Writ courts cannot restrict arbitral tribunals from deciding whether contract termination is an “excepted matter”: Supreme Court

The appellant, a construction company, was awarded a South Central Railway contract for doubling the Guntur–Guntakal railway track section, under an agreement dated 30 November 2017, with completion scheduled for 23 October 2018.

The Railway terminated the contract on 10 June 2022 under Clause 62 of the Indian Railways Standard General Conditions of Contract (GCC), forfeited the performance guarantee and security, and denied compensation.

The appellant challenged the termination under Article 226, alleging non-compliance with the contractual procedure and seeking directions under Clause 17 of the GCC.

On appeal, the Division Bench set aside the Single Judge’s observation regarding the validity of the termination and permitted the appellant to raise its claims before the Arbitral Tribunal, directing that the claims be decided strictly in accordance with the contract.

A sole arbitrator was thereafter appointed, and the Tribunal framed issues including the validity of termination, limitation, “excepted matters,” and arbitrability.

Whether the Division Bench’s direction that the Arbitrator decide the appellant’s claims “strictly in accordance with the terms of the contract” exceeded the scope of judicial review under Article 226 and impermissibly restricted the Arbitral Tribunal’s jurisdiction under Section 16 of the Arbitration and Conciliation Act, 1996?

Whether the question of whether the dispute concerning termination constituted an “excepted matter” outside the scope of arbitration was required to be determined in the first instance by the Arbitral Tribunal?

The Court applied Section 5 of the Arbitration and Conciliation Act, 1996, which restricts judicial intervention in arbitration matters except where expressly provided; Section 16, embodying the principle of kompetenz-kompetenz, which empowers the Arbitral Tribunal to rule on its own jurisdiction, including objections concerning the existence, validity, or scope of the arbitration agreement; and Clauses 63 and 64 of the GCC, which exclude specified “excepted matters” from arbitration but do not expressly oust the jurisdiction of courts.

The Court relied on Duro Felguera, S.A. v. Gangavaram Port Ltd., Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, and Vidya Drolia v. Durga Trading Corporation for the principle that courts should undertake only limited scrutiny at the referral stage and decline reference only where non-arbitrability is manifest and obvious.

It further relied on Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., In Re: Interplay Between Arbitration Agreements and the Indian Stamp Act, 1899, and SBI General Insurance Co. Ltd. v. Krish Spinning to affirm that contested questions concerning arbitrability and the Tribunal’s jurisdiction ordinarily fall within the Tribunal’s Section 16 jurisdiction.

The Court held that Clause 63 merely excluded identified “excepted matters” from the arbitration clause; it did not exclude the jurisdiction of a court to examine the validity of a decision concerning such matters.

However, the question whether the termination dispute, wholly or partly, fell within an excepted-matters clause was itself a question of arbitrability and jurisdiction for the Arbitral Tribunal under Section 16.

Since even a court exercising appointment-stage jurisdiction under Section 11(6A) could not pre-determine the contractual standard by which the Tribunal would assess arbitrability, a writ appellate court exercising narrower judicial-review jurisdiction under Article 226 could not impose such a limitation.

The direction to decide the claims “strictly in accordance with the terms of the contract,” although apparently innocuous, could restrict the Tribunal’s authority to determine the scope of its own jurisdiction, including whether the termination dispute was arbitrable.

The Court also distinguished ABS Marine Services v. Andaman and Nicobar Administration because the contractual clause there excluded both court jurisdiction and arbitration, whereas Clause 63 in the present case excluded only arbitration for specified excepted matters.

The Tribunal was therefore free, under Section 16, to determine whether the termination dispute was an excepted matter and whether it fell within the scope of arbitration.

The Supreme Court expressed no opinion on the merits of the termination or the appellant’s claims.

There was no order as to costs, and pending applications were disposed of.