Court Can Examine If Arbitration Clause Is Arbitrary & Violates Article 14 While Considering S.11(6) Application : Supreme Court

In a significant judgment, the Supreme Court held that a clause in an arbitration agreement which is not in consonance with the Constitution cannot be enforced. The Court further held that it can examine if the arbitration clauses are manifestly arbitrary and violative of Article 14 of the Constitution while considering an application for appointment of arbitrator.A bench comprising Chief Justice of India DY Chandrachud, Justices JB Pardiwala and Manoj Misra was deciding an application filed by Lombardi Engineering Ltd., a Swiss company, under Section 11(6) of the Arbitration and Conciliation Act 1996 seeking appointment of arbitrator in a dispute with the State of Uttarakhand.The company filed the application before the Supreme Court taking objection to two clauses in the arbitration agreement - one, the condition that 7% of the total claim must be pre-deposited for invoking the arbitration clause; two, the discretion vested with the Principal Secretary/Secretary (Irrigation) to appoint a sole arbitrator.Issues considered by the CourtThe Court framed the following issues :(i) Whether the dictum as laid down in ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Another(2019) can be made applicable to the case in hand more particularly when Clause 55 of the General Conditions of Contract provides for a pre-deposit of 7% of the total claim for the purpose of invoking the arbitration clause?(ii) Whether there is any direct conflict between the decisions of this Court in S.K. Jain v. State of Haryana(2009) and ICOMM Tele Limited (supra)?(iii) Whether this Court while deciding a petition filed under Section 11(6) of the Act 1996 for appointment of a sole arbitrator can hold that the condition of pre-deposit stipulated in the arbitration clause as provided in the Contract is violative of the Article 14 of the Constitution of India being manifestly arbitrary?(iv) Whether the arbitration Clause No. 55 of the Contract empowering the Principal Secretary/Secretary (Irrigation), State of Uttarakhand to appoint an arbitrator of his choice is in conflict with the decision of this Court in the case of Perkins Eastman (supra)?Principles laid down in ICOMM Tele LtdThe Court noted that the principles of law laid down in ICOMM Tele Limited (supra) are as under:(a) That the pre-deposit condition in an arbitration clause is violative of Article 14 of the Constitution of India being arbitrary. (b) Unless it is first found or prima facie established that the litigation that has been embarked upon is frivolous, the exemplary costs or punitive damages cannot follow. (c) Deterring a party to an arbitration from invoking the Alternative Dispute Resolution Process by pre-deposit of certain percentage would discourage arbitration. This would run contrary to the object of de-clogging the court system and would render the arbitral process ineffective and expensive.The judgment authored by Justice Pardiwala held that there is no conflict between S.K. Jain (supra) and ICOMM Tele Limited (supra), as the relevant arbitration clauses that fell for the consideration of the Supreme Court in both the cases stood completely on a different footing. Also, the points of law on which S.K. Jain (supra) was distinguished and explained in ICOMM Tele Limited (supra).Court can examine if the arbitration clauses are arbitrary while considering application to appoint sole arbitratorAnswering the issue in the affirmative, the Court stated that the Constitution is the the paramount source of law in our country.The argument that the Court cannot examine the Constitutionality of the clause while exercising jurisdiction under Section 11(6) was rejected."It would be too much for the respondent to say that it is only the writ court in a petition under Article 226 of the Constitution that can consider whether a particular condition in the arbitration clause is arbitrary," the judgment stated."The Constitution is the basic and the ultimate source of law", Justice Pardiwala wrote relying on Kelsen's theory of Grundnorm.The judgment explained that, in the context of the Arbitration Agreement, the layers of the Grundnorm as per Kelsen's theory would be in the following hierarchy: (i) Constitution of India, 1950; (ii) Arbitration and Conciliation Act, 1996 & any other Central/State Law; (iii) Arbitration Agreement entered into by the parties in light of s. 7 of the Arbitration and Conciliation Act, 1996.Thus, the Arbitration Agreement, has to comply with the requirements of the following and cannot fall foul of: (i) Section 7 of the Arbitration and Conciliation Act; (ii) any other provisions of the Arbitration and Conciliation Act, 1996 & Central/State Law; (iii) Constitution of India, 1950, the Court stated."For an arbitration clause to be legally binding it has to be in consonance with the “operation of law” which includes the Grundnorm i.e. the Constitution. It is the rule of law which is supreme and forms parts of the basic structure. The...

Court Can Examine If Arbitration Clause Is Arbitrary & Violates Article 14 While Considering S.11(6) Application : Supreme Court

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