M/s ABS Marine Services vs The Andaman and Nicobar Administration, the Hon’ble Supreme Court of India has held that contractual clauses in government agreements cannot be framed in a manner that completely bar a private party from seeking legal remedies Hon’ble Courts or Ld. Arbitral tribunals.
The dispute arose from a manning agreement executed between the appellant and the respondent administration for providing crew on government vessels. Following an incident involving damage to a vessel, the respondent administration imposed a penalty and effected recovery from the appellant’s pending dues by invoking Clause 3.20 of the agreement.
Clause 3.20 empowered the respondent to determine the extent of loss and recover the same unilaterally, declared such determination as final and binding, and barred the appellant from initiating any proceedings Hon’ble Courts or Ld. Arbitral tribunals. At the same time, the clause reserved the respondent’s right to initiate legal proceedings in case of shortfall in recovery.
Aggrieved by the recovery, the appellant invoked arbitration. Ld. arbitral tribunal passed an award in favour of the appellant directing refund of the recovered amount along with interest. The challenge to the award under Section 34 of the Arbitration and Conciliation Act, 1996 was dismissed. However, the Hon’ble Calcutta High Court interfered with the arbitral award relying upon the aforesaid contractual clause.
Aggrieved thereby, the appellant approached the Hon’ble Supreme Court of India.
The Hon’ble Supreme Court of India examined the validity and effect of Clause 3.20 and observed as follows:
A contractual clause which enables one party to unilaterally determine breach and quantify damages cannot be sustained in law.
A clause which bars a party from approaching courts or arbitral tribunals results in denial of legal remedies.
While parties may exclude certain disputes from arbitration as excepted matters, they cannot exclude all legal remedies.
A contractual provision which permits one party to seek legal recourse while denying the same to the other is discriminatory in nature.
Such clauses are contrary to the principle that no party can be a judge in its own cause.
The Hon’ble Court further observed that acceptance of such clauses would permit one party to determine liability and recovery without any mechanism for adjudication, which would be inconsistent with settled legal principles.
Accordingly, the Hon’ble Supreme Court of India set aside the judgment of the Hon’ble High Court and restored the arbitral award passed in favour of the appellant.
The judgment reiterates that contractual clauses which completely oust the jurisdiction of courts or arbitral tribunals and deny a party access to legal remedies cannot be sustained in law.
