargaining power, giving one party more power over the other, can be set aside.In
this case, a nine-judge bench of the Supreme Court of Cannada stated that
deposition of an amount of USD 14,500 (Fourteen Thousand Five Hundred Dollars)
is unconscionable.
In regard to the second issue pertaining to the appointment
of arbitrator by Principal Secretary/Secretary (Irrigation), Government of
Uttarakhand in Clause 55(b) of the GCC, the Hon ble Supreme Court upheld the decisionunderthe
Perkins Eastman
[xiv]
in
respect ofthe intention of the legislature to maintain the neutrality of the
arbitrators and invalidated the clause under the GCC. Thus, the Apex Court held
that the two conditions mentioned in Clause 55(a) and Clause 55(b) of the GCCought
tobe ignored, and further appointed Former Chief Justice of the High Court of
Sikkim to act as the sole arbitrator.
CONCLUSION
The present caseof the Supreme Court has reiterated
the established legal principles in regard to unilateral appointment andhas further
gone a step further to re-emphasise the importance of the agreements to be in
consonance with the fundamental rights enshrined under the Constitution. The Respondent
in the present case is state under Article 12 of the Constitution and is under
the duty to preserve and protect the fundamental rights.
Further, the Hon ble Supreme Court relied upon the
doctrine of unconscionability leading to a deeper examination of the bargaining
power in the appointment procedure. The ApexCourt has, time and again in
various cases including
Perkins Eastman
[xv]
and
TRF Limited v.
Energo Engineering Projects Limited
[xvi]
,upheld
the neutrality, independence and impartiality of the arbitrators which has been
the fundamental principle in the decision of the present case.
[i]
SC 2023
INSC 976.
[ii]
(2020) 20
SCC 760.
[iii]
Supra
note at (ii).
[iv]
Supra
note at (ii).
[v]
(2019) 4
SCC 401.
[vi]
Iron & Steel Co.
Ltd. v. Tiwari Road Lines,
(2007)
5 SCC 703;
National Highways Authority of India and Another v. Bumihiway DDB
Ltd. (JV) and Others,
(2006) 10 SCC 763; and
Yashwith Constructions
(P)Ltd. v. Simplex Concrete Piles India Ltd. and Another,
(2006) 6 SCC 204.
[vii]
(2009) 4
SCC 357.
[viii]
Supra
note at (v).
[ix]
Supra
note at (iv).
[x]
Supra
note at (v).
[xi]
(2007) 5
SCC 344.
[xii]
Supra
note at (iv).
[xiii]
2020 SCC
OnLine Can SC 13.
[xiv]
Supra
note at (ii).
[xv]
Supra
note at (ii).
[xvi]
(2017) 8
SCC 377.