Arbitration Cannot Be Invoked Beyond Contractually Agreed Monetary Limits: Bombay High Court

The Bombay High Court has held that where parties have contractually agreed to restrict arbitration only to disputes up to a specified percentage of the contract value, courts cannot compel arbitration for claims exceeding that agreed limit.

Justice Sandeep V. Marne emphasised that arbitration is founded on party autonomy, under which parties are free to determine not only whether disputes will be arbitrated but also which categories or value of disputes will be subject to arbitration.

Emphasising this principle, the Court observed,

“Once arbitration agreement is arrived at, it does not mean that every dispute has to be resolved only by arbitration. It is for parties to decide whether all or selective disputes are to be resolved by arbitration. Parties here have clearly intended that claims of only particular value would be adjudicated through arbitration while claims exceeding the agreed value would be resolved through other remedies. It is for the parties to agree as to whether the disputes would be resolved through arbitration or not and the Court cannot force the parties to have the disputes resolved through the mechanism of private arbitration.”

The court clarified that such monetary caps do not become invalid merely because they restrict the scope of arbitration, so long as they do not extinguish substantive legal remedies. It held that where parties have agreed that higher-value claims will be resolved through civil proceedings instead of arbitration, courts cannot rewrite the contract to expand the scope of arbitration.

“The Court cannot force the parties to have the disputes resolved through the mechanism of private arbitration,” the Bench said.

The ruling came in an application filed by Sowil Limited seeking appointment of an arbitrator against the Deputy Chief Engineer (Construction), Bhusawal, arising from a contract dated May 7, 2018, for preparation of design and structural drawings for bridges under the Manmad–Jalgaon third railway line project.

The contract was valued at about Rs 84.52 lakh. Under the arbitration clause, however, only disputes involving claims up to 20% of the contract value could be referred to arbitration.

After the contract was terminated, the contractor claimed damages of around Rs 3 crore, approximately four times the contract value. The Railways opposed the request for appointment of an arbitrator, arguing that the claim was beyond the scope of the arbitration clause.

Rejecting the contractor's challenge to the validity of the cap, the Court held that the clause did not bar the contractor from pursuing legal remedies.

“The restrictive covenant in the arbitration agreement does not defeat the remedy of the Applicant in any manner… All that it does is to restrict the mechanism of dispute resolution through private arbitration to claims upto 20% of the contract value,” the Court observed, adding that the contractor remained free to approach the civil court for higher claims.

Distinguishing cases involving financial barriers such as mandatory deposits, the Court held that the clause did not restrain legal proceedings and therefore did not violate Section 28 of the Contract Act or Article 14 of the Constitution.

Accordingly, the court dismissed the petition, holding that since the claim exceeded the contractual limit for which arbitration was permitted, a petition seeking appointment of an arbitrator could not be allowed.