Delhi High Court stays arbitration over Navy shipbuilding contract, holding government’s national-security decision prima facie non-arbitrable

Hindustan Shipyard Limited (“HSL”) and Anadolu Deniz Insaat Kizaklari Sanayi Ve Ticaret A.S. entered into a Collaborator Contract dated 20 March 2020 for design, supply of key machinery and technical assistance relating to five Fleet Support Ships for the Indian Navy.

The Cabinet Committee on Security and the Ministry of Defence subsequently decided that the project would proceed through indigenous industry without the involvement of the Turkish defendant, and directed HSL to initiate termination proceedings.

HSL terminated the contract on 24 August 2023 under Article 23.8, followed by unsuccessful attempts at amicable settlement.

In 2026, the defendant invoked arbitration under Article 25.1 and filed a Statement of Claim before the Indian Council of Arbitration (“ICA”), which registered the matter as ICA Case No. INTARB-0035.

The ICA thereafter directed HSL to file its Statement of Defence and nominate an arbitrator by email dated 19 August 2026.

HSL instituted the present suit under Section 37 of the Specific Relief Act, 1963, seeking declaratory and injunctive relief against continuation of the arbitration, and sought interim relief under Order XXXIX Rules 1 and 2 CPC.

1. Whether the termination of the Collaborator Contract, being founded on the Government of India’s decision concerning a defence project and national security, was prima facie a sovereign and inherently non-arbitrable decision?

2. Whether the ICA could proceed with the arbitration despite HSL’s objection that the underlying dispute was non-arbitrable?

3. Whether the Delhi High Court possessed territorial jurisdiction to entertain the suit despite the contract designating Visakhapatnam as the seat/place of arbitration?

4. Whether HSL established a prima facie case, balance of convenience and irreparable injury warranting interim protection under Order XXXIX Rules 1 and 2 CPC?

The Court applied Articles 23.7 and 23.8 of the Collaborator Contract, which dealt with governmental prohibition and the consequences of termination, and Article 25 concerning arbitration.

Under Sections 2(3) and 5 of the Arbitration and Conciliation Act, 1996, disputes excluded from arbitration by law are not subject to the ordinary principle of minimal judicial intervention.

Relying principally on Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, the Court applied the rule that inalienable sovereign and public-interest functions of the State are non-arbitrable, particularly where they affect national security and cannot be delegated to a private adjudicatory forum.

The Court also considered the competence-competence principle under Section 16 of the Arbitration Act, the seat-related jurisdiction principles in BGS SGS SOMA JV v. NHPC, (2020) 4 SCC 234, Mankastu Impex Pvt. Ltd. v. Airvisual Ltd., (2020) 5 SCC 399, and J&K Economic Reconstruction Agency v. Rash Builders India (P) Ltd., 2026 SCC OnLine SC 596, but distinguished those cases as primarily concerning supervisory jurisdiction over arbitration.

For territorial jurisdiction at the plaint stage, the Court applied Section 20 CPC and the principle in Dahiben v. Arvindbhai Kalyanji Bhanusali, (2020) 7 SCC 366, that the plaint’s averments must be accepted at face value while considering threshold objections under Order VII Rule 11 CPC.

Interim relief was assessed under the established requirements of prima facie case, balance of convenience and irreparable injury under Order XXXIX Rules 1 and 2 CPC.

The Court held that the contract concerned the construction of strategic naval assets and was inseparably connected with national defence and security.

The Government’s decision to proceed without the Turkish collaborator was not an ordinary contractual or commercial decision: the contract had been executed with governmental approval, and HSL was required to implement the Ministry of Defence’s direction.

Article 23.8 was interpreted broadly; the expression “any such governmental prohibition” was not confined only to the specific prohibition contemplated by Article 23.7, but extended to governmental decisions arising from national-security and defence considerations.

Applying Vidya Drolia, the Court concluded prima facie that the Government’s decision was an inalienable and non-delegable sovereign function and therefore non-arbitrable.

The termination letter, being expressly based on that governmental decision, was consequently also prima facie non-arbitrable.

Although the defendants relied on the arbitral tribunal’s power under Section 16 and the agreed seat at Visakhapatnam, the Court held that those principles could not displace the prior question of inherent non-arbitrability of a sovereign decision.

At the interlocutory stage, the Court accepted the plaint’s assertions that the ICA proceedings were administered in Delhi and that the relevant sovereign decision was taken in Delhi; it therefore declined to conclusively reject territorial jurisdiction at that stage.

Given the strong prima facie case and the risk of permitting a private arbitral process to examine a sovereign defence-related decision, the balance of convenience and irreparable injury favoured HSL.

It consequently directed that the ICA’s email dated 19 August 2026 in ICA Case No. INTARB-0035 remain in abeyance until the next date of listing.

Notice was issued in the interim-application, replies were directed within three weeks, and the matter was listed before the Joint Registrar on 17 November 2026 and before the Court on 8 December 2026.

The Court clarified that its observations were only prima facie and would not prejudice the final adjudication on merits.

The applications concerning filing of clearer documents and exemption from pre-institution mediation were allowed/disposed of, and the suit was directed to be registered with summons issued.