Calcutta High Court Strikes Down Arbitration Clause As Unconstitutional, Upholds Subcontractor's Right To Independent Dispute Resolution

The Calcutta High Court bench of Justice Sabyasachi Bhattacharyya has struck part of the arbitration clause as being violative of Article 14 of the Constitution. The clause prevented the subcontractor from participating in arbitration proceedings despite having to bear the expenses for its claims. Further, it allowed the Indian Oil Corporation (IOCL) to unilaterally decide whether a dispute could be referred to arbitration, thus depriving the subcontractor of an independent right to raise disputes. Brief Facts: The matter pertained to works contracts issued to M/s Zillion Infraprojects Pvt Ltd (Petitioner) by Bridge and Roof Company (India) Limited (B&R) (Respondent). The principal contract was executed between Indian Oil Corporation of India Limited (IOCL) and the respondent concerning work involving mechanical equipment, erection, and pending works. The Petitioner was subcontracted to perform this work. Disputes and differences arose between the Petitioner and the Respondent which led to the filing of petitions under Section 11 of the Arbitration andConciliation Act, 1996 for appointment of arbitrator. The relevant clause in both works contracts was Clause 14.0. The Petitioner argued that this clause provided for the resolution of disputes between the Petitioner/sub-contractor and B&R. However, if the Petitioner wishes to refer the matter to arbitration, it must approach B&R with a request substantiating its claim. Only if B&R feels justified in initiating arbitration will it invoke the arbitration clause with IOCL. It highlighted that the inherent lopsidedness of the clause and argued that even if the Petitioner sought to raise a dispute by invoking the arbitration clause, it must approach B&R despite the dispute being against B&R itself. Another injustice in the clause as argued by the Petitioner was that the Petitioner must bear its portion of expenses regarding its claim without participating in the arbitral process. It argued that the conditions of the arbitration clause were unreasonable and violated Article 14 of the Constitution. The Petitioner argued that since the intention to refer disputes to arbitration was expressed in the clause, the portion of the clause violating Article 14 of the Constitution should be struck down. It argued that it should be permitted to independently refer the matter to arbitration in disputes between the Petitioner and B&R. The relevant arbitration clause is reproduced below: “14.0 The Arbitration of disputes if any between IOCL & B&R will be final & binding upon the subcontractor. No dispute can be adjudicated separately through arbitration or any other similar forum for any disputes between the subcontractor & B&R. However in case the subcontractor desires B&R to raise certain disputes pertaining to its claim for reference to arbitration, the subcontractor shall approach B&R with such request substantiating its claim and incase B&R feels justified to initiate an arbitration (decision of concerned General Manager of B&R in this regard will be final & binding), the arbitration may be invoked by B&R with M/s. IOCL and decision of the arbitrator will be final and binding upon the subcontractor for all disputes. However the subcontractor has to bear prorata cost of its portion of claim of arbitration expenses. The jurisdiction of Court, if situation so arises, in any circumstances shall be at Kolkata.” Observations by the High Court: The High Court noted that the clause was divided into two distinct parts. The first part pertained to disputes between the subcontractor and the contractor which stated that such disputes cannot be resolved through arbitration or any alternative dispute resolution forum. The second part was that if the subcontractor wishes to raise a dispute against IOCL, it must seek the contractor's decision on whether to include this claim in the arbitration proceedings against IOCL. The Petitioner challenged this clause on the grounds of violating Article 14 of the Constitution and argued that the second part of the clause was unjust and violated party autonomy. However, the High Court held that the second part of the clause was severable from the first part. Striking down the second part does not affect the first part, which clearly barred any dispute between the subcontractor and the contractor from being referred to arbitration. The High Court also examined the compliance of the arbitration clause with Section 7 of the Arbitration Act. Section 7 defines an arbitration agreement as an agreement to submit to arbitration all or certain disputes arising between the parties. The High Court noted that the clause provided a clear bar against arbitration for disputes between the subcontractor and the contractor, using negative language to indicate this prohibition. Further, it held that there was nothing in the other parts of the clause to suggest a right ...

Calcutta High Court Strikes Down Arbitration Clause As Unconstitutional, Upholds Subcontractor's Right To Independent Dispute Resolution

Rajesh Kumar

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