Arbitrariness in Arbitration Clauses

“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 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.”

It is well settled that the terms of an invitation to tender are not open to judicial scrutiny, as they are in the realm of contract, unless they are arbitrary, discriminatory, or actuated by malice. A.L. Kalra v. The Project & Equipment Corporation of India Limited, [1984] 3 SCR 646 turned down a submission that arbitrariness is only a facet of discrimination. Arbitrariness is a separate and distinct facet of Article 14.

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. 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 being illegal and a damages claim of One Crore is finally granted by the Learned Arbitrator at only Ten Lakhs, only one-tenth of the deposit made will be liable to be returned to the successful party. The party who has lost in the Arbitration Proceedings will be entitled to forfeit nine-tenths 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.

Hon’ble Justice R.F. Nariman, M/s. ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board, [Civil Appeal No. 2713 of 2019].