Case Note & Summary
The appellants, Mr. Vivek R Nair and Mr. Raveendran Nair, were the plaintiffs in an arbitration suit (AS No.85/2012) before the 6th Additional City Civil & Sessions Judge, Bengaluru City, which was dismissed. They appealed under Section 37(1)(c) of the Arbitration and Conciliation Act, 1996 against the judgment and decree dated 22.3.2016. The first appellant was appointed as a Senior Engineer by the first respondent, Tata Elxsi Limited, at its office in Thiruvananthapuram, Kerala. An arbitral agreement was entered into between the first appellant and the respondent company, which included a clause requiring the first appellant to work for a minimum period of 18 months. If he left the job within that period, a compensatory cost was payable by the appellants to the respondent company as stipulated in the clause. The first appellant worked only for a short period and left, triggering the compensatory cost clause. The matter went to arbitration, and the arbitrator passed an award in favor of the respondent company. The appellants challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, which was dismissed by the trial court. The appellants then filed the present appeal under Section 37 of the Act. The legal issues considered were whether the compensatory cost clause was unconscionable and contrary to public policy, and whether the arbitral award and the judgment under Section 34 were liable to be set aside. The appellants argued that the clause was a penalty and unconscionable, while the respondents contended that it was a genuine pre-estimate of damages. The court analyzed the provisions of Section 74 of the Indian Contract Act, 1872, and held that the compensatory cost clause was not a penalty but a genuine pre-estimate of damages. The court also held that the award was not in conflict with public policy. The court dismissed the appeal, upholding the arbitral award and the judgment of the trial court.
Headnote
A) Arbitration Law - Challenge to Arbitral Award - Section 34, Arbitration and Conciliation Act, 1996 - The court considered whether the compensatory cost clause in an employment agreement was unconscionable. The appellants challenged the arbitral award and the judgment dismissing their petition under Section 34. The court held that the compensatory cost clause was not unconscionable and the award did not warrant interference. (Paras 1-10) B) Contract Law - Employment Bond - Compensatory Cost - Section 74, Indian Contract Act, 1872 - The court examined whether the clause requiring payment of a sum for premature resignation was a penalty. The court held that the clause was a genuine pre-estimate of damages and not a penalty, and thus enforceable. (Paras 2-8) C) Arbitration Law - Public Policy - Section 34(2)(b)(ii), Arbitration and Conciliation Act, 1996 - The court considered whether the award was in conflict with public policy. The court held that the compensatory cost clause did not violate public policy as it was a reasonable commercial term agreed upon by the parties. (Paras 5-9)
Issue of Consideration
Whether the compensatory cost clause in the employment agreement requiring payment of a sum upon premature resignation is unconscionable and contrary to public policy, and whether the arbitral award and the judgment under Section 34 of the Arbitration and Conciliation Act, 1996 dismissing the challenge to the award are liable to be set aside.
Final Decision
The appeal is dismissed. The judgment and decree dated 22.3.2016 in AS No.85/2012 passed by the 6th Additional City Civil & Sessions Judge, Bengaluru City, is upheld.
Law Points
- Arbitration and Conciliation Act
- 1996
- Section 34
- Section 37
- Indian Contract Act
- 1872
- Section 74
- Employment bond
- Compensatory cost
- Unconscionable contract
- Public policy
