Arbitration Clauses against Public Policy are Unconscionable & Unenforceable: District Court Observed

"Moral of the story is if we make 'Arbitration Clauses' sacred or unquestionable then in the disputes of strong and weak, justice may not win but stronger party would always win" – Hon'ble District Judge, Sh. L. K. Gaur

The entire world is moving towards alternative dispute resolution for faster, inexpensive and procedural flexibility as compared to the court litigation. In order to encourage the adjudication through ADR, the legislation has been amended the Law to include mandatory recourse to these remedies before proceedings in the court. The Government of India has also amended the Arbitration and Conciliation Act. 1996 in 2015 to make the act more effective, faster adjudication and bridged the gaps which were exploited by the parties. However, this doesn’t deter the parties to exploit the basic fabric of party autonomy to make the Arbitration process inaccessible and unaffordable by inserting unfair and unreasonable arbitration clauses particularly where there is unequal bargaining power between the parties to the litigation.

In one of the case, District Judge at Karkardooma court observed that if the arbitration clause violates the public policy and is in restrain of legal proceeding, it would be void ab initio in terms of section 23 & 28 of Contract Act and consequent award on such clause would not be enforceable and execution application would be liable to be dismissed. The Hon’ble court has given its detailed and reasoned judgement on the execution applications filed by the Bajaj Finance Ltd., Kotak Mahindra Bank Ltd., AU Small Finance Bank Ltd., Edel Weiss Retail Finance Ltd., India Infoline Finance Ltd., Cholamandalam Investment and Finance Company Ltd. Group, Equitas Small Finance Bank Ltd. Group, Magma Fincorp Ltd. Group.

The court discussed the cases of the various decree holders wherein in the unfair and unreasonable arbitration clauses were formulated to include, a) the judgement debtors (of Delhi) in case of dispute, were required to participate in the arbitration proceeding to be held in Pune, Maharashtra, b) the judgement debtor has the office in Mumbai and the arbitration was held in Chennai though as per the terms of the arbitration clause it could have been in Delhi as according to the arbitration clause, bank has the option to have arbitration anywhere it has its branch located, c) the loan was granted at Delhi to the borrower however it was provided that the arbitration shall take place at Jaipur and in another case the seat of arbitration given was of Chennai, d) in other cases the loan was given at Delhi and the seat of arbitration was given to be of Kolkata or of Mumbai.

The court observed that in all these cases, the borrowers were the small businessman and not having any bargaining power as compared to the decree holders and the arbitration clauses in these agreements were formulated to ensure that the judgement debtor will never be able to participate in the arbitration proceeding except for a cost and inconvenience which they will not be able to afford. It was further held that these companies have misused their positions to ensure that borrower will have no reasonable chance to participate in the arbitration proceedings and at the same time may not be able to approach the court in Delhi for any relief.

Referring to the basic structure of the party autonomy in the arbitration, in the Hon’ble district judge observed "It is not always a case of just "Party Autonomy” but also if the distribution of this ‘autonomy’ is even or asymmetrical. When one says ‘Party Autonomy’, it does not necessarily translate into "Equal Autonomy” for both sides. In fact more often than not a party which is in a position to dictate terms or is in a stronger position would in fact like the other party to surrender its autonomy in its favour, not just as to the appointment of the Arbitrator at its sole discretion but also in the manner the arbitration proceedings would be conducted and where, which may be completely disadvantageous to the weaker party. In my view, the question of 'Party Autonomy' cannot be stretched beyond a limit. It must stop before it turns into an instrument of exploitation”.

The court opined that, in terms of public policy as enshrined in Article 39 A of the constitution of the India, ‘There can not be anything more fundamental than the right to equal opportunity to fair adjudication’ and any law or agreement which creates barrier in promoting equal opportunity to access to justice violates Article 14 of the constitution and can easily be said to be against public policy.

The court interpreted the Section 8 of the Arbitration and Conciliation Act 1996 and Section 23 & 28 of the Contract Act and observed that ‘It is clear that the an arbitration clause of this nature was inserted to ensure that the Judgement Debtor would on the one hand would be able attend the Arbitration proceedings and on the other hand will not be able to approach ordinary courts because of the embargo put under section 8 of the Arbitration and conciliation Act. I am of the view that arbitration clause in the agreement is unconscionable and against public and also an agreement in restraint of legal proceedings and thus void ab initio in terms of section 23 and 28 of the Contract Act. The arbitration proceedings/ award based on such an arbitration clause would not be enforceable and consequently the execution application filed is liable to be dismissed’.

The court after considering the pleadings of the decree holders observed that "I am accordingly of the view that so far as the cases in hand are concerned it can be said without any hesitation that the Decree Holder completely (mis) used the Arbitration clauses in a way that would render the arbitration clause as unconscionable and against public policy. Arbitration conducted its basis thus can be said to be void ab initio"

The court further observed ‘Moral of the story is if we make ‘Arbitration Clauses’ sacred or unquestionable then in the disputes of strong and weak, justice may not win but stronger party would always win’.

Judgement (CNR = DLNE010049242019) dated 16-03-2020 can be downloaded from website: https://services.ecourts.gov.in/ecourtindia_v6/#