State Cannot Decide Contractual Breach and Bar Arbitration Remedy: SC

ABS Marine Services Vs Andaman and Nicobar Administration (Supreme Court of India)

Summary: The Supreme Court considered whether contractual clauses could permit a State instrumentality to unilaterally determine that a private contracting party had committed wilful breach or negligence and simultaneously prevent the dispute from being challenged before a court or arbitral tribunal. The dispute arose from a Manning Agreement between ABS Marine Services and the Andaman and Nicobar Administration concerning manning of vessels. Following damage to M.V. Long Island, the Administration recovered Rs. 2,87,84,305/- from the appellant towards penalty. The appointed arbitrator held that Clause 3.20 of the agreement, insofar as it purported to make the Administration’s decision final and barred court proceedings and arbitration, could not prevent adjudication where liability itself was disputed.

The Supreme Court agreed. It held that a party to a contract cannot itself adjudicate whether the opposite party committed the breach when that liability is disputed. Relying, inter alia, on State of Karnataka v. Shree Rameshwara Rice Mills Thirthahalli and J.G. Engineers Private Limited v. Union of India, the Court held that disputed contractual liability must be determined by an independent adjudicatory forum. The Court further applied the principle that a contractual interpretation cannot create a vacuum in legal remedies. Clause 3.22 contained a broadly worded arbitration agreement covering disputes arising out of the contract. The Court held that where wilful action, omission or negligence was disputed, the dispute fell within the arbitration clause and was not an “excepted matter”. The Court restored the arbitral award dated 08.05.2017, which directed payment of Rs. 2,87,84,305/- with interest and costs, and set aside the Calcutta High Court judgment dated 11.07.2018.