The Supreme Court, vide its judgement¹ dated November 06, 2023, held that any arbitration clause which is inconsistent with the Constitution of India cannot be enforced. The Court further held that it can examine if any arbitration clause is manifestly arbitrary and violative of Article 14 of the Constitution while considering an application for the appointment of an Arbitrator.

Factual Background
The Petitioner (Lombardi Engineering Ltd.) entered into a Contract with the Respondent for providing certain consultancy services in relation to a hydroelectric project in the State of Uttarakhand (“Project”). Clause 53, read with Clause 55 of the said Contract, set out the arbitration agreement between the parties, and provided inter alia that the party initiating arbitration shall deposit 7% of the arbitration claim in the form of a security deposit; and the case shall be referred to a sole arbitrator, to be appointed by the Principal Secretary (Irrigation), Government of Uttarakhand.

Thereafter, disputes arose between the parties and the Petitioner issued a notice of arbitration, calling upon the Respondent to appoint an Arbitrator. The Respondent, however, terminated the Contract alleging non-fulfilment of Contractual Obligations on the part of the Petitioner. Therefore, the Petitioner preferred an application under Section 11(6) of the Arbitration and Conciliation Act, 1996² , for appointment of an Arbitrator, before the Supreme Court.

The key issues that arose for consideration before the Supreme Court:

1. Whether the pre-deposit requirement of 7% of the total claim was arbitrary and unconstitutional under Article 14 of the Constitution of India?
2. Whether the arbitration clause 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 Architects DPC and Anr. versus HSCC (India) Limited ?³

Contentions of the Parties
The Petitioner primarily contended that the unilateral right to appoint an Arbitrator accorded to the Respondent, was unenforceable and in contravention of the decision of the Supreme Court in Perkins Eastman (supra)whereby it was settled that a party “who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator”; and that the condition for pre-deposit was unfair, arbitrary and violative of Article 14 of the Constitution of India.

On the other hand, the Respondent inter alia contended that the security deposit contemplated under the Contract was refundable, with the object of ensuring that only valid and bona fide claims are made by the parties and that the Project is not halted due to frivolous claims. It was further contended in this regard that the Supreme Court ought not to test the validity of a condition stipulated in the arbitration clause on the yardstick of Article 14 of the Constitution when considering a Section 11(6) application.

Analysis of the Court
While analysing the contentions of the Respondent, the Court rejected the argument that it cannot examine the constitutionality of an arbitral clause whilst exercising its jurisdiction under Section 11(6) of the Arbitration and Conciliation Act, 1996. It categorically held in this regard that all laws in India assume validity by conforming with the Constitution of India, as it was the ‘grundnorm’ or the paramount source of law in the country. The Court, however, held that the Respondent’s contention that the principle of ‘party autonomy’ was being violated by the Petitioner, having consented to the pre-deposit clause at the time of executing the Contract, was without any merit, and could not be stretched to an extent where it violates the fundamental rights under the Constitution.

As regards the validity of the arbitration clause by way of which the Principal Secretary/ Secretary (Irrigation), Government of Uttarakhand, was empowered to appoint an Arbitrator of its choice, it was held that the issue was squarely covered by the decision of the Supreme Court in Perkins Eastman (supra), whereby it was held that the unilateral appointment of an Arbitrator without the consent of the other party would be bad in law. Referring to the same decision, the Court further held that those with a vested interest in the arbitration’s outcome should not have the authority to appoint Arbitrators.

Conclusion
In conclusion, the Court held that it should ignore the two conditions contained in the Contract, one relating to the 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 proceeded to appoint an Independent Arbitrator.

By - Prachi Pandey