Court Can Examine If Arbitration Clause Is Arbitrary & Violates Article 14 While Considering S.11(6) Application : Supreme Court


Chambers of Ishaan Garg
Ch. No. 217, Western Wing, District & Sessions Court, Tis Hazari, New Delhi, Delhi 110054
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In a significant judgment, the Supreme Court held that a clause in an arbitration agreement which is not in consonance with the Constitution cannot be enforced. The Court further held that it can examine if the arbitration clauses are manifestly arbitrary and violative of Article 14 of the Constitution while considering an application for appointment of arbitrator.

A bench comprising Chief Justice of India DY Chandrachud, Justices JB Pardiwala and Manoj Misra was deciding an application filed by Lombardi Engineering Ltd., a Swiss company, under Section 11(6) of the Arbitration and Conciliation Act 1996 seeking appointment of arbitrator in a dispute with the State of Uttarakhand.

The company filed the application before the Supreme Court taking objection to two clauses in the arbitration agreement - one, the condition that 7% of the total claim must be pre-deposited for invoking the arbitration clause; two, the discretion vested with the Principal Secretary/Secretary (Irrigation) to appoint a sole arbitrator.

Issues considered by the Court

The Court framed the following issues :
(i) Whether the dictum as laid down in ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Another(2019) can be made applicable to the case in hand more particularly when Clause 55 of the General Conditions of Contract provides for a pre-deposit of 7% of the total claim for the purpose of invoking the arbitration clause?

(ii) Whether there is any direct conflict between the decisions of this Court in S.K. Jain v. State of Haryana(2009) and ICOMM Tele Limited (supra)?
(iii) Whether this Court while deciding a petition filed under Section 11(6) of the Act 1996 for appointment of a sole arbitrator can hold that the condition of pre-deposit stipulated in the arbitration clause as provided in the Contract is violative of the Article 14 of the Constitution of India being manifestly arbitrary?

(iv) Whether the arbitration Clause No. 55 of the Contract empowering the Principal Secretary/Secretary (Irrigation), State of Uttarakhand to appoint an arbitrator of his choice is in conflict with the decision of this Court in the case of Perkins Eastman (supra)?

Architects DPC and another v. HSCC (India) Ltd which held that persons interested in the outcome of the arbitration must not have the power to appoint arbitrators.

"If circumstances exist giving rise to justifiable doubts as to the independence and impartiality of the person nominated or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore the designated arbitrator and appoint someone else," the Court said.

Reference was made to Section 12 of the Arbitration and Conciliation Act as amended by the 2015 amendment.

The Court concluded that it should ignore the two conditions contained in Clause 55 of the GCC, one relating to 7% deposit of the total amount claimed and the second one relating to the stipulation empowering the Principal Secretary (Irrigation) Government of Uttarakhand to appoint a sole arbitrator and proceed to appoint an independent arbitrator.

Allowing the application, the Court appointed Mr. V.K. Bist, the Former Chief Justice of the High Court of Sikkim to act as the sole arbitrator.

Case Title : Lombardi Engineering Ltd v. State of Uttarakhand 2023 SC