Lombardi Engineering Limited vs Uttarakhand Jal Vidyut Nigam Limited

Factual Background

Lombardi Engineering Ltd. (hereinafter “Petitioner”) is a design consultancy firm based in Switzerland, having a registered office in Switzerland and a local address in Delhi. The Petitioner entered into a contract with Uttarakhand Project Development and Construction Corporation Limited (hereinafter “UPDCC”) to provide consultancy services and prepare a project report for Arakot Tiuni Hydro Electric Project on river Pabar in Uttarkashi, Uttarakhand on 25 October 2019. The project was valued at Rs. 1,39,45,000/- and the work was to be completed within 24 months from the date of signing of the contract i.e., 25 September 2021.

Through a government order dated 08 May 2020, the project was transferred from UPDCC to Uttarakhand Jal Vidyut Nigam Limited (hereinafter “Respondent”). The contract provided for arbitration under clause 53 and clause 55 of the General Conditions of Contract (hereinafter “GCC”) stating that the arbitration will be conducted in accordance with the Arbitration and Conciliation Act, 1996 (hereinafter “A&C Act”). It stipulated that a 7% deposit of the claim amount must be provided as a security deposit for initiating arbitration. Moreover, the clause provided that a sole arbitrator will be appointed by the Principal Secretary/Secretary (Irrigation) for claims up to 10 crores.

Because of the disputes, the Petitioner issued a notice of arbitration on 06 May 2022 highlighting the Respondent’s failure to pay for financial losses suffered due to the abandonment of the contract by the Respondent. The Petitioner proposed Mr. S.K. Sarvaria as the sole arbitrator and requested the Respondent’s approval within 15 days.

The Respondent did not respond to the notice, instead issued a letter dated 09 May 2022, terminating the contract citing non-compliance of work and non-fulfilment of contractual obligations.

Thereafter, the Petitioner filed the present application under Section 11(6) of the A&C Act for the appointment of an arbitrator.

Extract of Relevant Clause

55. Arbitration

(a) …. However, the Party initiating the arbitration claim shall have to deposit 7% of the arbitration claim in the shape of a Fixed Deposit Receipt as the security deposit.

(b)(I) …. For claim amount up to 10.00 Crores, the case shall be referred to a Sole Arbitrator to be appointed by the Principal Secretary/Secretary (Irrigation), GoU……

Issues

Can the principles established in the ICOMM Tele Limited case be applied to Clause 55 of the GCC, which requires a 7% pre-deposit to invoke arbitration?

Is there a direct conflict between the decision of S.K. Jain and ICOMM Tele Limited?

When deciding a petition under Section 11(6) of the A&C Act, can the court determine that the pre-deposit requirement in an arbitration clause is arbitrary and violative of Article 14 of the Constitution of India?

Is the arbitration clause in Clause 55, which allows the Principal Secretary (Irrigation) of Uttarakhand to appoint an arbitrator, in conflict with the Perkins Eastman decision?

Petitioner’s Position

The Petitioner submitted that the arbitration clause mandating the appointment of a sole arbitrator by the Principal Secretary is unenforceable pursuant to the Supreme Court Decision in Perkins Eastman Architects DPC and Another v. HSCC (India) Limited.

Additionally, the pre-deposit condition of 7% of the claimed amount to initiate arbitration is contrary to the decision in ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Another, wherein a clause mandating a pre-deposit of 10% for initiating arbitration was held void and contrary to Article 14 of the Constitution of India.

Respondent’s Position

The Respondent argued that the Petitioner failed to meet two pre-conditions: 7% pre-deposit of the claimed amount and approaching the Principal Secretary for the appointment of an arbitrator. Thus, the Appellant failed to act according to the prescribed procedure. To support the submission, reliance was placed on decisions of the Supreme Court in Iron and Steel Co. Ltd, Yashwith Construction P. Ltd and Bhumihiway DDB Ltd., wherein it was held if parties have agreed upon a specific procedure for arbitration, then that procedure must be followed. The intervention of the court under Section 11 of the A&C Act, 1996 is not permissible unless the agreed procedure fails.

The Respondent contended that a similar pre-deposit clause was upheld by the Supreme Court in S.K. Jain v. State of Haryana, containing a balancing factor to prevent frivolous and inflated claims. They argued that the Petitioner’s reliance on ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board was misplaced because the arbitration clause in that case was different as it provided for the forfeiture of the security deposit. They pointed out that the security deposit in the current contract is refundable, intended to ensure only genuine claims are made and prevent frivolous disputes. For this, reliance was placed on Clause 4 of GCC, which provided for a refund of the security deposit. Respondent argued that the clause does not exclude the security deposit under Clause 55.

The Respondent highlighted that the substantive challenges were made to the pre-deposit clause in S.K. Jain and ICOMM Tele Limited while in the instant case, the petition under Section 11 of A&C Act, 1996, is solely for the appointment of an arbitrator and did not challenge the pre-deposit clause.

Decision and Reasoning

On Issue 1

The court concluded that the 7% pre-deposit condition as contained in Clause 55 of the GCC is problematic. It is evident that the clause did not specify anything, nothing has been provided as to how this amount of 7% is to be ultimately adjusted at the end of the arbitral proceedings. With regard to the submission from the Respondent that the pre-deposit is refundable under Clause 4 of GCC, the court observed that the said clause relates to the security deposit for performance, not pre-deposit [¶67].

The court observed that such a vague and ambiguous condition of 7% pre-deposit of the total claim makes the same more vulnerable to arbitrariness thereby violating Article 14 of the Constitution. The court also highlighted that if claim is found to be frivolous, then the arbitral tribunal can always impose cost. In this context, reliance was placed on Section 31A of the A&C Act and the decision of the Supreme Court of Canada in Uber Technologies Inc. v. David Heller [¶68-69].

On Issue 2

The court held that there was no conflict between S.K. Jain and ICOMM Tele Limited, as the relevant clauses were completely different. The court distinguished S.K. Jain in the ICOMM Tele limited case [¶61]. The court highlighted the following distinguishing factors between the two cases: Firstly, no plea that the clause was violative of Article 14 of the Constitution was raised in S.K. Jain. Secondly, the clause in S.K. Jain explicitly provided for a refund/adjustment mechanism for the pre-deposit [¶62].

On Issue 3

The court held that the contention of the Respondent, that this Court while considering an application under Section 11(6) of the A&C Act for the appointment of arbitrator should not test the validity or reasonableness of the conditions stipulated in the arbitration clause on the touchstone or anvil of Article 14 of the Constitution, is without any merit or substance. The court cited TRF Limited v. Energo Engineering Projects Limited and Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited to explain the phrase ‘operation of law’ and explained this phrase is of wider connotation and covers the A&C Act, Constitution of India and any other Central or State Law [¶73-76]. The court observed that an arbitration agreement cannot be contradiction to Section 7 of the A&C Act, any provision of A&C Act, central or state law and Constitution of India. The court emphasized that fundamental rights cannot be waived, referencing Olga Tellis v. Bombay Municipal Corporation.

On Issue 4

The court held that if circumstances exist giving rise to justifiable doubts as to the independence and impartiality of the person nominated or if other circumstances warrant the appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded 55 ignore the designated arbitrator and appoint someone else referencing IOC v. Raja Transport Pvt. Ltd. [¶87].

Conclusion

Thus, the court held that 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, Government of Uttarakhand to appoint a sole arbitrator should not be taken into consideration and proceeded to appoint Mr. V.K. Bist, the Former Chief Justice of the High Court of Sikkim to act as the sole arbitrator. Hence, this application was allowed.

Author(s)

Vanshika Sharma

Student at NALSAR, Hyderabad