Pre-deposit demand for arbitration illegal

A condition in a notice of tender demanding a pre-deposit of 10 per cent of the claim for invoking arbitration is illegal and arbitrary, the Supreme Court ruled last week in its judgment, Icomm Tele Ltd vs Punjab State Water Supply Board. Such a condition will discourage parties from taking the route of an alternative dispute resolution process. The judgment of the Punjab & Haryana High Court which took a contrary view was struck down. In this case, the board invited tenders for augmentation of the water supply and sewerage system in the state. Icomm was selected. When disputes arose, the terms of the contract were challenged. According to the board, the party invoking arbitration shall “deposit at call” 10 per cent of the claim to avoid frivolous demands. The Supreme Court stated that 10 per cent of a huge contract will amount to a large sum. It will deter an aggrieved party from invoking arbitration. It would act as a ‘clog’ according to the law of contract, while the arbitration law is meant to de-clog the courts burdened with huge arrears. “Any requirement to deposit would certainly amount to a clog on this process. Also, it is easy to visualise that often a deposit of 10 per cent of a huge claim would be even greater than court fees that may be charged for filing a suit in a civil court.” The judgment pointed out that if there are frivolous claims, the arbitrator or the court can impose a deterrent penalty on the guilty party.