Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIIL APPELLATE JURISDICTION
CIVIL APPEAL NO. OF 2009
(Arising out of SLP (C) No. 21552 of 2007)
S.K. Jain .....Appellant
Versus
State of Haryana and Anr. ....Respondents
J U D G M E N T
Dr. ARIJIT PASAYAT, J.
1. Leave granted.
2. Challenge in this appeal is to the order passed by a Division Bench of
the Punjab and Haryana High Court dismissing the writ petition filed by the
appellant under Section 226 of the Constitution of India, 1950 ( in short the
‘Constitution’). Prayer was to quash the Memo No.428 dated 10.1.2007
directing the appellant to deposit the amount of about Rs.1.81 crores which
is 7% of the total amount claimed by the appellant before the Arbitral
Tribunal (hereinafter referred to as the ‘Tribunal’).
3. Background facts in a nutshell are as follows:
The appellant is a contractor, who was allotted work of constructing
Haryana Government office building in Sector 17, Chandigarh. On 4-3-
1992 an agreement was entered into between the parties, which incorporated
sub-clause (7) of clause 25-A providing for arbitration in case of any
dispute. Some differences between the parties regarding payment in respect
of allotted work had arisen which resulted in referring the dispute to the
three members Tribunal. The appellant filed his claim before the Tribunal.
The respondent-State filed its objection to the claim by principally
submitting that the contractor has to comply with the mandatory
requirements of sub-clause (7) of Clause 25-A of the agreement dated
4.3.1992 which obliged the appellant to deposit 7% of the total claim made.
The amount so calculated comes to Rs.1,81,14,845/-. The Tribunal
sustained the objection and after placing reliance on a judgment of this
2
Court in Municipal Corporation, Jabalpur v. M/s Rajesh Construction
Company (JT (2007 (5) SC 450) has opined as follows:
“In view of the decision of the Supreme Court, referred
to above, as suggested on behalf of the respondent, the
claimant is directed to deposit Rs. 1,81,14,815/- i.e 7%
of the amount claimed in the statement of claim with the
respondent and further arbitration proceedings would
proceed only thereafter. The claimant was to comply
with the above condition in agreement before steps could
be taken to start arbitration proceedings. Hence, at this
stage Arbitrators cannot assume jurisdiction to proceed
with the arbitration. While allowing objection petition
filed under Section 16 of the Arbitration and
Conciliation Act, it is so ordered as above, accordingly.
Challenge before the High Court was that the Arbitration and
Conciliation Act, 1996 (in short the ‘Act’) does not permit the parties to
contract out of the provisions of the Act, and therefore the prescription
under Sub-Clause (7) of Clause 25-A of the agreement was in conflict with
the provisions of Section 31(8) read with Section 38 of the Act. It was
submitted that the costs involved cannot be more than Rs.20 crores and,
therefore, the demand of Rs.1.81 crores which is 7% of the total amount
claimed is wholly arbitrary, unreasonable and capricious. The High Court
did not find any substance in the plea and held that the challenge to the
3
legality of Sub-Clause (7) of Clause 25-A of the agreement is without any
substance. Accordingly, the writ petition was dismissed.
4. It is submitted by learned counsel for the appellant that Sub-clause (7)
of Clause 25-A incorporated in the agreement was a result of the unequal
bargaining power of the parties and since the Government is not required to
make the deposit, it is unconscionable and, therefore, the High Court has
erroneously dismissed the writ petition. Additionally, it is submitted that the
true effect of Sections 31(8) and 38 of the Act has not been kept in view. It
is also submitted that the contract is in conflict with Sections 23 and 28 of
the Indian Contract Act, 1872 (in short the ‘Contract Act’).
5. Learned counsel for the respondents on the other hand supported the
judgment of the High Court.
6. It is to be noted that the plea relating to unequal bargaining power
was made with great emphasis based on certain observations made by this
Court in Central Inland Water Transport Corporation Ltd. and Anr. v. Brojo
Nath Ganguly and Anr. (1986 (3) SCC 156). The said decision does not in
any way assist the appellant, because at para 89 it has been clearly stated
4
that the concept of unequal bargaining power has no application in case of
commercial contracts.
7. In Central Bank of India Ltd. v. Hartford Fire Insurance Co. Ltd.
(AIR 1965 SC 1288) it was observed at para 5 as follows:
“5. The contention of the appellant is based on the
interpretation of clause 10. Now it is commonplace that
it is the court’s duty to give effect to the bargain of the
parties according to their intention and when that bargain
is in writing the intention is to be looked for in the words
used unless they are such that one may suspect that they
do not convey the intention correctly. If those words are
clear, there is very little that the court has to do. The
court must give effect to the plain meaning of the words
however it may dislike the result. We have earlier set out
clause 10 and we find no difficulty or doubt as to the
meaning of the language there used. Indeed the language
is the plainest. The clause says “This Insurance may be
terminated at any time at the request of the Insured”, and
“The Insurance may also at any time be terminated at the
instance of the Company.” These are all the words of the
clause that matter for the present purpose. The words “at
any time” can only mean “at any time the party
concerned likes”. Shortly put clause 10 says “Either
party may at its will terminate the policy.” No other
meaning of the words used is conceivable.”
8. In General Assurance Society Ltd. v. Chandmull Jain and Anr. (AIR
1966 SC 1644 at para 11) the decision was re-iterated as follows:
5
“11. A contract of insurance is a species of commercial
transactions and there is a well established commercial
practice to send cover notes even prior to the completion
of a proper proposal or while the proposal is being
considered or a policy is in preparation for delivery. A
cover note is a temporary and limited agreement. It may
be self-contained or it may incorporate by reference the
terms and conditions of the future policy. When the
cover note incorporates the policy in this manner, it does
not have to recite the term and conditions, but merely to
refer to a particular standard policy. If the proposal is for
a standard policy and the cover note refers to it, the
assured is taken to have accepted the terms of that
policy. The reference to the policy and its terms and
conditions may be expressed in the proposal or the cover
note or even in the letter of acceptance including the
cover note. The incorporation of the terms and
conditions of the policy may also arise from a
combination of references in two or more documents
passing between the parties. Documents like the
proposal, cover note and the policy are commercial
documents and to interpret them commercial habits and
practice cannot altogether be ignored. During the time
the cover note operates, the relations of the parties are
governed by its terms and conditions, if any, but more
usually by the terms and conditions of the policy
bargained for and to be issued. When this happens the
terms of the policy are incipient but after the period of
temporary cover, the relations are governed only by the
terms and conditions of the policy unless insurance is
declined in the meantime. Delay in issuing the policy
makes no difference. The relations even then are
governed by the future policy if the cover notes give
sufficient indication that it would be so. In other respects
there is no difference between a contract of insurance
and any other contract except that in a contract of
insurance there is a requirement of uberrima fides i.e.
good faith on the part of the assured and the contract is
likely to be construed contra proferentem that is against
the company in case of ambiguity or doubt. A contract is
6
formed when there is an unqualified acceptance of the
proposal. Acceptance may be expressed in writing or it
may even be implied if the insurer accepts the premium
and retains it. In the case of the assured, a positive act on
his part by which he recognises or seeks to enforce the
policy amounts to an affirmation of it. This position was
clearly recognised by the assured himself, because he
wrote, close upon the expiry of the time of the cover
notes, that either a policy should be issued to him before
that period had expired or the cover note extended in
time. In interpreting documents relating to a contract of
insurance, the duty of the court is to interpret the words
in which the contract is expressed by the parties, because
it is not for the court to make a new contract, however
reasonable, if the parties have not made it themselves.
Looking at the proposal, the letter of acceptance and the
cover notes, it is clear that a contract of insurance under
the standard policy for fire and extended to cover flood,
cyclone etc. had come into being.”
Sub-Clause (7) of Clause 25-A of the agreement
reads as follows:
“(7) It is also a term of this contract agreement that
where the party invoking arbitration is the contractor, no
reference for arbitration shall be maintainable unless the
contractor furnishes to the satisfaction of the executive
Engineer-in-Charge of the work a security deposit of a
sum determined according to details given below and the
sum so deposited shall, on the termination of the
arbitration proceedings be adjusted against the cost, if
any, awarded by the arbitrator against the claimant party
and the balance remaining after such adjustment in the
absence of any such cost being awarded, the whole of the
sum will be refunded to him within one month from the
date of the award-
7
Amount of claim Rate of Security deposit
1. For claims below Rs.10,000/- 2% of amount claimed
2. For claims of Rs.10,000/- and 5% of amount claimed
above and below Rs.1,00,000/-
and
3. For claims of Rs.1,00,000/- and 7% of amount
claimed.
above
9. So far as the plea relating to Sub-Section (8) of Section 31 and
Section 38 are concerned they read as follows:
“ 31-Form and contents of arbitral award:-
xx xx xx
(8) Unless otherwise agreed by the parties-
(a) the costs of an arbitration shall be fixed by the
arbitral tribunal;
(b) the arbitral tribunal shall specify-
(i) the party entitled to costs,
(ii) the party who shall pay the costs,
(iii) the amount of costs or method of
determining that amount, and
(iv) the manner in which the costs shall be paid.
Explanation - For the purpose of clause (a), “costs”
means reasonable costs relating to-
(i) the fees and expenses of the arbitrators and
witnesses,
(ii) legal fees and expenses,
(iii) any administration fees of the institution
supervising the arbitration, and
8
(iv) any other expenses incurred in connection
with the arbitral proceedings and the arbitral
award.
38. Deposits - (1) The arbitral tribunal may fix the
amount of the deposit or supplementary deposit, as the
case may be, as an advance for the costs referred to in
sub-section (8) of Section 31, which it expects will be
incurred in respect of the claim submitted to it.
Provided that where apart from the claim a counter
claim has been submitted to the arbitral tribunal, it may
fix separate amount of deposit for the claim and counter
claim.
(2) The deposit referred to in sub-section (1) shall be
payable in equal shares by the parties.
Provided that where one party fails to pay his
share of the deposit, the other party may pay that share:
Provided further that where the other party also
does not pay the aforesaid share in respect of the claim
or the counter claim, the arbitral tribunal may suspend or
terminate the arbitral proceedings in respect of such
claim or counter claim as the case may be.
(3) Upon termination of the arbitral proceedings, the
arbitral tribunal shall render an accounting to the parties
of the deposits received and shall return any unexpended
balance to the party or parties, as the case may be.”
9
10. A bare perusal of the aforesaid provisions clearly shows that the
provision is to operate in the absence of agreement with regard to cost. It
cannot be pressed into service to get over sub-clause (7) of Clause 25-A.
11. In addition to the various pleas, the stand taken by the appellant is
squarely answered by what has been stated by this Court in Assistant Excise
Commissioner and Ors. v. Issac Peter and Ors. (1994 (4) SCC 104). At para
26 it has been stated as follows:
“ 26. Learned counsel for respondents then submitted that
doctrine of fairness and reasonableness must be read into
contracts to which State is a party. It is submitted that the
State cannot act unreasonably or unfairly even while
acting under a contract involving State power. Now, let
us see, what is the purpose for which this argument is
addressed and what is the implication? The purpose, as
we can see, is that though the contract says that supply of
additional quota is discretionary, it must be read as
obligatory — at least to the extent of previous year’s
supplies — by applying the said doctrine. It is submitted
that if this is not done, the licensees would suffer
monetarily. The other purpose is to say that if the State is
not able to so supply, it would be unreasonable on its
part to demand the full amount due to it under the
contract. In short, the duty to act fairly is sought to be
imported into the contract to modify and alter its terms
and to create an obligation upon the State which is not
there in the contract. We must confess, we are not aware
of any such doctrine of fairness or reasonableness. Nor
could the learned counsel bring to our notice any
decision laying down such a proposition. Doctrine of
10
fairness or the duty to act fairly and reasonably is a
doctrine developed in the administrative law field to
ensure the rule of law and to prevent failure of justice
where the action is administrative in nature. Just as
principles of natural justice ensure fair decision where
the function is quasi-judicial, the doctrine of fairness is
evolved to ensure fair action where the function is
administrative. But it can certainly not be invoked to
amend, alter or vary the express terms of the contract
between the parties. This is so, even if the contract is
governed by statutory provisions, i.e., where it is a
statutory contract — or rather more so. It is one thing to
say that a contract — every contract — must be
construed reasonably having regard to its language. But
this is not what the licensees say. They seek to create an
obligation on the other party to the contract, just because
it happens to be the State. They are not prepared to apply
the very same rule in converse case, i.e., where the State
has abundant supplies and wants the licensees to lift all
the stocks. The licensees will undertake no obligation to
lift all those stocks even if the State suffers loss. This
one-sided obligation, in modification of express terms of
the contract, in the name of duty to act fairly, is what we
are unable to appreciate. The decisions cited by the
learned counsel for the licensees do not support their
proposition. In Dwarkadas Marfatia v. Board of
Trustees of the Port of Bombay it was held that where a
public authority is exempted from the operation of a
statute like Rent Control Act, it must be presumed that
such exemption from the statute is coupled with the duty
to act fairly and reasonably. The decision does not say
that the terms and conditions of contract can be varied,
added or altered by importing the said doctrine. It may be
noted that though the said principle was affirmed, no
relief was given to the appellant in that case. Shrilekha
Vidyarthi v. State of U.P. was a case of mass termination
of District Government Counsel in the State of U.P. It
was a case of termination from a post involving public
element. It was a case of non-government servant
holding a public office , on account of which it was held
11
to be a matter within the public law field. This decision
too does not affirm the principle now canvassed by the
learned counsel. We are, therefore, of the opinion that in
case of contracts freely entered into with the State, like
the present ones, there is no room for invoking the
doctrine of fairness and reasonableness against one party
to the contract (State), for the purpose of altering or
adding to the terms and conditions of the contract,
merely because it happens to be the State. In such cases,
the mutual rights and liabilities of the parties are
governed by the terms of the contracts (which may be
statutory in some cases) and the laws relating to
contracts. It must be remembered that these contracts are
entered into pursuant to public auction, floating of
tenders or by negotiation. There is no compulsion on
anyone to enter into these contracts. It is voluntary on
both sides. There can be no question of the State power
being involved in such contracts. It bears repetition to
say that the State does not guarantee profit to the
licensees in such contracts. There is no warranty against
incurring losses. It is a business for the licensees.
Whether they make profit or incur loss is no concern of
the State. In law, it is entitled to its money under the
contract. It is not as if the licensees are going to pay
more to the State in case they make substantial profits.
We reiterate that what we have said hereinabove is in the
context of contracts entered into between the State and
its citizens pursuant to public auction, floating of tenders
or by negotiation. It is not necessary to say more than
this for the purpose of these cases. What would be the
position in the case of contracts entered into otherwise
than by public auction, floating of tenders or negotiation,
we need not express any opinion herein.”
12. It has been submitted by learned counsel for the appellant that there
should be a cap in the quantum payable in terms of sub-clause (7) of Clause
12
25-A. This plea is clearly without substance. It is to be noted that it is
structured on the basis of the quantum involved. Higher the claim, the
higher is the amount of fee chargeable. There is a logic in it. It is the
balancing factor to prevent frivolous and inflated claims. If the appellants’
plea is accepted that there should be a cap in the figure, a claimant who is
making higher claim stands on a better pedestal than one who makes a claim
of a lesser amount.
13. Above being the position, the appeal is clearly without merit,
deserves dismissal which we direct.
………………………………J.
(Dr. ARIJIT PASAYAT)
………………………………J.
(V.S. SIRPURKAR)
…………………………..…..J.
(ASOK KUMAR GANGULY)
New Delhi,
February 23, 2009
13