Any clause in an agreement, that requires one of the contracting parties to make a deposit of amount as a precondition for invoking the arbitration, has to be seen as rendering the entire clause arbitrary, being not only excessive or disproportionate but leading to a wholly unjust situation in arbitration proceedings

Kerala High Court on 28.10.2020 in the matter of Lite Bite Foods Pvt. Ltd. Vs. Airports Authority Of India, reiterated the law declared by the Supreme Court in ICOMM Tele Ltd. v. Punjab State Water Supply and Sewerage Board and Anr. – [(2019) 4 SCC 401] that “after the amendment of the 1996 Act in 2015, the law must be taken to be that any clause in an agreement, that requires one of the contracting parties to make a deposit of amount as a precondition for invoking the arbitration, has to be seen as rendering the entire clause arbitrary, being not only excessive or disproportionate but leading to a wholly unjust situation in arbitration proceedings, that are ordinarily to be encouraged on account of the high pendency of cases in courts and the ever-increasing cost of litigation.”

Facts of the case-

The Respondent is the Airport Authority of India and had floated a “request for qualification” [RFQ] and “request for proposal” [RFP] for concession to develop, market, setup, operate, maintain and manage the food and beverage outlets [F&B outlets] at Calicut International Airport, and invited bids from intending bidders in terms of the RFP and RFQ. The Petitioner being a company incorporated under the Companies Act, 1956 submitted its bid and was found eligible and was accordingly awarded the concession referred. The parties executed the Letter of Intent to Award [LOIA] dated 07.12.2017 AND THE Concession Agreement dated 22.03.2018.
It is the case of the Petitioner that since the inception of the Project, various acts of commission and omission of the Respondent led to delay in operationalisation and the BCAS clearance of F&B outlets was obtained only by 20.7.2018. The Petitioner could not commence commercial operations before the said date however the Respondent wrongfully raised invoices in September, 2018 with effect from 6.4.2018. The Petitioner under protest, made some payments and issued a termination notice dated 16.4.2019 and vacated the premised on 13.8.2019.
Thereafter, the respondent unilaterally invoked the bank guarantee that had been furnished by the petitioner as security deposit and also blacklisted the petitioner from participating in future tenders floated by the Respondent for three years. The Petitioner was granted an injunction on the invocation of the bank guarantee from Principal District Judge and also the invoked the arbitration clause vide notice 23.9.2019, however, on the Respondent refuting the claim of the petitioner for recourse to arbitration, the petitioner was constrained to approach this Court through the present Arbitration Request.
The Respondent contended that the arbitration request is premature as the petitioner had not complied with the various preconditions that are required to be satisfied before invoking the arbitration clause.
Petitioner submitted that on a reading of Article 1.2 of the Concessionaire Agreement, it becomes apparent that while the RFP would form part of the Concessionaire Agreement, in the event of a conflict in the clauses in the RFP and the Concessionaire Agreement, priority has to be accorded to the clauses in the concessionaire agreement, and viewed thus, Article 22 of the Concessionaire Agreement has to be seen as the Arbitration Agreement between the parties. In view of the apparent conflict between clause 5.15 of the RFP and Article 22 of the Concessionaire Agreement, the former has to yield to the latter, for the purposes of determining the Arbitration agreement between the parties.
Even otherwise, the petitioner contended that the preconditions laid out in clause 5.15 of the RFP which mandates that the petitioner has to deposit the disputed amount with the respondent as a condition precedent for invoking the arbitration clause, and further, that consent has to be obtained from the petitioner for acceptance of the recommendations of the Arbitrator, before making a reference to the Arbitrator for adjudicating the dispute, would fall foul of the law declared by the Supreme Court in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. – [2019 9 SCC Online SC 1517] as also in ICOMM Tele Ltd. v. Punjab State Water Supply and Sewerage Board and Anr. – [(2019) 4 SCC 401] that opined that ‘deterring a party to an arbitration from invoking the alternate dispute resolution process, by insisting on a pre-deposit of 10 per cent would discourage arbitration, contrary to the object of de-clogging the court system, and would render the arbitral process ineffective and expensive’.

Ratio:

The Court pointed out that at the very outset, the Court has to remind itself that the limited role that is expected of it, in proceedings under Section 11 of the 1996 Act, after its amendment in 2015, is to look at one aspect alone, namely, the existence of an arbitration agreement between the parties. In the present case, there is no dispute among the parties in regard to the existence of an arbitration agreement between them, the question urged being only as to whether the petitioner was required to fulfill certain preconditions before invoking the arbitration under the said agreement.
On a reading of Article 1.2 of the Concessionaire Agreement, it is noted that there is a clear indication therein that the terms of the Concessionaire Agreement are to be accorded priority over all other agreements and documents that formed part of the Concessionaire Agreement i.e. the RFQ, RFP and LOIA. On an overall perusal of the clauses in the RFP as also in the Concessionaire Agreement, the Hon’ble Court found out that the clauses in the Concessionaire Agreement which deal with the same subject matter as the corresponding clause in the RFP were intended to override the latter clauses in the RFP. Viewing clause 5.15 of the RFP and Article 22 of the Concessionaire Agreement, in the said backdrop, the inference must necessarily be that both the clauses deal with the manner of dispute resolution, and if that be the case, then, by virtue of Article 1.2 of the Concessionaire Agreement, Article 22 of the said Agreement must be seen as constituting the Arbitration Agreement between the parties.
The Court held that, “After the amendment of the 1996 Act in 2015, the law must be taken to be that any clause in an agreement, that requires one of the contracting parties to make a deposit of amount as a precondition for invoking the arbitration, has to be seen as rendering the entire clause arbitrary, being not only excessive or disproportionate but leading to a wholly unjust situation in arbitration proceedings, that are ordinarily to be encouraged on account of the high pendency of cases in courts and the ever-increasing cost of litigation.