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.