REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2713 of 2019

(Arising out of SLP (Civil) No.3307 of 2018)

M/S ICOMM TELE LTD. …APPELLANT

VERSUS

PUNJAB STATE WATER SUPPLY

& SEWERAGE BOARD & ANR. …RESPONDENTS

J U D G M E N T

R.F. NARIMAN, J.

1.Leave granted.

2.In 2008, the Punjab State Water Supply & Sewerage Board,

Bhatinda 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. On 25.9.2008, the appellant company, which is

involved in civil/electrical works in India, was awarded the said

tender after having been found to be the best suited for the task. On

1

16.1.2009, a formal contract was entered into between the appellant

and respondent No. 2. It may be mentioned that the notice inviting

tender formed part and parcel of the formal agreement. Contained

in the notice inviting tender is a detailed arbitration clause. In this

matter, we are 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 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.”

3.The appellant had entered into similar contracts with

respondent No. 2 which contained the same arbitration clause. It

had therefore addressed letters to respondent No. 2 with regard to

appointment of arbitrator in those matters 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,

2

before the High Court of Punjab and Haryana. This writ petition was

dismissed by a judgment dated 14.9.2016 stating that such tender

condition can in no way be said to be arbitrary or unreasonable.

4.On 8.3.2017, 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.

5.Learned counsel appearing on behalf of the appellant has

argued that the arbitration clause contained in the tender condition

amounts to a contract of adhesion, and since there is unfair

bargaining strength between respondent No. 2 and the appellant,

this clause ought to be struck down following the judgment in

Central Inland Water Transport Corpn. v. Brojo Nath Ganguly,

(1986) 3 SCC 156. He has also argued that arbitration being an

alternative dispute resolution process, a 10% deposit would amount

to a clog on entering the aforesaid process. Further, claims may

ultimately be found to be untenable but need not be frivolous. Also,

frivolous claims can be compensated by heavy costs. Further, even

3

in the event that the award is in favour of the claimant, what can be

refunded to him is only in proportion to the amount awarded and the

rest is to be forfeited. This would also be a further arbitrary and

highhanded action on the part of respondent No. 2.

6.Learned counsel appearing on behalf of the respondents has

argued that there is no infraction of Article 14 in the present case. It

is clear that clause 25(viii) would apply to both the parties equally,

and as this is so, the said sub-clause cannot be struck down as

being discriminatory. Further, the principle contained in Central

Inland Water Transport Corpn. (supra) cannot possibly be applied

to commercial contracts. Also, in similar cases, this Court has not

entertained this kind of a challenge.

7.Having heard learned counsel for both parties, it will be seen

that 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. Clause 25(xv) is also material and is set out

hereinbelow:

“xv. No question relating to this contract shall be brought

before any civil court without first invoking and

completing the arbitration proceedings, if the issue is

4

covered by the scope of arbitration under this contract.

The pending arbitration proceedings shall not disentitle

the Engineer-in-charge to terminate the contract and to

make alternate arrangements for completion of the

works.”

8.From this clause, it also becomes clear that arbitration is

considered to be an alternative dispute resolution process and entry

to the civil court is sought to be taken away if the disputes between

the parties are covered by the arbitration clause.

9.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. Thus, in

Directorate of Education v. Educomp Datamatics Ltd., (2004) 4

SCC 19, this Court held:

“9. It is well settled now that the courts can scrutinise the

award of the contracts by the Government or its

agencies in exercise of their powers of judicial review to

prevent arbitrariness or favouritism. However, there are

inherent limitations in the exercise of the power of judicial

review in such matters. The point as to the extent of

judicial review permissible in contractual matters while

inviting bids by issuing tenders has been examined in

depth by this Court in Tata Cellular v. Union of India

[(1994) 6 SCC 651]. After examining the entire case-law

the following principles have been deduced:

5

“94. The principles deducible from the above are:

(1) The modern trend points to judicial restraint in

administrative action.

(2) The court does not sit as a court of appeal but

merely reviews the manner in which the decision

was made.

(3) The court does not have the expertise to

correct the administrative decision. If a review of

the administrative decision is permitted it will be

substituting its own decision, without the

necessary expertise which itself may be fallible.

(4) The terms of the invitation to tender cannot be

open to judicial scrutiny because the invitation to

tender is in the realm of contract. Normally

speaking, the decision to accept the tender or

award the contract is reached by process of

negotiations through several tiers. More often

than not, such decisions are made qualitatively by

experts.

(5) The Government must have freedom of

contract. In other words, a fair play in the joints is

a necessary concomitant for an administrative

body functioning in an administrative sphere or

quasi-administrative sphere. However, the

decision must not only be tested by the

application of Wednesbury principle of

reasonableness (including its other facts pointed

out above) but must be free from arbitrariness not

affected by bias or actuated by mala fides.

(6) Quashing decisions may impose heavy

administrative burden on the administration and

lead to increased and unbudgeted expenditure.””

(emphasis in original)

“12. It has clearly been held in these decisions that the

terms of the invitation to tender are not open to judicial

scrutiny, the same being in the realm of contract. That

the Government must have a free hand in setting the

6

terms of the tender. It must have reasonable play in its

joints as a necessary concomitant for an administrative

body in an administrative sphere. The courts would

interfere with the administrative policy decision only if it is

arbitrary, discriminatory, mala fide or actuated by bias. It

is entitled to pragmatic adjustments which may be called

for by the particular circumstances. The courts cannot

strike down the terms of the tender prescribed by the

Government because it feels that some other terms in

the tender would have been fair, wiser or logical. The

courts can interfere only if the policy decision is arbitrary,

discriminatory or mala fide.”

10.To similar effect is the decision in Global Energy Ltd. v.

Adani Exports Ltd., (2005) 4 SCC 435, where this Court held:

“10. The principle is, therefore, well settled that the terms

of the invitation to tender are not open to judicial scrutiny

and the courts cannot whittle down the terms of the

tender as they are in the realm of contract unless they

are wholly arbitrary, discriminatory or actuated by malice.

This being the position of law, settled by a catena of

decisions of this Court, it is rather surprising that the

learned Single Judge passed an interim direction on the

very first day of admission hearing of the writ petition and

allowed the appellants to deposit the earnest money by

furnishing a bank guarantee or a bankers' cheque till

three days after the actual date of opening of the tender.

The order of the learned Single Judge being wholly

illegal, was, therefore, rightly set aside by the Division

Bench.”

11.As has correctly been argued by learned counsel appearing on

behalf of the respondents, this court’s judgment in Central Inland

Water Transport Corpn. (supra), which lays down that contracts of

7

adhesion, i.e., contracts in which there is unequal bargaining power,

between private persons and the State are liable to be set aside on

the ground that they are unconscionable, does not apply where both

parties are businessmen and the contract is a commercial

transaction (see paragraph 89 of the said judgment). In this view of

the matter, the argument of the appellant based on this judgment

must fail.

12.In S.K. Jain v. State of Haryana, (2009) 4 SCC 357, this

Court dealt with an arbitration clause in an agreement which read as

follows:-

“11. Sub-clause (7) of Clause 25-A of the agreement

reads as follows:

“25-A. (7) It is also a term of this contract agreement

that where the party invoking arbitration is the

contractor, no reference for arbitration shall be

maintainable unless the contractor furnishes to the

satisfaction of the Executive Engineer in charge of the

work, a security deposit of a sum determined

according to details given below and the sum so

deposited shall, on the termination of the arbitration

proceedings be adjusted against the costs, if any,

awarded by the arbitrator against the claimant party

and the balance remaining after such adjustment in

the absence of any such costs being awarded, the

whole of the sum will be refunded to him within one

month from the date of the award—

8

Amount of claim Rate of

security deposit

1

.

For claims below Rs

10,000

2% of amount

claimed

2

.

For claims of Rs 10,000

and above and below Rs

1,00,000 and

5% of amount

claimed

3

.

For claims of Rs 1,00,000

and above

7% of amount

claimed.”

13.In upholding such a clause, this Court referred to the judgment

in Central Inland Water Transport Corpn. (supra) and

distinguished this judgment, stating that the concept of unequal

bargaining power has no application in the case of commercial

contracts. It then went on to hold:-

“14. It has been submitted by learned counsel for the

appellant that there should be a cap in the quantum

payable in terms of sub-clause (7) of Clause 25-A. This

plea is clearly without substance. It is to be noted that it

is structured on the basis of the quantum involved.

Higher the claim, the higher is the amount of fee

chargeable. There is a logic in it. It is the balancing factor

to prevent frivolous and inflated claims. If the appellants'

plea is accepted that there should be a cap in the figure,

a claimant who is making higher claim stands on a better

pedestal than one who makes a claim of a lesser

amount.”

9

14.It will be noticed that in this judgment there was no plea that

the aforesaid condition contained in an arbitration clause was

violative of Article 14 of the Constitution of India as such clause is

arbitrary. The only pleas taken were that the ratio of Central Inland

Water Transport Corpn. (supra) would apply and that there should

be a cap in the quantum payable by way of security deposit, both of

which pleas were turned down by this court. Also, the security

deposit made would, on the termination of the arbitration

proceedings, first be adjusted against costs if any awarded by the

arbitrator against the claimant party, and the balance remaining after

such adjustment then be refunded to the party making the deposit.

This clause is materially different from clause 25(viii), which, as we

have seen, makes it clear that in all cases the deposit is to be 10%

of the amount claimed and that refund can only be in proportion to

the amount awarded with respect to the amount claimed, the

balance being forfeited and paid to the other party, even though that

other party may have lost the case. This being so, this judgment is

wholly distinguishable and does not apply at all to the facts of the

present case.

10

15.In ABL International Ltd. v. Export Credit Guarantee

Corpn. of India Ltd., (2004) 3 SCC 553, this Court has held that

even within the contractual sphere, the requirement of Article 14 to

act fairly, justly and reasonably by persons who are “state”

authorities or instrumentalities continues. Thus, this Court held:

“23. It is clear from the above observations of this Court,

once the State or an instrumentality of the State is a

party of the contract, it has an obligation in law to act

fairly, justly and reasonably which is the requirement of

Article 14 of the Constitution of India. Therefore, if by the

impugned repudiation of the claim of the appellants the

first respondent as an instrumentality of the State has

acted in contravention of the abovesaid requirement of

Article 14, then we have no hesitation in holding that a

writ court can issue suitable directions to set right the

arbitrary actions of the first respondent…

xxx xxx xxx

27. From the above discussion of ours, the following

legal principles emerge as to the maintainability of a writ

petition:

(a) In an appropriate case, a writ petition as against a

State or an instrumentality of a State arising out of a

contractual obligation is maintainable.

xxx xxx xxx

53. From the above, it is clear that when an

instrumentality of the State acts contrary to public good

and public interest, unfairly, unjustly and unreasonably, in

its contractual, constitutional or statutory obligations, it

really acts contrary to the constitutional guarantee found

in Article 14 of the Constitution…”

11

16.Thus, it must be seen as to whether the aforesaid clause

25(viii) can be said to be arbitrary or discriminatory and violative of

Article 14 of the Constitution of India.

17.We agree with the learned counsel for the respondents that

the aforesaid clause cannot be said to be discriminatory in that it

applies equally to both respondent No. 2 and the appellant.

However, arbitrariness is a separate and distinct facet of Article 14.

In A.L. Kalra v. The Project & Equipment Corporation of India

Limited, [1984] 3 S.C.R. 646, this Court turned down a submission

that arbitrariness is only a facet of discrimination. The contention of

Shri Lal Narain Sinha was recorded thus (at page 661):-

“It was urged that in the absence of any specific pleading

pointing out whether any one else was either similarly

situated as the appellant or dissimilarly treated the

charge of discrimination cannot be entertained and no

relief can be claimed on the allegation of contravention of

Art. 14 or Art. 16 of the Constitution. It was submitted

that the expression discrimination imports the concept of

comparison between equals and if the resultant

inequality is pointed out in the treatment so meted out

the charge of discrimination can be entertained and one

can say that equal protection of law has been denied.

Expanding the submission, it was urged that the use of

the expression 'equality' in Art. 14 imports duality and

comparison which is predicated upon more than one

person of situation and in the absence of available

12

material for comparison, the plea of discrimination must

fail. As a corollary, it was urged that in the absence of

material for comparative evaluation not only the charge

of discrimination cannot be sustained but the executive

action cannot be struck down on the ground that the

action is per se arbitrary.”

18.This contention was negatived stating (at pages 662-663):-

“It thus appears well settled that Art. 14 strikes at

arbitrariness in executive/administrative action because

any action that is arbitrary must necessarily involve the

negation of equality. One need not confine the denial of

equality to a comparative evaluation between two

persons to arrive at a conclusion of discriminatory

treatment. An action per se arbitrary itself denies equal of

protection by law. The Constitution Bench pertinently

observed in Ajay Hasia's case [[1981] 2 S.C.R. 79] and

put the matter beyond controversy when it said 'wherever

therefore, there is arbitrariness in State action whether it

be of the legislature or of the executive or of an

"authority" under Article 12, Article 14 immediately

springs into action and strikes down such State action.’

This view was further elaborated and affirmed in D.S.

Nakara v. Union of India [[1983] 1 SCC 305]. In Maneka

Gandhi v. Union of India [[1978] 2 S.C.R. 621] it was

observed that Art. 14 strikes at arbitrariness in State

action and ensure fairness and equality of treatment. It is

thus too late in the day to contend that an executive

action shown to be arbitrary is not either judicially

reviewable or within the reach of Article 14.”

19.We have thus to see whether clause 25(viii) can be said to be

arbitrary and violative of Article 14 of the Constitution of India.

13

20.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. Thus, in Dnyandeo Sabaji

Naik v. Pradnya Prakash Khadekar, (2017) 5 SCC 496, this Court

held:

“14. Courts across the legal system—this Court not

being an exception—are choked with litigation. Frivolous

and groundless filings constitute a serious menace to the

administration of justice. They consume time and clog

the infrastructure. Productive resources which should be

deployed in the handling of genuine causes are

dissipated in attending to cases filed only to benefit from

delay, by prolonging dead issues and pursuing worthless

causes. No litigant can have a vested interest in delay.

Unfortunately, as the present case exemplifies, the

process of dispensing justice is misused by the

unscrupulous to the detriment of the legitimate. The

present case is an illustration of how a simple issue has

occupied the time of the courts and of how successive

applications have been filed to prolong the inevitable.

The person in whose favour the balance of justice lies

has in the process been left in the lurch by repeated

attempts to revive a stale issue. This tendency can be

curbed only if courts across the system adopt an

institutional approach which penalises such behaviour.

Liberal access to justice does not mean access to chaos

and indiscipline. A strong message must be conveyed

that courts of justice will not be allowed to be disrupted

by litigative strategies designed to profit from the delays

of the law. Unless remedial action is taken by all courts

here and now our society will breed a legal culture based

14

on evasion instead of abidance. It is the duty of every

court to firmly deal with such situations. The imposition of

exemplary costs is a necessary instrument which has to

be deployed to weed out, as well as to prevent the filing

of frivolous cases. It is only then that the courts can set

apart time to resolve genuine causes and answer the

concerns of those who are in need of justice. Imposition

of real time costs is also necessary to ensure that access

to courts is available to citizens with genuine grievances.

Otherwise, the doors would be shut to legitimate causes

simply by the weight of undeserving cases which flood

the system. Such a situation cannot be allowed to come

to pass. Hence it is not merely a matter of discretion but

a duty and obligation cast upon all courts to ensure that

the legal system is not exploited by those who use the

forms of the law to defeat or delay justice. We commend

all courts to deal with frivolous filings in the same

manner.”

(Emphasis supplied)

21.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.

22.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 frivolous

litigation. This court held:-

15

“16. We proceed to deal with the issue of correctness of

finding recorded by the National Commission for

awarding punitive damages. Before doing so, we may

notice that the respondent complainant appearing in

person, in his written submissions has raised various

questions, including the question that the appellant

should be asked to account for the proceeds of the

vehicles sold by it. Admittedly, the vehicle in question has

been ordered to be handed back to the appellant against

which the respondent complainant has no claim. Thus,

the plea raised is without any merit. The other issue

raised for further punitive damages of Rs. 100 crores and

also damages for dragging him in this Court, merits no

consideration being beyond the claim of the complainant

in the complaint filed by him. Moreover, no litigant can be

punished by way of punitive damages for merely

approaching this Court, unless its case is found to be

frivolous.”

23.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

16

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. 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

17

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.

24.Further, it is also 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. This Court in State of J&K v.

Dev Dutt Pandit, (1999) 7 SCC 339, has held:-

“23. Arbitration is considered to be an important

alternative disputes redressal process which is to be

encouraged because of high pendency of cases in the

courts and cost of litigation. Arbitration has to be looked

up to with all earnestness so that the litigant public has

faith in the speedy process of resolving their disputes by

this process. What happened in the present case is

certainly a paradoxical situation which should be

avoided. Total contract is for Rs. 12,23,500. When the

contractor has done less than 50% of the work the

contract is terminated. He has been paid Rs 5,71,900. In

a Section 20 petition he makes a claim of Rs. 39,47,000

and before the arbitrator the claim is inflated to Rs.

18

63,61,000. He gets away with Rs. 20,08,000 with interest

at the rate of 10% per annum and penal interest at the

rate of 18% per annum. Such type of arbitration

becomes subject of witticism and do not help the

institution of arbitration. Rather it brings a bad name to

the arbitration process as a whole. When claims are

inflated out of all proportions not only that heavy cost

should be awarded to the other party but the party

making such inflated claims should be deprived of the

cost. We, therefore, set aside the award of cost of Rs.

7500 given in favour of the contractor and against the

State of Jammu and Kashmir.”

(Emphasis supplied)

25.Several judgments of this Court have also reiterated that the

primary object of arbitration is to reach a final disposal of disputes in

a speedy, effective, inexpensive and expeditious manner. Thus, in

Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd.,

(2017) 2 SCC 228, this court held:

“39. In Union of India v. U.P. State Bridge Corpn.

Ltd. [(2015) 2 SCC 52] this Court accepted the view [O.P.

Malhotra on the Law and Practice of Arbitration and

Conciliation (3rd Edn. revised by Ms Indu Malhotra,

Senior Advocate)] that the A&C Act has four foundational

pillars and then observed in para 16 of the Report [sic]

that:

“16. First and paramount principle of the first pillar is

‘fair, speedy and inexpensive trial by an Arbitral

Tribunal’. Unnecessary delay or expense would

frustrate the very purpose of arbitration.

Interestingly, the second principle which is recognised

in the Act is the party autonomy in the choice of

procedure. This means that if a particular procedure is

19

prescribed in the arbitration agreement which the

parties have agreed to, that has to be generally

resorted to.””

(Emphasis in original)

26.Similarly, in Union of India v. Varindera Constructions Ltd.,

(2018) 7 SCC 794, this Court held:-

“12. The primary object of the arbitration is to reach a

final disposition in a speedy, effective, inexpensive and

expeditious manner. In order to regulate the law

regarding arbitration, legislature came up with legislation

which is known as Arbitration and Conciliation Act, 1996.

In order to make arbitration process more effective, the

legislature restricted the role of courts in case where

matter is subject to the arbitration. Section 5 of the Act

specifically restricted the interference of the courts to

some extent. In other words, it is only in exceptional

circumstances, as provided by this Act, the court is

entitled to intervene in the dispute which is the subject-

matter of arbitration. Such intervention may be before, at

or after the arbitration proceeding, as the case may be.

In short, court shall not intervene with the subject-matter

of arbitration unless injustice is caused to either of the

parties.”

27.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.

20

28.For all these reasons, we strike down clause 25(viii) of the

notice inviting tender. This clause being severable from the rest of

clause 25 will not affect the remaining parts of clause 25. The

judgment of the High Court is set aside and the appeal allowed.

………..……………… J.

(R. F. Nariman)

…..…………………… J.

(Vineet Saran)

New Delhi.

March 11, 2019.

21