Unit 4
Arbitration and Conciliation
Arbitration is a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court. An Act to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation and for matters connected therewith or incidental thereto.
Section 7(1) “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
According to section 10 of the Arbitration and Conciliation act, 1996, the parties are free to choose the number of arbitrators to be appointed for the proceedings. If they fail to do so, a sole arbitrator is to be appointed. Section 11 talks about the appointment of arbitrators. The parties are free to agree upon a procedure for the appointment of the arbitrators. In case of three arbitrators, each party has to appoint one arbitrator and they have to appoint a third arbitrator who shall be the presiding arbitrator. In case either the parties or the two arbitrators fail to appoint an arbitrator within 30 days, then upon the request of the parties, the Supreme Court or the High Court or any person or institution designated by the courts shall appoint one. The designation of a person or institution by the Supreme Court or the High Court may be considered as a delegation of judicial powers.
Qualifications of an arbitrator
- Confidence of the parties
- Impartiality
- Technical and legal qualification
- Non conflict of interest
- Adjudication of the arbitral agreement
Concept of conciliation
Conciliation is a process in which disputes resolve between the parties by appointing a conciliator who help (amicable) the disputed parties to arrive at a negotiated settlement. Settling the dispute without litigation, it is informal process. He does by lowering tensions; improve communication, interpreting issues, providing technical help.
Some of the significant differences between Arbitration and Conciliation:
1. The person appointed for the process of arbitration is called arbitrator. Appointment of Arbitrator is done under provision of section 11 of Arbitration and Conciliation act 1996. While, the person appointed for the process of Conciliation is called conciliator. Appointment of conciliator is done under the provisions of section 64 of Arbitration and Conciliation act 1996.
2. An arbitrator has the power to enforce his decision. While, the person appointed to settle the dispute don't have power to enforce the decision taken by him.
3. To settle the dispute through the process of arbitration, prior agreement is required. While, to settle the dispute through the process of Conciliation no prior agreement is required.
4. Arbitration is available for existing and future dispute as well but conciliation is available for existing disputes only, it do not focus on the future dispute.
5. Arbitration is a legal proceeding while conciliation is not a legal proceeding.
KEY TAKEAWAYS
- ARBITRATION IS A PROCEDURE IN WHICH A DISPUTE IS SUBMITTED, BY AGREEMENT OF THE PARTIES, TO ONE OR MORE ARBITRATORS WHO MAKE A BINDING DECISION ON THE DISPUTE. IN CHOOSING ARBITRATION, THE PARTIES OPT FOR A PRIVATE DISPUTE RESOLUTION PROCEDURE INSTEAD OF GOING TO COURT.
- CONCILIATION IS A PROCESS IN WHICH DISPUTES RESOLVE BETWEEN THE PARTIES BY APPOINTING A CONCILIATOR WHO HELP (AMICABLE) THE DISPUTED PARTIES TO ARRIVE AT A NEGOTIATED SETTLEMENT. SETTLING THE DISPUTE WITHOUT LITIGATION, IT IS INFORMAL PROCESS.
Some of the important definitions provided under the Arbitration and Conciliation Act, 1996 are highlighted below-
Section 2(a) “arbitration” means any arbitration whether or not administered by permanent arbitral institution.
Section 2(b) “arbitration agreement” means an agreement referred to in section 7.
Section 2(c) “arbitral award” includes an interim award;
Section 2(d) “arbitral tribunal” means a sole arbitrator or a panel of arbitrators
Section 2(e) “Court” means—
(i) in the case of an arbitration other than international commercial arbitration, the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any Civil Court of a grade inferior to such principal Civil Court, or any Court of Small Causes;
(ii) in the case of international commercial arbitration, the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, and in other cases, a High Court having jurisdiction to hear appeals from decrees of courts subordinate to that High Court;
Section 2(f) “international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—
(i) an individual who is a national of, or habitually resident in, any country other than India; or
(ii) a body corporate which is incorporated in any country other than India; or
(iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or
(iv) the Government of a foreign country;
Section 2(g) “legal representative” means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased, and, where a party acts in a representative character, the person on whom the estate devolves on the death of the party so acting;
Section 2(h) “party” means a party to an arbitration agreement.
(2) This Part shall apply where the place of arbitration is in India:
[Provided that subject to an agreement to the contrary, the provisions of sections 9, 27 and clause (a) of sub-section (1) and sub-section (3) of section37 shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognised under the provisions of Part II of this Act.]
(3) This Part shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration.
(4) This Part except sub-section (1) of section 40, sections 41 and 43 shall apply to every arbitration under any other enactment for the time being in force, as if the arbitration were pursuant to an arbitration agreement and as if that other enactment were an arbitration agreement, except in so far as the provisions of this Part are inconsistent with that other enactment or with any rules made thereunder.
(5) Subject to the provisions of sub-section (4), and save in so far as is otherwise provided by any law for the time being in force or in any agreement in force between India and any other country or countries, this Part shall apply to all arbitrations and to all proceedings relating thereto.
(6) Where this Part, except section 28, leaves the parties free to determine a certain issue, that freedom shall include the right of the parties to authorise any person including an institution, to determine that issue.
(7) An arbitral award made under this Part shall be considered as a domestic award.
(8) Where this Part— (a) refers to the fact that the parties have agreed or that they may agree, or (b) in any other way refers to an agreement of the parties, that agreement shall include any arbitration rules referred to in that agreement.
(9) Where this Part, other than clause (a) of section 25 or clause (a) of sub-section (2) of section 32, refers to a claim, it shall also apply to a counterclaim, and where it refers to a defence, it shall also apply to a defence to that counterclaim.
Essentials of Arbitration Agreement
The essential features of an arbitration agreement, as defined by clause (b) of section 2(1) read with section 7, are as follows-
1) Valid & binding Agreement -
There should be a valid and binding agreement between the parties.
2) Such agreement may be -
In the form of an arbitration clause in a contract or in the form of a separate agreement.
3) Written Agreement -
An arbitration agreement shall be in writing.
4) An arbitration agreement is in writing if it is contained in—
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.
5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.
Power and Duties of Arbitration
The powers and duties of arbitrator are highlighted below-
Powers of an arbitrator
The arbitrator is the one who will give the arbitral award, therefore, The Arbitration and Conciliation Act, 1996 provides several powers to him in order to decide the award.
- Power to administer an oath to the parties and witnesses
The arbitrator has the power to administer the oath to the parties and witnesses. He also could issue interrogatories to the parties if he thought it necessary to do so. There is no express provision relating to that power being given under The Arbitration and Conciliation Act, 1966. However, it is implicitly applied to the fact that he acts like a quasi-judicial authority in arbitration.
2. Power to take interim measures
According to Section 17 of this Act, when any party during the arbitration proceeding or at any time after making of the arbitral award, may seek the interim measure before the arbitration tribunal. The arbitration tribunal has the power to take an interim measure relating to:
- Appointment of guardian for minor or person of unsound mind;
- For the protection of:-
a) Interim custody and sale of goods which are subjected to the arbitration agreement;
b) Securing amount which is disputed in the arbitration;
c) Detention, prevention or inspection of any property or thing which is subjected to arbitration;
d) Appointment of receiver;
e) Such other interim measure is necessary for the eyes of the Court.
3. Power to proceed to ex-parte
In any arbitration proceeding, the arbitrator has the power to proceed to ex-parte i.e in the favour of one party if another party contravenes any provision of this Act. According to Section 25, there are three conditions under which the court may pass an ex- parte award:
a) When the claimant fails to communicate his statement of claim in accordance with Section 23(1) of the Act.
b) When the respondent fails to communicate his statement of claim in accordance with Section 23(1) of the Act.
c) When any party fails to appear at an oral hearing or to produce the document or to produce documentary evidence.
The court, however, doesn’t proceed ex-parte against any party without giving him the notice regarding the court’s intention to proceed ex parte on a specific date, time and place.
4. Power to appoint an expert
According to Section 26 of the Act, the arbitrator has the power to appoint one or more experts to report to him on a specific issue, if he finds it necessary in any case. The arbitrator also has the power to give the expert any relevant information or documents or property for the purpose of his inspection. If necessary the arbitrator also has the power to appoint the expert as a participant in a hearing but in order to appoint an expert, the expert must have to show the parties that he has expertise in matters related to this case.
5. Power to make awards
Power to make awards is the most important power as well as the duty of arbitrators which is given under The Arbitration and Conciliation Act, 1996. However, the rules applicable in an arbitration proceeding is:
- In matters related to international commercial arbitration, the arbitral dispute shall be decided according to the rules of proceeding which is decided by the parties but if they fail to decide it, then the arbitrator himself decides the rules which are applicable.
- In other matters, the arbitral tribunal shall have to decide the rule which is in accordance with the substantive law.
However, with such aforesaid power, at the time of making such an award, the arbitrator also has the duty to consider the following necessary aspects:
- The party who is entitled to costs;
- The party who pays the cost;
- The amount and method of determining those costs;
- The manner in which the costs shall be payable;
- The cost of the arbitration proceeding or any other expenses fixed by the arbitration tribunal
If the number of arbitrators is more than one, then the decision must be signed either by all the arbitrators or by the majority of them.
Duties of an arbitrator
In arbitration, the parties may impose specific duties on the arbitrator at the time of appointment. The general duties which the arbitrator has to fulfil in all kinds of arbitration are-
- Duties to be independent and impartial
Section 12 and Section 18 of The Arbitration and Conciliation Act, 1996 imposed an important duty on the arbitrator that in any arbitration proceeding that he must have to be independent and impartial. By being independent it means that there is no such personal or professional relationship between the arbitrator or parties which may affect the final judgment, however, by impartial, it means that the arbitrator should neither favour nor oppose any party and should give equal treatment to both parties.
2. Duty to determine time and place of arbitration
According to Section 20 of this Act, it is the duty of the arbitrator to appoint the time and place of arbitration if the parties have failed to decide it amongst themselves. But at the time of determination, the arbitrator must keep in mind the circumstances including the convenience of the parties. The arbitrator unless otherwise agreed by the parties, also has the power to decide other places to hear the witness or expert or to an inspection of documents, goods, and other property.
3. Duty to disclosure
According to Section 12 of this Act, there is an obligation on an arbitrator to disclose all the relevant facts which are required to be known by both parties at the time of his first encounter with them.
In the case of Steel Authority of India v. British Marine 2016, the Court said that the arbitrator must have to disclose all such facts which are likely to affect impartiality or which might create an appearance of partiality or bias.
4. Duty to effectively resolve the dispute
The arbitrator should have to make effective decisions without doing any misconduct. However, there is no guideline of misconduct that is given under the Act, its scope is to develop by case to case. The acts which are generally considered as misconduct on the parts of the arbitrator are:
- Fails to comply with terms, that is expressly or impliedly given;
- Making awards that oppose public policy;
- To be bribed or corrupted;
- Breach the rule of natural justice.
5. Duty to determine the rule of procedure
According to Section 19, the arbitration procedure is not bound by any code of procedure. Earlier parties are free to agree on the procedure that may be followed by the arbitration tribunal, It always depends upon the will of the parties but if they do not have any prior agreement on this, then the arbitrator has all the power to decide the procedure for such a case. This power includes the power to determine the admissibility, relevance, materiality or weight of any evidence.
6. Duty to interpret or correct the award
According to Section 33 of this Act, it is a duty of the arbitrator to correct or interpret the award passed by himself within 30 days from the date of receipt:
- A party with notice to another party may request arbitration tribunal to correct any error like any typographical, computation, clerical, or any other error of similar nature;
- A party with a notice to another party may request to interpret any specific part or parts of the award.
In this section, the court also may correct any error of the award on its own initiative within thirty days from the date of the arbitration award.
Conciliation proceeding
The provisions related to conciliation proceedings are part III of the Arbitration and Reconciliation Act, 1996 are highlighted below-
Commencement of conciliation proceedings (Section 62)
(1) The party initiating conciliation shall send to the other party a written invitation to conciliate under this Part, briefly identifying the subject of the dispute.
(2) Conciliation proceedings, shall commence when the other party accepts in writing the invitation to conciliate.
(3) If the other party rejects the invitation, there will be no conciliation proceedings.
(4) If the party initiating conciliation does not receive a reply within thirty days from the date on which he sends the invitation, or within such other period of time as specified in the invitation, he may elect to treat this as a rejection of the invitation to conciliate and if he so elects, he shall inform in writing the other party accordingly.
Number of conciliators (Section 63)
(1) There shall be one conciliator unless the parties agree that there shall be two or three conciliators.
(2) Where there is more than one conciliator, they ought, as a general rule, to act jointly.
Appointment of conciliators (Section 64)
(1) Subject to sub-section (2)—
(a) in conciliation proceedings, with one conciliator, the parties may agree on the name of a sole conciliator;
(b) in conciliation proceedings with two conciliators, each party may appoint one conciliator;
(c) in conciliation proceedings with three conciliators, each party may appoint one conciliator and the parties may agree on the name of the third conciliator who shall act as the presiding conciliator.
(2) Parties may enlist the assistance of a suitable institution or person in connection with the appointment of conciliators, and in particular,—
(a) a party may request such an institution or person to recommend the names of suitable individuals to act as conciliator; or
(b) the parties may agree that the appointment of one or more conciliators be made directly by such an institution or person: Provided that in recommending or appointing individuals to act as conciliator, the institution or person shall have regard to such considerations as are likely to secure the appointment of an independent and impartial conciliator and, with respect to a sole or third conciliator, shall take into account the advisability of appointing a conciliator of a nationality other than the nationalities of the parties.
Submission of statements to conciliator (Section 65)
(1) The conciliator, upon his appointment, may request each party to submit to him a brief written statement describing the general nature of the dispute and the points at issue. Each party shall send a copy of such statement to the other party.
(2) The conciliator may request each party to submit to him a further written statement of his position and the facts and grounds in support thereof, supplemented by any documents and other evidence that such party deems appropriate. The party shall send a copy of such statement, documents and other evidence to the other party.
(3) At any stage of the conciliation proceedings, the conciliator may request a party to submit to him such additional information as he deems appropriate.
Role of conciliator (Section 67)
(1) The conciliator shall assist the parties in an independent and impartial manner in their attempt to reach an amicable settlement of their dispute.
(2) The conciliator shall be guided by principles of objectivity, fairness and justice, giving consideration to, among other things, the rights and obligations of the parties, the usages of the trade concerned and the circumstances surrounding the dispute, including any previous business practices between the parties.
(3) The conciliator may conduct the conciliation proceedings in such a manner as he considers appropriate, taking into account the circumstances of the case, the wishes the parties may express, including any request by a party that the conciliator hear oral statements, and the need for a speedy settlement of the dispute.
(4) The conciliator may, at any stage of the conciliation proceedings, make proposals for a settlement of the dispute. Such proposals need not be in writing and need not be accompanied by a statement of the reasons therefor.
Administrative assistance (Section 68)
In order to facilitate the conduct of the conciliation proceedings, the parties, or the conciliator with the consent of the parties, may arrange for administrative assistance by a suitable institution or person.
Communication between conciliator and parties (Section 69)
(1) The conciliator may invite the parties to meet him or may communicate with them orally or in writing. He may meet or communicate with the parties together or with each of them separately.
(2) Unless the parties have agreed upon the place where meetings with the conciliator are to be held, such place shall be determined by the conciliator, after consultation with the parties, having regard to the circumstances of the conciliation proceedings.
Disclosure of information (Section 70)
When the conciliator receives factual information concerning the dispute from a party, he shall disclose the substance of that information to the other party in order that the other party may have the opportunity to present any explanation which he considers appropriate: Provided that when a party gives any information to the conciliator subject to a specific condition that it be kept confidential, the conciliator shall not disclose that information to the other party.
Co-operation of parties with conciliator (Section 71)
The parties shall in good faith co-operate with the conciliator and, in particular, shall endeavour to comply with requests by the conciliator to submit written materials, provide evidence and attend meetings.
Suggestions by parties for settlement of dispute (Section 72)
Each party may, on his own initiative or at the invitation of the conciliator, submit to the conciliator suggestions for the settlement of the dispute.
Settlement agreement (Section 73)
(1) When it appears to the conciliator that there exist elements of a settlement which may be acceptable to the parties, he shall formulate the terms of a possible settlement and submit them to the parties for their observations. After receiving the observations of the parties, the conciliator may reformulate the terms of a possible settlement in the light of such observations.
(2) If the parties reach agreement on a settlement of the dispute, they may draw up and sign a written settlement agreement. If requested by the parties, the conciliator may draw up, or assist the parties in drawing up, the settlement agreement.
(3) When the parties sign the settlement agreement, it shall be final and binding on the parties and persons claiming under them respectively.
(4) The conciliator shall authenticate the settlement agreement and furnish a copy thereof to each of the parties.
Termination of conciliation proceedings (Section 76)
The conciliation proceedings shall be terminated—
(a) by the signing of the settlement agreement by the parties, on the date of the agreement; or
(b) by a written declaration of the conciliator, after consultation with the parties, to the effect that further efforts at conciliation are no longer justified, on the date of the declaration; or
(c) by a written declaration of the parties addressed to the conciliator to the effect that the conciliation proceedings are terminated, on the date of the declaration; or
(d) by a written declaration of a party to the other party and the conciliator, if appointed, to the effect that the conciliation proceedings are terminated, on the date of the declaration.
Resort to arbitral or judicial proceedings (Section 77)
The parties shall not initiate, during the conciliation proceedings, any arbitral or judicial proceedings in respect of a dispute that is the subject-matter of the conciliation proceedings except that a party may initiate arbitral or judicial proceedings where, in his opinion, such proceedings are necessary for preserving his rights.
Role of conciliator in other proceedings (Section 80)
Unless otherwise agreed by the parties,—
(a) the conciliator shall not act as an arbitrator or as a representative or counsel of a party in any arbitral or judicial proceeding in respect of a dispute that is the subject of the conciliation proceedings;
(b) the conciliator shall not be presented by the parties as a witness in any arbitral or judicial proceedings.
Admissibility of evidence in other proceedings (Section 81)
The parties shall not rely on or introduce as evidence in arbitral or judicial proceedings, whether or not such proceedings relate to the dispute that is the subject of the conciliation proceedings,—
(a) views expressed or suggestions made by the other party in respect of a possible settlement of the dispute;
(b) admissions made by the other party in the course of the conciliation proceedings;
(c) proposals made by the conciliator;
(d) the fact that the other party had indicated his willingness to accept a proposal for settlement made by the conciliator.
THE ARBITRATION AND CONCILIATION (AMENDMENT) ACT, 2021
The amendments made in the Arbitration and Conciliation Act, 2021 are highlighted below-
An Act further to amend the Arbitration and Conciliation Act, 1996.
BE it enacted by Parliament in the Seventy-second Year of the Republic of India as follows:––
1. (1) This Act may be called the Arbitration and Conciliation (Amendment) Act, 2021.
(2) Save as otherwise provided in this Act, it shall be deemed to have come into force on the 4th day of November, 2020.
2. In the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the principal Act), in section 36, in sub-section (3), after the proviso, the following shall be inserted and shall be deemed to have been inserted with effect from the 23rd day of October, 2015, namely:
“Provided further that where the Court is satisfied that a prima facie case is made out that,—
(a) the arbitration agreement or contract which is the basis of the award; or
(b) the making of the award,
Was induced or effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge under section 34 to the award.
3. For section 43J of the principal Act, the following section shall be substituted, namely:––
“43J. The qualifications, experience and norms for accreditation of arbitrators shall be such as may be specified by the regulations.”.
4. The Eighth Schedule to the principal Act shall be omitted.
5. (1) The Arbitration and Conciliation (Amendment) Ordinance, 2020 is hereby repealed. (2) Notwithstanding such repeal, anything done or any action taken under the said Ordinance shall be deemed to have been done or taken under this Act.
KEY TAKEAWAYS
- “ARBITRATION” MEANS ANY ARBITRATION WHETHER OR NOT ADMINISTERED BY PERMANENT ARBITRAL INSTITUTION.
References
1) Business and Corporate Law: - Dr. Kaur Harpreet, Lexis Nexis (2013)
2) Laws for Business, Sulphey M.M.&Basheer, PHI Learning Pvt. Ltd., Delhi. (2013)
3) Business Laws: - Kuchhal M.C.&KuchhalVivek, Vikas Publishing House (2013)
4) Business and Commercial Laws:-Sen And Mitra , The World Press Pvt. Ltd.(2018)
Case study
- Trammo AG v. MMTC Limited; 2019 SCC OnLine Del 7337, Order dated 27.02.2019
In the aforesaid case, the award, which was upheld by the Supreme Court was sought to be executed by way of an Execution Petition before the High Court of Delhi. The question before the Court was in respect of the foreign exchange rate to be applied as the award was in US dollars.
The issue before the Court was:
"What is the foreign exchange rate to be applied? Whether the same should be calculated on the basis of conversion rate on the date of the award or on the date of dismissal of the Section 34 petition or on the date of dismissal of the SLP or on the date of dismissal of the review petition or finally on the date when the execution petition is being disposed of."
The High Court of Delhi after taking into account the decisions in Forasol v. Oil and Natural Gas Commission, 1984 (supp) SCC 263 and Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644 inter alia held that:
"...In the present case, the present execution petition was filed immediately upon the objections under Section 34 being dismissed. The Decree Holder obviously understood, rightly so, that the award became an executable decree immediately upon the challenge having failed. At that stage the awarded amount stood crystallised. What is being enforced in this case is the award, as per Section 36. Unless the award has been modified by the appellate forums leading to merger, the award as it is, is being enforced. The award acquired finality only when the Supreme Court finally dismissed the challenge to the award. Until then, this award could not be enforced, though the present execution was pending during the said period. The principle in an execution petition is that the Decree Holder should be placed in the same position as he would have been if he had received the money on the date of the award. The contract was in US Dollars. MMTC also conducts business in foreign exchange. As per the principles culled out from the above decisions, the Decree Holder is entitled to receive the sum only when finality attaches to the award, which in this case, happened on 12th February, 2019 when the review petition was dismissed by the Supreme Court."
2. ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board and Another; 2019 SCC OnLine SC 361, Order dated 11.03.2019
The Punjab State Water Supply & Sewerage Board, Bhatinda had issued notice inviting tender for extension and augmentation of water supply, sewerage scheme, pumping station and sewerage treatment plant for various towns mentioned therein on a turnkey basis. The appellant company, was awarded the said tender. In furtherance thereto, a formal contract was entered into between the appellant and respondent No. 2. The arbitration clause was contained in Clause 25(viiii) of the notice inviting tender and reads as under:—
"viii. 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 per cent of the amount claimed, on a schedule 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."
The Appellant addressed letters with regard to appointment of arbitrator and sought for waiving the 10% deposit fee. After having received no response, the Appellant had filed a writ petition, being Civil Writ Petition No. 18917 of 2016, before the High Court of Punjab and Haryana. This writ petition was dismissed stating that such tender condition can in no way be said to be arbitrary or unreasonable. The appellant approached the High Court of Punjab and Haryana challenging the validity of this part of the arbitration clause by filing Civil Writ Petition No. 4882 of 2017. The High Court in the impugned judgment merely followed its earlier judgment and dismissed this writ petition as well. Aggrieved by the same, the Appellant approached the Supreme Court of India.
The Apex Court referred to its earlier decision in General Motors (I) (P) Ltd. v. Ashok Ramnik Lal Tolat, (2015) 1 SCC 429 and observed that:
"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...This would render the entire clause wholly arbitrary, being not only excessive or disproportionate but leading to the wholly unjust result of a party who has lost an arbitration being entitled to forfeit such part of the deposit as falls proportionately short of the amount awarded as compared to what is claimed.
It was further noted that it is also a settled law 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. 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.
In light of the above, it was thus held that:
"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.
