Pre Deposit Clause in the Arbitration Agreement

Pre-Deposit
Clause
in the Arbitration
Agreement
 ICOMM Tele Ltd Vs. Punjab State water Supply Board, [(2019)
4 SCC 401]
 In this matter, the Court is concerned with clause 25 (viii)
which is set out as follows:-
“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 percent 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
 This writ petition before the P & H high Court was dismissed
stating that such tender condition can in no way be said to
be arbitrary or unreasonable.
 Before the Supreme Court, the respondent argued that there
is no infraction of Article 14 in the present case. It is clear
that clause 25(viii) would apply to both parties equally, and
as this is so, the said sub-clause cannot be struck down as
being discriminatory.
 The 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 first important thing to notice is that the 10% “deposit-at
call” of the amount claimed is in order to avoid frivolous claims
by the party invoking arbitration. It is well settled that a
frivolous claim can be dismissed with exemplary costs.
 It is therefore always 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.
 We may also notice this Court’s judgment in General Motors (I)
(P) Ltd. v. Ashok Ramnik Lal Tolat, (2015) 1 SCC 429, that
punitive damages follow when a court is approached with a
 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.
 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. Take for example a claim based on a
termination of a contract being illegal and consequent damages
thereto. If the claim succeeds and the termination is set aside as
 of the deposit made despite the fact that the aforesaid party
has an award against it. 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.
 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.
 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.
 For all these reasons, we strike down clause 25(viii) of the
notice inviting tender.
 Lombardi Engineering Ltd. v. State of Uttarakhand, Arbitration
Petition No. 43 of 2022. (2023 Judgment)
 Whether the Validity of the Pre-deposit Condition as Contained
in Clause 55 of the Agreement Can Be Looked Into And
 The submission for the respondent argued that this Court
while considering an application under Section 11(6) of the
Act 1996 for the appointment of arbitrator should not test
the validity or reasonableness of the conditions stipulated in
the arbitration clause on the touchstone or anvil of Article 14
of the Constitution, is without any merit or substance.
 Someone becomes ineligible by “Operation of Law”.
 The phrase “operation of law” is of wider connotation and

covers the Act 1996 as well as the Constitution of India and
any other Central or State Law.
 We should look into and discuss the Kelson’s Pure Theory of
 It is the Grundnorm which determines the content and validates
the other norms derived from it.
 Our Constitution is the paramount source of law in our country.
All other laws assume validity because they are in conformity with
the Constitution. The Constitution itself contain provisions that
clearly provide that any law which is in violation of its provisions
is unlawful and is liable to be struck down as contained in Article
13.
 This again unveils the principle of Grundnorm which says there
has to be a basic rule. The Constitution is the basic and the
ultimate source of law.
(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 concept of “party autonomy” as pressed into service by
the respondent cannot be stretched to an extent where it
violates the fundamental rights under the Constitution. 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 a settled position of law that there can be no consent
against the law and there can be no waiver of fundamental
rights (Olga Tellis and Others v. Bombay Municipal
Corporation and Others reported in (1985) 3 SCC 545.)
 Therefore, the condition contained in Clause 55 of the

Pre Deposit Clause in the Arbitration Agreement

Uploaded by

Copyright:

Available Formats

Pre Deposit Clause in the Arbitration Agreement

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Pre Deposit Clause in the Arbitration Agreement

Uploaded by

Copyright:

Available Formats

Pre-Deposit

“viii. It shall be an essential term of this contract that in order

 The phrase “operation of law” is of wider connotation and

(iii) Arbitration Agreement entered into by the parties in light of

(i) Section 7 of the Arbitration and Conciliation Act;

(ii)any other provisions of the Arbitration and Conciliation Act,

(iii)Constitution of India, 1950.

You might also like