New Delhi, Aug 18 The Supreme Court has referred to a larger bench the question whether contractual clauses requiring contractors to deposit a percentage of their claim amount before invoking arbitration are legally valid.
A bench comprising justices Manmohan and Manoj Misra on Monday said that such conditions could potentially deter parties from pursuing arbitration and make the right to sue illusory and directed the apex registry to place the case before the Chief Justice of India on the administrative side for appropriate directions to set up a larger bench.
"This court is of the considered view that an arbitration clause cannot impose pre-deposit conditions so onerous as to render the right to sue, at the very threshold, illusory or nugatory.
"A stipulation mandating the deposit of a substantial percentage of the claim amount, as a precondition to invoking arbitration would inevitably suppress claims, deter recourse to alternative dispute resolution, and thereby defeat its very object," Justice Manmohan, who authored the judgement for the bench, said.
The direction to refer the issue to a larger bench came in an order on an appeal filed by M/s Santosh Associate Private Limited against Haryana State Industrial and Infrastructure Development Corporation Ltd (HSIIDC).
The bench expressed doubts about the continuing validity of a 2009 three-judge bench ruling in the S.K. Jain v. State of Haryana, which had upheld a similar pre-deposit requirement.
"Keeping in view the aforesaid judgments and this court (sitting in a combination of two judges) having doubts about the legality and validity of a three-judge bench judgment in S.K. Jain (supra) as a binding precedent, is of the opinion that the matter calls for reference to a larger bench," the judgement said.
Consequently, this court requests the CJI to consider the desirability as to whether the issues formulated, or such other issues as may be deemed relevant, do warrant a reference to a larger bench, it said. The bench then framed questions for reference to a larger bench.
"Whether a stipulation requiring the contractor alone to make a pre-deposit of security/fees prior to reference of disputes to arbitration is contrary to Section 18 of the Act which mandates equal treatment of parties at all stages of arbitration," reads the first question.
The second question asks whether pre-deposit conditions in contracts having arbitration clauses discourage alternative dispute resolution and undermine its objective of declogging the court system.
"Whether a condition of pre-deposit of security/fees prior to reference to arbitration is arbitrary and violative of the right to sue as well as Article 14 of the Constitution and Section 28 of the Indian Contract Act, 1872," reads the third question.
The dispute in the present case arose from a contract awarded by HSIIDC in 2017 for execution of storm-water drainage systems and related works at Sector-35, Udyog Vihar, Phase-VII, Gurugram.
The contract initially had a value of about Rs 5.14 crore, which was subsequently reduced to around Rs 2.41 crore following a reduction in the scope of work.
The contract's arbitration clause required a contractor raising a claim of Rs 1 lakh or more to furnish a security deposit equivalent to 10 per cent of the claim amount before the dispute could be referred to arbitration.
The deposit was to be adjusted against costs, if any, awarded against the claimant and the balance refunded after the arbitration.
Santosh Associate challenged the requirement, contending that it was arbitrary and discriminatory as it imposed the pre-deposit obligation only on contractors.
The company also said that requiring a substantial deposit before there had been any determination that a claim was frivolous had no rational connection with the objective of preventing frivolous claims.
In the present case, the contractor's claim was stated to be Rs 1.77 crore, requiring a security deposit of Rs 17.70 lakh under the disputed clause.
The sole arbitrator, appointed by the Punjab and Haryana High Court, upheld HSIIDC's objection to the maintainability of the claim after the contractor declined to make the required deposit.
The commercial court at Gurugram subsequently dismissed the contractor's challenge.
