Case BriefsSupreme Court

Supreme Court: In the case where a Notice Inviting Tender had a clause asking the parties invoking arbitration to furnish a “deposit-at-call” for 10% of the amount claimed, the bench of RF Nariman and Vineet Saran, JJ struck down the said clause on the premise 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.”

The Court was hearing the matter where 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. Clause 25(viii) of the Notice inviting Tender was challenged before the Court which read

“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.”

Noticing that a 10% deposit has to be made before any determination that a claim made by the party invoking arbitration is frivolous, the Court said that such a clause would be unfair and unjust and which no reasonable man would agree to.

The Court said that since 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. It also said:

“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.”

Striking down the said clause, the Court said 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.”

[ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board, 2019 SCC OnLine SC 361, decided on 11.03.2019]

Case BriefsHigh Courts

Uttaranchal High Court: The Bench of Sudhanshu Dhulia, J. stated that if the major part of the work was of civil nature then making the lead contractor from the civil department cannot be detrimental to the other non-civil contractors.

The petitioner who was a contractor and a proprietor of a firm was aggrieved by the tender notice inviting for civil and electrical work by the respondent. He has questioned the composite nature of the tender which according to him must have been separately called for taking into consideration the work which was both of civil and electrical engineering. He further contends that the nature of work has electrical component but experienced electrical contractors have been virtually ousted from the process by treating them as a ‘junior partner’ making it a violation under Articles 14 and 19 (1) (g) of the Constitution of India. The rebuttal placed by the respondents were that they acted in the above-stated manner to save time and money of the department as the major component of the work was civil work and only 20 to 30 per cent was reserved for the electrical plus they haven’t barred the petitioners from participating in the tender rather a joint venture was created so violation under no case could be claimed. 

The Court considering that amount of electrical work which formed a  small part of the entire venture and thus Civil Engineering being in the forefront does no harm and was not arbitrary. Accordingly there was no illegality if a composite contract was called for as that would best serve the interest of the State.  Hence the petition was dismissed.[Naveen Chandra Joshi v. State of Uttarakhand, 2018 SCC OnLine Utt 1062, order dated 11-07-2018]

Case BriefsForeign Courts

Supreme Court of the United States: The appeal lies before the Bench of Kavanaugh, J.

The facts of the case were such that the respondent Archer and White Sales Inc. sued Henry Schein for the violation of Federal and State anti-trust laws, seeking monetary and injunctive relief. The contract between the parties provided for arbitration to resolve any dispute arising between them except for actions seeking injunctive relief. Schein, therefore, requested the District Court to refer the matter to arbitration while Archer argued that this matter was not subject to arbitration owing to injunctive relief. The Fifth Circuit affirmed with Archer’s view. However, the Supreme Court vacated the judgment of the Fifth Circuit and held that parties to such a contract may refer to an arbitrator to decide the ‘gateway questions of arbitrability.’ The Court opined that a court cannot override the contract even if it thinks that the arbitrability claim is ‘wholly groundless.’

The case was remanded for further proceedings.[Henry Schein Inc. v. Archer and White Sales Inc., 2019 SCC OnLine US SC 1, decided on 08-01-2019]

Case BriefsHigh Courts

Bombay High Court: A Single Judge Bench comprising of S.B. Shukre, J. dismissed a petition filed challenging the orders of Collector, Gadchiroli and Additional Commissioner, Nagpur under Section 14(1)(g) of the Maharashtra Village Panchayats Act, 1958.

The petitioner, a candidate for Gram Panchayat elections, was disqualified under the said section by the orders impugned as the husband of the petitioner had entered into a contract with the Gram Panchayat for giving of a shop block belonging to the Gram Panchayat, and the petitioner, being his wife, was indirectly interested in the contract. The petitioner challenged the order on the reasoning that there was no contract executed between her husband and the Gram Panchayat, the execution being only of a rent agreement. According to her, the word contract used in Section 14(1)(g) has a restrictive meaning which has to be understood as referring only to those contracts which had been awarded by the Gram Panchayat for execution of some work of the Gram Panchayat. Secondly, the petitioner being only the wife, could not be said to having an indirect interest in the said contract.

The High Court found favour with the submission of counsel for the respondent that the word contract had nowhere been clarified in the Act by laying down that the word has to be understood only in the context of a particular type of contracts. In such circumstances, contract must be understood by the definition given in Section 2(h) of the Indian Contract Act, 1872, according to which even the rent agreement executed between the Gram Panchayat and the husband would be a contract. As to the second contention, it was held that mere relationship, by itself, would not determine the extent of interest in a contract and something more is required to be proved against of Gram Panchayat. In the instant case, the petitioner admitted that her family is maintained from the income earning from the business carried out from the rented premises. Thus, it was clear that she had an interest, and therefore the said rent agreement was to be treated as a contract in which the petitioner was having an interest. Resultantly, the Court found no fault with the order impugned. The petition was accordingly dismissed. [Gita Vijay Somankar v. Divisional Commr., Nagpur, 2018 SCC OnLine Bom 2943, decided on 03-10-2018]

Case BriefsHigh Courts

Delhi High Court: A Division Bench comprising of Ravindra Bhat and A.K. Chawla, JJ., dismissed a First Appeal against an order declining grant of interim relief under Section 9 of the Arbitration and Conciliation Act, 1996.

The contract between the parties was the result of bidding in a public tendering process. The consideration of the contract was over Rs. 69 crores, with the period of execution being of 15 months along with an option to apply for extension. The appellant was aggrieved by the termination of contract after several defects and deficiencies during performance were pointed out. The grievance of the appellant was threefold viz. against invocation of performance guarantee, mobilization of advance bank guarantee and alleged unlawful termination of contract.

The Court directed that the issue of wrongful termination was a matter to be decided on merits during the arbitral proceedings and proceeded to decide upon the issues of invocation.

On that issue, the Court held that the performance guarantee mandates the bank to honour without demur any demand by the principal, who is the real beneficiary of any sums, claimed by it as due under the contract. In other words, the bank cannot adjudicate as to whether the claim by the beneficiary was in fact determined by it in accordance with the underlying contract between it and a third party. It was further held, that guarantee is an independent contract and has only a referential connection to the contract between the two parties, who agree upon the execution of performance of a particular contract for which the bank guarantee is issued. In the circumstances, mere invocation of a guarantee does not provide valid grounds for interdicting the invocation of guarantee. [M/s Classic KSM Bashir JV v. Rites Ltd., 2018 SCC OnLine Del 9056, decided on 14-05-2018]

Case BriefsSupreme Court

Supreme Court: Stating that a property developer has to respect the contractual commitment, the 3-Judge Bench of Dipak Misra, Amitava Roy and A.M. Khanwilkar, JJ said that the developer has to live up to the terms of the contract and gain trust so that the people who dream of houses can repose faith in him.

In the case at hand, the 39 respondents had argued that their patience is on the burial pyre and they cannot wait any longer believing in the concept of optimism and expectation, for the appellant had not built the flats as assured, and in fact, compelled them to land up in such a financial crisis that they had never conceived of.

Taking note of the contention of the respondents, the Court said that the appellant by delaying or procrastinating the completion of the flats cannot base its stand on excuses or any subterfuge to advance the stand that the constructions take time. It is “flat” or “money” and nothing else.

The appellant had suggested that it would complete three towers by the end of April, 2017 and would hand over possession to some of the respondents by that time and further the respondents can be allowed to take some amount by direction of this Court that is to say that the respondents can be distributed Rs.5,00,00,000/- towards the principal and be handed over flats by the end of April, 2017 and some shall be given thereafter when the other towers are complete. The rest of the amount, that is, Rs.10,00,00,000/- that have been deposited before the Registry of this Court be allowed to be refunded to the appellant for facilitating the construction.

Considering the fact that the respondents were not interested in the flats and hadmade a demand for refund of money because they have fought the litigation with ceaseless vigour and enormous hope, the Court said that the principal amount deposited by the respondents amounts to Rs.16,55,02,525/-  as Rs.15,00,00,000/- have been invested and some interest has accrued, let the same be given to the respondents on pro rata basis on proper identification by the learned counsel. The Court directed that the appellant company is directed to deposit a further sum of Rs.2,00,00,000/-  within four weeks hence. [Unitech Residential Resorts Ltd. v. Atul Gupta, 2016 SCC OnLine SC 1155 , decided on 19.10.2016]

Case BriefsSupreme Court

Supreme Court: Considering the sad state of affairs of long drawn expensive and cumbersome trials to resolve disputes between two Government owned corporations and the fact that one of the parties in the case at hand had with considerable tenacity opposed the move aimed at a quick and effective resolution of the conflict and resultant quietus to the controversy by a reference of the disputes to arbitration in terms of the Arbitration and Conciliation Act, 1996, the bench of T.S. Thakur, CJ and R. Banumathi, J. referred the matter for adjudication to Justice K.G. Balakrishnan, Former Chief Justice of Supreme Court, who is hereby appointed as Sole Arbitrator to adjudicate upon all claims and counter claims which the parties may choose to file before him.

In the present case, the parties had entered into a contract for construction of a Coal Handling Plant and a Clause in the Contract provided for adjudication of disputes between the parties by way of arbitration. Disputes between the parties were referred for resolution in terms of the “permanent in-house administrative machinery” set up by the Government. Both the parties, upon being dissatisfied with the awards, challenged the award in appeals filed before the Law Secretary, Department of Legal Affairs, Ministry of Law and Justice in terms of the in-house mechanism provided by the Government. The appellant then filed a civil suit before the High Court of Delhi alleging that the Arbitral award passed by the appellate authority was according to the appellant illegal and vitiated by errors apparent on the face of the record, hence, liable to be set aside.

Discussing the question of remanding the case to the Civil Court, the Court noticed that an arbitral award under the Permanent Machinery of Arbitration may give quietus to the controversy if the same is accepted by the parties to the dispute. In cases, however, a party does not accept the award, as is the position in the case at hand, the arbitral award may not put an end to the controversy. Such an award being outside the framework of the law governing arbitration will not be legally enforceable in a court of law. Just because a Government owned company has resorted to the permanent procedure or taken part in the proceedings there can be no estoppel against its seeking redress in accordance with law. Making reference to a sole arbitrator for adjudication of all outstanding disputes between the two corporations, the Court held that the alternative to such arbitration is a long drawn expensive and cumbersome trial of the suit filed by the appellant before a civil court and the difficulties that beset the execution of an award made under a non-statutory administrative mechanism and that both these courses are unattractive with no prospects of an early fruition. [NORTHERN COALFIELD LTD v. HEAVY ENGINEERING CORP. LTD, 2016 SCC OnLine SC 697, decided on 13.07.2016]