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

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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

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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

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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:

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“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

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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-

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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

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(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.”     

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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

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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

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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

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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   

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