LOMBARDI ENGINEERING LIMITED vs. UTTARAKHAND JAL VIDYUT NIGAM LIMITED

REPORTABLE 2023 INSC 976 IN THE SUPREME COURT OF INDIA CIVIL ORIGINAL JURISDICTION ARBITRATION PETITION NO. 43 OF 2022 LOMBARDI ENGINEERING LIMITED …PETITIONER(S) VERSUS UTTARAKHAND JAL VIDYUT NIGAM LIMITED …RESPONDENT(S) J U D G M E N T J. B. PARDIWALA, J.: 1. This is a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 (for short, “the Act 1996”) filed at the instance of a company based in Switzerland and engaged in the business of design consultancy seeking appointment of an arbitrator for the adjudication of disputes and claims emanating from the Contract dated 25.10.2019 entered into between the petitioner and respondent i.e., Uttarakhand Vidyut Nigam Limited (a wholly Signature Not Verified Digitally signed by CHETAN KUMAR Date: 2023.11.06 17:20:53 IST Reason: owned corporation of the Government of Uttarakhand). 1 FACTUAL MATRIX 2. The petitioner is a design consultancy firm based in Switzerland, having its registered office at Via Del Tiglio 2, PO Box 934, CH 934, CH 6512, st Bellinzona-Guibiasco, Switzerland and local Indian address at B3/61, 1 Floor, Safdarjung Enclave, Delhi – 110029. 3. The respondent is a wholly owned corporation of the Government of Uttarakhand having its registered office at Maharani Bagh, GMS Road, Dehradun, Uttarakhand, India and is engaged in the business of operating hydro power plants in the State of Uttarakhand. 4. The petitioner entered into a contract with the Uttarakhand Project Development and Construction Corporation Limited (hereinafter referred to as “UPDCC”) for “Providing consultancy services and preparation of modified comprehensive and bankable Detailed Project Report of Arakot Tiuni Hydro Electric Project on river Pabar in district Uttarkashi of Uttarakhand” dated 25.10. 2019 (Tender Reference No. 01/DGM/UPDCC/2018-19) (hereinafter referred to as, ‘the Contract’ or ‘the Project’). The Project was valued at Rs. 1,39,45,000/- (Rupees One Crore Thirty-Nine Lac Forty-Five Thousand only) (hereinafter referred to as the “Contract Value”). The petitioner was to commence work on the date of the execution of the Contract, i.e., 25.10.2019 and complete the work within 24 months, i.e., by 25.09.2021. 2 5. The Schedule A to Clause 5 of the Special Conditions of Contract (SCC) (hereinafter referred to as the “Schedule A”) provided for the completion period of all works that the petitioner was required to carry out under the Project. Further, the Schedule B to Clause 5 of the SCC (hereinafter referred to as the “Schedule B”) provided for the payment that was to be released to the petitioner upon the completion of each stage of work. 6. The respondent took over the said Project from the UPDCC pursuant to an order dated 08.05.2020, passed by the Government of Uttarakhand, which directed that the Project be transferred from UPDCC to the respondent. The takeover of the Project was done by virtue of a tripartite agreement dated 06.10.2020 (hereinafter referred to as the “Tripartite Agreement”), whereby the Contract was novated to the extent that the respondent stepped into the shoes of UPDCC and took over all the obligations under the Contract. 7. The Clause 53 read with Clause 55 of the General Conditions of Contract (hereinafter referred to as “GCC”), which forms part and parcel of the Contract between the petitioner and the respondent, set out the Arbitration Agreement. The said clauses are reproduced hereinbelow for reference: “ CLAUSE-53: PROCEDURE FOR CLAIMS: 53.1 If a dispute of any kind, whatsoever, arises between the Employer and contractor in connection with or arising out of the contract for the execution of this works, whether during the execution of the works or after their completion and whether before or after repudiation or termination of the contract, including any disagreement by either party with any action, 3 inaction, opinion, instruction determination, certificate or valuation of the Engineer, the matter in dispute shall, be referred to in accordance with the provisions of the Arbitration and Conciliation Act, 1996 or any statutory modification or re- enactment thereof and the rules made the under and for the time being in force, shall apply to the arbitration proceedings. 53.2 The contractor shall submit the details of his claims in writing including: (i) Particulars concerning the events on which the claim is based; (ii) the legal basis for the claim, whether based on a term of the Contract or otherwise, and if based on a term of the Contract, clearly identifying the specific term; vii) the facts relied upon in support of the Claim in sufficient detail to permit verification; and viii) details of the amount claimed and how it has been calculated. Xxx xxx xxx CLAUSE-55: ARBITRATION: (a) All question and disputes relating to the meaning of the specification design, drawing and instructions herein and as to the quality of workmanship or materials used on the work or as to any other question claim, right, matter or thing, whatsoever in any way arising out of or relating to the contract, designs, drawings, specification, estimates instructions, orders or these condition or otherwise concerning the works or the execution or failure to execute the same, whether arising during the progress of the work or after the cancellation, termination, completion or abandonment thereof, shall be conducted in accordance with the provisions of the Arbitration and Conciliation Act, 1996 or any statutory modification or re-enactment thereof and the rules made the under and for the time being in force, shall apply to the arbitration proceedings. However, the Party initiating the arbitration claim shall have to deposit 7% of the arbitration claim in the shape of Fixed Deposit Receipt as security deposit. (b) On submission of claims the Arbitrator shall be appointed as per the following procedure: 4 I) For claim amount upto 10.00 Crores, the case shall be referred to Sole Arbitrator to be appointed by the Principal Secretary/Secretary (Irrigation), GoU,…” (Emphasis supplied) 8. In the wake of various disputes that arose between the parties, the petitioner herein issued a notice of arbitration dated 06.05.2022, calling upon the respondent to appoint an arbitrator in terms of the arbitration clause contained in the GCC referred to above. The relevant part of the arbitration notice reads thus: “26. The Respondent’s failure to pay the Claimant’s outstanding dues, therefore, entitles the Claimant to invoke the arbitration clause contained in 53 and 55 of the GCC for settlement of the Claimant’s claims of a total of INR 1,04,32.664.86/- (Indian Rupees One Crore Four Lacs Thirty-two Thousand Six Hundred and Sixty- Four and Eighth-Six Paise only), i.e. INR 32,91,020/- (Indian Rupees Thirty Two Lakh Ninety One Thousand and Twenty only) towards Invoice dated 27 July 2020 and INR. 71,41,644.86/- (Indian Rupees Seventy-One Lacs Forty-One Thousand Six Hundred and Forty-Four and Eighty Six Paise only) for financial loss suffered by the Claimant on account of abandonment of the Contract by the Respondent. This Notice is without prejudice to the Claimant’s rights to correct/amend/update/add any other additional figure/facts that may come to its notice in support of its claim, which rights are expressly reserved. 27. Since the Claimant’s claim is for an amount less than INR 10 Crores, under Clause 55(b)(I) of the GCC, a sole arbitrator is to be appointed by the Principal Secretary/ Secretary (Irrigation), Government of Uttarakhand. Notwithstanding the foregoing, the Claimant submits that in light of recent amendments to the Arbitration and Conciliation Act, 1996 and settled prevalent law laid down by the Hon’ble Supreme Court in the case of Perkins Eastman Architects DPC and Another v. HSCC (India) Limited [(2020) 20 SCC 760], the unilateral right of appointment given to the Respondent under the Contract, is not enforceable as on date. Therefore, the Claimant will propose the name of an arbitrator in this Notice, for 5

10. In such circumstances referred to above, the petitioner has preferred the present application for appointment of an arbitrator invoking Section 11(6) of the Act 1996.

6 constitution of an arbitral tribunal under Section 11(6) of the Act 1996 as the case is one of international commercial arbitration.

13. The learned counsel further submitted that the condition for pre-deposit of 7% of the claimed amount to initiate arbitration in accordance with Clause 55.1(b)(I) of the Contract is contrary to the decision of this Court in the case of ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Another reported in (2019) 4 SCC 401. 14. It was argued that such a clause could be termed as arbitrary being violative of Article 14 of the Constitution in the sense of being unfair and unjust. It was also argued that such clauses in the Contract do not have any nexus in preventing any frivolous or vexatious claims in determination to such claims. 7 15. In such circumstances referred to above, the learned counsel prayed that there being merit in this petition the same may be allowed and a sole arbitrator be appointed to resolve the disputes between the parties.

17. In the aforesaid context, he strongly relied upon the decisions of this Court in the cases of Iron & Steel Co. Ltd. v. Tiwari Road Lines reported in (2007) 5 SCC 703, National Highways Authority of India and Another v. Bumihiway DDB Ltd. (JV) and Others reported in (2006) 10 SCC 763 and Yashwith Constructions (P)Ltd. v. Simplex Concrete Piles India Ltd. and Another reported in (2006) 6 SCC 204. 18. He submitted that the respondent cannot be said to have failed to act as required under the prescribed procedure. He invited the attention of a three- Judge Bench of this Court to a decision in the case of S.K. Jain v. State of Haryana and Another reported in (2009) 4 SCC 357, wherein a similar clause 8 requiring a security deposit of certain percentage of the claim amount was held to be valid. He argued that the reliance on the decision of this Court in the case of ICOMM Tele Limited (supra) by the petitioner is completely misconceived as the relevant arbitration clause therein was quite differently worded vis-a-vis the pre-deposit clause provided in the case of S.K. Jain (supra). 19. He submitted that in the absence of any clause to the contrary, the security deposit is refundable by virtue of being only a deposit for “security”. The object of such a clause is to ensure that only valid and bona fide claims are made by the parties, and that the project is not hindered by frivolous and baseless claims. He submitted that a three-Judge Bench of this Court in S.K. Jain (supra) found the clause providing for pre-deposit to be logical and containing a balancing factor to prevent frivolous and inflated claims. The relevant clause in S.K. Jain (supra) provided that on the termination of arbitration proceedings, the sum would be adjusted against the costs awarded by the arbitrator and the balance amount would be refunded. In ICOMM Tele Limited (supra), the contract expressly provided for forfeiture of the security deposit, even in the event of the award going in favour of the party which made the deposit. In such circumstances, this Court held such a clause to be arbitrary being violative of Article 14 of the Constitution. In the present case, the Contract does not provide for any such forfeiture under Clause 55 and by virtue of the terminology used, the amount is to be deposited as a “security”. It was submitted that the same should be 9 understood to be refundable upon completion of the proceedings between the parties. It was argued that in any case, Clause 4 of the GCC stipulates that the security deposit is to be refunded to the contractor on demand, after 14 days of expiry of Defects Liability Period. It does not exclude the security deposit made under Clause 55 from its purview. 20. He submitted that as such there is no challenge to the pre-deposit clause in the petition and the present petition under Section 11(6) of the Act 1996 is only for appointment of an arbitrator. The judgments in S.K. Jain (supra) and ICOMM Tele Limited (supra), relied upon on behalf of the petitioner were delivered in appeals arising out of writ petitions before the respective High Courts, where substantive challenges were made to the pre-deposit clause. 21. It was also argued that the petitioner having consented to the pre-deposit clause cannot be permitted to turn around and question its validity at the stage when a petition under Section 11(6) of the Act, 1996 is being considered, thereby circumventing the principle of “party autonomy”. 22. In the last, it was argued that any order passed by this Court under Section 11(6) of the Act 1996 cannot be treated as a binding precedent in view of the decision of this Court in State of West Bengal and Others v. Associated Contractors reported in (2015) 1 SCC 32. 23. In such circumstances referred to above, the learned counsel appearing for the respondent prayed that there being no merit in the petition, the same be rejected. 10 ANAYLSIS 24. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the following issues fall for the consideration of this Court: (i) Whether the dictum as laid down in ICOMM Tele Limited (supra) 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 (supra) 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)? JURISDICTION OF THE COURT UNDER SECTION 11(6) OF THE ACT 1996 11 25. In the wake of a few decisions of this Court, the legislature thought fit to add sub section (6A) to Section 11 of the Act 1996 by way of the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter referred to as “Amendment 2015”). The same reads thus: “(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under subsection (4) or sub- section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.” (Emphasis supplied) 26. Taking cognizance of the legislative change, this Court in Duro Felguera, S.A. v. Gangavaram Port Limited reported in (2017) 9 SCC 729, noted that post the 2015 Amendment, the jurisdiction of the court under Section 11(6) of the Act, 1996 is limited to examining whether an arbitration agreement exists between the parties - “ nothing more, nothing less ”. 27. The entire case law on the subject was considered by a three-judge bench of this Court in Vidya Drolia and Others v. Durga Trading Corporation reported in (2021) 2 SCC 1, and an overarching principle with respect to the pre- referral jurisdiction under Section 11(6) of the Act was laid down. The relevant portion of the judgment is as follows: “153. Accordingly, we hold that the expression “existence of an arbitration agreement” in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment. In cases of debatable and disputable facts, and good reasonable arguable 12 case, etc., the court would force the parties to abide by the arbitration agreement as the Arbitral Tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability. 154. Discussion under the heading “Who Decides Arbitrability?” can be crystallised as under: 154.1. Ratio of the decision in Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] on the scope of judicial review by the court while deciding an application under Sections 8 or 11 of the Arbitration Act, post the amendments by Act 3 of 2016 (with retrospective effect from 23-10-2015) and even post the amendments vide Act 33 of 2019 (with effect from 9-8-2019), is no longer applicable. 154.2. Scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted. 154.3. The general rule and principle, in view of the legislative mandate clear from Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of non-arbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act. 154.4. Rarely as a demurrer the court may interfere at Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable” and to cut off the deadwood. The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration 13

through the test of a prima facie review. This is explained as under: “133. Prima facie case in the context of Section 8 is not to be confused with the merits of the case put up by the parties which has to be established before the Arbitral Tribunal. It is restricted to the subject-matter of the suit being prima facie arbitrable under a valid arbitration agreement. Prima facie case means that the assertions on these aspects are bona fide. When read with the principles of separation and competence-competence and Section 34 of the Arbitration Act, the referral court without getting bogged down would compel the parties to abide unless there are good and substantial reasons to the contrary. 134. Prima facie examination is not full review but a primary first review to weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes. The prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straightforward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage. Only when the court is certain that no valid arbitration agreement exists or the disputes/subject-matter are not arbitrable, the application under Section 8 would be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary and not a mini trial… xxx xxx xxx 138…On the other hand, issues relating to contract formation, existence, validity and non-arbitrability would be connected and intertwined with the issues underlying the merits of the respective 14

Drolia (supra), this Court has consistently been holding that the arbitral tribunal is the preferred first authority to determine and decide all questions of non- 15 arbitrability. In Pravin Electricals Private Limited v. Galaxy Infra and Engineering Private Limited reported in (2021) 5 SCC 671, Sanjiv Prakash v. Seema Kukreja and Others reported in (2021) 9 SCC 732 and Indian Oil Corporation Limited v. NCC Limited reported in (2023) 2 SCC 539, the parties were referred to arbitration, as the prima facie review in each of these cases on the objection of non-arbitrability was found to be inconclusive. Following the exception to the general principle that the court may not refer parties to arbitration when it is clear that the case is manifestly and ex facie non- arbitrable, in Bharat Sanchar Nigam Limited and Another v. Nortel Networks India Private Limited reported in (2021) 5 SCC 738, Secunderabad Cantonment Board v. B. Ramachandraiah and Sons reported in (2021) 5 SCC 705 and B and T AG v. Ministry of Defence reported in 2023 SCC OnLine SC 657, arbitration was refused as the claims of the parties were demonstrably time- barred. 30. In the case on hand, we are not concerned with the issue relating to the arbitrability of the dispute. It is not even the case of the respondent that the dispute is ex facie non-arbitrable. The case put up by the respondent is that there is definitely an arbitrable dispute and the same should be referred to the arbitral tribunal, however, the petitioner should abide by Clause 55 of the Contract. 31. In the case on hand, we are concerned first with the validity of the arbitration clause which provides for 7% pre-deposit of the total claim for the 16 purpose of invoking arbitration and secondly, the discretion vested with the Principal Secretary/Secretary (Irrigation) to appoint a sole arbitrator. RE: ISSUE NOS. 1 AND 2

Rate of security Amount of claim deposit 17 1. For claims below Rs 10,000 2% of amount claimed 2. For claims of Rs 10,000 and above and below Rs 1,00,000 and 5% of amount claimed

36. In the said case, the appellants had floated a notice inviting tender for construction of a road. Some portion of the work was awarded to the respondent therein by entering into a contract on the terms and conditions as contained in the tender. The tender contained various clauses; one amongst the same being clause 29 which pertained to arbitration in case any dispute arose between the parties and reads thus: 18

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as under:

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22 16.01.2009, a formal contract was entered into between the appellant and respondent No. 2 therein. 40. On 08.03.2017, the appellant approached the High Court of Punjab and Haryana challenging the validity of this part of the arbitration clause by filing Civil Writ Petition No. 4882 of 2017. The High Court merely followed its earlier judgment and dismissed the writ petition as well. The matter was carried to this Court.

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(a) That the pre-deposit condition in an arbitration clause is violative of Article 14 of the Constitution of India being arbitrary. (b) Unless it is first found or prima facie established that the litigation that has been embarked upon is frivolous, the exemplary costs or punitive damages cannot follow. (c) Deterring a party to an arbitration from invoking the Alternative Dispute Resolution Process by pre-deposit of certain percentage would discourage 25 arbitration. This would run contrary to the object of de-clogging the court system and would render the arbitral process ineffective and expensive.

26 clause 5.15 of the RFP on the ground that it is violative of the fundamental rights of the petitioner under Article 14 of the Constitution of India, that this Court can hold the said clause, in the RFP, as illegal. 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. I am therefore of the opinion that even if the clause in the RFP is to be treated as supplementing Article 22 of the Concessionaire Agreement, the offending conditions in the RFP would have to be ignored in view of the declaration of law by the Supreme Court in the cases referred above.” (Emphasis supplied) 45. In the aforesaid decision of the Kerala High Court, the learned Single Judge after due consideration of the decisions of this Court in Perkins Eastman (supra) and ICOMM Tele Limited (supra), held that any clause in the agreement that requires one of the contracting parties to make a deposit of an amount as a pre-condition for invoking the arbitration should be seen as one rendering the entire clause arbitrary being not only excessive or disproportionate but something that may lead to a wholly unjust situation. Ultimately Article 22 of the concessionaire agreement therein was ignored while appointing an arbitrator in an application filed under Section 11(6) of the Act 1996. 46. The Assan Co-Op. L & C Society v. Haryana Vidyut Prasaran Nigam Ltd ., ARB-127-2019 (Section 11 Petition) and CWP-13539-2021 (Civil Writ Petition) 27

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34 57. In the aforesaid decision of the Punjab and Haryana High Court, the decisions of this Court in the case of ICOMM Tele Limited (supra) as well as S.K. Jain (supra) were taken into consideration and ultimately, the Court followed the dictum as laid in ICOMM Tele Limited (supra), as the relevant arbitration clause in the said matter was almost identical to the one in ICOMM Tele Limited (supra).

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“25. … That part of Clause 33 of the agreement between the parties providing for constitution of a Dispute Resolution Committee with a stipulation that before availing of dispute resolution, the disputed amount has to be deposited, is invalid and contrary to law for more than one reason. The first and foremost is that it fetters the right of the petitioner, a party to the arbitration agreement to avail of arbitration which is a statutory right. [ICOMM Tele Ltd. v. Punjab State Water Supply and Sewerage Board reported in (2019) 4 SCC 401]. Secondly, it is most ambiguous. If the petitioner is making a claim which is then and there disputed by the respondent, why should the petitioner, being the claimant be asked to deposit the disputed amount? When the petitioner is making a claim against the respondent, it is unable, at that point of time, to know whether the whole claim or part of it would be admitted, or the whole of it denied by the latter. Hence, it is unable to gauge the disputed amount. Even if it were possible for the respondent to notify the disputed amount immediately, the clause would only be operative if the respondent was simultaneously making a counter claim more than the petitioner's claim which was being denied by the petitioner, by seeking reference of the dispute to arbitration. If the respondent was first making the claim which was disputed by the petitioner, still the matter could not be referred to the Committee in as much as the clause suggests an application for dispute resolution by the petitioner only. For all these reasons, this clause itself is vague for uncertainty and invalid.” (Emphasis supplied) 60. In the aforesaid decision of the Calcutta High Court, ICOMM Tele Limited (supra) and Perkins Eastman (supra) were relied upon and ultimately, it was held that Clause 33 of the agreement therein between the parties providing for constitution of a “Dispute Resolution Committee” with a stipulation that 36 before availing of dispute resolution clause, the disputed amount has to be deposited, was held to be invalid and contrary to law. 61. We are of the view that as such there is no conflict between S.K. Jain (supra) and ICOMM Tele Limited (supra), as the relevant arbitration clauses that fell for the consideration of this Court in both the cases stood completely on a different footing. What is relevant to note are the points of law on which S.K. Jain (supra) was distinguished and explained in ICOMM Tele Limited (supra). 62. The Court while distinguishing S.K. Jain (supra) in ICOMM Tele Limited (supra) made some relevant observations in para 14 of the Judgment. Para 14 reads thus:

37 (Emphasis supplied) 63. In para 16 of ICOMM Tele Limited (supra), the court ultimately considered whether Clause 25(viii) could be said to be arbitrary and violative of Article 14 of the Constitution of India. Para 16 reads thus:

64. Thereafter, the Court proceeded to observe that Clause 25(viii) therein could not be said to be discriminatory as the same applied equally to both the parties, however, arbitrariness could be said to be a separate and distinct facet of Article 14 of the Constitution. Saying so, the Court referred to and relied upon para 19 of this Court’s decision in A.L. Kalra v. Project and Equipment Corporation of India Ltd. reported in (1984) 3 SCC 316. Para 19 reads thus:

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“ CLAUSE-3: SECURITY DEPOSIT FOR PERFORMANCE: 3.1 The Security Deposit shall comprise of following: (i) Performance Security Deposit/Performance Guarantee to be furnished by the Contractor at the time of Award of Work. (ii) Retention Money/Security Deposit to be recovered from Interim bills of the Contractor. 3.2 The Contractor within 28 (Twenty Eight) days from the date of issue of Letter of Acceptance, shall furnish a Performance security deposit of 10% (Ten percent) of the Contract Price for due performance of contract, in any one of the following forms: (a) Demand draft on any Nationalized/scheduled Bank of India in the name of Employer; or FDR/CDR in the manner as specified in Section-I. 40 (b) Bank Guarantee from an Indian Nationalized/Scheduled Bank of India or a foreign bank through its branch located in India acceptable to Employer in the prescribed proforma.” 67. Thereafter our attention was drawn to Clause 4 which provides for refund of security deposit. Clause 4 reads thus: “ CLAUSE-4: REFUND OF SECURITY DEPOSIT : The Security Deposit less any amount due shall, on demand, be returned to the contractor after 14 days of expiry of Defects Liability Period (referred in Clause 43 hereof). No interest on the amount of Security Deposit shall be paid to the Contractor at the time of release of Security Deposit as stated above.” 68. We are of the view that Clauses 3 and 4 respectively as above relating to security deposit for performance and refund of the same has no nexus at all with the pre-deposit amount of 7% as stipulated in Clause 55 of the GCC. Such 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. Even otherwise, as explained in ICOMM Tele Limited (supra) if the claim of the petitioner herein is ultimately found to be frivolous the arbitral tribunal can always award costs in accordance with Section 31A of the Act 1996, which reads thus:

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decision of the Supreme Court of Canada in the case of Uber Technologies Inc., Uber Canada, Inc., Uber B.V. and Rasier Operations B.V. v. David Heller reported in 2020 SCC OnLine Can SC 13 . We quote the relevant observations as under:

WHETHER THE VALIDITY OF THE PRE-DEPOSIT CONDITION AS CONTAINED IN CLAUSE 55 OF THE AGREEMENT CAN BE 43 LOOKED INTO AND DECIDED ON THE ANVIL OF ARTICLE 14 OF THE CONSTITUTION IN A PETITION UNDER SECTION 11(6) OF THE ACT 1996? 70. The vociferous submission on the part of the learned counsel appearing for the respondent, that this Court while considering an application under Section 11(6) of the Act 1996 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. 71. It would be too much for the respondent to say that it is only the writ court in a petition under Article 226 of the Constitution that can consider whether a particular condition in the arbitration clause is arbitrary. 72. It is not for the first time that this Court is looking into the arbitration clause falling foul of Article 14 of the Constitution while deciding Section 11(6) application. 73. In the case of TRF Limited v. Energo Engineering Projects Limited reported in (2017) 8 SCC 377, this Court observed as under: - “ In this batch of appeals, by special leave, the seminal issues that emanate for consideration are; whether the High Court [TRF Ltd. v. Energo Engg. Projects Ltd., 2016 SCC OnLine Del 2532] , while dealing with the applications under Section 11(6) of the Arbitration and Conciliation Act, 1996 (for brevity, “the Act”), is justified to repel the submissions of the appellants that once the 44 person who was required to arbitrate upon the disputes arisen under the terms and conditions of the contract becomes ineligible by operation of law , he would not be eligible to nominate a person as an arbitrator, and second, a plea that pertains to statutory disqualification of the nominated arbitrator can be raised before the court in application preferred under Section 11(6) of the Act, for such an application is not incompetent. For the sake of clarity, convenience and apposite appreciation, we shall state the facts from Civil Appeal No. 5306 of 2017.” xxx xxx xxx 54. In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator . The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so .” (Emphasis supplied) 74. In Perkins Eastman (supra), this Court held as under: “This application under Section 11(6) read with Section 11(12)(a) of the Arbitration and Conciliation Act, 1996 (“the Act”) and under the Appointment of Arbitrators by the Chief Justice of India Scheme, 1996 (“the Scheme”) prays for the following principal relief: 45 “(a) appoint a sole arbitrator, in accordance with Clause 24 of the contract dated 22-5-2017 executed between the parties and the sole arbitrator so appointed may adjudicate the disputes and differences between the parties arising from the said contract.” xxx xxx xxx 21. But, in our view that has to be the logical deduction from TRF Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72] Para 50 of the decision shows that this Court was concerned with the issue, “whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator” The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter- balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) and recognised by the decision of this Court in TRF Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72]” (Emphasis supplied) 46 75. In Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited reported in (2017) 4 SCC 665, this Court held as under: “28. Before we part with, we deem it necessary to make certain comments on the procedure contained in the arbitration agreement for constituting the Arbitral Tribunal. Even when there are a number of persons empanelled, discretion is with DMRC to pick five persons therefrom and forward their names to the other side which is to select one of these five persons as its nominee (though in this case, it is now done away with). Not only this, DMRC is also to nominate its arbitrator from the said list. Above all, the two arbitrators have also limited choice of picking upon the third arbitrator from the very same list i.e. from remaining three persons. This procedure has two adverse consequences. In the first place, the choice given to the opposite party is limited as it has to choose one out of the five names that are forwarded by the other side. There is no free choice to nominate a person out of the entire panel prepared by DMRC. Secondly, with the discretion given to DMRC to choose five persons, a room for suspicion is created in the mind of the other side that DMRC may have picked up its own favourites. Such a situation has to be countenanced. We are, therefore, of the opinion that sub-clauses (b) & (c) of Clause 9.2 of SCC need to be deleted and instead choice should be given to the parties to nominate any person from the entire panel of arbitrators. Likewise, the two arbitrators nominated by the parties should be given full freedom to choose the third arbitrator from the whole panel .” (Emphasis supplied ) 76. What is relevant to note in all the above referred decisions of this Court is the phrase “operation of law”. This phrase is of wider connotation and covers the Act 1996 as well as the Constitution of India and any other Central or State Law. 47 77. In the aforesaid context, we should look into and discuss the Kelson’s Pure Theory of Law on the basic norm that he called “Grundnorm”. 78. Kelson’s pure theory of law has its pyramidical structure of hierarchy based on the basic norm of Grundnorm. The word ‘Grundnorm’ is a German word meaning fundamental norm. He has defined it as ‘ the postulated ultimate rule according to which the norms of this order are established and annulled, receive or lose their validity ’. It is the Grundnorm which determines the content and validates the other norms derived from it. But from where it derives its validity, was a question which Kelson did not answer, stating it to be a meta- physical question. Grundnorm is a fiction, rather than a hypothesis as proposed by the jurist. The Grundnorm is the starting point in a legal system and from this base; a legal system broadens down in gradation becoming more and more detailed and specific as it progresses. This is a dynamic process. At the top of the pyramid is the Grundnorm, which is independent. The subordinate norms are controlled by norms superior to them in hierarchical order. The system of norms proceeds from downwards to upwards and finally closes at Grundnorm. (Reference: Application of Grundnorm in India, Zainab Arif Khan, Aligarh Muslim University) 79. Our Constitution is the paramount source of law in our country. All other laws assume validity because they are in conformity with the Constitution. The Constitution itself contain provisions that clearly provide that any law which is 48 in violation of its provisions is unlawful and is liable to be struck down. As contained in Article 13 , which provides that all laws which were made either before the commencement of the Constitution, or are made after it, by any competent authority, which are inconsistent with the fundamental rights enshrined in the Constitution, are, to the extent of inconsistency, void. This again unveils the principle of Grundnorm which says there has to be a basic rule. The Constitution is the basic and the ultimate source of law. 80. In the aforesaid context, we must look into view decisions of the High Courts explaining the theory of Grundnorm. (i) In the case of Squadron Leader H. S. Kulshrestha v Union of India reported in 1999 SCC OnLine All 270, the court held that ‘ According to the theory of the eminent jurist Kelson, in every country there is a hierarchy of laws, and the highest law is known as the grundnorm of law. In our country the grundnorm is the Constitution. ’ (ii) In another case of Abdur Sukur & Another v State of West Bengal & others reported in 2019 SCC Online Cal 5455, the court held that ‘ …enshrined in the Constitution of India, which is the grundnorm of all Indian statutes. ’ (iii) In another case of Om Prakash Gupta v Hindustan Petroleum Corporation Ltd. & Anr. reported in 2009 SCC OnLine Raj 1381, it was again 49

the grundnorm – the paramount law of the country. All other laws derive their origin and are supplementary and incidental to the principles laid down in the Constitution. ’ (v) In the case of Government of Andhra Pradesh & Ors vs Smt. P. Laxmi Devi reported in (2008) 4 SCC 720, this Court observed, ‘ According to Kelson, in every country there is a hierarchy of legal norms, headed by what he calls as the ‘grundnorm ’ . If a legal norm in a higher layer of this hierarchy conflicts with a legal norm in a lower layer the former will prevail. In India the Grundnorm is the Indian Constitution .’ 81. Thus, in the context of the Arbitration Agreement, the layers of the Grundnorm as per Kelsen's theory would be in the following hierarchy: (i) Constitution of India, 1950; (ii) Arbitration and Conciliation Act, 1996 & any other Central/State Law; (iii) Arbitration Agreement entered into by the parties in light of s. 7 of the Arbitration and Conciliation Act, 1996. 50 82. Thus, the Arbitration Agreement, has to comply with the requirements of the following and cannot fall foul of: (i) Section 7 of the Arbitration and Conciliation Act; (ii) any other provisions of the Arbitration and Conciliation Act, 1996 & Central/State Law; (iii) Constitution of India, 1950. 83. The observations of this Court in para 236 of Vidya Drolia (supra) should clinch the issue. Para 236 reads thus:

51 (Emphasis supplied) 84. The concept of “party autonomy” as pressed into service by the respondent cannot be stretched to an extent where it violates the fundamental rights under the Constitution. For an arbitration clause to be legally binding it has to be in consonance with the “operation of law” which includes the Grundnorm i.e. the Constitution. It is the rule of law which is supreme and forms parts of the basic structure. The argument canvassed on behalf of the respondent that the petitioner having consented to the pre-deposit clause at the time of execution of the agreement, cannot turn around and tell the court in a Section 11(6) petition that the same is arbitrary and falling foul of Article 14 of the Constitution is without any merit. 85. It is a settled position of law that there can be no consent against the law and there can be no waiver of fundamental rights. The Constitution Bench of this Court speaking through Chief Justice Y.V. Chandrachud (as His Lordship then was) in Olga Tellis and Others v. Bombay Municipal Corporation and Others reported in (1985) 3 SCC 545 observed something very illuminating on the said aspect: “28. It is not possible to accept the contention that the petitioners are estopped from setting up their fundamental rights as a defence to the demolition of the huts put up by them on pavements or parts of public roads. There can be no estoppel against the Constitution. The Constitution is not only the paramount law of the land but, it is the source and sustenance 52 of all laws. Its provisions are conceived in public interest and are intended to serve a public purpose. The doctrine of estoppel is based on the principle that consistency in word and action imparts certainty and honesty to human affairs. If a person makes a representation to another, on the faith of which the latter acts to his prejudice, the former cannot resile from the representation made by him. He must make it good. This principle can have no application to representations made regarding the assertion or enforcement of fundamental rights. For example, the concession made by a person that he does not possess and would not exercise his right to free speech and expression or the right to move freely throughout the territory of India cannot deprive him of those constitutional rights, any more than a concession that a person has no right of personal liberty can justify his detention contrary to the terms of Article 22 of the Constitution. Fundamental rights are undoubtedly conferred by the Constitution upon individuals which have to be asserted and enforced by them, if those rights are violated. But, the high purpose which the Constitution seeks to achieve by conferment of fundamental rights is not only to benefit individuals but to secure the larger interests of the community. The Preamble of the Constitution says that India is a democratic Republic. It is in order to fulfil the promise of the Preamble that fundamental rights are conferred by the Constitution, some on citizens like those guaranteed by Articles 15, 16, 19, 21 and 29 and, some on citizens and non-citizens alike, like those guaranteed by Articles 14, 21, 22 and 25 of the Constitution. No individual can barter away the freedoms conferred upon him by the Constitution. A concession made by him in a proceeding, whether under a mistake of law or otherwise, that he does not possess or will not enforce any particular fundamental right, cannot create an estoppel against him in that or any subsequent proceeding. Such a concession, if enforced, would defeat the purpose of the Constitution. Were the argument of estoppel valid, an all-powerful State could easily tempt an individual to forego his precious personal freedoms on promise of transitory, immediate benefits . Therefore, notwithstanding the fact that the petitioners had conceded in the Bombay High Court that they have no fundamental right to construct hutments on pavements and that they will not object to their demolition after October 15, 1981, they are entitled to assert that any such action on the part of public authorities will be in violation of their fundamental rights. How far the argument regarding the 53 existence and scope of the right claimed by the petitioners is well-founded is another matter. But, the argument has to be examined despite the concession. 29. The plea of estoppel is closely connected with the plea of waiver, the object of both being to ensure bona fides in day-to- day transactions. In Basheshar Nath v. CIT [1959 Supp 1 SCR 528 : AIR 1959 SC 149 : (1959) 35 ITR 190], a Constitution Bench of this Court considered the question whether the fundamental rights conferred by the Constitution can be waived. Two members of the Bench (Das, C.J. and Kapoor, J.) held that there can be no waiver of the fundamental right founded on Article 14 of the Constitution. Two others (N.H. Bhagwati and Subba Rao, JJ.) held that not only could there be no waiver of the right conferred by Article 14, but there could be no waiver of any other fundamental right guaranteed by Part III of the Constitution. The Constitution makes no distinction, according to the learned Judges, between fundamental rights enacted for the benefit of an individual and those enacted in public interest or on grounds of public policy.” (Emphasis supplied) Issue No. IV 86. The issue as regards, the validity of arbitration clause empowering the Principal Secretary/Secretary (Irrigation), Government of Uttarakhand to appoint an arbitrator of his choice is concerned, the same could be said to be covered by the decision of this Court in Perkins Eastman (supra): 87. 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 54 ignore the designated arbitrator and appoint someone else. [See: IOC v. Raja Transport Pvt. Ltd , (2009) 8 SCC 520]

55

EUTRALITY OF RBITRATORS “ N A 53. It is universally accepted that any quasi-judicial process, including the arbitration process, must be in accordance with principles of natural justice. In the context of arbitration, neutrality of arbitrators viz. their independence and impartiality, is critical to the entire process. 54. In the Act, the test for neutrality is set out in Section 12(3) which provides— ‘ 12. (3) An arbitrator may be challenged only if— (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality.…’ 55. The Act does not lay down any other conditions to identify the “circumstances” which give rise to “justifiable doubts”, and it is clear that there can be many such circumstances and situations. The test is not whether, given the circumstances, there is any actual bias for that is setting the bar too high; but, whether 56 the circumstances in question give rise to any justifiable apprehensions of bias. 56. The limits of this provision has been tested in the Indian Supreme Court in the context of contracts with State entities naming particular persons/designations (associated with that entity) as a potential arbitrator. It appears to be settled by a series of decisions of the Supreme Court (see Executive Engineer, Irrigation Division v. Gangaram Chhapolia [Executive Engineer, Irrigation Division v. Gangaram Chhapolia, (1984) 3 SCC 627] , Transport Deptt. v. Munuswamy Mudaliar [Transport Deptt. v. Munuswamy Mudaliar, 1988 Supp SCC 651] , International Airports Authority v. K.D. Bali [International Airports Authority v. K.D. Bali, (1988) 2 SCC 360] , S. Rajan v. State of Kerala [S. Rajan v. State of Kerala, (1992) 3 SCC 608] , Indian Drugs & Pharmaceuticals Ltd. v. Indo Swiss Synthetics Gem Mfg. Co. Ltd. [Indian Drugs & Pharmaceuticals Ltd. v. Indo Swiss Synthetics Gem Mfg. Co. Ltd., (1996) 1 SCC 54] , Union of India v. M.P. Gupta [Union of India v. M.P. Gupta, (2004) 10 SCC 504] and ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd. [ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd., (2007) 5 SCC 304] that arbitration agreements in government contracts which provide for arbitration by a serving employee of the department, are valid and enforceable. While the Supreme Court, in Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd. [Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd., (2009) 8 SCC 520 : (2009) 3 SCC (Civ) 460] , carved out a minor exception in situations when the arbitrator ‘was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject-matter of the dispute’ (SCC p. 533, para 34) and this exception was used by the Supreme Court in Denel (Proprietary) Ltd. v. Ministry of Defence [Denel (Proprietary) Ltd. v. Ministry of Defence, (2012) 2 SCC 759 : (2012) 2 SCC (Civ) 37 : AIR 2012 SC 817] and Bipromasz Bipron Trading Sa v. Bharat Electronics Ltd. [Bipromasz Bipron Trading Sa v. Bharat Electronics Ltd., (2012) 6 SCC 384 : (2012) 3 SCC (Civ) 702] , to appoint an independent arbitrator under Section 11, this is not enough. 57 57. The balance between procedural fairness and binding nature of these contracts, appears to have been tilted in favour of the latter by the Supreme Court, and the Commission believes the present position of law is far from satisfactory. Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the Arbitral Tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles — even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties' apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, even if this is what the parties agreed. The Commission hastens to add that Mr P.K. Malhotra, the ex officio member of the Law Commission suggested having an exception for the State, and allow State parties to appoint employee arbitrators. The Commission is of the opinion that, on this issue, there cannot be any distinction between State and non-State parties. The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous — and the right to natural justice cannot be said to have been waived only on the basis of a “prior” agreement between the parties at the time of the contract and before arising of the disputes. 58. Large-scale amendments have been suggested to address this fundamental issue of neutrality of arbitrators, which the Commission believes is critical to the functioning of the arbitration process in India. In particular, amendments have been proposed to Sections 11, 12 and 14 of the Act. 59. The Commission has proposed the requirement of having specific disclosures by the arbitrator, at the stage of his possible appointment, regarding existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts. The Commission has proposed the incorporation of the 58

59 90. Although, the Law Commission discussed the aforesaid aspect under the heading “Neutrality of Arbitrators”, yet the focus of discussion was on impartiality and independence of the arbitrators which has relation to or bias towards one of the parties. In the field of international arbitration, neutrality is generally related to the nationality of the arbitrator. In the international sphere, the “appearance of neutrality” is considered equally important, which means that an arbitrator is neutral if his nationality is different from that of the parties. However, that is not the aspect which is being considered and the term “neutrality” used is relatable to impartiality and independence of the arbitrators, without any bias towards any of the parties. In fact, the term “neutrality of arbitrators” is commonly used in this context as well. (See: Voestalpine Schienen GMBH (supra)) 91. Keeping in mind the aforequoted recommendation of the Law Commission, with which spirit, Section 12 has been amended by the Amendment Act, 2015, it is manifest that the main purpose for amending the provision was to provide for neutrality of arbitrators. In order to achieve this, sub-section (5) of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject-matter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator. In such an eventuality i.e. when the arbitration clause finds foul with the amended provisions extracted above, the appointment of an arbitrator would be beyond 60 pale of the arbitration agreement, empowering the court to appoint such arbitrator(s) as may be permissible. That would be the effect of the non obstante clause contained in sub-section (5) of Section 12 and the other party cannot insist on appointment of the arbitrator in terms of the arbitration agreement. (See: Voestalpine Schienen GMBH (supra)) 92. There are a plethora of judgments of this Court even prior to the amendment of Section 12, where courts have appointed the arbitrators, giving a go-by to the agreed arbitration clause in certain contingencies and situations, having regard to the provisions of unamended Section 11(8) of the Act which, inter alia , provided that while appointing the arbitrator, Chief Justice, or the person or the institution designated by him, shall have regard to the other conditions as are likely to secure the appointment of an independent and impartial arbitrator. See Datar Switchgears Ltd. v. Tata Finance Ltd reported in (2000) 8 SCC 151, Punj Lloyd Ltd. v. Petronet MHB Ltd. reported in (2006) 2 SCC 638, Union of India v. Bharat Battery Mfg. Co. (P) Ltd. reported in (2007) 7 SCC 684, Deep Trading Co. v. Indian Oil Corpn. reported in (2013) 4 SCC 35, Union of India v. Singh Builders Syndicate reported in (2009) 4 SCC 523 and North Eastern Railway v. Tripple Engg. Works reported in (2014) 9 SCC 288. 93. Taking note of the aforesaid judgments, this Court in Union of India and Others v . Uttar Pradesh State Bridge Corporation Limited reported in (2015) 2 SCC 52 summed up the position in the following manner: 61

62

63

Insofar as the first pillar is concerned, it contains three general principles on which the entire edifice of the said Act is structured. These principles are mentioned by an English Court in its judgment in Deptt. of Economics, Policy and Development of the City of Moscow v. Bankers Trust Co. [2005 QB 207 : (2004) 3 WLR 533 : (2004) 4 All ER 746 : 2004 EWCA Civ 314]. In that case, Mance, L.J. succinctly summed up the objective of this Act in the following words: (QB p. 228, para 31) 64 “31. … Parliament has set out, in the Arbitration Act, 1996, to encourage and facilitate a reformed and more independent, as well as private and confidential, system of consensual dispute resolution, with only limited possibilities of court involvement where necessary in the interests of the public and of basic fairness.” Section 1 of the Act sets forth the three main principles of arbitration law viz. (i) speedy, inexpensive and fair trial by an impartial tribunal; (ii) party autonomy; and (iii) minimum court intervention. This provision has to be applied purposively. In case of doubt as to the meaning of any provision of this Act, regard should be had to these principles. 15. In the book O.P. Malhotra on the Law and Practice of Arbitration and Conciliation (3rd Edn. revised by Ms Indu Malhotra), it is rightly observed that the Indian Arbitration Act is also based on the aforesaid four foundational pillars. 16. First and paramount principle of the first pillar is “fair, speedy and inexpensive trial by an Arbitral Tribunal”. Unnecessary delay or expense would frustrate the very purpose of arbitration. Interestingly, the second principle which is recognised in the Act is the party autonomy in the choice of procedure. This means that if a particular procedure is prescribed in the arbitration agreement which the parties have agreed to, that has to be generally resorted to. It is because of this reason, as a normal practice, the court will insist the parties to adhere to the procedure to which they have agreed upon. This would apply even while making the appointment of substitute arbitrator and the general rule is that such an appointment of a substitute arbitrator should also be done in accordance with the provisions of the original agreement applicable to the appointment of the arbitrator at the initial stage. [See Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd. [ (2006) 6 SCC 204]. However, this principle of party autonomy in the choice of procedure has been deviated from in those cases where one of the parties have committed default by not acting in accordance with the procedure prescribed. Many such instances where this course of action is taken and the Court appoint the arbitrator when the persona designata has failed to act, are taken note of in paras 6 and 7 of Tripple Engg. Works [North Eastern Railway v. Tripple Engg. Works, (2014) 9 SCC 288 : (2014) 5 65

66 94. In the context of independence and impartiality of the arbitrator more particularly keeping in mind the amended Section 12 of the Act 1996, we must refer to and rely upon the observations made by this Court in paras 20 to 25 of the decision in the case of Voestalpine Schienen (supra):

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FEW FOREIGN COURT JUDGMENTS ON THE SUBJECT 95. We also looked into a very lucid and erudite judgement on the issue of unconscionable pre-condition in the arbitration agreement delivered by a 9 Judge 69 Bench of the Supreme Court of Canada in the case of Uber Technologies v. Heller (supra). 96. In the aforesaid case, Mr. Heller (driver) was required to accept the terms of Uber’s standard form service agreement, which stipulated that to resolve any dispute through arbitration or mediation with Uber, the claimant would have to pay an up-front administrative and filing fee of USD 14,500. 97. The Supreme Court of Canada held the aforesaid pre-condition to be unconscionable and unenforceable by a majority of 8:1. The majority speaking through Abella and Rowe JJ., while explaining the doctrine of unconscionability held as under:

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71 arguments “may speak more or less forcefully depending on the context” (Wellman, at para. 53; see also B.J. Reiter, “Unconscionability : Is There a Choice? A Reply to Professor Hasson” (1980) 4 Can. Bus. L.J. 403, at pp. 405-6). As Professor Atiyah has noted: The proposition that a person is always the best judge of his own interests is a good starting-point for laws and institutional arrangements, but as an infallible empirical proposition it is an outrage to human experience. The parallel moral argument, that to prevent a person, even in his own interests, from binding himself is to show disrespect for his moral autonomy, can ring very hollow when used to defend a grossly unfair contract secured at the expense of a person of little understanding or bargaining skill. [Emphasis added; p. 148] 58. Courts have never been required to take the ideal assumptions of contract theory as “infallible empirical proposition[s]”. Equitable doctrines have long allowed judges to “respond to the individual requirements of particular circumstances …. humaniz[ing] and contextualiz[ing] the law's otherwise antiseptic nature” (Leonard I. Rotman, “The ‘Fusion’ of Law and Equity? : A Canadian Perspective on the Substantive, Jurisdictional, or Non-Fusion of Legal and Equitable Matters” (2016) 2 C.J.C.C.L. 497, at pp. 503-4). Courts, as a result, do not ignore serious flaws in the contracting process that challenge the traditional paradigms of the common law of contract, such as faith in the capacity of the contracting parties to protect their own interests. The elderly person with cognitive impairment who sells assets for a fraction of their value (Ayres v. Hazelgrove, Q.B. England, February 9, 1984); the ship captain stranded at sea who pays an extortionate price for rescue (The Mark Lane, [L.R.] 15 P.D. 135); the vulnerable couple who signs an improvident mortgage with no understanding of its terms or financial implications (Commercial Bank of Australia Ltd. v. Amadio, [1983] HCA 14 : 151 CLR 447) — these and similar scenarios bear little resemblance to the operative assumptions on which the classic contract model is constructed. 59. In these kinds of circumstances, where the traditional assumptions underlying contract enforcement lose their 72 justificatory authority, the doctrine of unconscionability provides relief from improvident contracts. When unfair bargains cannot be linked to fair bargaining — when they cannot be attributed to one party's “donative intent or assumed risk”, as Professor Benson puts it — courts can avoid the inequitable effects of enforcement without endangering the core values on which freedom of contract is based (p. 182; see also Eisenberg, at pp. 799-801; S.M. Waddams, “Good Faith, Unconscionability and Reasonable Expectations” (1995) 9 J.C.L. 55, at p. 60). This explains how unconscionability lines up with traditional accounts of contract theory while recognizing the doctrine's historical roots in equity, which has long operated as a “corrective to the harshness of the common law” (McCamus, at p. 10; see also Rotman, at pp. 503-4). 60. This Court has often described the purpose of unconscionability as the protection of vulnerable persons in transactions with others (Hodgkinson v. Simms, [1994] 3 SCR 377, at pp. 405 and 412; Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 SCR 426, at p. 462, per Dickson C.J., and p. 516, per Wilson J.; Norberg v. Wynrib, [1992] 2 SCR 226, at p. 247; see also Bhasin v. Hrynew, [2014] 3 SCR 494, at para. 43). We agree. Unconscionability, in our view, is meant to protect those who are vulnerable in the contracting process from loss or improvidence to that party in the bargain that was made (see Mindy Chen-Wishart, Unconscionable Bargains (1989), at p. 109; see also James Gordley, “Equality in Exchange” (1981) 69 Cal. L. Rev. 1587, at pp. 1629- 34; Birch, at para. 44). Although other doctrines can provide relief from specific types of oppressive contractual terms, unconscionability allows courts to fill in gaps between the existing “islands of intervention” so that the “clause that is not quite a penalty clause or not quite an exemption clause or just outside the provisions of a statutory power to relieve will fall under the general power, and anomalous distinctions … will disappear” (S.M. Waddams, The Law of Contracts (7th ed. 2017), at p. 378). Xxx xxx xxx 70. The classic example of a “necessity” case is a rescue at sea scenario (see The Medina, [L.R.] 1 P.D. 272). The circumstances under which such agreements are made indicate 73

74 (Waddams (2019), at pp. 118-19; see also Benson, at p. 188; Smith, at pp. 360-62.) 85. We agree. One party knowingly or deliberately taking advantage of another's vulnerability may provide strong evidence of inequality of bargaining power, but it is not essential for a finding of unconscionability. Such a requirement improperly emphasizes the state of mind of the stronger party, rather than the protection of the more vulnerable. This Court's decisions leave no doubt that unconscionability focuses on the latter purpose. Parties cannot expect courts to enforce improvident bargains formed in situations of inequality of bargaining power; a weaker party, after all, is as disadvantaged by inadvertent exploitation as by deliberate exploitation. A rigid requirement based on the stronger party's state of mind would also erode the modern relevance of the unconscionability doctrine, effectively shielding from its reach improvident contracts of adhesion where the parties did not interact or negotiate. 86. In our view, the requirements of inequality and improvidence, properly applied, strike the proper balance between fairness and commercial certainty. Freedom of contract remains the general rule. It is precisely because the law's ordinary assumptions about the bargaining process do not apply that relief against an improvident bargain is justified. 87. Respecting the doctrine of unconscionability has implications for boiler plate or standard form contracts. As Karl N. Llewellyn, the primary drafter of the Uniform Commercial Code, explained: Instead of thinking about “assent” to boiler-plate clauses, we can recognize that so far as concerns the specific, there is no assent at all. What has in fact been assented to, specifically, are the few dickered terms, and the broad type of the transaction, and but one thing more. That one thing more is a blanket assent (not a specific assent) to any not unreasonable or indecent terms the seller may have on his form, which do not alter or eviscerate the reasonable meaning of the dickered terms. The fine print which has not been read has no business to cut under the reasonable meaning of those dickered terms which 75 constitute the dominant and only real expression of agreement, but much of it commonly belongs in. There has been an arm's-length deal, with dickered terms. There has been accompanying that basic deal another which … at least involves a plain expression of confidence, asked and accepted, with a corresponding limit on the powers granted : the boiler-plate is assented to en bloc, “unsight, unseen,” on the implicit assumption and to the full extent that (1) it does not alter or impair the fair meaning of the dickered terms when read alone, and (2) that its terms are neither in the particular nor in the net manifestly unreasonable and unfair. (The Common Law Tradition : Deciding Appeals (1960), pp. 370-71) 88. We do not mean to suggest that a standard form contract, by itself, establishes an inequality of bargaining power (Waddams (2017), at p. 240). Standard form contracts are in many instances both necessary and useful. Sophisticated commercial parties, for example, may be familiar with contracts of adhesion commonly used within an industry. Sufficient explanations or advice may offset uncertainty about the terms of a standard form agreement. Some standard form contracts may clearly and effectively communicate the meaning of clauses with unusual or onerous effects (Benson, at p. 234). 89. Our point is simply that unconscionability has a meaningful role to play in examining the conditions behind consent to contracts of adhesion, as it does with any contract. The many ways in which standard form contracts can impair a party's ability to protect their interests in the contracting process and make them more vulnerable, are well-documented. For example, they are drafted by one party without input from the other and they may contain provisions that are difficult to read or understand (see Margaret Jane Radin, “Access to Justice and Abuses of Contract” (2016) 33 Windsor Y.B. Access Just. 177, at p. 179; Stephen Waddams, “Review Essay : The Problem of Standard Form Contracts : A Retreat to Formalism” (2013) 53 Can. Bus. L.J. 475, at pp. 475-476; Thal, at pp. 27-28; William J. Woodward, Jr., “Finding the Contract in Contracts for Law, Forum and Arbitration” (2006) 2 Hastings Bus. L.J. 1, at p. 46). The potential for such contracts 76 to create an inequality of bargaining power is clear. So too is their potential to enhance the advantage of the stronger party at the expense of the more vulnerable one, particularly through choice of law, forum selection, and arbitration clauses that violate the adhering party's reasonable expectations by depriving them of remedies. This is precisely the kind of situation in which the unconscionability doctrine is meant to apply. 90. This development of the law of unconscionability in connection with standard form contracts is not radical. On the contrary, it is a modern application of the doctrine to situations where “the normative rationale for contract enforcement … [is] stretched beyond the breaking point” (Radin, at p. 179). The link between standard form contracts and unconscionability has been suggested in judicial decisions, textbooks, and academic articles for years (see, e.g., Douez, at para. 114; Davidson v. Three Spruces Realty Ltd., (1977) 79 DLR 481 (3d) (B.C.S.C.); Hunter, at p. 513; Swan, Adamski and Na, at pp. 992-93; McCamus, at p. 444; Jean Braucher, “Unconscionability in the Age of Sophisticated Mass-Market Framing Strategies and the Modern Administrative State” (2007) 45 Can. Bus. L.J. 382, at p. 396). It has also been present in the American jurisprudence for more than half a century (see Williams v. Walker-Thomas Furniture Company, 350 F.2d 445 (1965), at pp. 449-50). 91. Applying the unconscionability doctrine to standard form contracts also encourages those drafting such contracts to make them more accessible to the other party or to ensure that they are not so lop-sided as to be improvident, or both. The virtues of fair dealing were explained by Jean Braucher as follows: Businesses are driven to behave competitively in their framing of market situations or otherwise they lose to those who do. Only if there are meaningful checks on what might be considered immoral behavior will persons in business have the freedom to act on their moral impulses. An implication of this point is that, absent regulation, business culture will become ever more ruthless, so that the distinctions between “reputable businesses” and fringe marketers gradually wither away…. [p. 390] 77 92. This brings us to the appeal before us and whether Mr. Heller's arbitration clause with Uber is unconscionable. 93. There was clearly inequality of bargaining power between Uber and Mr. Heller. The arbitration agreement was part of a standard form contract. Mr. Heller was powerless to negotiate any of its terms. His only contractual option was to accept or reject it. There was a significant gulf in sophistication between Mr. Heller, a food deliveryman in Toronto, and Uber, a large multinational corporation. The arbitration agreement, moreover, contains no information about the costs of mediation and arbitration in the Netherlands. A person in Mr. Heller's position could not be expected to appreciate the financial and legal implications of agreeing to arbitrate under ICC Rules or under Dutch law. Even assuming that Mr. Heller was the rare fellow who would have read through the contract in its entirety before signing it, he would have had no reason to suspect that behind an innocuous reference to mandatory mediation “under the International Chamber of Commerce Mediation Rules” that could be followed by “arbitration under the Rules of Arbitration of the International Chamber of Commerce”, there lay a US$14,500 hurdle to relief. Exacerbating this situation is that these Rules were not attached to the contract, and so Mr. Heller would have had to search them out himself. 94. The improvidence of the arbitration clause is also clear. The mediation and arbitration processes require US$14,500 in up- front administrative fees. This amount is close to Mr. Heller's annual income and does not include the potential costs of travel, accommodation, legal representation or lost wages. The costs are disproportionate to the size of an arbitration award that could reasonably have been foreseen when the contract was entered into. The arbitration agreement also designates the law of the Netherlands as the governing law and Amsterdam as the “place” of the arbitration. This gives Mr. Heller and other Uber drivers in Ontario the clear impression that they have little choice but to travel at their own expense to the Netherlands to individually pursue claims against Uber through mandatory mediation and arbitration in Uber's home jurisdiction. Any representations to the arbitrator, including about the location of the hearing, can only be made after the fees have been paid. 78 95. The arbitration clause, in effect, modifies every other substantive right in the contract such that all rights that Mr. Heller enjoys are subject to the apparent precondition that he 7 travel to Amsterdam, initiate an arbitration by paying the required fees and receive an arbitral award that establishes a violation of this right. It is only once these preconditions are met that Mr. Heller can get a court order to enforce his substantive rights under the contract. Effectively, the arbitration clause makes the substantive rights given by the contract unenforceable by a driver against Uber. No reasonable person who had understood and appreciated the implications of the arbitration clause would have agreed to it. 96. We add that the unconscionability of the arbitration clause can be considered separately from that of the contract as a whole. As explained in Bremer Vulkan Schiffbau und Maschinenfabrik v. South India Shipping Corporation Ltd., [1981] A.C. 909 (H.L.), an arbitration agreement “constitutes a self-contained contract collateral or ancillary to the [main] agreement” (p. 980; see also p. 998, per Lord Scarman). Further support comes from the severability clause of the Uber Rasier and Uber Portier agreements, and s. 17(2) of the AA.” (Emphasis supplied) 98. Brown J. in his separate but concurring opinion held that such a pre- condition as mentioned in the agreement was opposed to public policy as it impeded the claimant from resolving his dispute effectively. The relevant observations are as under: “ 110. The ground upon which I proceed is that which precludes an ouster of court jurisdiction or, more broadly, which protects the integrity of the justice system. As Lord Atkin stated in Fender v. St. John-Mildmay, [1938] A.C. 1 (H.L.), at p. 12, ousting the jurisdiction of the courts is harmful in itself and “injurious to public interests” (see also Kain and Yoshida, at pp. 20-23). A provision that penalizes or prohibits one party from enforcing the terms of their agreement directly undermines the administration of justice. There is nothing novel about the proposition that contracting parties, as a matter of public policy, 79 cannot oust the court's supervisory jurisdiction to resolve contractual disputes (see e.g. Kill v. Hollister, (1746) 1 Wils. K.B. 129 : 95 E.R. 532; Scott v. Avery, (1856) 5 H.L.C. 811 : 10 E.R. 1121; Deuterium of Canada Ltd. v. Burns & Roe Inc., [1975] 2 SCR 124). Indeed, irrespective of the value placed on freedom of contract, courts have consistently held that a contracting party's right to legal recourse is “a right inalienable even by the concurrent will of the parties” (Scott, at p. 1133). 111. This head of public policy serves to uphold the rule of law, which, at a minimum, guarantees Canadian citizens and residents “a stable, predictable and ordered society in which to conduct their affairs” (Reference re Secession of Quebec, [1998] 2 SCR 217, at para. 70). Such a guarantee is meaningless without access to an independent judiciary that can vindicate legal rights. The rule of law, accordingly, requires that citizens have access to a venue where they can hold one another to account (Jonsson v. Lymer, 2020 ABCA 167, at para. 10 (CanLII)). Indeed, “[t]here cannot be a rule of law without access, otherwise the rule of law is replaced by a rule of men and women who decide who shall and who shall not have access to justice” (B.C.G.E.U. v. British Columbia (Attorney General), [1988] 2 SCR 214, at p. 230). Unless private parties can enforce their legal rights and publicly adjudicate their disputes, “the rule of law is threatened and the development of the common law undermined” (Hryniak v. Mauldin, 2014 SCC 7 : [2014] 1 SCR 87, at para. 26). Access to civil justice is paramount to the public legitimacy of the law and the legitimacy of the judiciary as the institution of the state that expounds and applies the law. 112. Access to civil justice is a precondition not only to a functioning democracy but also to a vibrant economy, in part because access to justice allows contracting parties to enforce their agreements. A contract that denies one party the right to enforce its terms undermines both the rule of law and commercial certainty. That such an agreement is contrary to public policy is not a manifestation of judicial idiosyncrasies, but rather an instance of the self-evident proposition that there is no value in a contract that cannot be enforced. Thus, the harm to the public that would result from holding contracting parties to a bargain they cannot enforce is “substantially incontestable” (Millar Estate, at p. 7, quoting Fender, at p. 12). It really is this simple : unless everyone has reasonable access to the law and its 80