DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

CONTRACT LAW - I
PROJECT – CASE COMMENT ON M/S ICOMM TELE V PUNJAB
STATE WATER SUPPLY & SEWERAGE BOARD

SUBMITTED TO- SUBMITTED BY

Contents
INTRODUCTION .................................................................................................................................. 3

FACT OF THE CASE ............................................................................................................................ 3

ISSUE BEHIND THE COURT .............................................................................................................. 4

LAWS (STATUES AND CASE LAWS) ............................................................................................... 5

ARGUMENTS OF THE APPEALANT................................................................................................. 5

ARGUMENTS OF RESPONDENT ....................................................................................................... 6

JUDGEMENT......................................................................................................................................... 6

CRITICAL ANALYSIS ......................................................................................................................... 8

BIBLIOGRAPHY ................................................................................................................................... 9
 M/S Icomm Tele Ltd. v Punjab State Water Supply & Sewerage Board

(Rohinton Fali Nariman and Vineet Saran)

(2019) 4 SCC 401

INTRODUCTION

Freedom of contract is the basic right of an individual to enter into a contract. It says that if two
parties have entered into a contract with their free consent the contract should be enforced on
those terms. It implies that the freedom of contract ultimately rests on the consent of the parties.
Earlier the freedom of contract was treated as sacrosanct but over the period of time it has been
realised that the consenting parties always not consent with their free consent. Therefore, a
significant dilution has been witnessed in freedom of contract. The Indian courts has cleared
the stand that the freedom of contract can be tested in those contract cases which include
government and a commercial body. It can’t be question in those contracts which take place
between purely commercial body. This stand has been clarified further in the recent case of
icomm tele ltd. Vs Punjab state water supply which is decided in the year 2019.

FACT OF THE CASE

The Punjab Water Supply Sewage Board (Respondent) issued a tender for inviting extension
and expansion of water supply, sewage system, and sewage treatment plant for the benefit and
welfare of the nearby villagers. M/S Icomm Tele Ltd. (the contractor) (Appellant) was
eventually awarded the tender. Accordingly, a formal contract was entered between the State
Board and the Contractor with the notice Inviting the tender forming the part and parcel of the
contract. The arbitration was defined under Clause 25(viii) of the notice inviting tender.

The arbitration clause in question read as follows:

‘viii. It shall be essential term of the 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.’

Also, clause 25(xv) read as follows:

“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 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.”

When disputes arose and arbitration was subsequently invoked, the Contractor sought waiver
of the pre-deposit of ten percent of the claim amount. On such a request being ignored by the
other party, the Contractor approached the High court of Punjab and Haryana challenging the
validity of such a pre-deposit requirement. However, the High Court did not find the condition
to be arbitrary or unreasonable, thereby refusing to strike it down. The Contractor accordingly
approached the supreme Court to decide whether such a clause was in fact arbitrary and/or
discriminatory, violative of article 14 of the constitution of India and therefore liable to be set
aside.

ISSUE BEFORE THE COURT

Whether the arbitration clause 25 (viii) mandating a ten percent pre-deposit of the amount
claimed prior to the invocation of arbitration can be said to be arbitrary or discriminatory and
therefore, in violation of Article 14 of the Constitution of India?
 LAWS (STATUES AND CASE LAWS)
Laws

Indian Contract Act, 1876

Arbitration and Conciliation Act, 1996

Constitution of India - Article 14

Case laws

Central Inland Water Transport Corpn. v Brojo Nath Ganguly - (1986) 3 SCC 156

Directorate of Education v. Educomp Datamatics Ltd. – (2004) 4 SCC 19

ABL international Ltd. V Export Credit Guarantee Corpn. Of India Ltd. – (2004) 3 SCC 553

Dnyandeo Sabaji Naik v. Pradnya Prakash Khadekar – (2017) 5 SCC 496: (2017) 3 SCC (Civ)
189

ARGUMENTS OF THE APPEALANT

The Contractor argued that the arbitration clause amounts to a contract of adhesion since there
is unfair bargaining power exist between him and the State Board due to which it should be
struck down in keeping with the principals laid down in Central Inland Water Transport Corpn.
v Brojo Nath Ganguly1.

He argued that arbitration being an alternative dispute resolution process, a 10 percent deposit
would amount to 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.

Lastly, he argued that such a clause was arbitrary and violative of Article 14 as even if the
award is in favour of a claimant, what would be refunded is only in proportion to the actual

1
Central Inland Water Transport Corpn v Brojo Nath Ganguly, (1986) 3 SCC 156
amount awarded w.r.t the amount claimed with the rest being forfeited to respondent, despite
it having lost the case.

ARGUMENTS OF RESPONDENT

The State Board countered the arguments against Clause 25(viii) as discriminatory, stating that
there is no such infraction of Article 14 since the said clause would apply to both parties
equally, and this being the case, the clause cannot be struck down as being discriminatory. It
further submitted that Central Inland Water Transport Corpn. Which lays down that contract
of adhesion i.e., contracts in which there is unequal bargaining power between private persons
and the State are liable to be set aside because they are unconscionable, does not apply where
both parties are businessmen and where the contract is a commercial transaction.

JUDGEMENT

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
(Directorate of Education v. Educomp Datamatics Ltd.2).

The court held that the clause can be violative of Article 14 if it is found to be discriminatory
or arbitrary. It agreed with the State Board’s argument that the concept of unequal bargaining
does not apply to commercial contracts and that therefore the said clause could not be said to
be discriminatory. The reason being that businessmen ought to be aware of the nature of
commercial transactions and therefore cannot use the argument of unequal bargaining power
of their advantage. However, it placed reliance on ABL international Ltd. V Export Credit
Guarantee Corpn. Of India Ltd3. To hold 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.

2
Directorate of Education v Educomp Datamatics Ltd, (2004) 4 SCC 19
3
ABL International Ltd v Export Credit Guarantee Corpn of India Ltd, (2004) 3 SCC 553
The Court thus opined that conditions laid down in the arbitration clause are arbitrary (even if
not discriminatory) for the following reasons:

1) There is no nexus between frivolous claims and the condition of 10 percent pre-deposit
since the pre-deposit amount is a pre-condition regardless of whether the claim is frivolous
or genuine. 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 held in Dnyandeo
Sabaji Naik v. Pradnya Prakash Khadekar4. 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. Frivolous claims can be
avoided by imposing exemplary costs and therefore an arbitrary condition of pre-deposit
such as in the clause in question need not be resorted to.
2) Given the fact that the said clause envisaged refund only in proportion to the amount
awarded, with the balance being forfeited to the other party, even though such a party may
have lost the case. 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, the same is certainly arbitrary and
violative of article 14, even if not discriminatory.

The court emphasised that arbitration is to be encouraged because of high pendency of cases
and costs of litigation. It pointed out that several judgements have reiterated that the primary
object of arbitration is to reach a final disposal of disputes in a speedy, effective, inexpensive
and expeditious manner. A deposit of 10 percent of a huge claim would be far greater than any
court fee that may be charged for filling a suit, it observed. Considering this, the court opined
that deterring a party to an arbitration, contrary to the object of de-clogging the court system,
and would render the arbitral process ineffective and expensive.

Having considered the above, the court went on to strike down the said clause and allowed the
appeal of the contractor.

4
Dnyandeo Sabaji Naik v Pradnya Prakash Khadekar, (2017) 5 SCC 496
 CRITICAL ANALYSIS

In the present case the Indian Supreme Court held an arbitration clause mandating a contractor
of a State’s Water Supply and Sewerage Board (the State Board) to furnish a pre-deposit of ten
percent of the amount of its claim in arbitration at the time of invocation of arbitration, as
arbitrary and unconstitutional. In doing so, the Court re-affirmed the primary purpose of
arbitration as ‘de-clogging the court system.’ The Court held that such a pre-deposit clause was
itself a ‘clog’ on entering the arbitral process and would render the same impermissibly
‘ineffective and expensive.’

The court has put reliance on various arguments used in various cases which held govt. and its
instrumentalities liable for discriminatory and arbitrary act that are in contravention to the
constitution. Subsequently the court has rightly applied those principles in present case in
holding the respondent liable.

In the recent past, we have witnessed courts are increasingly adopting a pro-arbitration
approach by refraining from interfering in the arbitral process. As we know very well about the
Indian judicial system, due to huge population of India and very less judicial officers for this
large population, overburdening of judicial system leads to huge clogging of cases. Also, the
duration of trail is very lengthy, due to which they are emphasising on alternate dispute
resolution mechanism such as arbitration for commercial disputes, which will be very helpful
in de-clogging of cases and reduce the burden on judiciary. Also, it is less expensive and speedy
way for justice. In this judgement however, is a unique example of a court forwarding the object
of arbitration by in fact taking a significant and bold step of ‘interfering’ and correcting a
commercial understanding between parties that was found to be arbitrary and discouraging
towards the arbitration process.

As in this case the clause 25 (viii) can be proved discouraging for arbitration and would run
contrary to the primary object of arbitration, which is to achieve the final disposal of disputes
in a speedy, effective inexpensive and expeditious manner. As in large tenders like this case
the 10 percent of the total damage claim will be very huge, therefore unreasonable. Also, the
court has already set precedent in Dnyandeo Sabaji Naik v. Pradnya Prakash Khadekar to use
exemplary damages to get prevent from frivols claims. In that case court held that “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”. So, it was a needed decision of the hour by
the Supreme Court.

Though this judgement, the judiciary has demonstrated the ideal way in which courts may play
a guiding role in the arbitral process by stepping in constructively when parties may overstep
the very purpose of the constitution or may act against the very objective of arbitration for
which it is prevalent. While maintaining utmost reverence for the party autonomy, the very
crux of alternative dispute resolution mechanism. Parties should be mindful that although
commercial contracts may be protected from judicial scrutiny, they are still required to be fair,
just and reasonable. The judgement was delivered by the Rohinton Fali Nariman and Vineet
Saran, JJ.

BIBLIOGRAPHY

● https://www.wikipedia.org/
● https://byjus.com/
● SSC Online
● Avtar Singh, Contract and Specific Relief, Eastern Book Company, Lucknow, 12th
edition.