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The Supreme Court bench comprising Justice Rohinton Fali Nariman and Justice Vineet Saran has observed that arbitral process will be ineffective and expensive if the pre-deposit clause invokes. The struck down such a clause in a notice inviting tender by Punjab State Water Supply & Sewerage Board. The case of the company (ICOMM Tele Ltd.) which was awarded the said tender was that the said arbitration clause contained in the tender condition amounts to a contract of adhesion and arbitration being an alternative dispute resolution process, a 10% deposit would amount to a clog on entering the system. As the High court dismissed their challenge against the said clause, they approached the Apex court.
The said clause has an aspect stating to furnish 10% deposit at call before a party can successfully invoke the arbitration clause is on the basis that this is in order to avoid frivolous claims.
The bench observed that a frivolous claim can also be dismissed with exemplary costs, and thus it would be open to the party who has succeeded before the arbitrator to invoke this principle and it is open to the arbitrator to dismiss a claim as frivolous on imposition of exemplary costs. The court also added that the said clause does not really have any direct nexus to the filing of frivolous claims, as it applies to all claims (frivolous or otherwise) made at the very threshold.
It said: "The important principle established by this case is that unless it is first found that the litigation that has been embarked upon is frivolous, exemplary costs or punitive damages do not follow. Clearly, therefore, a "deposit-at-call" of 10% of the amount claimed, which can amount to large sums of money, is obviously without any direct nexus to the filing of frivolous claims, as it applies to all claims (frivolous or otherwise) made at the very threshold. A 10% deposit has to be made before any determination that a claim made by the party invoking arbitration is frivolous. This is also one important aspect of the matter to be kept in mind in deciding that such a clause would be arbitrary in the sense of being something which would be unfair and unjust and which no reasonable man would agree to. Indeed, a claim may be dismissed but need not be frivolous, as is obvious from the fact that where three arbitrators are appointed, there have been known to be majority and minority awards, making it clear that there may be two possible or even plausible views which would indicate that the claim is dismissed or allowed on merits and not because it is frivolous. Further, even where a claim is found to be justified and correct, the amount that is deposited need not be refunded to the successful claimant."
The bench reiterated that arbitration is an important alternative dispute resolution process which is to be encouraged because of high pendency of cases in courts and cost of litigation. It said: "Any requirement as to deposit would certainly amount to a clog on this process. Also, it is easy to visualize that often a deposit of 10% of a huge claim would be even greater than court fees that may be charged for filing a suit in a civil court.", While striking down the pre-deposit clause, the bench said: "Primary object of arbitration is to reach a final disposal of disputes in a speedy, effective, inexpensive and expeditious manner.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."
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