REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIIL APPELLATE JURISDICTION

CIVIL APPEAL NO. OF 2009

(Arising out of SLP (C) No. 21552 of 2007)

S.K. Jain .....Appellant

Versus

State of Haryana and Anr. ....Respondents

J U D G M E N T

Dr. ARIJIT PASAYAT, J.

1.Leave granted.

2.Challenge in this appeal is to the order passed by a Division Bench of

the Punjab and Haryana High Court dismissing the writ petition filed by the

appellant under Section 226 of the Constitution of India, 1950 ( in short the

‘Constitution’). Prayer was to quash the Memo No.428 dated 10.1.2007

directing the appellant to deposit the amount of about Rs.1.81 crores which

is 7% of the total amount claimed by the appellant before the Arbitral

Tribunal (hereinafter referred to as the ‘Tribunal’).

3.Background facts in a nutshell are as follows:

The appellant is a contractor, who was allotted work of constructing

Haryana Government office building in Sector 17, Chandigarh. On 4-3-

1992 an agreement was entered into between the parties, which incorporated

sub-clause (7) of clause 25-A providing for arbitration in case of any

dispute. Some differences between the parties regarding payment in respect

of allotted work had arisen which resulted in referring the dispute to the

three members Tribunal. The appellant filed his claim before the Tribunal.

The respondent-State filed its objection to the claim by principally

submitting that the contractor has to comply with the mandatory

requirements of sub-clause (7) of Clause 25-A of the agreement dated

4.3.1992 which obliged the appellant to deposit 7% of the total claim made.

The amount so calculated comes to Rs.1,81,14,845/-. The Tribunal

sustained the objection and after placing reliance on a judgment of this

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Court in Municipal Corporation, Jabalpur v. M/s Rajesh Construction

Company (JT (2007 (5) SC 450) has opined as follows:

“In view of the decision of the Supreme Court, referred

to above, as suggested on behalf of the respondent, the

claimant is directed to deposit Rs. 1,81,14,815/- i.e 7%

of the amount claimed in the statement of claim with the

respondent and further arbitration proceedings would

proceed only thereafter. The claimant was to comply

with the above condition in agreement before steps could

be taken to start arbitration proceedings. Hence, at this

stage Arbitrators cannot assume jurisdiction to proceed

with the arbitration. While allowing objection petition

filed under Section 16 of the Arbitration and

Conciliation Act, it is so ordered as above, accordingly.

Challenge before the High Court was that the Arbitration and

Conciliation Act, 1996 (in short the ‘Act’) does not permit the parties to

contract out of the provisions of the Act, and therefore the prescription

under Sub-Clause (7) of Clause 25-A of the agreement was in conflict with

the provisions of Section 31(8) read with Section 38 of the Act. It was

submitted that the costs involved cannot be more than Rs.20 crores and,

therefore, the demand of Rs.1.81 crores which is 7% of the total amount

claimed is wholly arbitrary, unreasonable and capricious. The High Court

did not find any substance in the plea and held that the challenge to the

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legality of Sub-Clause (7) of Clause 25-A of the agreement is without any

substance. Accordingly, the writ petition was dismissed.

4.It is submitted by learned counsel for the appellant that Sub-clause (7)

of Clause 25-A incorporated in the agreement was a result of the unequal

bargaining power of the parties and since the Government is not required to

make the deposit, it is unconscionable and, therefore, the High Court has

erroneously dismissed the writ petition. Additionally, it is submitted that the

true effect of Sections 31(8) and 38 of the Act has not been kept in view. It

is also submitted that the contract is in conflict with Sections 23 and 28 of

the Indian Contract Act, 1872 (in short the ‘Contract Act’).

5.Learned counsel for the respondents on the other hand supported the

judgment of the High Court.

6.It is to be noted that the plea relating to unequal bargaining power

was made with great emphasis based on certain observations made by this

Court in Central Inland Water Transport Corporation Ltd. and Anr. v. Brojo

Nath Ganguly and Anr. (1986 (3) SCC 156). The said decision does not in

any way assist the appellant, because at para 89 it has been clearly stated

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that the concept of unequal bargaining power has no application in case of

commercial contracts.

7.In Central Bank of India Ltd. v. Hartford Fire Insurance Co. Ltd.

(AIR 1965 SC 1288) it was observed at para 5 as follows:

“5. The contention of the appellant is based on the

interpretation of clause 10. Now it is commonplace that

it is the court’s duty to give effect to the bargain of the

parties according to their intention and when that bargain

is in writing the intention is to be looked for in the words

used unless they are such that one may suspect that they

do not convey the intention correctly. If those words are

clear, there is very little that the court has to do. The

court must give effect to the plain meaning of the words

however it may dislike the result. We have earlier set out

clause 10 and we find no difficulty or doubt as to the

meaning of the language there used. Indeed the language

is the plainest. The clause says “This Insurance may be

terminated at any time at the request of the Insured”, and

“The Insurance may also at any time be terminated at the

instance of the Company.” These are all the words of the

clause that matter for the present purpose. The words “at

any time” can only mean “at any time the party

concerned likes”. Shortly put clause 10 says “Either

party may at its will terminate the policy.” No other

meaning of the words used is conceivable.”

8.In General Assurance Society Ltd. v. Chandmull Jain and Anr. (AIR

1966 SC 1644 at para 11) the decision was re-iterated as follows:

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“11. A contract of insurance is a species of commercial

transactions and there is a well established commercial

practice to send cover notes even prior to the completion

of a proper proposal or while the proposal is being

considered or a policy is in preparation for delivery. A

cover note is a temporary and limited agreement. It may

be self-contained or it may incorporate by reference the

terms and conditions of the future policy. When the

cover note incorporates the policy in this manner, it does

not have to recite the term and conditions, but merely to

refer to a particular standard policy. If the proposal is for

a standard policy and the cover note refers to it, the

assured is taken to have accepted the terms of that

policy. The reference to the policy and its terms and

conditions may be expressed in the proposal or the cover

note or even in the letter of acceptance including the

cover note. The incorporation of the terms and

conditions of the policy may also arise from a

combination of references in two or more documents

passing between the parties. Documents like the

proposal, cover note and the policy are commercial

documents and to interpret them commercial habits and

practice cannot altogether be ignored. During the time

the cover note operates, the relations of the parties are

governed by its terms and conditions, if any, but more

usually by the terms and conditions of the policy

bargained for and to be issued. When this happens the

terms of the policy are incipient but after the period of

temporary cover, the relations are governed only by the

terms and conditions of the policy unless insurance is

declined in the meantime. Delay in issuing the policy

makes no difference. The relations even then are

governed by the future policy if the cover notes give

sufficient indication that it would be so. In other respects

there is no difference between a contract of insurance

and any other contract except that in a contract of

insurance there is a requirement of uberrima fides i.e.

good faith on the part of the assured and the contract is

likely to be construed contra proferentem that is against

the company in case of ambiguity or doubt. A contract is

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formed when there is an unqualified acceptance of the

proposal. Acceptance may be expressed in writing or it

may even be implied if the insurer accepts the premium

and retains it. In the case of the assured, a positive act on

his part by which he recognises or seeks to enforce the

policy amounts to an affirmation of it. This position was

clearly recognised by the assured himself, because he

wrote, close upon the expiry of the time of the cover

notes, that either a policy should be issued to him before

that period had expired or the cover note extended in

time. In interpreting documents relating to a contract of

insurance, the duty of the court is to interpret the words

in which the contract is expressed by the parties, because

it is not for the court to make a new contract, however

reasonable, if the parties have not made it themselves.

Looking at the proposal, the letter of acceptance and the

cover notes, it is clear that a contract of insurance under

the standard policy for fire and extended to cover flood,

cyclone etc. had come into being.”

Sub-Clause (7) of Clause 25-A of the agreement

reads as follows:

“(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 cost, if

any, awarded by the arbitrator against the claimant party

and the balance remaining after such adjustment in the

absence of any such cost being awarded, the whole of the

sum will be refunded to him within one month from the

date of the award-

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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 5% of amount claimed

above and below Rs.1,00,000/-

and

3.For claims of Rs.1,00,000/- and 7% of amount

claimed.

above

9.So far as the plea relating to Sub-Section (8) of Section 31 and

Section 38 are concerned they read as follows:

“31-Form and contents of arbitral award:-

xx xx xx

(8)Unless otherwise agreed by the parties-

(a)the costs of an arbitration shall be fixed by the

arbitral tribunal;

(b)the arbitral tribunal shall specify-

(i)the party entitled to costs,

(ii)the party who shall pay the costs,

(iii)the amount of costs or method of

determining that amount, and

(iv)the manner in which the costs shall be paid.

Explanation- For the purpose of clause (a), “costs”

means reasonable costs relating to-

(i)the fees and expenses of the arbitrators and

witnesses,

(ii)legal fees and expenses,

(iii)any administration fees of the institution

supervising the arbitration, and

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(iv)any other expenses incurred in connection

with the arbitral proceedings and the arbitral

award.

38. Deposits- (1) The arbitral tribunal may fix the

amount of the deposit or supplementary deposit, as the

case may be, as an advance for the costs referred to in

sub-section (8) of Section 31, which it expects will be

incurred in respect of the claim submitted to it.

Provided that where apart from the claim a counter

claim has been submitted to the arbitral tribunal, it may

fix separate amount of deposit for the claim and counter

claim.

(2)The deposit referred to in sub-section (1) shall be

payable in equal shares by the parties.

Provided that where one party fails to pay his

share of the deposit, the other party may pay that share:

Provided further that where the other party also

does not pay the aforesaid share in respect of the claim

or the counter claim, the arbitral tribunal may suspend or

terminate the arbitral proceedings in respect of such

claim or counter claim as the case may be.

(3)Upon termination of the arbitral proceedings, the

arbitral tribunal shall render an accounting to the parties

of the deposits received and shall return any unexpended

balance to the party or parties, as the case may be.”

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10.A bare perusal of the aforesaid provisions clearly shows that the

provision is to operate in the absence of agreement with regard to cost. It

cannot be pressed into service to get over sub-clause (7) of Clause 25-A.

11.In addition to the various pleas, the stand taken by the appellant is

squarely answered by what has been stated by this Court in Assistant Excise

Commissioner and Ors. v. Issac Peter and Ors. (1994 (4) SCC 104). At para

26 it has been stated as follows:

“26. Learned counsel for respondents then submitted that

doctrine of fairness and reasonableness must be read into

contracts to which State is a party. It is submitted that the

State cannot act unreasonably or unfairly even while

acting under a contract involving State power. Now, let

us see, what is the purpose for which this argument is

addressed and what is the implication? The purpose, as

we can see, is that though the contract says that supply of

additional quota is discretionary, it must be read as

obligatory — at least to the extent of previous year’s

supplies — by applying the said doctrine. It is submitted

that if this is not done, the licensees would suffer

monetarily. The other purpose is to say that if the State is

not able to so supply, it would be unreasonable on its

part to demand the full amount due to it under the

contract. In short, the duty to act fairly is sought to be

imported into the contract to modify and alter its terms

and to create an obligation upon the State which is not

there in the contract. We must confess, we are not aware

of any such doctrine of fairness or reasonableness. Nor

could the learned counsel bring to our notice any

decision laying down such a proposition. Doctrine of

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fairness or the duty to act fairly and reasonably is a

doctrine developed in the administrative law field to

ensure the rule of law and to prevent failure of justice

where the action is administrative in nature. Just as

principles of natural justice ensure fair decision where

the function is quasi-judicial, the doctrine of fairness is

evolved to ensure fair action where the function is

administrative. But it can certainly not be invoked to

amend, alter or vary the express terms of the contract

between the parties. This is so, even if the contract is

governed by statutory provisions, i.e., where it is a

statutory contract — or rather more so. It is one thing to

say that a contract — every contract — must be

construed reasonably having regard to its language. But

this is not what the licensees say. They seek to create an

obligation on the other party to the contract, just because

it happens to be the State. They are not prepared to apply

the very same rule in converse case, i.e., where the State

has abundant supplies and wants the licensees to lift all

the stocks. The licensees will undertake no obligation to

lift all those stocks even if the State suffers loss. This

one-sided obligation, in modification of express terms of

the contract, in the name of duty to act fairly, is what we

are unable to appreciate. The decisions cited by the

learned counsel for the licensees do not support their

proposition. In Dwarkadas Marfatia v. Board of

Trustees of the Port of Bombay it was held that where a

public authority is exempted from the operation of a

statute like Rent Control Act, it must be presumed that

such exemption from the statute is coupled with the duty

to act fairly and reasonably. The decision does not say

that the terms and conditions of contract can be varied,

added or altered by importing the said doctrine. It may be

noted that though the said principle was affirmed, no

relief was given to the appellant in that case. Shrilekha

Vidyarthi v. State of U.P. was a case of mass termination

of District Government Counsel in the State of U.P. It

was a case of termination from a post involving public

element. It was a case of non-government servant

holding a public office, on account of which it was held

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to be a matter within the public law field. This decision

too does not affirm the principle now canvassed by the

learned counsel. We are, therefore, of the opinion that in

case of contracts freely entered into with the State, like

the present ones, there is no room for invoking the

doctrine of fairness and reasonableness against one party

to the contract (State), for the purpose of altering or

adding to the terms and conditions of the contract,

merely because it happens to be the State. In such cases,

the mutual rights and liabilities of the parties are

governed by the terms of the contracts (which may be

statutory in some cases) and the laws relating to

contracts. It must be remembered that these contracts are

entered into pursuant to public auction, floating of

tenders or by negotiation. There is no compulsion on

anyone to enter into these contracts. It is voluntary on

both sides. There can be no question of the State power

being involved in such contracts. It bears repetition to

say that the State does not guarantee profit to the

licensees in such contracts. There is no warranty against

incurring losses. It is a business for the licensees.

Whether they make profit or incur loss is no concern of

the State. In law, it is entitled to its money under the

contract. It is not as if the licensees are going to pay

more to the State in case they make substantial profits.

We reiterate that what we have said hereinabove is in the

context of contracts entered into between the State and

its citizens pursuant to public auction, floating of tenders

or by negotiation. It is not necessary to say more than

this for the purpose of these cases. What would be the

position in the case of contracts entered into otherwise

than by public auction, floating of tenders or negotiation,

we need not express any opinion herein.”

12.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

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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.

13.Above being the position, the appeal is clearly without merit,

deserves dismissal which we direct.

………………………………J.

(Dr. ARIJIT PASAYAT)

………………………………J.

(V.S. SIRPURKAR)

…………………………..…..J.

(ASOK KUMAR GANGULY)

New Delhi,

February 23, 2009

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