LOMBARDI ENGINEERING LIMITED v. UTTARAKHAND JAL VIDYUT NIGAM LIMITED

VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]

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.

80Copy pinpoint80. 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 Indian statutes.’ (iii) In another case of Om Prakash Gupta v Hindustan Petroleum Corporation Ltd. & Anr. reported in 2009 SCC OnLine Raj 1381, it was again held that ‘Since the limits have been defined by the Constitution, they are, in jurisprudential term, ‘the grundnorm’.’ (iv) In another case of Sunil v State of M. P. & Another reported in 2016 SCC OnLine MP 8551, it was again mentioned that, ‘The Constitution of India is the grundnorm – the paramount law of the country. All other laws derive their origin and are supplementary and incidental to the principles laid down in the Constitution.’ (v) In the case of Government of Andhra Pradesh & Ors vs Smt. P. Laxmi Devi reported in (2008) 4 SCC 720, this Court observed, ‘According to Kelson, in every country there is a hierarchy of legal norms, headed by what he calls as the ‘grundnorm’. If a legal norm in a higher layer of this hierarchy conflicts with a legal norm in a lower layer the former will prevail. In India the Grundnorm is the Indian Constitution.’

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81Copy pinpoint81. Thus, in the context of the Arbitration Agreement, the layers of the Grundnorm as per Kelsen’s theory would be in the following hierarchy: (i) Constitution of India, 1950; (ii) Arbitration and Conciliation Act, 1996 & any other Central/State Law; (iii) Arbitration Agreement entered into by the parties in light of s. 7 of the Arbitration and Conciliation Act, 1996.

82Copy pinpoint82. Thus, the Arbitration Agreement, has to comply with the requirements of the following and cannot fall foul of: (i) Section 7 of the Arbitration and Conciliation Act; (ii) any other provisions of the Arbitration and Conciliation Act, 1996 & Central/State Law; (iii) Constitution of India, 1950.

83Copy pinpoint83. The observations of this Court in para 236 of Vidya Drolia (supra) should clinch the issue. Para 236 reads thus: “236. Having established the threshold standard for the court to examine the extent of validity of the arbitration agreement, as a starting point, it is necessary to go back to Duro Felguera [Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 : (2017) 4 SCC (Civ) 764], which laid down : (SCC p. 759, para 48) “48. … From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one aspect—the existence of an arbitration agreement. What are the factors for deciding 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

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VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]

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)

84Copy pinpoint84. 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 arbitration clause to be legally binding it has to be in consonance with the “operation of law” which includes the Grundnorm i.e. the Constitution. It is the rule of law which is supreme and forms parts of the basic structure. The argument canvassed on behalf of the respondent that the petitioner having consented to the pre-deposit clause at the time of execution of the agreement, cannot turn around and tell the court in a Section 11(6) petition that the same is arbitrary and falling foul of Article 14 of the Constitution is without any merit.

85Copy pinpoint85. It is a settled position of law that there can be no consent against the law and there can be no waiver of fundamental rights. The Constitution Bench of this Court speaking through Chief Justice Y.V. Chandrachud (as His Lordship then was) in Olga Tellis and Others v. Bombay Municipal Corporation and Others reported in (1985) 3 SCC 545 observed something very illuminating on the said aspect: “28. It is not possible to accept the contention that the petitioners are estopped from setting up their fundamental rights as a defence to the demolition of the huts put up by them on pavements or parts of public roads. There can be no estoppel against the Constitution. The Constitution is not only the paramount law of the land but, it is the source and sustenance of all laws. Its provisions are conceived in public interest and are intended to serve a public purpose. The doctrine of estoppel is based on the principle that consistency in word and action imparts certainty and honesty to human affairs. If a person makes a representation to another, on the faith of which the latter acts to his

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prejudice, the former cannot resile from the representation made by him. He must make it good. This principle can have no application to representations made regarding the assertion or enforcement of fundamental rights. For example, the concession made by a person that he does not possess and would not exercise his right to free speech and expression or the right to move freely throughout the territory of India cannot deprive him of those constitutional rights, any more than a concession that a person has no right of personal liberty can justify his detention contrary to the terms of Article 22 of the Constitution. Fundamental rights are undoubtedly conferred by the Constitution upon individuals which have to be asserted and enforced by them, 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, notwithstanding the fact that the petitioners had conceded in the Bombay High Court that they have no fundamental right to construct hutments on pavements and that they will not object to their demolition after October 15, 1981, they are entitled to assert that any such action on the part of public authorities will be in violation of their fundamental rights. How far the argument regarding the existence and scope of the right claimed by the petitioners is well-founded is another matter. But, the argument has to be examined despite the concession.

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VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]

86Copy pinpoint86. The issue as regards, the validity of arbitration clause empowering the Principal Secretary/Secretary (Irrigation), Government of Uttarakhand to appoint an arbitrator of his choice is concerned, the same could be said to be covered by the decision of this Court in Perkins Eastman (supra):

87Copy pinpoint87. 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. [See: IOC v. Raja Transport Pvt. Ltd, (2009) 8 SCC 520]

88Copy pinpoint88. In the aforesaid context, we must look into the amended Section 12 of the 1996 Act. Section 12 reads thus: “12. 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,—

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(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) he does not possess the qualifications agreed to by the parties. (4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made. (5) 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 shall be ineligible to be appointed as an arbitrator: Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”

89Copy pinpoint89. The Amendment 2015 is also based on the recommendation of the Law Commission which specifically dealt with the issue of “Neutrality of Arbitrators” and a discussion in this behalf is contained in paras 53 to 60 of the Law Commission’s Report No. 246 published in the August 2004. We reproduce the entire discussion hereinbelow:

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VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]

“Nਅਕਔ਒ਁ਌ਉਔਙ ਏਆ A਒ਂਉਔ਒ਁਔਏ਒ਓ

53. It is universally accepted that any quasi-judicial process, including the arbitration process, must be in accordance with principles of natural justice. In the context of arbitration, neutrality of arbitrators viz. their independence and impartiality, is critical to the entire process.

54. In the Act, the test for neutrality is set out in Section 12(3) which provides— ‘12. (3) An arbitrator may be challenged only if— (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality.…’

55. The Act does not lay down any other conditions to identify the “circumstances” which give rise to “justifiable doubts”, and it is clear that there can be many such circumstances and situations. The test is not whether, given the circumstances, there is any actual bias for that is setting the bar too high; but, whether the circumstances in question give rise to any justifiable apprehensions of bias.

56. The limits of this provision has been tested in the Indian Supreme Court in the context of contracts with State entities naming particular persons/designations (associated with that entity) as a potential arbitrator. It appears to be settled by a series of decisions of the Supreme Court (see Executive Engineer, Irrigation Division v. Gangaram Chhapolia [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

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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 dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject-matter of the dispute’ (SCC p. 533, para 34) and this exception was used by the Supreme Court in Denel (Proprietary) Ltd. v. Ministry of Defence [Denel (Proprietary) Ltd. v. Ministry of Defence, (2012) 2 SCC 759 : (2012) 2 SCC (Civ) 37 : AIR 2012 SC 817] and Bipromasz Bipron Trading Sa v. Bharat Electronics Ltd. [Bipromasz Bipron Trading Sa v. Bharat Electronics Ltd., (2012) 6 SCC 384 : (2012) 3 SCC (Civ) 702] , to appoint an independent arbitrator under Section 11, this is not enough.

57. The balance between procedural fairness and binding nature of these contracts, appears to have been tilted in favour of the latter by the Supreme Court, and the Commission believes the present position of law is far from satisfactory. Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the Arbitral Tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles — even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties’ apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, even if this is what the parties agreed. The Commission hastens to add that Mr P.K. Malhotra, the ex officio member of the Law Commission suggested having an exception for the State, and allow State parties to appoint employee arbitrators. The Commission is of the opinion that, on this issue, there cannot be any distinction between State and non-State parties. The concept of party autonomy cannot be stretched

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VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]

to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous — and the right to natural justice cannot be said to have 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 person proposed to be appointed as an arbitrator shall be ineligible to be so appointed, notwithstanding any prior agreement to the contrary. In the event such an ineligible person is purported to be appointed as an arbitrator, he shall be de jure deemed to be unable to perform his functions, in terms of the proposed Explanation to Section 14. Therefore, while the disclosure is required with respect to a broader list of categories (as set out in the Fourth Schedule, and as based on the red and orange lists of the IBA Guidelines), the ineligibility to be appointed as an arbitrator (and the consequent de jure inability to so act) follows from a smaller and more serious sub-set of situations (as set out in the Fifth Schedule, and as based on the red list of the IBA Guidelines).

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60. The Commission, however, feels that real and genuine party autonomy must be respected, and, in certain situations, parties should be allowed to waive even the categories of ineligibility as set in the proposed Fifth Schedule. This could be in situations of family arbitrations or other arbitrations where a person commands the blind faith and trust of the parties to the dispute, despite the existence of objective “justifiable doubts” regarding his independence and impartiality. To deal with such situations, the Commission has proposed the proviso to Section 12(5), where parties may, subsequent to disputes having arisen between them, waive the applicability of the proposed Section 12(5) by an express agreement in writing. In all other cases, the general rule in the proposed Section 12(5) must be followed. In the event the High Court is approached in connection with appointment of an arbitrator, the Commission has proposed seeking the disclosure in terms of Section 12(1) and in which context the High Court or the designate is to have “due regard” to the contents of such disclosure in appointing the arbitrator.” (Emphasis supplied)

90Copy pinpoint90. Although, the Law Commission discussed the aforesaid aspect under the heading “Neutrality of Arbitrators”, yet the focus of discussion was on impartiality and independence of the arbitrators which has relation to or bias towards one of the parties. In the field of international arbitration, neutrality is generally related to the nationality of the arbitrator. In the international sphere, the “appearance of neutrality” is considered equally 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))

91Copy pinpoint91. 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

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VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]

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 be beyond pale of the arbitration agreement, empowering the court to appoint such arbitrator(s) as may be permissible. That would be the effect of the non obstante clause contained in sub-section (5) of Section 12 and the other party cannot insist on appointment of the arbitrator in terms of the arbitration agreement. (See: Voestalpine Schienen GMBH (supra))

92Copy pinpoint92. 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. See Datar Switchgears Ltd. v. Tata Finance Ltd reported in (2000) 8 SCC 151, Punj Lloyd Ltd. v. Petronet MHB Ltd. reported in (2006) 2 SCC 638, Union of India v. Bharat Battery Mfg. Co. (P) Ltd. reported in (2007) 7 SCC 684, Deep Trading Co. v. Indian Oil Corpn. reported in (2013) 4 SCC 35, Union of India v. Singh Builders Syndicate reported in (2009) 4 SCC 523 and North Eastern Railway v. Tripple Engg. Works reported in (2014) 9 SCC 288.

93Copy pinpoint93. Taking note of the aforesaid judgments, this Court in Union of India and Others v. Uttar Pradesh State Bridge Corporation Limited reported in (2015) 2 SCC 52 summed up the position in the following manner: “13. No doubt, ordinarily that would be the position. The moot question, however, is as to whether such a course of action has to be necessarily adopted by the High Court in all cases, while dealing with an application under Section 11 of the Act or is there room for play in the joints and the High Court is not divested of exercising discretion under some circumstances? If yes, what are those circumstances? It is this very aspect which was specifically dealt with by this Court

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in Tripple Engg. Works [North Eastern Railway v. Tripple Engg. Works, (2014) 9 SCC 288 : (2014) 5 SCC (Civ) 30]. Taking note of various judgments, the Court pointed out that the notion that the High Court was bound to appoint the arbitrator as per the contract between the parties has seen a significant erosion in recent past. In paras 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 right of appointment of the arbitrator(s) as per the terms of the contract. The implication that the Court would be free to deviate from the terms of the contract is obvious.

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and by further laying down that the said expression has to be read along with the requirement of sub-section (8) of Section 11 of the Act. The position was further clarified in Indian Oil Corpn. Ltd. v. Raja Transport (P) Ltd. [(2009) 8 SCC 520 : (2009) 3 SCC (Civ) 460]. Para 48 of the Report wherein the scope of Section 11 of the Act was summarised may be quoted by reproducing sub-paras (vi) and (vii) hereinbelow: (Indian Oil case [(2009) 8 SCC 520 : (2009) 3 SCC (Civ) 460], SCC p. 537) ‘48.(vi) The Chief Justice or his designate while exercising power under sub-section (6) of Section 11 shall endeavour to give effect to the appointment procedure prescribed in the arbitration clause. (vii) 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.”

8. The above discussion will not be complete without reference to the view of this Court expressed in Union of India v. Singh Builders Syndicate [(2009) 4 SCC 523 : (2009) 2 SCC (Civ) 246], wherein the appointment of a retired Judge contrary to the agreement requiring appointment of specified officers was held to be valid on the ground that the arbitration proceedings had not concluded for over a decade making a mockery of the process. In fact, in para 25 of the Report in Singh Builders Syndicate [(2009) 4 SCC 523 : (2009) 2 SCC (Civ) 246] this Court had suggested that the Government, statutory authorities and government companies should consider phasing out arbitration clauses providing for appointment of serving officers and encourage professionalism in arbitration.

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

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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 also, Modern Arbitration Law on the lines of U਎ਃਉਔ਒ਁ਌ Model Law, came to be enacted in the same year as the Indian law which is known as the English Arbitration Act, 1996 and it became effective from 31-1-

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succinctly summed up the objective of this Act in the following words: (QB p. 228, para 31) “31. … Parliament has set out, in the Arbitration Act, 1996, to encourage and facilitate a reformed and more independent, as well as private and confidential, system of consensual dispute resolution, with only limited possibilities of court involvement where necessary in the interests of the public and of basic fairness.” Section 1 of the Act sets forth the three main principles of arbitration law viz. (i) speedy, inexpensive and fair trial by an impartial tribunal; (ii) party autonomy; and (iii) minimum court intervention. This provision has to be applied purposively. In case of doubt as to the meaning of any provision of this Act, regard should be had to these principles.

15. In the book O.P. Malhotra on the Law and Practice of Arbitration and Conciliation (3rd Edn. revised by Ms Indu Malhotra), it is rightly observed that the Indian Arbitration Act is also based on the aforesaid four foundational pillars.

16. First and paramount principle of the first pillar is “fair, speedy and inexpensive trial by an Arbitral Tribunal”. Unnecessary delay or expense would frustrate the very purpose of arbitration. 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

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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 paras 6 and 7 of Tripple Engg. Works [North Eastern Railway v. Tripple Engg. Works, (2014) 9 SCC 288 : (2014) 5 SCC (Civ) 30]. We are conscious of the fact that these were the cases where appointment of the independent arbitrator made by the Court in exercise of powers under Section 11 of account of “default procedure”. We are, in the present case, concerned with the constitution of substitute Arbitral Tribunal where earlier Arbitral Tribunal has failed to perform. However, the above principle of default procedure is extended by this Court in such cases as well as is clear from the judgment in Singh Builders Syndicate [Union of India v. Singh Builders Syndicate, (2009) 4 SCC 523 : (2009) 2 SCC (Civ) 246].

17. In the case of contracts between government corporations/ State-owned companies with private parties/contractors, the terms of the agreement are usually drawn by the government company or public sector undertakings. Government contracts have broadly two kinds of arbitration clauses, first where a named officer is to act as sole arbitrator; and second, where a senior officer like a Managing Director, nominates a designated officer to act as the sole arbitrator. No doubt, such clauses which give the Government a dominant position to constitute the Arbitral Tribunal are held to be valid. At the same time, it also casts an onerous and responsible duty upon the persona designata to appoint such persons/officers as the arbitrators who are not only able to function independently and impartially, but are in a position to devote adequate time in conducting the arbitration. If the Government has nominated those officers as arbitrators who are not able to devote time to the arbitration proceedings or become incapable of acting as arbitrators because of frequent transfers, etc., then the principle of “default procedure” at least in the cases where Government has assumed the role of appointment of arbitrators to itself, has to be applied in the case of substitute arbitrators as well and the Court will step in to appoint the arbitrator by keeping aside the procedure which is agreed to between the parties. However, it will depend upon the facts of a particular case as to whether such a course

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of action should be taken or not. What we emphasise is that Court is not powerless in this regard.” (Emphasis supplied)

94Copy pinpoint94. In the context of independence and impartiality 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 non-independence 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 not to act in, or so as to further, the particular interest of either parties. After all, the arbitrator has adjudicatory role to perform and, therefore, he must be independent of parties as well as impartial. The United Kingdom Supreme Court has beautifully highlighted this aspect in Hashwani v. Jivraj [(2011) 1 WLR 1872 : 2011 UKSC 40] in the following words: (WLR p. 1889, para 45) “45. … the dominant purpose of appointing an arbitrator or arbitrators is the impartial resolution of the dispute between the parties in accordance with the terms of the agreement and, although the contract between the parties and the arbitrators would be a contract for the provision of personal services, they were not personal services under the direction of the parties.”

21. Similarly, Cour de Cassation, France, in a judgment delivered in 1972 in Consorts Ury [Fouchard, Gaillard, Goldman on International

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Commercial Arbitration 562 (Emmanuel Gaillard & John Savage eds., 1999) {quoting Cour de cassation [Cass.] [Supreme Court for judicial matters] Consorts Ury v. S.A. des Galeries Lafayette, Cass. 2e civ., 13-4-1972, JCP, Pt. II, No. 17189 (1972) (France)}.] , underlined that: “an independent mind is indispensable in the exercise of judicial power, whatever the source of that power may be, and it is one of the essential qualities of an arbitrator.”

22. Independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while partiality will more likely surface during the arbitration proceedings.

23. It also cannot be denied that the Seventh Schedule is based on IBA guidelines which are clearly regarded as a representation of international based practices and are based on statutes, case law and juristic opinion from a cross-section on jurisdiction. It is so mentioned in the guidelines itself.

24. Keeping in view the aforesaid parameters, we advert to the facts of this case. Various contingencies mentioned in the Seventh Schedule render a person ineligible to act as an arbitrator. 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

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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 of the party to the dispute. It also deprives a person to act as an arbitrator if he had been the consultant or the advisor or had any past or present business relationship with DMRC. No such case is made out by the petitioner.

25. Section 12 has been amended with the objective to induce neutrality of arbitrators viz. their independence and impartiality. The amended provision is enacted to identify the “circumstances” which give rise to “justifiable doubts” about the independence or impartiality of the arbitrator. If any of those circumstances as mentioned therein exists, it will give rise to justifiable apprehension of bias. The Fifth Schedule to the Act enumerates the grounds which may give rise to justifiable doubts of this nature. Likewise, the Seventh Schedule mentions those circumstances which would attract the provisions of sub-section (5) of Section 12 and nullify any prior agreement to the contrary. In the context of this case, it is relevant to mention that only if an arbitrator is an employee, a consultant, an advisor or has any past or present business relationship with a party, he is rendered ineligible to act as an arbitrator. Likewise, that person is treated as incompetent to perform the role of arbitrator, who is a manager, director or part of the management or has a single controlling influence in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration. Likewise, persons who regularly advised the appointing party or affiliate of the appointing party are incapacitated. A comprehensive list is enumerated in Schedule 5 and Schedule 7 and admittedly the persons empanelled by the respondent are not covered by any of the items in the said list.” (Emphasis supplied) FEW FOREIGN COURT JUDGMENTS ON THE SUBJECT

95Copy pinpoint95. We also looked into a very lucid and erudite judgement on the issue of unconscionable pre-condition in the arbitration agreement delivered

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by a 9 Judge Bench of the Supreme Court of Canada in the case of Uber Technologies v. Heller (supra).

96Copy pinpoint96. In the aforesaid case, Mr. Heller (driver) was required to accept the terms of Uber’s standard form service agreement, which stipulated that to resolve any dispute through arbitration or mediation with Uber, the claimant would have to pay an up-front administrative and filing fee of USD 14,500.

97Copy pinpoint97. The Supreme 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 Enrichment and Restitution (2014), at p. 521; see also pp. 520- 24; Bradley E. Crawford, “Restitution — Unconscionable Transaction — Undue Advantage Taken of Inequality Between Parties” (1966) 44 Can. Bar Rev. 142, at p. 143). This development has been described as “one of the signal accomplishments of modern contract law, representing a renaissance in the doctrinal treatment of contractual fairness” (Peter Benson, Justice in Transactions : A Theory of Contract Law (2019), at p. 165; see also Angela Swan, Jakub Adamski and Annie Y. Na, Canadian Contract Law (4th ed. 2018), at p. 925).

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55. Unconscionability is widely accepted in Canadian contract law, but some questions remain about the content of the doctrine, and it has been applied inconsistently by the lower courts (see, among others, Morrison v. Coast Finance Ltd., (1965) 55 DLR 710 (2d) (B.C.C.A.); Harry v. Kreutziger, (1978) 9 B.C.L.R. 166 (C.A.), at p. 177, per Lambert J.A.; Downer v. Pitcher, 2017 NLCA 13 : 409 DLR 542 (4th), at para. 20; Input Capital Corp. v. Gustafson, 2019 SKCA 78 : 438 DLR 387 (4th); Cain v. Clarica Life Insurance Co., 2005 ABCA 437 : 263 DLR 368 (4th); Titus v. William F. Cooke Enterprises Inc., 2007 ONCA 573 : 284 DLR 734 (4th); Birch v. Union of Taxation Employees, Local 70030, 2008 ONCA 809 : 305 DLR 64 (4th); see also Swan, Adamski and Na, at p. 982; McInnes, at pp. 518-19). These questions require examining underlying contractual theory (Rick Bigwood, “Antipodean Reflections on the Canadian Unconscionability Doctrine” (2005) 84 Can. Bar Rev. 171, at p. 173).

56. The classic paradigm underlying freedom of contract is the “freely negotiated bargain or exchange” between “autonomous and self-interested parties” (McCamus, at p. 24; see also Swan, Adamski and Na, at pp. 922-23; P.S. Atiyah, Essays on Contract (1986), at p. 140). At the heart of this theory is the belief that contracting parties are best-placed to judge and protect their interests in the bargaining process (Atiyah, at pp. 146-48; Bigwood, at pp. 199-200; Alan Brudner, “Reconstructing contracts” (1993) 43 U.T.L.J. 1, at pp. 2-3). It also presumes equality between the contracting parties and that “the contract is negotiated, freely agreed, and therefore fair” (Mindy Chen- Wishart, Contract Law (6th ed. 2018), at p. 12) (emphasis in original).

57. In cases where these assumptions align with reality, 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:

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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]

59. In these kinds of circumstances, where the traditional assumptions underlying contract enforcement lose their justificatory authority, the doctrine of unconscionability provides relief from improvident contracts. When unfair bargains cannot be linked to fair bargaining — when they cannot be attributed to one party’s “donative intent or assumed risk”, as Professor Benson puts it — courts can avoid the

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inequitable effects of enforcement without endangering the core values on which freedom of contract is based (p. 182; see also Eisenberg, at pp. 799-801; S.M. Waddams, “Good Faith, Unconscionability and Reasonable Expectations” (1995) 9 J.C.L. 55, at p. 60). This explains how unconscionability lines up with traditional accounts of contract theory while recognizing the doctrine’s historical roots in equity, which has long operated as a “corrective to the harshness of the common law” (McCamus, at p. 10; see also Rotman, at pp. 503-4).

60. This Court has often described the purpose of unconscionability as the protection of vulnerable persons in transactions with others (Hodgkinson v. Simms, [1994] 3 SCR 377, at pp. 405 and 412; Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 SCR 426, at p. 462, per 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 indicate the weaker party did not freely enter into the contract, as it was the product of his “extreme need … to relieve the straits in which he finds himself” (Bundy, at p. 339). Other situations of dependence also fit this mould, including those where a party is vulnerable due to financial desperation, or where

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there is “a special relationship in which trust and confidence has been reposed in the other party” (Norberg, at p. 250, quoting Christine Boyle and David R. Percy, Contracts : Cases and Commentaries (4th ed. 1989), at pp. 637-38). Unequal bargaining power can be established in these scenarios even if duress and undue influence have not been demonstrated (see Norberg, at pp. 247-48; see also McInnes, at p. 543).

71. The second common example of an inequality of bargaining power is where, as a practical matter, only one party could understand and appreciate the full import of the contractual terms, creating a type of “cognitive asymmetry” (see Smith, at pp. 343-44). This may occur because of personal vulnerability or because of disadvantages specific to the contracting process, such as the presence of dense or difficult to understand terms in the parties› agreement. In these cases, the law›s assumption about self-interested bargaining loses much of its force. Unequal bargaining power can be established in these scenarios even if the legal requirements of contract formation have otherwise been met (see Sebastien Grammond, “The Regulation of Abusive or Unconscionable Clauses from a Comparative Law Perspective” (2010) 49 Can. Bus. L.J. 345, at pp. 353-54). Xxx xxx xxx

84. Unconscionability, moreover, can be established without proof that the stronger party knowingly took advantage of the weaker. Such a requirement is closely associated with theories of unconscionability that focus on wrongdoing by the defendant (see Boustany, at p. 6). But unconscionability can be triggered without wrongdoing. As Professor Waddams compellingly argues: The phrases ‘unconscionable conduct’, ‘unconscionable behaviour’ and ‘unconscionable dealing’ lack clarity, are unhistorical insofar as they imply the need for proof of wrongdoing, and have been unduly restrictive. (Waddams (2019), at pp. 118-19; see also Benson, at p. 188; Smith, at pp. 360-62.)

85. We agree. One party knowingly or deliberately taking advantage of another›s vulnerability may provide strong evidence of inequality of

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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 justified.

87. Respecting the doctrine of unconscionability has implications for boiler plate or standard form contracts. As Karl N. Llewellyn, the primary drafter of the Uniform Commercial Code, explained: Instead of thinking about “assent” to boiler-plate clauses, we can recognize that so far as concerns the specific, there is no assent at all. What has in fact been assented to, specifically, are the few dickered terms, and the broad type of the transaction, and but one thing more. That one thing more is a blanket assent (not a specific assent) to any not unreasonable or indecent terms the seller may have on his form, which do not alter or eviscerate the reasonable meaning of the dickered terms. The fine print which has not been read has no business to cut under the reasonable meaning of those dickered terms which constitute the dominant and only real expression of agreement, but much of it commonly belongs in. There has been an arm’s-length deal, with dickered terms. There has been accompanying that basic deal another which … at least involves a plain expression of confidence, asked and accepted, with a

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corresponding limit on the powers granted : the boiler-plate is assented to en bloc, “unsight, unseen,” on the implicit assumption and to the full extent that (1) it does not alter or impair the fair meaning of the dickered terms when read alone, and (2) that its terms are neither in the particular nor in the net manifestly unreasonable and unfair. (The Common Law Tradition : Deciding Appeals (1960), pp. 370-71)

88. We do not mean to suggest that a standard form contract, by itself, establishes an inequality of bargaining power (Waddams (2017), at p. 240). Standard form contracts are in many instances both necessary and useful. Sophisticated commercial parties, for example, may be familiar with contracts of adhesion commonly used within an industry. Sufficient explanations or advice may offset uncertainty about the terms of a standard form agreement. Some standard form contracts may clearly and effectively communicate the meaning of clauses with unusual or onerous effects (Benson, at p. 234).

89. Our point is simply that unconscionability has a meaningful role to play in examining the conditions behind consent to contracts of adhesion, as it does with any contract. The many ways in which standard form contracts can impair 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

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remedies. This is precisely the kind of situation in which the unconscionability doctrine is meant to apply.

90. This development of the law of unconscionability in connection with standard form contracts is not radical. On the contrary, it is a modern application of the doctrine to situations where “the normative rationale for contract enforcement … [is] stretched beyond the breaking point” (Radin, at p. 179). The link between standard form contracts and unconscionability has been suggested in judicial decisions, textbooks, and academic articles for years (see, e.g., Douez, at para. 114; Davidson v. Three Spruces Realty Ltd., (1977) 79 DLR 481 (3d) (B.C.S.C.); Hunter, at p. 513; Swan, Adamski and Na, at pp. 992-93; McCamus, at p. 444; Jean Braucher, “Unconscionability in the Age of Sophisticated Mass-Market Framing Strategies and the Modern Administrative State” (2007) 45 Can. Bus. L.J. 382, at p. 396). It has also been present in the American jurisprudence for more than half a century (see Williams v. Walker-Thomas Furniture Company, 350 F.2d 445 (1965), at pp. 449-50).

91. Applying the unconscionability doctrine to standard form contracts also encourages those drafting such contracts to make them more accessible to the other party or to ensure that they are not so lop- sided as to be improvident, or both. The virtues of fair dealing were explained by Jean Braucher as follows: Businesses are driven to behave competitively in their framing of market situations or otherwise they lose to those who do. Only if there are meaningful checks on what might be considered immoral behavior will persons in business have the freedom to act on their moral impulses. An implication of this point is that, absent regulation, business culture will become ever more ruthless, so that the distinctions between “reputable businesses” and fringe marketers gradually wither away…. [p. 390]

92. This brings us to the appeal before us and whether Mr. Heller›s arbitration clause with Uber is unconscionable.

93. There was clearly inequality of bargaining power between Uber and Mr. Heller. The arbitration agreement was part of a standard

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form contract. Mr. Heller was powerless to negotiate any of its terms. His only contractual option was to accept or reject it. There was a significant gulf in sophistication between Mr. Heller, a food deliveryman in Toronto, and Uber, a large multinational corporation. The arbitration agreement, moreover, contains no information about the costs of mediation and arbitration 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 up-front 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 foreseen when the contract was entered into. The arbitration agreement also designates the law of the Netherlands as the governing law and Amsterdam as the “place” of the arbitration. This gives Mr. Heller and other Uber drivers in Ontario the clear impression that they have little choice but to travel at their own expense to the Netherlands to individually pursue claims against Uber through mandatory mediation and arbitration in Uber›s home jurisdiction. Any representations to the arbitrator, including about the location of the hearing, can only be made after the fees have been paid.

95. The arbitration clause, in effect, modifies every other substantive right in the contract such that all rights that Mr. Heller enjoys are subject to the apparent precondition that he travel to Amsterdam,7 initiate

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an arbitration by paying the required fees and receive an arbitral award that establishes a violation of this right. It is only once these preconditions are met that Mr. Heller can get a court order to enforce his substantive rights under the contract. Effectively, the arbitration clause makes the substantive rights given by the contract unenforceable by a driver against Uber. No reasonable person who had understood and appreciated the implications of the arbitration clause would have agreed to it.

96. We add that the unconscionability of the arbitration clause can be considered separately from that of the contract as a whole. As explained in Bremer Vulkan Schiffbau und Maschinenfabrik v. South India Shipping Corporation Ltd., [1981] A.C. 909 (H.L.), an arbitration agreement “constitutes a self-contained contract collateral or ancillary to the [main] agreement” (p. 980; see also p. 998, per Lord Scarman). Further support comes from the severability clause of the Uber Rasier and Uber Portier agreements, and s. 17(2) of the AA.” (Emphasis supplied)

98Copy pinpoint98. Brown J. in his separate but concurring opinion held that such a pre-condition as mentioned in the agreement was opposed to public policy as it impeded the claimant from resolving his dispute effectively. The relevant observations are as under: “110. The ground upon which I proceed is that which precludes an ouster of court jurisdiction or, more broadly, which protects the integrity of the justice system. As Lord Atkin stated in Fender v. St. John-Mildmay, [1938] A.C. 1 (H.L.), at p. 12, ousting 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,

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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 without access to an independent judiciary that can vindicate legal rights. The rule of law, accordingly, requires that citizens have access to a venue where they can hold one another to account (Jonsson v. Lymer, 2020 ABCA 167, at para. 10 (CanLII)). Indeed, “[t]here cannot be a rule of law without access, otherwise the rule of law is replaced by a rule of men and women who decide who shall and who shall not have access to justice” (B.C.G.E.U. v. British Columbia (Attorney General), [1988] 2 SCR 214, at p. 230). Unless private parties can enforce their legal rights and publicly adjudicate their disputes, “the rule of law is threatened and the development of the common law undermined” (Hryniak v. Mauldin, 2014 SCC 7 : [2014] 1 SCR 87, at para. 26). Access to civil justice is paramount to the public legitimacy of the law and the legitimacy of the judiciary as the institution of the state that expounds and applies the law.

112. Access to civil justice is a precondition not only to a functioning democracy but also to a vibrant economy, in part because access to justice allows contracting parties to enforce their agreements. A contract that denies one party the right to enforce its terms undermines both the rule of law and commercial certainty. That such an agreement is contrary to public policy is not a manifestation of judicial idiosyncrasies, but rather an instance of the self-evident proposition that there is no value in a contract that cannot be enforced. Thus, the harm to the public that would result from holding contracting parties to a bargain they cannot enforce is “substantially incontestable” (Millar Estate, at p. 7, quoting Fender, at p. 12). It really is this simple : unless everyone has reasonable access to the law and its processes where necessary to vindicate legal rights, we will live in a society

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where the strong and well-resourced will always prevail over the weak. Or, as Frederick Wilmot-Smith puts it, “[l]egal structures that make enforcement of the law practically impossible will leave weaker members of society open to exploitation at the hands of, for example, unscrupulous employers or spouses.” (Equal Justice : Fair Legal Systems in an Unfair World (2019), at pp. 1-2).

113. The reference to making enforcement of the law practically impossible leads to a further, related point : there is no good reason to distinguish between a 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 as an express contractual prohibition against litigation. [pp. 548-49] xxx xxx xxx

117. Uber›s position requires this Court to accept that the change in judicial posture following the enactment of modern arbitration legislation leaves no room for the operation of public policy. But curial respect for arbitration, and for parties› choices to refer disputes to arbitration, is premised upon two considerations. First, the purpose of arbitration is to ensure that contracting parties have access to “a

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‘good and accessible method of seeking resolution for many kinds of disputes’ that ‘can be more expedient and less costly than going to court’” (Wellman, at para. 83, quoting Legislative Assembly of Ontario, March 27, 1991, at p. 245). Second, courts have accepted arbitration as an acceptable alternative to civil litigation because it can provide a resolution according to law. As this Court observed in Sport Maska Inc. v. Zittrer, [1988] 1 SCR 564, at p. 581: The legislator left … various procedures for settling disputes to be resolved freely by litigants when recourse to the courts was still possible. If judicial intervention was ruled out, however, the legislator had to ensure that the process would guarantee litigants the same measure of justice as that provided by the courts, and for this reason, rules of procedure were developed to ensure that the arbitrator is impartial and that the rules of fundamental justice … are observed. The arbitrator will make an award which becomes executory by homologation. This indicates the similarity between the arbitrator’s real function and that of a judge who has to decide a case. [Emphasis added.] In other words, any means of dispute resolution that serves as a final resort for contracting parties must be just. This is important because, unlike the submission of existing disputes to arbitration, and contrary to my colleague Côté J.’s assertion, an agreement to submit all future unknown disputes to arbitration is not simply a substitute for the parties’ negotiations (para. 250). Rather, it serves as a transfer of dispute resolution authority away from public adjudicators (W.G. Horton, “A Brief History of Arbitration” (2017) 47 Adv. Q. 12, at p. 14; Sport Maska, at p. 581; Wellman, at para. 48; Desputeaux, [2003] 1 SCR 178, at para. 40). The legitimacy of such a transfer rests upon 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 Côté J. characterizes it, nor an expansion

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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)

99Copy pinpoint99. 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, and only Mr. Heller, would experience undue hardship in attempting to advance a claim against Uber, regardless of the claim’s legal merit” (para. 136). The arbitration clause is the only way Mr. Heller can vindicate his rights under the contract, but arbitration is out of reach for him and other drivers in his position. His contractual rights are, as a result, illusory.

98. Based on both the disadvantages faced by Mr. Heller in his ability to protect his bargaining interests and on the unfair terms that resulted, the arbitration clause is unconscionable and therefore invalid.” (Emphasis supplied)

100Copy pinpoint100. 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 reported in 18 Cal. Rptr. 2d 563 (Cal. Ct. App. 1993), had the occasion to consider whether the requirement for the claimants to pay a filing fee along with hearing fees for the purpose of resolving the matter could be said to be unconscionable. The Court of Appeals held that such a condition was “incomprehensible” and discouraged the borrowers from pursuing their claims. The relevant observations are as under:

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“B. Unconscionability

2. Two alternative analyses exist under California law for determining whether a contractual provision will be unenforceable because it is unconscionable. (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925, fn. [216 Cal. Rptr. 345, 702 P.2d 503] [“Both analytical pathways should lead to the same result.”].) The first model set out in Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807 [171 Cal. Rptr. 604, 623 P.2d 165] asks initially whether the contract is one of adhesion. (Id. at p. 819.) Since a contract of adhesion is still fully enforceable, the inquiry then turns to whether enforcement should be denied. First, enforcement will be denied if the contract or provision falls outside the reasonable expectations of the weaker party. (Id. at p. 820.) Second, enforcement will be denied even if it does fall within the reasonable expectations of the parties, but it is unduly oppressive or unconscionable. (Ibid.) The alternative analytical model was set out in A M Produce Co. v. FMC Corp., supra, 135 Cal.App.3d 473. It sought to define what rendered a contract or a contractual 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

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VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]

reject it.” (Neal v. State Farm Ins. Cos. (1961) 188 Cal.App.2d 690, 694 [10 Cal.Rptr. 781].)

4. The record before us indicates that plaintiffs are individuals of modest means, some self-employed or temporarily jobless, who borrowed relatively small amounts of money, often in response to advertising promising “guaranteed loans.” The loan agreement which they signed included a preprinted form containing an arbitration clause either as the final paragraph on a page entitled “Agreement for Dispute Resolution” or at midpage on a sheet of text, but set apart by the use of boldface type. On both versions of the form the provision was clearly titled “Arbitration.” None of the preprinted clauses had been modified in any manner, which suggests that they were nonnegotiable. Several of the borrowers stated that they believed they would not have been able to obtain a bank loan. In these circumstances we think it indisputable that the contract was one of adhesion. ITT argues that arbitration has become such a common means of dispute resolution that it must be considered within the reasonable expectation of the borrowers. While arbitration per se may be within the reasonable expectation of most consumers, it is much more difficult to believe that arbitration in Minnesota would be within the reasonable expectation of California consumers. The arbitration clause says only that the dispute will be “resolved by binding arbitration by the National Arbitration Forum, Minneapolis, Minnesota.” xxx xxx xxx In order to obtain a participatory hearing, however, the responding party must make a prompt demand for one and accompany it with prepayment of fees. Prepayment of hearing fees can be waived for individuals, but only after filing an affidavit of indigency. However, the rule explaining the fee waiver process is, as the trial court aptly noted, “incomprehensible,” since it requires compliance with rules concerning involuntary dismissals. The likely effect of these procedures is to deny a borrower against whom a claim has been brought any opportunity to a hearing, much less a hearing held where the contract was signed, unless the borrower

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has considerable legal expertise or the money to hire a lawyer and/ or prepay substantial hearing fees. The latter is especially unlikely given the small dollar amounts at issue. In a dispute over a loan of $2,000 it would scarcely make sense to spend 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)

101Copy pinpoint101. 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 1038, 1044-45 (W.D. Mich. 2006) (Bell, C.J.). The inquiries for finding procedural and substantive unconscionability have been phrased as: “(1) What is the relative bargaining power of the parties, their relative economic strength, the alternative sources of supply, in a word, what are their options?; (2) Is the challenged term substantively reasonable?” Id. at 1045 (quoting Allen v. Mich. Bell. Tel. Co., 18 Mich. App. 632, 637, 171 N.W.2d 689 (1969)). As to procedural unconscionability, the Court finds that this was a contract of adhesion. The terms of the contract were not negotiated and Plaintiff had relatively little economic strength in the transaction.

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VIDYUT NIGAM LTD. [J. B. PARDIWALA, J.]

As to substantive unconscionability, the arbitration clause is unreasonable insofar as it requires Plaintiff to travel to Okaloosa County, Florida for the arbitration. In many circumstances requiring a consumer to travel a substantial distance to arbitrate a claim has been found to be unreasonable. DeOrnellas v. Aspen Square Mgmt., Inc., 295 F. Supp. 2d 753, 765-66 (E.D. Mich. 2003); Garrett v. Hooters-Toledo, 295 F. Supp. 2d 774, 783 (N.D. Ohio 2003); Comb v. PayPal, Inc., 218 F. Supp. 2d 1165, 1176-77 (N.D. Cal. 2002). In determining whether requiring the arbitration to be held in Florida is unreasonable, the Court must ask whether the “provision would deter a substantial number of similarly situated potential litigants. . . .”Morrison, 317 F.3d at 663. See Stutler, 448 F.3d at 346 (indicating that the test from Morrison is applicable “to the question of whether an arbitration clause is enforceable where federal statutorily provided rights are affected.”). Requiring a consumer who is experiencing financial distress to travel to Florida would effectively deter such a consumer from pursuing arbitration. At the time the contract was signed Defendants knew that Plaintiff was experiencing financial difficulty and presumably knew that it would be difficult for Plaintiff to arbitrate in Florida. Given those circumstances, the Court finds that requiring Plaintiff to arbitrate in Florida would effectively bar Plaintiff from brining a claim and is substantively unreasonable. The Court finds that the provision in the arbitration clause that designates Okaloosa County, Florida as the site of the arbitration is both procedurally and substantively unconscionable under Michigan law. Therefore, the Court severs and declares unenforceable the provision in the arbitration clause that designates Okaloosa, Florida as the site of the arbitration.”

102Copy pinpoint102. In view of the aforesaid discussion, we have reached to the conclusion that we should ignore the two conditions contained in Clause 55 of the GCC, one relating to 7% deposit of the total amount claimed and the second one relating to the stipulation empowering the Principal Secretary (Irrigation) Government of Uttarakhand to appoint a sole arbitrator.

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103Copy pinpoint103. In the result, this application stands allowed.

104Copy pinpoint104. We appoint Mr. V.K. Bist, the Former Chief Justice of the High Court of Sikkim to act as the sole arbitrator. The fees of the arbitrator including other modalities shall be fixed in consultation with the parties.

Headnotes prepared by: Application allowed. Nidhi Jain