The Supreme Court on Monday, March 23, strongly criticised one-sided clauses in government contracts that restrict or extinguish a private party’s ability to seek judicial or arbitral redress.
A Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan set aside the judgment of the Port Blair Bench of the Calcutta High Court, which had interfered with an arbitral award passed against the Andaman and Nicobar Administration. The High Court had relied on Clause 3.20 of the contract, a provision that barred the appellant from approaching either a court or an arbitral forum against the respondent’s unilateral decision to impose a penalty for alleged negligence in service.
Dispute Arose From Manning Agreement
The dispute stemmed from a Manning Agreement executed in 2008 between the appellant, ABS Marine Services, and the respondent, the Andaman and Nicobar Administration, for supply of crew to 17 government vessels.
In July 2009, one of the vessels sustained damage during rough seas. Following the incident, the Administration unilaterally recovered ₹2,87,84,305 from the contractor’s pending bills as penalty.
Clause 3.20 Gave Administration Unilateral Power
At the centre of the controversy was Clause 3.20 of the agreement. The clause empowered the Administration to assess the loss and recover the amount unilaterally. It also declared the Administration’s decision to be final and binding, while barring both court proceedings and arbitration on the issue.
At the same time, the clause preserved the Administration’s right to initiate legal proceedings in case it could not recover the entire amount, thereby creating what the Court described as a one-sided arrangement.
Arbitral Award And Subsequent Proceedings
The arbitrator passed an award in favour of the appellant and directed the respondent to pay ₹2,87,84,305 with interest at 9 per cent from the date of recovery until the date of the award. The arbitrator also directed that payment be made within three months.
The District Court dismissed the challenge to the award under Section 34. Thereafter, the matter reached the High Court in an appeal under Section 37. The High Court interfered with the award, prompting the contractor to move the Supreme Court.
Supreme Court Finds Clause Grossly Discriminatory
Allowing the appeal, the Supreme Court held that the High Court had erred in interfering with the arbitral award. In the judgment authored by Justice K.V. Viswanathan, the Court described Clause 3.20 as grossly discriminatory, unfair and contrary to settled legal principles.
The Court observed that one party to a contract cannot decide whether the other party committed wilful breach or negligence where liability itself remains in dispute.
The Bench said:
“Clause 3.20 cannot be so construed as to let one party to a dispute decide whether the other party is in breach.”
State Cannot Reserve Remedies Only For Itself
The Court also pointed out the inconsistency embedded in the clause. While the Administration reserved to itself the right to approach the courts for recovery of any remaining amount, it simultaneously denied the contractor any forum to challenge the unilateral recovery.
The Court observed:
“A close reading of Clause 3.20 reveals an interesting aspect. Even on the aspect of quantification in cases where liability is admitted by the agent, where the administration is not able to fully recover, they have reserved for themselves the right to initiate proceedings for recovery of the differential amount. 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.”
Excepted Matters Permissible, Exclusion Of Justice Not Permissible
The Court clarified that parties may lawfully exclude certain disputes from arbitration as “excepted matters,” which is a recognised principle in arbitration law. However, they cannot altogether eliminate legal remedies.
In this regard, the Bench observed:
“Matters may be ‘excepted’ from arbitration, for that is a well-recognized concept, but a vacuum in legal remedies cannot result. ‘Except’ matters one may but ‘Exclude’ justice, one cannot.”
The Court said that accepting the respondent’s interpretation would allow the State to determine liability and quantum unilaterally, prevent the contractor from questioning that determination before any forum, and thereby leave the contractor remediless even where the State’s action was arbitrary, mistaken or mala fide.
It added:
“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 Court further observed that such an interpretation would strike at the very heart of the maxim ubi jus ibi remedium—there is no wrong without a remedy.
Appeal Allowed, Award Restored
In view of these findings, the Supreme Court allowed the appeal and restored the arbitral award.
Cause Title: M/s ABS Marine Services Versus The Andaman and Nicobar Administration
Appearance
For Appellant(s): Mr. S. Niranjan Reddy, Senior Advocate; Mr. Sidharth Sethi, AOR; Ms. Shivangi Pathak, Advocate; Ms. Palak Arora, Advocate.
For Respondent(s): Mr. Vikramjeet Banerjee, A.S.G.; Ms. Indira Bhakar, Advocate; Mr. Mukesh Kumar Verma, Advocate; Mr. Santosh Ramdurg, Advocate; Mr. Shreekant Neelappa Terdal, AOR.
