The Supreme Court on Monday strongly deprecated one-sided clauses in government contracts that allow the State or its instrumentalities to unilaterally decide liability, recover penalties, and bar the private contracting party from challenging such decisions either in a court of law or before an arbitrator. A bench comprising Justices J.B. Pardiwala and K.V. Viswanathan set aside the judgment of the Calcutta High Court (Circuit Bench at Port Blair) dated 11 July 2018 which had interfered with an arbitral award passed in favour of a private marine service provider and restored the award dated 08 May 2017 directing the Andaman and Nicobar Administration to refund the unilaterally recovered sum of ₹2,87,84,305 along with interest.
The dispute arose from a Manning Agreement executed on 26 December 2008 between the appellant, M/s ABS Marine Services, and the respondent, the Andaman and Nicobar Administration, for providing crew on 17 government vessels. After the vessel M.V. Long Island suffered damage in rough seas on 06 July 2009, the Administration issued a show-cause notice and, without adjudication, unilaterally recovered the penalty amount from the appellant’s pending bills on 25 September 2014. The matter was referred to arbitration under Section 11 of the Arbitration and Conciliation Act, 1996. The sole arbitrator, Hon’ble Mr. Justice S.S. Nijjar (Retd.), after detailed consideration, held Clause 3.20 of the agreement to be void under Section 28 of the Indian Contract Act, 1872 as it imposed a total restraint on legal remedies. The arbitrator directed the Administration to refund the recovered amount with 9% interest from the date of recovery till the date of the award and 12% interest thereafter in case of default.
The respondent challenged the award under Section 34 before the District Judge, who upheld it. In appeal under Section 37, the High Court set aside the award holding that the dispute fell within the “excepted matters” under Clause 3.20 and that the arbitrator lacked jurisdiction. The Supreme Court reversed this finding and restored the arbitral award.
Justice K.V. Viswanathan, authoring the judgment, observed that the interpretation canvassed by the respondent 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 such an interpretation were countenanced. The Court held that Clause 3.20 could not be construed to let one party to a dispute unilaterally decide whether the other party is in breach when liability is disputed by the private contractor. It further emphasised the legal maxim “Ubi jus ibi remedium” – there is no wrong without a remedy – and ruled that parties may legitimately agree to “except” certain matters from arbitration but cannot create a vacuum in legal remedies by completely barring access to courts or arbitration. The Court clarified that while “excepted matters” are a recognised concept, “excluding justice” is impermissible.
The Supreme Court held that the arbitration clause (Clause 3.22) was widely worded and covered all disputes arising out of the agreement. When the Manning Agent disputed the allegation of wilful act, omission or neglect, such a dispute squarely fell within the arbitrator’s jurisdiction. The Court also noted that even on the aspect of quantification where liability is admitted, the clause was grossly discriminatory as it reserved the right of the Administration to initiate legal proceedings for recovery of the differential amount while denying the same right to the private party. The Court observed that 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.
Accordingly, the appeals were allowed, the impugned judgment of the High Court was set aside, and the arbitral award dated 08 May 2017 was restored. No order as to costs was passed.
Cause Title: M/s ABS Marine Services v. The Andaman and Nicobar Administration
Citation: 2026 INSC 274 (Civil Appeal Nos. 3658-3659 of 2022)
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