Pre-Deposit Clauses To Invoke Arbitration Makes Arbitral Process Ineffective And Expensive

In CIVIL APPEAL NO. 2713 of 2019, M/S ICOMM TELE LTD. vs PUNJAB STATE WATER SUPPLY & SEWERAGE BOARD, the Supreme Court down struck down a clause in tender wherein any party invoking arbitration was supposed to furnish a “deposit-at-call” for ten percent of the amount claimed. The said clause was introduced in order to avoid frivolous claims. The Appellant’s challenge against the said clause was dismissed by the High Court.

On appeal, the Supreme Court held that the primary object of arbitration is to reach a final disposal of disputes in a speedy, effective, inexpensive and expeditious manne. 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. 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.

The Supreme Court finally observed that pre-deposit clauses to invoke arbitration would render the arbitral process ineffective and expensive.

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