Supreme Court Calls Govt. Contractual Clause Foreclosing Redressal Before Courts "Shocking"; Restores Award For ABS Marine

The Supreme Court on Monday expressed shock at the stand taken by the Andaman and Nicobar Administration that a contractual clause made its decision final and beyond challenge, holding that such a term offended the rule of law.

The court made the observationwhile setting aside a July 11, 2018 judgment of the Calcutta High Court and restoring an arbitral award of Rs 2.87 crore in favour of ABS Marine Services.

The ruling came in a dispute where the Andaman and Nicobar Administration relied on Clause 3.20 of its agreement with ABS Marine Services to contend that its decision on liability was final and could not be challenged either before a court or an arbitral tribunal.

Rejecting this stand, a bench of Justices J.B. Pardiwala and K.V. Viswanathan observed:

“It is shocking that the respondent administration with all seriousness at their command contend that under Clause 3.20 not only have they a right to decide wilfulness or neglect on the part of the manning agent in cases where liability is disputed, but also that such decision cannot be challenged in any court of law or before the arbitrator. We reject the contentions, since we have held the dispute to be within the jurisdiction of the arbitrator.”

The top court also held that the administration, being a party to the contract, could not decide the question of breach when liability itself was disputed. The court observed:

“Firstly, whether at all there was a wilful act of omission or negligence on the part of Manning Agent or his Personnel/Complement, when the manning agent disputes, liability cannot be decided by the respondent administration which is the party alleging the breach. The interpretation canvassed by the respondent, if accepted, would militate against the fundamental principle of the Rule of Law that no party shall be a judge in its own cause. Notions of justice and fair play would be rendered a mockery, if the interpretation canvassed by the respondent is countenanced.”

The dispute arose out of a Manning Agreement dated December 26, 2008, under which ABS Marine Services was engaged to provide crew for vessels operated by the Andaman and Nicobar Administration. After a vessel suffered damage on July 6, 2009, the administration imposed a penalty of Rs 2.87 crore, which was recovered on September 25, 2014 from the company's pending dues.

The dispute was referred to arbitration pursuant to a Supreme Court order dated November 2, 2015, and by an award dated May 8, 2017 the arbitrator directed a refund of the recovered amount with interest. The award was upheld by the district judge but was later set aside by the Calcutta High Court, which held that the arbitrator lacked jurisdiction in view of Clause 3.20 of the agreement.

Setting aside the High Court judgment, the Supreme Court held that one party to a contract cannot act as the judge of its own cause, particularly when liability itself is disputed, and that contractual clauses cannot be interpreted in a manner that leaves a party without any legal remedy.

The bench said that even where certain matters may be excluded from arbitration, the law does not permit a clause that bars both arbitration and recourse to courts.

“To say the least, this is grossly discriminatory. It is high time that clauses of these types are not incorporated in contracts between a private party on the one hand and the state and its instrumentalities on the other, foreclosing even redress through Courts of law.”

The court further remarked that clauses that both exclude arbitration and prevent judicial review hark back to a time when “might was right” and are inconsistent with a legal system governed by the rule of law.

Accordingly, the court allowed the appeals and restored the arbitral award in favour of ABS Marine Services.