Delhi High Court Keeps Anadolu Deniz-HSL Arbitration In Abeyance, Says Sovereign Decision Non-Arbitrable

The Delhi High Court on 18 September directed that arbitral proceedings initiated by Turkish company Anadolu Deniz against Hindustan Shipyard Limited (HSL) before the Indian Council of Arbitration (ICA) be kept in abeyance.

Justice Tushar Rao Gedela passed the direction on HSL's application for interim protection after finding prima facie that the Union Government's decision to exclude Anadolu Deniz from a project for construction of Fleet Support Ships for the Indian Navy was a sovereign decision concerning national security and defence procurement, and therefore non-arbitrable. The Bench observed:

“Surely, if internal security is a sovereign function, then national security, and matters related to defence procurement for the armed forces would clearly fall within the expression “sovereign function”, and the decision taken in such context could be expressed as “sovereign decision”...Having regard to the above analysis and facts, it is clear that the decision of the GoI dated 23.08.2023 is a “decision of the Sovereign”, and in view of the ratio in Vidya Drolia (supra), “non arbitrable”, per se.”

The dispute arose from a Collaborator Contract executed by HSL and Anadolu Deniz on 20 March 2020 for collaboration in the design and supply of Key Machinery Equipment, technical assistance and project implementation for five Fleet Support Ships for the Indian Navy.

On 16 August 2023, the Cabinet Committee on Security approved the Fleet Support Ships project but decided that it would be executed through indigenous industry without the involvement of Anadolu Deniz. The Ministry of Defence thereafter directed HSL to initiate termination proceedings against Anadolu Deniz.

HSL terminated the Collaborator Contract by invoking Article 23.8 pursuant to the Government's decision. It subsequently attempted to settle the dispute through meetings at Visakhapatnam, but the talks did not materialise.

Anadolu Deniz's counsel thereafter wrote to HSL demanding reference of the dispute to arbitration. Anadolu Deniz invoked arbitration and proposed a nominee arbitrator. It subsequently filed its Statement of Claim before the ICA on 7 August 2026.

The ICA registered the proceedings by an email dated 19 August 2026 and directed HSL to file its Statement of Defence and nominate its arbitrator. HSL then approached the Delhi High Court under Order XXXIX Rules 1 and 2 read with Section 151 of the Code of Civil Procedure, seeking a declaration and permanent injunction restraining the arbitral proceedings.

Solicitor General of India Tushar Mehta, appearing for HSL, submitted that the contract itself had been entered into pursuant to a Government decision and that its termination was also a consequence of a sovereign decision. He submitted that the contract was not merely a commercial contract for supply, design and implementation of Fleet Support Ships but was connected with national maritime security, naval readiness and national security.

He relied on Article 23.8 of the contract, which provided for termination where the contract became impossible to perform due to governmental prohibition. It submitted that Article 23.8 operated as an exception to the arbitration provision under Article 25 and that a challenge to a sovereign decision could not be referred to arbitration.

Senior Advocate Rajiv Nayar, appearing for Anadolu Deniz, opposed the application and contended that the Delhi High Court lacked territorial jurisdiction.

He submitted that the contract was executed in Visakhapatnam, was to be performed there, the termination notice was issued by HSL from Visakhapatnam and the settlement talks were also conducted there. Relying on Article 25.1(d) of the contract, he further submitted that Visakhapatnam was the seat and venue of the arbitration.

The Court examined Articles 23.7 and 23.8 of the contract. Article 23.7 dealt with prohibition or ban by the Indian or Turkish Government, while Article 23.8 provided for the consequences where the contract became impossible to perform due to governmental prohibition. It observed that the expression “any such governmental prohibition” in Article 23.8 was not necessarily confined to the specific circumstances mentioned in Article 23.7.

Further, the Bench noted that the contract concerned the construction of five Fleet Support Ships for the Indian Navy and examined whether the Government's decision could be characterised as a sovereign decision.

Relying on the Supreme Court's judgment in Vidya Drolia v. Durga Trading Corporation, it observed that sovereign functions, being inalienable and non-delegable, are non-arbitrable. It further noted that the Supreme Court had held that sovereign and public interest functions of the State fall outside the scope of arbitration. It held that if internal security constitutes a sovereign function, national security and procurement for the armed forces would fall within the expression “sovereign function”.

It noted that the contract concerned the construction of Fleet Support Ships for the Indian Navy and was therefore connected with strategic defence assets and national security.

The Bench also noted that the Collaborator Contract had been entered into with the approval and concurrence of the Ministry of External Affairs, the Department of Defence Production and the Ministry of Defence. It held that withdrawal or rescindment of such approval would have a direct consequence on the subsistence of the contract.

It found that HSL's role was limited and that it was required to act pursuant to the Government's decision. It held that the 23 August 2023 communication manifested the Government's decision to proceed with the project without Anadolu Deniz and required HSL to initiate termination proceedings.

The Court rejected the argument that the arbitral tribunal could rule on its own jurisdiction under Section 16 of the Arbitration and Conciliation Act, 1996. It held that where a prima facie finding had been made that a sovereign function was non-arbitrable, an exercise under Section 16 would be futile. It observed:

“The inalienability and the non-delegable nature in terms of Vidya Drolia (supra), clearly indicates that the insulation from arbitral interference, available to the sovereign decision inheres in the Sovereign, ab initio and at all times to come”.

The Bench distinguished the judgments relied upon by Anadolu Deniz on seat and venue, holding that those judgments primarily concerned the supervisory jurisdiction of courts over arbitration proceedings. It held that the present case concerned whether the sovereign decision itself was arbitrable and which court could entertain proceedings concerning such a decision. It observed:

“this Court is not exercising a supervisory jurisdiction, however, is considering an issue which arises out of a sovereign decision which has been held to be inalienable, non-delegable and non-arbitrable by the Supreme Court in Vidya Drolia (supra). That read alongwith the analysis/interpretation of the effect and interplay between Section 2(3) and 5 of the Act, would clearly demonstrate the distinction between the present case, and those before the Supreme Court where the aforesaid proposition has been laid.”

It also rejected the argument that no cause of action arose in Delhi. It held that the averments in the plaint had to be considered to determine whether a cause of action arose within its jurisdiction and noted that HSL had shown that the Cabinet Committee on Security and Government decisions forming the basis of the dispute were taken in New Delhi.

Accordingly, the High Court granted interim protection to HSL by keeping the ICA's 19 August 2026 email in Arbitration Case No. INTARB-0035 in abeyance until the next date of listing.