TMI Blog2023 (11) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... ble from the aforesaid observations made by this Court in ICOMM Tele Limited are as under: (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 arbitration. This would run contrary to the object of de-clogging the court system and would render the arbitral process ineffective and expensive. In the decision of the Calcutta High Court in M/S AMAZING INDIA CONTRACTORS PVT. LTD. VERSUS THE AIRPORT AUTHORITY OF INDIA AND ORS. [ 2023 (6) TMI 1331 - CALCUTTA HIGH COURT] , ICOMM Tele Limited and PERKINS EASTMAN ARCHITECTS DPC ANOTHER VERSUS HSCC (INDIA) LTD. [ 2019 (11) TMI 1154 - SUPREME COURT] 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 bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. 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 [ 2019 (11) TMI 1154 - SUPREME COURT] ? - HELD THAT:- 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. The courts in the United States of America have also deliberated upon the doctrine of unconscionability on numerous occasions. The Court of Appeal of California in the case of Patterson v. ITT Consumer Financial Corporation, had the occasion to consider whether the requirement for the claimants to pay a filing fee along with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contractual obligation. 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. SUBMISSIONS ON BEHALF OF THE PETITIONER 11. Mr. Sidhant Goel, the learned counsel appearing for the petitioner submitted that the case on hand, is one of international commercial arbitration within the meaning of Section 2(f) of the Act 1996 as his client is incorporated outside India. He submitted that under Section 11(12)(a) of the Act 1996, this Court has the requisite jurisdiction to take necessary measures for the constitution of an arbitral tribunal under Section 11(6) of the Act 1996 as the case is one of international commercial arbitration. 12. The learned counsel submitted that Clause 55.1(b)(I) of the Contract which provides for appointment of a sole arbitrator by the Principal Secretary/Secretary (Irrigation), Government of Uttarakhand is in teeth of the decision of this Court in Perkins Eastman Architects DPC and Another v. HSCC (India) Limited reported in (2020) 20 SCC 760. He submitted that the unilateral right of appointment of the arbitrator given to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner 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 viola ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 subsection (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bitrability. 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 proceedings. This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tral Tribunal. Undertaking a detailed full review or a long-drawn review at the referral stage would obstruct and cause delay undermining the integrity and efficacy of arbitration as a dispute resolution mechanism. Conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. There are certain cases where the prima facie examination may require a deeper consideration. The court's challenge is to find the right amount of and the context when it would examine the prima facie case or exercise restraint. The legal order needs a right balance between avoiding arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the matter is clearly nonarbitrable. 140. Accordingly, when it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the Arbitral Tribunal selected by the parties by consent. The underlying rationale being not to delay or defer and to discourage parties from using referral proceeding as a ruse to delay and obstruct. In such cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issues framed by us, we must look into few decisions referred to by us as aforesaid. S.K. JAIN V. STATE OF HARYANA 33. In S.K. Jain (supra), the challenge was to an order passed in a writ petition filed by the appellant, wherein it had prayed to quash a memo directing it to deposit 7% of the claimed amount before the arbitral tribunal. The civil appeal was dismissed by a three-Judge Bench of this Court and the memo was accordingly upheld. 34. In S.K. Jain (supra), the relevant arbitration clause reads as under: 25-A. (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 costs, if any, awarded by the arbitrator against the claimant party and the balance remaining after such adjustment in the absence of any such costs being awarded, the whole of the sum will be refunded to him within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccurrence. Thereupon the City Engineer shall give his written instructions and/or decisions within a period of 60 days of such request. This period can be extended by mutual consent of the parties. Upon receipt of written instructions of decisions, the parties shall promptly proceed without delay to comply with such instructions or decisions. If the City Engineer fails to give his instructions or decisions in writing within a period of 60 days or mutually agreed time after being requested if the parties are aggrieved against the decision of the CE, the parties may within 30 days prefer an appeal of MPL Com who shall afford an opportunity to the parties of being heard and to offer evidence in support of his appeal. MPL Com will give his decision within 90 days. If any party is not satisfied with the decision of MPL Com, he can refer such disputes for arbitration to an Arbitration Board to be constituted by the Corporation, which shall consist of three members of whom one shall be chosen from among the officers belonging to the Urban Administration and Development Department not below the rank of BE, one retired Chief Engineer of any technical department and City Engineer, Naga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cated in clause 29. However, before doing so, the party invoking arbitration clause is required to furnish security of a sum to be determined by the Corporation. 21. In this case, admittedly, the security has not been furnished by the respondent to the Corporation. We, in fact, asked Mr Sharma, appearing on behalf of the respondent to ascertain on the date of the hearing of the appeal, whether the security deposit was made or not. On instruction, Mr Sharma informed us that such security has not yet been deposited. Such being the position even today, we hold that the obligation of the Corporation to constitute an Arbitration Board to resolve disputes between the parties could not arise because of failure of the respondent to furnish security as envisaged in clause 29(d) of the contract. Therefore, we are of the opinion, that on account of nonfurnishing of security by the respondent, the question of constituting an Arbitration Board by the Corporation could not arise at all. Accordingly, we hold that the High Court was not justified in appointing a retired Chief Justice of a High Court as arbitrator by the impugned order. 22. It is not disputed before us that the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Emphasis supplied) 39. In 2008, the Punjab State Water Supply Sewerage Board, Bhatinda issued notice inviting tender for extension and augmentation of water supply, sewerage scheme, pumping station and sewerage treatment plant for various towns mentioned therein on a turnkey basis. On 25.09.2008, the appellant company, which was involved in civil/electrical works in India, was awarded the said tender after having been found to be the best suited for the task. On 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. 41. The relevant observations made by this Court are as under: 12. In S.K. Jain v. State of Haryana [(2009) 4 SCC 357 : (2009) 2 SCC (Civ) 163], this Court dealt with an arbitration clause in an agreement which read as follows: Xxx xxx xxx 13. In upholding such a clause, this Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t-at-call of 10 per cent of the amount claimed, which can amount to large sums of money, is obviously without any direct nexus to the filing of frivolous claims, as it applies to all claims (frivolous or otherwise) made at the very threshold. A 10 per cent deposit has to be made before any determination that a claim made by the party invoking arbitration is frivolous. This is also one important aspect of the matter to be kept in mind in deciding that such a clause would be arbitrary in the sense of being something which would be unfair and unjust and which no reasonable man would agree to. Indeed, a claim may be dismissed but need not be frivolous, as is obvious from the fact that where three arbitrators are appointed, there have been known to be majority and minority awards, making it clear that there may be two possible or even plausible views which would indicate that the claim is dismissed or allowed on merits and not because it is frivolous. Further, even where a claim is found to be justified and correct, the amount that is deposited need not be refunded to the successful claimant. Take for example a claim based on a termination of a contract being illegal and consequent dam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isites for appointment of the Arbitrator as laid hereunder: i. The case shall be referred to the Sole Arbitrator as per AA1 delegation of powers in vogue subject to the condition that the Concessionaire shall have to deposit the disputed amount with AA1 as condition precedent and the consent shall have to be obtained from the concessionaire for acceptance of the recommendations of Arbitrator before making reference to the Arbitrator for adjudication of dispute. (Emphasis supplied) 44. The relevant extract from the Judgment reads thus: 11 the conditions in clause 5.15 of the RFP, that require the petitioner to choose an Arbitrator from among a panel suggested by the respondent, as also the condition that requires the petitioner to make a pre-deposit of amounts as a condition for invoking the arbitration, would fall foul of the law declared by the Supreme court in the decisions reported as Perkins Eastman Architects DPC v. HSCC (India) Ltd. - [2019 SCC OnLine SC 1517] and ICOMM Tele Ltd. v. Punjab State Water Supply and Sewerage Board - [(2019) 4 SCC 401] respectively. I am not persuaded to accept the contention of the learned senior counsel for the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her party and correctness thereof at any stage whatsoever it shall be referred to arbitration of MD/Chief Engineer of HVPNL or his nominee not below the rank of Superintending Engineer subject to the following conditions:- xxx xxx xxx 7. In case the party invoking the arbitration is the contractor, the reference for arbitration shall be maintainable only after the contractor furnishes to the satisfaction of Engineering-In Charge a case security fee deposited @ 3% of the total amount claimed by him. The sum so deposited by the contractor shall on the termination of the arbitration proceedings be adjusted against the cost and any amount awarded against the contractor. The remaining amount shall be refunded to the contractor with-in one month from the date of the award. (Emphasis supplied) 47. The relevant observations from the Judgment are as under: 23. Resultantly, the issue of pre-deposit now arises. Counsel for the petitioner has heavily relied upon the judgment passed in M/s ICOMM Tele Ltd. (supra), which has been rightly distinguished by the learned counsel for the respondent 24. Thereafter, in 'S.K. Jain Vs. State of Haryana and another& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posited 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: Sr. No. Amount Claims Rate of Security Deposit i. For claims below Rs. 10,000/ 2% of amount claimed ii. For claims of Rs. 10,000/- above but below Rs. 1,00,000/- 5% of amount claimed iii. For claims of Rs. 1,00,000/- and above 7.5% of amount claimed (Emphasis supplied) 50. The relevant observations from the Judgment are as under: All the questions and grounds sought to be raised by learned counsel for the petitioner are succinctly answered by the Hon'ble Supreme Court in M/s. ICOMM Tele Limited's case (supra) itself while discussing S.K. Jain's case (supra). It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udge) Nature of the Clause: 25(A)(vii) It is also a term of this arbitration agreement that where the party invoking arbitration is the contractor, no reference for Arbitrator shall be maintainable unless the contractor, furnishes to the satisfaction of the 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 or whole sum 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. AMOUNT OF CLAIMS RATE OF SECURITY DEPOSIT i) For claims below Rs. 10,000/- 2% of amount claimed ii) For claims of Rs. 10,000/- above below Rs. 1,00,000/- 5% of amount claimed iii) For claims of Rs. 1,00,000/- 7.5 % of amount claimed and above 53. The relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be an essential term of this contract that in order to avoid frivolous claims, the party invoking arbitration shall specify the disputes based upon facts and calculations stating the amount claimed under each claim and shall furnish a deposit-at call for ten percent of the amount claimed, on a scheduled bank in the name of the Arbitrator/Chairman of the Arbitral Tribunal, by his official designation who shall keep the amount in deposit till the announcement of the award. In the event of an award in favour of the claimant, the deposit shall be refunded to him in proportion to the amount awarded with respect to the amount claimed and the balance, if any, shall be forfeited and paid to the other party. (Emphasis supplied) 56. The relevant observations from the Judgment are as under: 10. From a perusal of the aforesaid two clauses (supra) i.e. one that has been assailed by the petitioner and the other that has been quashed by the Supreme Court in juxta position makes it absolutely clear that they are identical containing the same stipulations. The Supreme Court in the case of M/s Icomm Tele Ltd. (supra) after considering the validity of the said clause has held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly spelt out. In case the dispute is not resolved within 45 days of reference, then the case shall be referred to sole arbitration of a person to be appointed by the Chairman/Member of the Authority. The award of the arbitrator so appointed shall be final and binding on the parties. The Arbitration Conciliation Act, 1996 shall be applicable. Once the arbitration clause has been invoked, the DRC process will cease to be operative. It will be no bar that the Arbitrator appointed as aforesaid is or has been an employee of the Authority and the appointment of the Arbitrator will not be challenged; or be open to Question in any Court of Law, on this account. 59. The relevant observations from the Judgment are as under: 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 righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India as such clause is arbitrary. The only pleas taken were that the ratio of Central Inland Water Transport Corpn. [Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156 : 1986 SCC (L S) 429] would apply and that there should be a cap in the quantum payable by way of security deposit, both of which pleas were turned down by this Court. Also, the security deposit made would, on the termination of the arbitration proceedings, first be adjusted against costs if any awarded by the arbitrator against the claimant party, and the balance remaining after such adjustment then be refunded to the party making the deposit. This clause is materially different from Clause 25(viii), which, as we have seen, makes it clear that in all cases the deposit is to be 10 per cent of the amount claimed and that refund can only be in proportion to the amount awarded with respect to the amount claimed, the balance being forfeited and paid to the other party, even though that other party may have lost the case. This being so, this judgment is wholly distinguishable and does not apply at all to the facts of the present case. (Emphasis supplied) 63. In para 16 of ICO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both according to political logic and constitutional law and is therefore violative of Article 14, and if it affects any matter relating to public employment, it is also violative of Article 16. Articles 14 and 16 strike at arbitrariness in State action and ensure fairness and equality of treatment. This view was approved by the Constitution Bench in Ajay Hasia case [(1981) 2 SCR 79 : (1981) 1 SCC 722 : 1981 SCC (L S) 258 : AIR 1981 SC 487 : (1981) 1 LLJ 103]. It thus appears wellsettled that Article 14 strikes at arbitrariness in executive/administrative action because any action that is arbitrary must necessarily involve the negation of equality. One need not confine the denial of equality to a comparative evaluation between two persons to arrive at a conclusion of discriminatory treatment. An action per se arbitrary itself denies equal of (sic) protection by law. The Constitution Bench pertinently observed in Ajay Hasia case [(1981) 2 SCR 79 : (1981) 1 SCC 722 : 1981 SCC (L S) 258 : AIR 1981 SC 487 : (1981) 1 LLJ 103] and put the matter beyond controversy when it said wherever therefore, there is arbitrariness in State action whether it be of the Legislature or of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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: 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute in question has arisen. 69. In the aforesaid context, we may refer to and rely upon a nine-Judge Bench 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: 42. In our view, there are ways to mitigate this concern that make the overall calculus favour departing from the general rule of referring the matter to the arbitrator in these situations. Courts have many ways of preventing the misuse of court processes for improper ends. Proceedings that appear vexatious can be handled by requiring security for costs and by suitable awards of costs. In England, courts have awarded full indemnity costs where a party improperly ignored arbitral jurisdiction (Hugh Beale, ed., Chitty on Contracts (33rd ed. 2018), vol. II, Specific Contracts, at para. 32-065; A. v. B. (No. 2), [2007] EWHC 54 (Comm.) : [2007] 1 All ER 633 (Comm.), at para. 15; Kyrgyz Mobil Tel Limited v. Fellowes International Holdings Limited, [2005] EWHC 1329 : 2005 WL 6514129 (Q.B.), at paras. 43-44). Further, if the party who successf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 obliterate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TRF Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72] (Emphasis supplied) 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. Seco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether there is an arbitration agreement is the next question. The resolution to that is simple it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement. At first blush, the Court seems to have read the existence of the arbitration agreement by limiting the examination to an examination of its factual existence. However, that is not so, as the existence of arbitration agreement does not mean anything unless such agreement is contractually valid. This view is confirmed by Duro Felguera case [Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 : (2017) 4 SCC (Civ) 764], wherein the reference to the contractual aspect of arbitration agreement is ingrained under Section 7 analysis. A mere agreement is not legally binding, unless it satisfies the core contractual requirements, concerning consent, consideration, legal relationship, etc. (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 arbitr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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, notwithsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Grounds for challenge. (1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances, (a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and (b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months. Explanation 1. The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Explanation 2. The disclosure shall be made by such person in the form specified in the Sixth Schedule.] (3) An arbitrator may be challenged only if (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or (b) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave 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 Fourth Schedule, which has drawn from the red and orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration, and which would be treated as a guide to determine whether circumstances exist which give rise to such justifiable doubts. On the other hand, in terms of the proposed Section 12(5) of the Act and the Fifth Schedule which incorporates the categories from the red list of the IBA Guidelines (as above), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 and 7 of the said decision, those judgments wherein departure from the aforesaid classical notion has been made are taken note of. It would, therefore, be useful to reproduce the said paragraph along with paras 8 and 9 hereinbelow: (SCC pp. 291-93) 6. The classical notion that the High Court while exercising its power under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter for short the Act ) must appoint the arbitrator as per the contract between the parties saw a significant erosion in ACE Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corpn. Ltd. [(2007) 5 SCC 304], wherein this Court had taken the view that though the contract between the parties must be adhered to, deviations therefrom in exceptional circumstances would be permissible. A more significant development had come in a decision that followed soon thereafter in Union of India v. Bharat Battery Mfg. Co. (P) Ltd. [(2007) 7 SCC 684] wherein following a three-Judge Bench decision in Punj Lloyd Ltd. v. Petronet MHB Ltd. [(2006) 2 SCC 638], it was held that once an aggrieved party files an application under Section 11(6) of the Act to the High Court, the opposite party would lose its righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitration clauses providing for appointment of serving officers and encourage professionalism in arbitration. 64 9. A pronouncement of late in Deep Trading Co. v. Indian Oil Corpn. [(2013) 4 SCC 35 : (2013) 2 SCC (Civ) 449] followed the legal position laid down in Punj Lloyd Ltd. [Punj Lloyd Ltd. v. Petronet MHB Ltd., (2006) 2 SCC 638] which in turn had followed a two-Judge Bench decision in Datar Switchgears Ltd. v. Tata Finance Ltd. [(2000) 8 SCC 151]. The theory of forfeiture of the rights of a party under the agreement to appoint its arbitrator once the proceedings under Section 11(6) of the Act had commenced came to be even more formally embedded in Deep Trading Co. [(2013) 4 SCC 35 : (2013) 2 SCC (Civ) 449] subject, of course, to the provisions of Section 11(8), which provision in any event, had been held in Northern Railway Admn. [(2008) 10 SCC 240] not to be mandatory, but only embodying a requirement of keeping the same in view at the time of exercise of jurisdiction under Section 11(6) of the Act. (emphasis in original) 14. Speedy conclusion of arbitration proceedings hardly needs to be emphasised. It would be of some interest to note that in England ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tration. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artiality 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): 20. Independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which applied to all judicial and quasi-judicial proceedings. It is for this reason that notwithstanding the fact that relationship between the parties to the arbitration and the arbitrators themselves are contractual in nature and the source of an arbitrator's appointment is deduced from the agreement entered into between the parties, notwithstanding the same nonindependence and non-impartiality of such arbitrator (though contractually agreed upon) would render him ineligible to conduct the arbitration. The genesis behind this rational is that even when an arbitrator is appointed in terms of contract and by the parties to the contract, he is independent of the parties. Functions and duties require him to rise above the partisan interest of the parties and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ator. Entry 1 is highlighted by the learned counsel for the petitioner which provides that where the arbitrator is an employee, consultant, advisor or has any other past or present business relationship with the party, would not act as an arbitrator. What was argued by the learned Senior Counsel for the petitioner was that the panel of arbitrators drawn by the respondent consists of those persons who are government employees or ex-government employees. However, that by itself may not make such persons ineligible as the panel indicates that these are the persons who have worked in the Railways under the Central Government or the Central Public Works Department or public sector undertakings. They cannot be treated as employee or consultant or advisor of the respondent DMRC. If this contention of the petitioner is accepted, then no person who had earlier worked in any capacity with the Central Government or other autonomous or public sector undertakings, would be eligible to act as an arbitrator even when he is not even remotely connected with the party in question, like DMRC in this case. The amended provision puts an embargo on a person to act as an arbitrator, who is the employee o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: 53. We agree with Mr. Heller that the arbitration agreement is unconscionable. The parties and interveners focused their submissions on unconscionability in accordance with this Court's direction in TELUS Communications Inc. v. Wellman, [2019] 2 SCR 144, at para. 85, that arguments over any potential unfairness resulting from the enforcement of arbitration clauses contained in standard form contracts are better dealt with directly through the doctrine of unconscionability . 54. Unconscionability is an equitable doctrine that is used to set aside unfair agreements [that] resulted from an inequality of bargaining power (John D. McCamus, The Law of Contracts (2nd ed. 2012), at p. 424). Initially applied to protect young heirs and the poor and ignorant from one-sided agreements, unconscionability evolved to cover any contract with the combination of inequality of bargaining power and improvidence (Mitchell McInnes, The Canadian Law of Unjust E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity, the arguments for enforcing contracts carry their greatest weight (Melvin Aron Eisenberg, The Bargain Principle and Its Limits (1982) 95 Harv. L. Rev. 741, at pp. 746-48). But these 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability 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 just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 upfront 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 forese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause that expressly blocks access to a legally determined resolution and one that has the ultimate effect of doing so. That this is so is illustrated by the judgment of Drummond J. in Novamaze Pty Ltd. v. Cut Price Deli Pty Ltd., (1995) 128 ALR 540 (F.C.A.). In Novamaze, the terms of a franchise agreement permitted the franchisor to take control of the franchisee's business if either party threatened to commence, or commenced, legal proceedings against the other. This clause, Drummond J. explained, was capable of operating as a powerful disincentive to the franchisee to take proceedings of any kind against [the franchisor], no matter how strong a case the franchisee may have that it has suffered wrong (p. 548). Summarizing the relevant principle, Drummond J. continued: the citizen is entitled to have recourse to the court for an adjudication on his legal rights. A contractual agreement to deny a person that inalienable right contravenes this public policy and is void. A disincentive to a person to exercise this right of recourse to the court can, depending upon how powerfully it operates to discourage litigation, amount to a denial of this right just as complete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on whether it can provide a comparable measure of justice. xxx xxx xxx 121. In sum, applying public policy to determine whether an arbitration agreement prohibits access to justice is neither stating a new common law rule as my colleague C t J. characterizes it, nor an expansion of the grounds for judicial intervention in arbitration proceedings (paras. 307, 312 and 316). Common law courts have long recognized the right to resolve disputes according to law. The law has simply evolved to embrace arbitration as means of achieving that resolution. Contractual stipulations that prohibit such resolution altogether, whether by express prohibition or simply by effect, continue to be unenforceable as a matter of public policy. (Emphasis supplied) 99. The Majority ultimately concluded observing the following in paragraphs 97 and 98 respectively of the judgement as under: 97. Respect for arbitration is based on it being a cost-effective and efficient method of resolving disputes. When arbitration is realistically unattainable, it amounts to no dispute resolution mechanism at all. As our colleague Justice Brown notes, under the arbitration clause, Mr. Heller, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual provision unconscionable and hence unenforceable under Civil Code section 1670.5 (135 Cal.App.3d at p. 485.) A M concluded that unconscionability has a procedural and a substantive component. (Id. at p. 486.) The procedural component focuses on the factors of oppression and surprise. (Ibid.) Oppression results where there is no real negotiation of contract terms because of unequal bargaining power. (Ibid.) `Surprise' involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in a prolix printed form drafted by the party seeking to enforce the disputed terms. (Ibid.) The substantive component of unconscionability looks to whether the contract allocates the risks of the bargain in an objectively unreasonable or unexpected manner. (Id. at p. 487.) To be unenforceable there must be both substantive and procedural unconscionability, though there may be an inverse relation between the two elements. (Ibid.) 3. A contract of adhesion is a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it. (Neal v. State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a minimum of $850 just to obtain a participatory hearing. In short the procedure seems designed to discourage borrowers from responding at all. In the event that they do not respond, an award may be entered against them if the documents submitted by ITT support its claim. (Emphasis supplied) 101. Similarly, the United States District Court, W.D. Michigan in the case of Vegter v. Forecast Financial Corporation reported in 2007 WL 4178947, while discussing the principle of procedural and substantive unconscionability in arbitration agreements, held as under: B. Unconscionability Generally applicable contract defenses, such as unconscionability, can invalidate an arbitration agreement consistent with the FAA. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996). Whether an arbitration clause is unconscionable is governed by state law. Stutler v. T.K. Constructors, Inc., 448 F.3d 343, 345 (6th Cir. 2006). Under Michigan law, in order to invalidate a contract provision for unconscionability, the Court must find the provision is both procedurally and substantively unconscionable. Pichey v. Ameritech Interactive Media Servs., Inc., 421 F. Supp. 2d 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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