Introduction
In a landmark judgment of Lombardi Engineering Ltd v. State of Uttarakhand, the Supreme Court held that an arbitration agreement clause, inconsistent with the Constitution of India, cannot be enforced.
The Bench comprising of Chief Justice DY Chandrachud, Justice JB Pardiwala and Justice Manoj Misra deliberated on an application submitted by Lombardi Engineering Ltd., a Swiss company. The application, made under Section 11(6) of the Arbitration and Conciliation Act 1996, sought the appointment of an arbitrator for a dispute involving the State of Uttarakhand.
The company submitted the application to the Supreme Court, raising concerns about two provisions in the arbitration agreement. First, it objected to the requirement of pre-depositing 7% of the total claim to activate the arbitration clause. Second, it contested the sole authority given to the Principal Secretary/Secretary (Irrigation) to appoint a sole arbitrator.
Issues
First: The Court addressed the legality of a 7% pre-deposit condition for invoking arbitration and addressed the issue of such provision being violative of the Article 14 of the Constitution of India being arbitrary.
Second: The Court addressed the legalilty of the provision of authority vested in the Principal Secretary/Secretary (Irrigation) to appoint a sole arbitrator.
Held
The Court, referring to the case of ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Another (2019) (ICOMM Case), emphasised that pre-deposit conditions in arbitration clauses violate Article 14 of the Constitution.
Article 14 of the Constitution of India provides for equality before the law or equal protection of the laws within the territory of India. It states: “The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.”
The Court concluded that deterring a party to an arbitration from invoking arbitration clause by pre-deposit of certain percentage would discourage arbitration. This scenario is inconsistent with the aim of easing the burden on the court system and would undermine the efficiency and affordability of the arbitration process.
The Court, referring to the case of Perkins Eastman Architects DPC and another v. HSCC (India) Ltd, held that those with a vested interest in the arbitration’s outcome should not have the authority to appoint arbitrators.
The Court stated, “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 ignore the designated arbitrator and appoint someone else.”
The court ignored the challenged conditions and appointed Mr. V.K. Bist, the Former Chief Justice of the High Court of Sikkim, as the sole arbitrator.
Conclusion
The judgment applied Kelsen’s theory of Grundnorm, stating that the Constitution is the supreme source of law. Arbitration agreements must comply with the Constitution, the Arbitration and Conciliation Act, and other relevant laws. The court rejected the argument that the petitioner cannot challenge the pre-deposit clause after initial consent, stating that there can be no consent against the law or waiver of fundamental rights. The case establishes that arbitration clauses must align with constitutional principles and cannot be enforced if found manifestly arbitrary or violative of Article 14. It emphasizes the supremacy of the Constitution in the legal hierarchy and affirms the court’s authority to scrutinize arbitration clauses for legality and fairness.
